Sei sulla pagina 1di 44

B2013|Insurance| Atty.

Bocobo |1

I. Introduction
A. Concept & Definitions
 Guarantee Against Loss
 Whether a regulated practice falls within the business of insurance is determined by three criteria:
o whether the practice has the effect of transferring or spreading a policyholder’s risk;
o whether the practice is an integral part of the policy relationship between the insurer and the insured; and
o whether the practice is limited to entities within the insurance industry. (43 Am Jur 2d 74)
 A contract of insurance is an agreement by which one party for a consideration promises to pay money or its
equivalent, or to do an act valuable to the insured, upon the destruction, loss or injury of something in which the other
party has an interest. (Definition of insurance adopted by the Legislature of Massachusetts, in Vance, p.83)

B. Functions
 Indemnity for Loss
 The main function of insurance is to provide compensation or indemnity for a loss which a person may suffer due to
the happening of a designated event, which may be either contingent of uncertain as to the time of its occurrence.
 Based on concept of pooling resources of big group of persons to compensate a few who may suffer from
disastrous event
 Effect: spread in an equitable manner the loss which would have burdened an individual to members of a large
group exposed to the same risks. (Campos, p.1)

 Risk-Distributing Scheme
o Elements of insurance, a risk-distributing device:
1) The insured has an interest susceptible of pecuniary estimation, known as “insurable interest”;
2) The insured is subject to a risk of loss through the destruction or impairment of said interest by the happening
of designated perils;
3) The insurer assumes that risk of loss;
4) Such assumption of risk is part of a general scheme to distribute actual losses among a large group or substantial
number of persons bearing a similar risk; and
5) The insured makes a ratable contribution called “premium” to a general insurance fund as consideration for the
insurer’s promise.
*contracts with having only the first three elements are risk-shifting devices.
 Insurance equitably distributes (economic) losses out of a general fund contributed by all.
 It provides protection against absorbing one’s losses alone.
(De Leon, pp.21-23)

 Principal, Subsidiary and Indirect Functions

1) Principal function: Risk Bearing. The financial losses of a few are equitably distributed over the many from a fund
contributed by all- spread the losses to over a large number of persons.
a) In fire insurance, the premium paid by policyholders is fixed based on individual circumstances. The insurer pays
for the insured property destroyed by fire from the fund created from the premiums paid by all similarly insured.
The loss is borne by all who contributed premiums.
b) In life insurance, every policy which does not lapse eventually becomes a claim but the same principle of risk
spreading is still there.
2) Subsidiary functions:
a) Stimulates business enterprises- insurance made possible large-scale commercial and industrial organizations
which would otherwise would not be undertaken were the risks they face were not assumed by insurers. It also
made industrialists use their capital than freeze such to secure them against various contingencies;
b) Encourages business efficiency and enterprise- insurance relieves enterprises of worried and uncertainties thus
increasing their efficiency. Risk reduction also increases their willingness to invest new capital in their
c) Promotes loss prevention- insurers encourage loss-prevention with a system of rating which gives room for
discounts and at the same time impose special conditions if the risk is unsatisfactory;
d) Encourages savings- insurance encourages savings by protecting individuals from unforeseen events. This is
more evident in life insurance which includes a saving or investment elements and a protection element; and
B2013|Insurance| Atty. Bocobo |2

e) Solves social problems- social insurance provided by the government (SSS and GSIS) and by free enterprise
insurance makes available compensation to victims of loss or injuries and lessens financial difficulties from old
age, disability or death.
3) Indirect functions:
a) Investment of funds- the funds pooled by insurers are themselves invested not only to earn interest to be added
to the funds but also they become available as huge resources for underwriting projects contributing to national
b) Use of reserve funds- insurers’ reserve funds are used productively which proceeds contribute to the lowering
of the cost of insurance to the insuring public;
c) Effect on prices- the cost of insurance is passed to the consumers but, paradoxically, insurance benefits
consumers with reduced prices- the cost of insurance is less than the cost of risk without insurance; and
d) As a basis of credit- insurance facilitates more credit extension by providing the creditor protection from adverse
events that would befall the collateral or the properties s/he lent.
(De Leon, pp.55-57)

C. History
1. Early Development in Ancient Societies
I. Babylonian.
 The contract of Bottomry or Respondentia orogonated from a practice similar to the Commenda of Islam, a trading
by agents in the Euphrates Valley.
 The Babylonians in 4000 to 3000 BC manufactured more than their home consumption and for foreign trade.
 Said trade provided them with raw materials (building materials, cotton, wool, silk, etc.) used for the production
of their manufactured goods.
 Manufacturers and big agricultural producers employed slaves or relations to take their goods in short trading
trips as their representatives.
 These employees were not partners and thus are neither liable for the goods nor entitled to share in the profits.
 When the service of the manufacturer’s servants are insufficient, they enter into a business relationship with a
Darmatha (hawker or trader by caravan), supplied with goods or money for a trade tour, with the following
o Security for the loan: “himself, family and property, in town or country, on the road, or in stock”;
o Interest or bonus paid was either half the profits, if said half exceeded 100% of loan, if did not was a
minimum interest of 100% on the loan or 100% of the loan whatever his profit or loss might be, in addition
to refunding the value of goods advanced in either case.
o The rate of interest remained the same regardless of the duration of the trade tour.
o The risk of losing the merchandise through attack of robbers burdened the Darmathas even if such loss
were not due to their own fault or negligence.
 New compromise in lieu of aforementioned stipulations, found in the Code of Hammurabi (2250 BC):
o Above all, if the loss was not through either the trader’s own negligence or connivance, he is freed from
the debt, both on the capital borrowed and interest.
 To wit, the essentials of Bottomry are:
o It is a contract of true lone and not a partnership sometimes and in others is a loan with limited
o The merchandise or money advanced was under the trader’s custody and use, not retained by the lender.
o The trader was wholly free from liability for the debt upon happening of a contingency provided for in the
o The rate of interest was a lot higher than that charged on an ordinary loan, which was limited to 20% at
that time.

II. Phoenician
 The contract of Bottomry could not possibly originate from Greece as its law was unfavorable to debtors before
the time of Solon (ca 590 BC) who discouraged oversea traffic. No reference to said contract in Greece history can
be found prior 4th century BC.
 The contract’s source could probably be the Phoenicians, from which in the same manner they derived their
knowledge of mathematics, navigation and, weights and measures, coinage, the alphabet, etc., ultimately from
the Babylonians.
B2013|Insurance| Atty. Bocobo |3

 Phoenicia was a great maritime power of the Mediterranean from 1600 to 1000 BC.
 It already had a large and independent commerce for the sale of mutual assistance since 1600 BC.
 That market for mutual assistance was necessary for the expansion as a sea-trading nation and also to become a
connecting ling between the three continents of the then known world.
 The two hundred years of commerce between Phoenicia and Greece would have been sufficient time for the
former’s transfer of the knowledge on Bottomry to the latter.
 The Babylonians are the great land traders, thus their contract provided for land journey losses only. On the other
hand, that of Phoenicians involves marine risks which could have probably been adapted by the Greeks.

III. Indian
 The Hindus, who were large trading partners of Babylonians, probably could have acquired the contract of
Bottomry from the latter prior to 600 BC which was modified to suit their needs, resulting in an elaborate form of
Bottomry. The following its essential deviations from that laid down by the Babylonians:
o The contract applied to both sea-borne and land-carried traffic.
o The interest was set depending on the risks and the length of time the money was required, not
anymore at just 100% in all cases.
o The rate of interest was fixed by valuers skilled in sea or land journeys based on the previous criteria.
o The rate of interest was subscribed in the contract.
o The borrower was excused payment, not only if he was robbed of the goods, but also if such did not
arrive in good order, at the place and time agreed upon by the parties.

IV. Greek
 The contract of Bottomry (at around 350 BC) has the following features:
o The agreement, known as the Bottomry bill or bond of Respondenta, containing the loan conditions, was
deposited at the bank.
o The security, generally at least twice the value of the sum advanced.
o The period of the loan.
o The rate of interest, 10-12% for outward voyages only and 22.5-30% for round voyages; penal rates apply
for conditions broken.
o The risk provided against: total loss of principal and interest for ships lost or captured at sea; loss of
proportion of principal and interest when some or all of the cargo was jettisoned or of a ransom being
o Representation of lender on voyage.
o Obligations of borrowers: take the most direct course; repay loan to lender or his representative or
assignee; declare if money borrowed already on the same goods; not to give second mortgage on goods-
a fraud by the firs as well as the second mortgagee.
o Captain’s powers of borrowing.

V. Roman
 Romans appear to have acquired the knowledge on Bottomry from Greeks either on 700 BC or later when the
Roman Commission on law went to Athens on 500 BC. This seems more probable with the fact that the contract
known to the Romans was always a loan of pecunia trajectilia- for a loan of money to be used in oversea trade.
 Roman legislation regarding Bottomry was practically identical with that of Greeks, except for the following
o Limitation of cases where lender should be responsible for the loss.
o Entire freedom from liability of borrower insofar as any collateral security given by him was concerned in
the event of the goods on which the loan was actually made having perished.
o Inability of lender to charge fœnicus nauticum for the loan after the sea risk had ceased in case borrower
did not settle his account as soon it became due, i.e., when the voyage was over.
VI. Traces of insurance (other than life) occurring in classical Roman authors and in the Digest
i. Public indemnity to shippers against loss of ships or cargo from storm or attacks of enemies (215 BC).
Three companies offered to supply goods to the Roman army in Spain on the condition, above all, that the State
shall bear all the loss of the ships or of the shippers brought by enemy attacks or by storms. The Republic agreed to
do so.
A contract of insurance? Yes. The Government undertook, in return for a valuable consideration, i.e., services of
trading companies, to insure shipments owned by said trading companies.
B2013|Insurance| Atty. Bocobo |4

ii. Private guarantee for safe delivery of goods (50 BC).

Cicero sought guarantors in Laodicea to protect his spoils of war from danger of loss during transit from Cilicia to
Rome- equivalent to marine insurance policy.
iii. Guarantee by the Emperor against the losses from storms incurred by shippers (58 AD)
Emperor Claudius offered to pay a fixed bounty on all corn imported and further agreed to assume responsibility
for all losses arising from storms during the great famine in Rome.
Essentials of insurance present in this case:
o Property guaranteed by the Emperor does not belong to the Emperor or to the State but to the merchants
importing the corn.
o No restriction on the absolute ownership of the corn was placed on the merchants upon receiving the bonus
and the guarantee.
o The risk is definitely stated to be that arising from storms.
o The premium or consideration in return for the insurance was the service rendered by the merchants in
importing the corn at an unfavorable season of the year.
iv. Contracts for indemnification, which do not appear to have been confined to losses arising from sea-risks.
Valid insurance of valuable property based on the following stipulation:
o “A. Do you promise that my £10,000 shall be safe?
B. I promise-“
B would indemnify A for any part of the £10,000 that might be lost.
Payment must have been made by A to B for B to give the desired guarantee and for him to be compelled for
specific performance.
A could not make a profit out of the contract- A was guaranteed only for the loss and not more than its amount.
v. Insurance by wager.
A to B, “If my ship shall perish, will you pay me for £10,000?” B agrees.
Not a contract of insurance as profit could be made if the value of the ship and cargo did not amount to £10,000.
As in (iv), a premium or consideration must be paid for the contract and it is for a certain voyage or for a specified
Immoral in nature: permits person to make profit on the loss of his property.

VII. Life assurance among the Romans

a) Mutual insurance
i) Civilian Societies
The Roman burial societies were later developments of religious societies. At first, they formed themselves into
societies to worship one or more divinities and there arose the custom of conducting the funerals of members at
the society’s expense to honor the divinities.
These societies, however became burial societies proper when the Romans’ religious feelings weakened, with
some of them having no patron at all, and others having only one for respectability or for the sake of being a legal
religious society.
Funeraticium- burying of a member at the cost of the society.
ii) Veterans’ Societies
Very similar to civilian societies, except that their membership was limited to men discharged from the army as
veterans (both men and women are accepted in a civilian society) and that the minimum age of entry was 46 (age
limit in civilian is 30).

iii) Military Societies

These societies are confined in military camps. They do not pretend to be religious societies and do not appear to
have been restricted in respect to their objects and of the benefits they provided for members. These benefits
o Pecuniary assistance to members for expenses in the discharge of their professional duties.
o Payment of a certain sum to each member who died in service.
o Payment of smaller sum to members dismissed from service.
o Payment of a certain sum, nomine annularium, to members when they received discharge from service as

b) Non-mutual life insurance

i) Contracts based on death held to be valid contain essential elements for a life assurance policy which are the following:
B2013|Insurance| Atty. Bocobo |5

The life insured.

The person or company with whom the contract is made.
The duration of the risk
The consideration in return for which the contract was made, which must have been valuable and of less amount
than the benefit and payable either in single payment or in installments.
The benefit.
The beneficiary.

VII. Sources and development of insurance other than life, known and practiced in the middle ages
a) Development of gilds from family group system
i) The “family group” of the Germans and Flemings
The primitive tribes of Germany and Flanders had the family, not the individual, as the unit. Each group is in itself a
“small combination for mutual assistance and support.” The collective rights and duties of members of the family
over and towards individual members were:
o Mutual property in land belonging to the group
o Mutual right of succession to property of intestate member
o Mutual obligation to prosecute murderer of member of group
o Mutual liability to pay wergild for murder committed by member of group
o Mutual obligation to assist fellow members
Then emerged gilds or geldonia with the object of protecting themselves from oppression by great territorial lords
and also from losses by fire, shipwreck or other misfortune- for the mutual insurance of gild members.
Following the gilds were village communities receiving charters or keuren from overlords, who already gave up in
opposing them. The charter of some of these communities (as in Amitie d’ Aire) dealt with the indemnification of a
member whose house was burnt or who had paid a ransom with a greater part of his property in exchange of liberty
from captivity. Each fellow member was obliged to pay a piece of silver to the unfortunate member.
Later keuren provided indemnification to persons whose house were burnt, with the additional requirement that
the origin of the fire was unknown.
Still, in addition, in the middle of 13th C, each member were obliged to pay pro rate with respect to the value of
their own property.
Following the formation of village communities was their joining together to form a communal government of the
entire district- fire insured against must be of external origin and payment of indemnification to be made “in
accordance with the law of the country.”
b) Forms of capitalist insurance practiced by the Flemings.
As far back as the 14th C, marine insurance (a contract for indemnity, non-mutual, as they were either
proprietary or underwritten, and not partaking of the nature of a wager) covers risks against capture, shipwreck,
unseaworthiness of the ship, etc.
On life assurance- at about 1550, life assurance was legal but this was reversed on 1581 due to a 1571 ordinance
forbidding all insurances on lives. In 1544, the practice of making wager insurances on lives of little boys and girls
was prohibited
(Trennery, pp. 3-42)
I. Chinese
Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in which insurance is part of the
financial sphere), early methods of transferring or distributing risk were practised by Chinese and Babylonian traders as
long ago as the 3rd and 2nd millennia BC, respectively.[11] Chinese merchants travelling treacherous river rapids would
redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed
a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practised by
early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an
additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea.
(Wikipedia, History of insurance)
II. Egyptian

2. Growth of Modern Insurance in Europe

a) Italian Maritime Merchants and Medieval Guilds / Earliest Known Insurance Contract (Genoa, 1347)
B2013|Insurance| Atty. Bocobo |6

It was the flourishing of maritime commerce in Venice, Florence and Genoa between the 12 th and 16th centuries. The earliest
known policy form was written in Genoa in 1347, and a statutory form was prescribed in Florence as early as 1523. From
these Italian republics, the custom of making mutual contracts of insurance spread rapidly to the rest of Europe, and by the
14th century, the practice had become general in all the maritime states of the continent. These contracts were mostly
confined to merchants engaged in international commerce, thus necessitating uniformity of regulations among the different
countries. Together with the rule growing out of the customs of merchants, these regulations came to be known as the law

b) England’s Friendly Societies

The first known life insurance policy was written in London during the late 1500s. In England, groups called friendly
societies gradually assumed many of the functions of guilds, including providing insurance to society members. Workers
contributed to a society’s pool of funds. If workers fell ill or died, the society would distribute money to them or their
families. However, many friendly societies went bankrupt due to poor management. In response, the English government
enacted the Friendly Society Act of 1793, which placed regulations on the societies’ practices.

c) Lloyd’s of London (Edward Lloyd’s Coffee House, 1688) / Underwriters

In the popular Lloyd’s Coffee House in London, merchants gathered and arranged mutual contracts to insure their ventures
against perils of the sea, a description of the vessel and its cargo were written on a slip of paper and those who were willing
to insure the venture would sign this slip, indicating the amount for which each was willing to be liable for, thus giving rise
to the use of the term Underwriter. By 1779, the Lloyd’s policy was adopted as the standard form of insurance, and despite
many criticisms against it, it has remained the basis of the modern marine insurance contract.

d) Great Fire of London (1666) / Sir Edmund Halley’s Mortality Table (1693)

Fire insurance did not assume any importance until the great London fire of 1666, and it was not until 1170 that the oldest
of all fire insurance companies, the Sun Fire Office, was established in England.

In 1693 Halley published an article on life annuities, which featured an analysis of age-at-death on the basis of the Breslau
statistics Caspar Neumann had been able to provide. This article allowed the British government to sell life annuities at an
appropriate price based on the age of the purchaser. Halley's work strongly influenced the development of actuarial science.
The construction of the life-table for Breslau, which followed more primitive work by John Graunt, is now seen as a major
event in the history of demography. [Wikipedia]

3. Development in the United States

a) Marine Insurance dominated by British Underwriters from 1700s and into 1900s

As the insurance business grew in the American colonies, many insurance companies began selling marine coverage. But
British underwriters kept much of the marine insurance business during the 1700s by offering greater coverage and lower

b) Benjamin Franklin and the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire (1730)
B2013|Insurance| Atty. Bocobo |7

The company collected contributions from citizens of Philadelphia, and this money went into an investment fund. Interest
on this fund went toward paying for claims on losses from fires and for dividends to those who contributed money.

c) Presbyterian Ministers’ Fund for Philadelphia (1759)

It was the first American organization to offer life insurance benefits. It offered coverage only to its members not to the
general public.

d) Constitutionality of State Insurance Regulation (1869) / New York Insurance Code (1906)

In 1869, the Supreme Court of the United States ruled in favor of the constitutionality of state insurance regulation. Most
state governments soon had insurance departments that oversaw the operation of insurance companies.

e) Expansion and Diversification: Health Care Insurance, Worker’s Compensation, Unemployment Insurance,
Automotive Coverage, Passenger and Cargo Insurance, Federal Deposit Insurance Corporation (FDIC), Social
Security and Medicare, etc.

In 1933 Congress passed the Federal Reserve Act, which required that banks keep a certain portion of their deposits in cash
to cover emergency withdrawals. The act also established the Federal Deposit Insurance Corporation (FDIC), a government
agency that promises to cover any person’s deposits against potential bank failures. At its creation, the FDIC guaranteed to
protect deposits of up to $100,000. Banks can become federally insured by meeting reserve requirements and certain other
qualifications. Today, the FDIC includes two branches, one that insures commercial banks and one that insures savings

4. Introduction and Development in the Philippines

a) Pre-Spanish Culture: Bayanihan, Abuloy, Ambag: Early Forms of Insurance?

When the political unit was then the family, if a member of the family died or suffered any other misfortune, it was borne by
the family. When communities, such as the barangays developed, the assistance was extended accordingly. Eventually,
mutual benefit societies and fraternal associations were organized for the purpose of rendering assistance, in money or in
kind, to their members.

b) Spanish Era: Introduction of Maritime Insurance

The first form of insurance introduced in the Philippines was marine insurance, brought in 1829 by a British company,
Stracham, Murray and Co., appointed as Lloyd’s agents in the country. The first life insurance was brought by Sun Life
Assurance Company of Canada in 1898.

c) American Period: Flourishing of Various Form of Insurance

1906 – first domestic non-life insurance company: Yek Tong Lin Fire and Marine Insurance Co. Ltd. (now renamed
Philippine First Insurance Co.)
B2013|Insurance| Atty. Bocobo |8

1910 – first domestic life insurance company was the Insular Life Assurance Co. Ltd.

1937 – GSIS

1949 – Insular Treasurer was appointed Commissioner ex-officio

1950 – Reinsurance Company of the Orient writing treaties for both life and non-life

1951 – first workmen’s compensation Pool was organized as the Royal Group Incorporated

1953 – Office of the Insurance Commission

1957 – SSS (private sector)


1. Source of Philippine Insurance Law

Ang Giok Chip v. Springfield Fire & Marine Ins. Co.

As the Philippine law was taken verbatim from the law of California, the Supreme Court should follow in fundamental points,
at least, the construction placed by California courts on a California law.

Republic v. Del Monte Motors, Inc.

The Insurance Code is patterned after that of California. Thus, the ruling of the state's Supreme Court on a similar concept is

2. Present Governing Laws

a) The Insurance Code of 1978 (PD 1460, as amended)

b) Civil Code (RA 386)

Art. 2011. The contract of insurance is governed by special laws. Matters not expressly provided for in such special laws
shall be regulated by this Code. (n)

Art. 2012. Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life
insurance policy by the person who cannot make any donation to him, according to said article. (n)

Art. 739. The following donations shall be void:

(1) Those made between persons who were guilty of adultery or concubinage at the time of the donation;

(2) Those made between persons found guilty of the same criminal offense, in consideration thereof;
B2013|Insurance| Atty. Bocobo |9

(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. (n)

Art. 2021. The aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or
more determinate persons in consideration of a capital consisting of money or other property, whose ownership is
transferred to him at once with the burden of the income. (1802a)

Art. 2022. The annuity may be constituted upon the life of the person who gives the capital, upon that of a third person, or
upon the lives of various persons, all of whom must be living at the time the annuity is established.

It may also be constituted in favor of the person or persons upon whose life or lives the contract is entered into, or in favor
of another or other persons. (1803)

Art. 2023. Life annuity shall be void if constituted upon the life of a person who was already dead at the time the contract
was entered into, or who was at that time suffering from an illness which caused his death within twenty days following said
date. (1804)

Art. 2024. The lack of payment of the income due does not authorize the recipient of the life annuity to demand the
reimbursement of the capital or to retake possession of the property alienated, unless there is a stipulation to the contrary;
he shall have only a right judicially to claim the payment of the income in arrears and to require a security for the future
income, unless there is a stipulation to the contrary. (1805a)

Art. 2025. The income corresponding to the year in which the person enjoying it dies shall be paid in proportion to the days
during which he lived; if the income should be paid by installments in advance, the whole amount of the installment which
began to run during his life shall be paid. (1806)

Art. 2026. He who constitutes an annuity by gratuitous title upon his property, may provide at the time the annuity is
established that the same shall not be subject to execution or attachment on account of the obligations of the recipient of the
annuity. If the annuity was constituted in fraud of creditors, the latter may ask for the execution or attachment of the
property. (1807a)

Art. 2027. No annuity shall be claimed without first proving the existence of the person upon whose life the annuity is
constituted. (1808)
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 10

Art. 2186. Every owner of a motor vehicle shall file with the proper government office a bond executed by a government-
controlled corporation or office, to answer for damages to third persons. The amount of the bond and other terms shall be
fixed by the competent public official. (n)

Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the
injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the
rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance
company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the
person causing the loss or injury.

c) Other Special Laws

 Revised Government Service Insurance Act of 1977 (PD 1460)

 Social Security Act of 1954 (RA 1161, as amended)
 Property Insurance Law (PD 245)
 RA 4898, as amended by RA 5756 providing life, disability and accident insurance to barangay officials
 RA 3591, creating the Philippine Deposit Insurance Corporation (PDIC)

d) Applicability of Insurance Code’s Chapter 1

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


A. Definition
Sec. 2. Whenever used in this Code, the following terms shall have the respective meanings hereinafter set forth or indicated, unless
the context otherwise requires:

(1) A "contract of insurance" is an agreement whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event.

A contract of suretyship shall be deemed to be an insurance contract, within the meaning of this Code, only if made by a surety
who or which, as such, is doing an insurance business as hereinafter provided.

(2) The term "doing an insurance business" or "transacting an insurance business", within the meaning of this Code, shall include:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other
legitimate business or activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance
business within the meaning of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the
provisions of this Code.

In the application of the provisions of this Code the fact that no profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct consideration is received therefor, shall not be deemed conclusive to show
that the making thereof does not constitute the doing or transacting of an insurance business.

(3) As used in this code, the term "Commissioner" means the "Insurance Commissioner".
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 11

Sec. 3. Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create
a liability against him, may be insured against, subject to the provisions of this chapter.

1. Unknown v. Contingent Event

An unknown event is either something certain to happen in the future but as to when the event will happen is not known to the
parties, or an event that happened in the past but the parties have no knowledge that it happened.

A Contingent event is something that is not certain to happen.

Thus, an unknown event encompasses either past or future events, while a contingent event refers only to future events.

2. Insurance v. Assurance
An assurance is an event that must occur, i.e. death, while insurance is a contingent event which may or may not occur.

Insurance covers assurance.

3. Loss, Damage, Liability

1. Consent, Object and Cause
Consent is always necessary in any contract.

Object of an insurance contract refers to the thing insured i.e. life, property.

Cause of an insurance contract is the consideration called the premium paid for by the insured.

2. Distinguishing elements
1) The insured has an interest susceptible of pecuniary estimation, known as “insurable interest”;
2) The insured is subject to a risk of loss through the destruction or impairment of said interest by the happening of designated
3) The insurer assumes that risk of loss;
4) Such assumption of risk is part of a general scheme to distribute actual losses among a large group or substantial number of
persons bearing a similar risk; and
5) The insured makes a ratable contribution called “premium” to a general insurance fund as consideration for the insurer’s
*contracts with having only the first three elements are risk-shifting devices.
3. Distinguished from –
a) Contracts for Contingent Personal Service
- The essential purpose of a contract for contingent personal services is the rendition of personal services while that of a contract
of insurance is indemnity against loss and damage. (Like in De Leon’s example, a law firm retained to represent its clients, in
consideration of periodical payments, undertakes to represent said clients in all suits for or against them is not engaged in
the business of insurance. On the other hand, a corporation, in consideration of a stipulated amount, agrees at its own
expense to defend a physician against all suits for damages for malpractice is one of insurance.)
b) Contracts with Contingent Incidental Benefits
- The Massachusetts Supreme Court, in Attorney General ex rel Monk v CE Osgood Co. decided that defendant company was
indeed engaging in the business of insurance when it had as one of its promotions the condition that should the buyer die
before full payment of the price of the furniture bought, the unpaid balance would be remitted to the extent of $500. De
Leon however argues that the insured in such case stood to lose nothing, and may even gain with such arrangement- it can
be reasonably supposed that the buyer/insured agreed to the price and held it as commensurate to the value of the furniture
and also that said buyer, and even his heirs upon his death, had enjoyed the use of such furniture upon delivery. Thus, there
is no need to compel the company to obtain an insurance business license, which at the first place, was aimed at protecting
the insured.
c) Suretyship Contracts
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 12

- in a suretyship contract, the surety guarantees the performance by another party of an obligation in favour or a third party.
Such is deemed insurance only if the surety’s main business is that of suretyship, not when the contract is merely incidental
to any other legitimate business or activity of the surety.


1. Consensual
It is perfected by the meeting of the minds of the parties. If an application for insurance is not yet accepted or rejected, there is no
insurance contract yet.

2. Voluntary
It is not compulsory and parties may incorporate terms and conditions as they may deem convenient which will be binding provided
they do not contravene any provision of law, public policy.
May be required by law, i.e. Third party liability insurance for granting a driver’s license.

3. Aleatory
It depends upon some contingent event but is not a contract of chance although the event against the occurrence of which it is
intended to provide for may never occur.

Each party must take a risk, the insured – the amount of parting with the price of the premium without receiving anything in return
in case the contingency does not happen, the insurer – to be compelled to pay the entire sum agreed upon.

4. Executed as to the Insured, Executory as to the Insurer

After the payment of the premium, it is executed as to the insured. Executory on the part of the insurance since its obligation to
indemnify cannot be executed until the happening of the loss or the event insur3ed against.

5. Conditional
It is subject to conditions which is the happening of the event insured against. Condition precedent is the payment of premium by
the insured.

6. Contract of indemnity (except in life insurance, more a form of investment)

The promise of the insurer is to make good only the loss of the insured. No person may secure insurance upon property which he
has no interest.

7. Personal Contract in Utmost Good Faith

As a rule, the insured cannot assign, before the happening of the loss, his rights under a property policy to others without the
consent of the insurer. Consequently, the obligation of the insurer to pay does not attach to or run with the property whether it be
real or personal property.

8. Contracts of Adhesion
Generally, insurance contracts are prepared by the insurer and the insured only affix his signature to it.

1. Classification According to Type of Loss
a) Insurance against loss or impairment of property rights, may be either in existence or merely expected; that is, present rights are
yet to accrue.
i.e. Marine Insurance - marine perils
Fire Insurance – fire
Guaranty insurance – earthquake, explosion etc.
Fidelity insurance – defalcations of employees
Credit Insurance – insolvency of debtors
Title insurance – defective titles
Theft insurance – theft/burglary

b) Insurance against loss of earning power due to death (life insurance), accidental injury, ill-health, sickness, old age or other
disability, or even unemployment
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 13

c) Insurance against contingent liability to make payment to another, the insured is protected against his loss with regard to claims
for damages.

2. Classifications by Interests Protected

a) First Party v Third party Insurance
In first-party insurance, the contract between the insurer and the insured is designed to indemnify the insured (or his beneficiary)
for a loss suffered directly by the insured PROPERTY INSURANCE, LIFE INSURANCE.

Third Party insurance, the interests protected by the contract are ultimately those of third parties injured by the insured’s conduct.
The loss is suffered “indirectly” by a third person not “directly” by the insured i.e. TPL, insured causes in jury to another, LIABILITY

b) All-Risk v. Specified-Risk
All-risk reimburses the insured for damage to the subject matter of the policy from all causes except those specifically excepted in
the policy.

Specified-risk insurance covers damage to the subject matter of the policy only if it results from specifically identified causes listed
in the policy.

3. Classification Under the Insurance Code

a) Life insurance Contracts
i. individual Life
ii. Group Life
iii. Industrial Life

b) Non-Life Insurance Contracts

i. Marine
ii. Fire
iii. Casualty
iv. Contracts of Suretyship

4. Are PRE-NED PLANS Contracts of Insurance?

RA 8799
3.9. "Pre-need plans" are contracts which provide for the performance of future services of or the payment of future monetary
considerations at the time actual need, for which plan holders pay in cash or installment at stated prices, with or without interest
or insurance coverage and includes life, pension, education, interment, and other plans which the Commission may from time to
time approve.



1. Where contract is ambiguous, doubtful or silent


Del Rosario is insured under a life insurance policy by Equitable Insurance. Covered by the policy is indemnity for injury sustained
by the wrecking or disablement of a railroad passenger car in or which the insured is travelling as a fare-paying passenger. The policy
does not cover disappearance or death by drowning, but a rider to the policy stipulates that said exception is waived by the company.
Del Rosario and beneficiary wife died from drowning when the vessel they were riding caught fire.

Issue is with respect to the amount that may be claimed given that there was a supposed exception if cause of death is drowning
and the rider to the policy waiving the exception. The SC held that where there is ambiguity with respect to the terms and conditions
of the policy, the same will be resolved against the one responsible thereof. The insured has generally little participation in the
preparation of the policy. The interpretation of obscure stipulations should not favor the party who caused the obscurity.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 14


The insurance contract stipulates that the company will indemnify any authorized driver provided that he is not entitled to any
indemnity under any other policy. The deceased, upon his death caused by a collision with another taxi, was paid his workman’s
compensation from another insurance policy. The Workman’s Compensation Act explicitly requires that an employee suffering any
injury of death arising out of or in the course of employment be compensated. The fulfillment of such statutory obligation cannot
be the basis for evading the clear, explicit and mandatory terms of the policy. Assuming there is doubt as to liability of the insurance
firm, the courts are to regard with “extreme jealousy” limitations of liability found in insurance policies and to construe them in
such a way as to preclude the insurer from non-compliance with his obligation.


Complainant is owner of the car insured. It was brought to car repair shop. While in the custody of the car repair shop, its employees
took out the car for a joy ride wherein it figured in an accident. Insurance company refused to pay the owner since the policy had
as “Authorized Driver” clause which limits the use of the vehicle by the insured and any other permitted by insured. The policy also
had a theft clause.

SC held Insurance Company liable. The purpose of authorized driver clause is that person driving is duly licensed and has no
disqualification to drive motor vehicles. When car owner entrusted the car to shop, he necessarily entrusted car keys to shop owner
and employees for legitimate purposes. The mere fact that the car was used by employee for illicit purpose does not mean
“authorized driver” clause has been violated. Also, independently of the foregoing, since car was unlawfully taken, the theft clause


Plaintiff insured car with insurance company under a Comprehensive Policy, which includes loss or damage to car due to theft. The
car was placed at Service Station so that car may be displayed as being for sale. One of the employees of the Service Station took
the car for a joyride without prior permission. Said vehicle, due to some mechanical defect, accidentally bumped an electric post
causing damage. Sc held insurance company liable as taking of the car constituted theft. There is no need for prior conviction to
make insurer liable.


Tantuco was engaged in the coconut oil milling and refining industry. It owned two oil mills located at its factory. Two oil mills
covered by two separate insurance. The old one covered for P3M, the new one for P6M. Fire broke and consumed new oil mill.
Insurance Company refused to pay proceeds claiming new mill was not covered by insurance. It claimed the P6M insurance was also
for old mill as described in the policy.

SC held the Insurance Company liable. In construing words used descriptive of a building insured, the greatest liberality is shown by
the courts in giving effect to the insurance. Mistake to identity of new mill is unlikely since insurer did inspection prior issuance of
policy. Mistake was actually caused by the clerk of the Insurance Company who copied the wrong description of boundaries. In
construing the contract, intent of the parties should be ascertained.


Respondent insured his car against “own damage.” The car figured in an accident. Respondent appellate court correctly ruled that
the deductions of P250.00 and P274.00 as deductible franchise and 20% depreciation on parts, respectively claimed by petitioners
as agreed upon in the contract, had no basis.

2. Where Terms are Clear


B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 15

Misamis Lumber insured its motor car. The policy provides that the insured may authorize the repair of the car necessitated by
damage for with the Insurance Company is liable provided that the estimated cost of repair does not exceed authorized Repair Limit
of Php150. Car was damaged when it accidentally passed over a water hole. Misamis had it repaired for Php302.27. Insurance
Company refused to pay entire amount. SC ruled in favor of Insurance Company. The literal meaning of the stipulation in the contract
must control, it being the actual contract, expressly and plainly provided for in the policy.


Union obtained loan, overdraft and credit accommodations from Republic Bank. Union executed real and chattel mortgages over
some of its properties. One of the conditions of the mortgage contract was for Union to secure insurance coverage over mortgaged
properties. Union failed to secure insurance, hence Republic Bank procured from Philippine Guaranty fire insurance over the
properties, with Bank as beneficiary. The policy was renewed upon expiration, Bank paid premium but for the account of Union.
Fire occurred. Union filed claims with Philippine Guaranty, which the latter denied since it alleged that Union violated “Other
Insurance Clause” as it did not give notice that it had taken policies with New India and with Manila Insurance.

SC held in favor of Philippine Guaranty. The function of the courts consists simply in enforcing and carrying out the contracts actually
made. While it is true, as a general rule, that contracts of insurance are construed most favorably to the insured, yet contracts of
insurance, like other contracts, are to be construed according to the sense and meaning of the terms which the parties themselves
have used. If such terms are clear and unambiguous, they must be understood in their plain, ordinary and popular sense.


Ty, employed as operator mechanic foreman in a cotton factory, insured himself in 18 local insurance companies with his employer
as the beneficiary. A fire broke and Ty was injured on his left hand by a heavy object. The injury caused temporary disability of his
left hand. The policies covered total or partial disability if the loss of the hand shall mean amputation through the bones of the wrist.

The SC held in favor of insurance companies. Partial disability was clearly defined as amputation.


Petitioner spouses insured the inventories in their store against fire. Fire broke and destroyed the inventories. The husband was
charged with arson, but was acquitted. Insurance Company denied claims for proceeds as it alleged the fire was not accidental, that
it was by willful act of the husband. The policy provided that the proceeds will be forfeited if: 1) the loss is occasioned by willful act
of insured or 2) claim is made and rejected but no action is commenced within 12 months after rejection (prescription). Present
action was brought beyond a year from time spouses received notice of rejection of their claim.

SV held in favor or Insurance Company ay the 12-month period is not merely a procedural requirement. It is a matter essential to
prompt settlement of claims; it is resolutory clause, the purpose of which is to terminate all liabilities in case action not filed within
prescribed period. Contractual limitation prevails over statutory limitation. Contract is the law between the parties.


Bus was insured with Insurance Company. Bus figured in an accident. Passenger sued bus owner for damages. Damages were
awarded by TC to passenger; hence owner filed complaint against Insurance company praying that latter be ordered to pay the
damages awarded to passenger. Owner also paid three other passengers P4,000 each without the written consent of Insurance

SC held that Insurance Company not liable to payments made without written notice to it, the same being specifically required
under the contract. The terms of the contract constitute the measure of the insurer’s liability and compliance therewith is a condition
precedent to the insured’s right of recovery from insurer.

F. Perfection of Contract
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 16

1. Offer and Acceptance

Civil Code Article 1315. Contracts are perfected by mere consent, and from the moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping
with good faith, usage and law.

Civil Code Article 1319. Consent is manifested by the meeting of the offer and acceptance upon the thing and the cause which are
to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-

Acceptance may be made by letter or telegram does not bind the offerer except from the time it came to his knowledge. Te contract,
in such case, is presumed to have been entered in the place where the offer was made.

a) In Non-Life Insurance- It is the insured who technically makes the offer to the insurer who accepts it, rejects it or makes a
b) In Life and Health Insurance-
a. If insured DOES NOT PAY PREMIUM- his application considered an invitation to insurer to make an offer, which
insured must accept before insurance takes any effect.
b. If insured PAYS PREMIUM with his application- his application is considered an offer. Life and health insurance
agents do not have authority to bind insurance company yet. Instead they customarily issue BINDING RECEIPT that
makes coverage effective on date of application or date or medical examination.

2. Premium Payment

De Leon: Insurance contract is consensual but the parties may stipulate additional conditions precedent to validity of policy
such as payment of first premium.

Campos: If premium has been paid with application, contract is perfected upon approval of the application although no
policy has yet to be issued. If however, the premium has not been paid, then despite issuance of policy, it will not be valid
and binding under section 77 of Insurance Code which provides:

An insurer is entitled to the 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 life or an industrial life policy
whenever the grace period provision applies.


GR: No perfected insurance contract until premium is paid.

Exception: For life or industrial life insurance policies whenever the grace period provision applies.

Capos questions the “grace period” phrase since it pertains to subsequent premium payments and not initial premium
payment per sections 227a, 228a, and 230a.

3. Delivery of Policy- the act of putting the insurance policy- the PHYSICAL DOCUMENT- into the possession of the insured.

a) Significance-
i. Evidence of making of contract
ii. Communication of insurer’s acceptance of the insured’s offer
iii. Determination of policy period
b) Modes of Delivery of Policy
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 17

i. Actual or constructive delivery- not prerequisite to validity unless agreed upon by the parties.


Arturo took out a life insurance policy on his life. He made application (with payment for first premium) through an agent and it was
agreed with the agent that the policy, when and if issued, should be delivered to his aunt with whom Arturo left a certain sum to
complete the payment of first annual premium.

December 1- Company accepted application and mailed the policy to agent for delivery to insured.

January 15- Arturo found out that he was suffering from acute nephritis and uremia.

January 19- Arturo died.

January 11- Company mailed policy.

January 16- Policy recived by agent.

January 18- Agent delivered policy to Aunt upon payment of balance of first year premium Agent asked Aunt if nephew was in good
health and she replied she believed so because she had no information that he was sick and agent thereupon delivered policy to

SC held the contract to be binding. The delivery of the policy to the insured by an agent of company who is authorized to make
delivery or withhold delivery (with DISCRETION) is the final act which binds the insurer and the insured, in the absence of fraud or
other legal ground for rescission. The fact that the agent was negligent does not operate against the insured.

c) Effects of Delivery of Policy-

i. Where delivery conditional- Non-performance of the condition precedent prevents the contract from
taking effect.
ii. Where delivery unconditional- Unconditional delivery CONSUMATES the contract, and the policy
delivered becomes the FINAL contract between the parties.
iii. Where premium still unpaid after UNCONDITIONAL delivery- There must be clear and express agreement
of CREDIT between insured and insurer. Otherwise, the policy will lapse if the premium is not paid, at the
time and manner specified in policy. (Note: Payment of premium essential to PREFECTION of contract.)
d) Delay in Delivery: Tort or Implied Acceptance?

Civil Code, Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence,
is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation
between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.

Civil Code, Article 1173. The fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and
of the place. Where negligence shows bad faith, the provisions in Articles 1171 and 2201, par 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that which is
expected of a good father of a family shall be required.

Campos: If with delay in processing by the insurer and premium has been paid with application, and in the interim
the peril insured against happens, the insurer is NOT LIABLE as there is NO PERFECTED insurance contract. BUT
the applicant may sue the insurer under tort theory (US jurisprudence). The theory is based on the proposition
that the insurance business is not an ordinary one but affected with public interest. It is thus the duty of the
insurer, which has derived its special authority to act as such from the State and which in fact solicits the
application, to act with reasonable promptness in either accepting or rejecting the application.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 18

Cited cases:
 Duffie v Bankers Life Insurance Co (US Case)- Negliegent agent forgot to send application, premium
payment and medical report to main office. The US SC held insurer bound to pay indemnity.
 Gloria v Phil. Amercian Life Ins. Co. (Philippine case)- Unjustifiable delay is implied acceptance.

G. Subject Matter

1. What may be insured/ insured against

Sec. 3. Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest,
or create a liability against him, may be insured against, subject to the provisions of this chapter.

The consent of the husband is not necessary for the validity of an insurance policy taken out by a married woman on her
life or that of her children.

Any minor of the age of eighteen years or more, may, notwithstanding such minority, contract for life, health and
accident insurance, with any insurance company duly authorized to do business in the Philippines, provided the insurance
is taken on his own life and the beneficiary appointed is the minor's estate or the minor's father, mother, husband, wife,
child, brother or sister.

The married woman or the minor herein allowed to take out an insurance policy may exercise all the rights and privileges
of an owner under a policy.

All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of a minor shall
automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the policy.

a) Subject Matter of Insurance Contracts- Anything having an appreciable pecuniary value, which is subject to loss
or deterioration or one of which one may be deprived so that his pecuniary interest is or may be prejudiced.

b) Event or Peril Insured Against- Contingency of unknown event must be such that its happening will
i. Damnify or cause loss to a person having an insurable interest, or
ii. Create a liability against him.
c) Insurance by a Married Woman- may take out insurance on:
i. Her life, or that of her children without the consent of his husband, or that of her husband (Note: with
husband's consent).
ii. Her paraphernal or separate property, or property given by husband.

2. What May NOT be Insured Against

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

a) Concept of Lottery- Extends to all schemes for the distribution of prizes by CHANCE.
b) Insurance Distinguished from Gambling-

Parties seek to distribute possible loss by reason of Parties contemplate gain thru mere chance.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 19

Insured seeks to avoid misfortune. Gambler courts fortune.

Insurance tends to equalize fortune. Gambling tends to increase inequality of fortune.
Essence: What one insured gains is not at the expense Essence: Whatever one person wins from a wager is
of another insured. lost by the other wagering party.
Purchaser of insurance does not create a new, Gambler creates risk of loss once makes wager.
therefore, non-existing risk of loss to the purchaser.

H. Parties to the Contract

1. The Insurer-

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

Sec. 184. For purposes of this Code, the term "insurer" or "insurance company" shall include all individuals, partnerships,
associations, or corporations, including government-owned or controlled corporations or entities, engaged as principals in
the insurance business, excepting mutual benefit associations. Unless the context otherwise requires, the terms shall also
include professional reinsurers defined in section two hundred eighty. "Domestic company" shall include companies
formed, organized or existing under the laws of the Philippines. "Foreign company" when used without limitation shall
include companies formed, organized, or existing under any laws other than those of the Philippines.

Sec. 185. Corporations formed or organized to save any person or persons or other corporations harmless from loss,
damage, or liability arising from any unknown or future or contingent event, or to indemnify or to compensate any
person or persons or other corporations for any such loss, damage, or liability, or to guarantee the performance of or
compliance with contractual obligations or the payment of debt of others shall be known as "insurance corporations".
The provisions of the Corporation Law shall apply to all insurance corporations now or hereafter engaged in business in
the Philippines insofar as they do not conflict with the provisions of this chapter.

Sec . 299. No insurance company doing business in the Philippines, nor any agent thereof, shall pay any commission or
other compensation to any person for services in obtaining insurance, unless such person shall have first procured from
the Commissioner a license to act as an insurance agent of such company or as an insurance broker as hereinafter
No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of applications for
insurance, or receive for services in obtaining insurance, any commission or other compensation from any insurance
company doing business in the Philippines, or any agent thereof, without first procuring a license to act from the
Commissioner, which must be renewed annually on the first day of January, or within six months thereafter. Such license
shall be issued by the Commissioner only upon the written application of the person desiring it, such application if for a
license to act as insurance agent, being approved and countersigned by the company such person desires to represent,
and shall be upon a form prescribed by the Commissioner giving such information as he may require, and upon payment
of the corresponding fee hereinafter prescribed. The Commissioner shall satisfy himself as to competence and
trustworthiness of the applicant and shall have the right to refuse to issue or renew and to suspend or revoke any such
license in his discretion. No such license shall be valid after the thirtieth day of June of the year following its issuance
unless it is renewed. (As amended by Presidential Decree No. 1455).

Note: The term “insurer” is synonymous with “assurer” and “underwriter.”

Who may be an insurer?

B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 20

i. Foreign or domestic insurance company or corporation

ii. Individual, partnership or association
Note: Need to secure first CERTIFICATE of AUTHORITY from the Insurance Commission.

Are Insurance Agents Parties to or Liable Under Insurance Contracts? NO


US insurer entered insurance agreement with Gamboa to insure one case or rayon yardage which Gamboa shipped from US to
Manila. There was a shortage in the shipment, hence Gamboa filed claim for damages with Philippine agent of US insurer.

SC held thet Philippine agent has NO liability since it is not a party to the contract and has not taken part, directly or indirectly, in
the contract. The actions should have been brought against the principal.


Importer insured shipment of goods with US insurer. The policy had note that “Claim, if any, payable in US currency at Manila, and
with Smith, Bell & Co, stamped as ‘Claim Agent’.” Some of the shipment were in bad condition, hence a claim was made against
Smith, Bell & Co.

SC ruled in favor of Smith, Bell & Co.

 Existing jurisprudence: Settling agent acting within scope of its authority cannot be held personally and/or solidarily liable
for the obligations of its disclosed principal merely because there is allegedly a need for speedy settlement of claim. No
other participation other than being stamped as claiming agent.
 Absence of solidary liability: Artcile 1207 provides solidary liability only when obligation so states, as provided by law, or
when nature of obligation requires solidarity. Agent, as representative of foreign insurer, is tasked only to receive legal
processes and not to answer personally for any insurance claims.
 NOT real party-in-interest.


Deceased was hired by foreign company, through its local manning agent, as chief cook on board a shipping vessel. The vessel and
the crew were insured with a PRTOTECTION AND INDEMNITY CLUB, of which owner of vessel is member. Deceased suffered heart
attack and died. Wife of deceased filed claim with the local insurance agent (PPI) of P&I Club. PPI claims it is not an insurance agent
but a mere local correspondent.

SC held PPI to be mere local correspondent as nothing in the record shows that it took part in negotiations. Even if agent, under the
principle of relativity of contracts, PPI cannot be held liable.

2. The Insured/ Concept of Public Enemy

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

Sec. 54. When an insurance contract is executed with an agent or trustee as the insured, the fact that his principal or
beneficiary is the real party in interest may be indicated by describing the insured as agent or trustee, or by other general
words in the policy.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 21

Sec. 55. To render an insurance effected by one partner or part-owner, applicable to the interest of his co-partners or
other part-owners, it is necessary that the terms of the policy should be such as are applicable to the joint or common

Sec. 56. When the description of the insured in a policy is so general that it may comprehend any person or any class of
persons, only he who can show that it was intended to include him can claim the benefit of the policy.

Sec. 57. A policy may be so framed that it will inure to the benefit of whomsoever, during the continuance of the risk,
may become the owner of the interest insured.

Capacity of Party Insured

a) Natural Person-
i. Must be competent to make a contract
ii. With insurable interest in the subject of the insurance
iii. Not a public enemy
b) Juridical Person-

Public Enemy- designates a nation with who the Philippines is at war and it includes every citizen or subject of such nation. During
wartime, a private corporation is deemed an enemy although organized under Philippine laws if they are controlled by enemy aliens

Effect of War on Existing Insurance Contracts

i. Property insurance- Insurance policy ceases to be valid and enforceable.

ii. Life insurance- Insurance contract is abrogated but the insured is entitled to the cash or reserve value of the policy, which
is the excess of the premiums paid over the actual risk carried during the years when the policy had been in force.

Note: Termination of war DOES NOT revive the contract.


Parties entered into a fire policy covering merchandise of respondent. During the Japanese occupation, the building and goods of
respondent were burned. Insurer refused to pay the proceeds as the respondent was controlled by German subjects (majority
stockholders). US declared war against Germany, which is a Japanese ally.

SC ruled in favor of insurer as respondent was a public enemy. Insurance ceased to be valid and enforceable. Elementary rules of
justice provide, however, that the premiums paid be returned.

3. The Beneficiary and Cestui Que Vie in Life Insurance

Civil Code, Art 2012. Any person who is forbidden from receiving any donation under Article 739 cannot be named
beneficiary of a life insurance policy by the person who cannot make any donation to him, according to said article.

Civil Code, Art 739. The following donations shall be void:

(1) Those made between persons who were guilty of adultery or concubinage at the time of the donation;
(2) Those made between persons found guilty of the same criminal offense, in consideration thereof;

(3) Those made to a public officer or his wife, descedants and ascendants, by reason of his office.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 22



1. Pecuniary benefit in preservation or pecuniary damage in loss of the subject of insurance.

2. Necessity for validity of insurance contract (Exception: Industrial life insurance). Absence amounts to gambling or wager
 Insurance Code, § 3 (1). Any contingent or unknown event, whether past or future, which may damnify a person
having an insurable interest, or create a liability against him, may be insured against, subject to the provisions of
this chapter.
 Same, § 4. The preceding section does not authorize an insurance for or against the drawing of any lottery, or for
or against any chance or ticket in a lottery drawing a prize.
 Same, §18. No contract or policy of insurance on property shall be enforceable except for the benefit of some
person having an insurable interest in the property insured.
 Same, § 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.
 Same, § 229. The term "industrial life insurance" as used in this Code shall mean that form of life insurance under
which the premiums are payable either monthly or oftener, if the face amount of insurance provided in any policy
is not more than five hundred times that of the current statutory minimum daily wage in the City of Manila, and
if the words "industrial policy" are printed upon the policy as part of the descriptive matter.
An industrial life policy shall not lapse for non-payment of premium if such non-payment was due to the failure of
the company to send its representative or agent to the insured at the residence of the insured or at some other
place indicated by him for the purpose of collecting such premium: Provided, That the provisions of this paragraph
shall not apply when the premium on the policy remains unpaid for a period of three months or twelve weeks
after the grace period has expired.

3. Reasons for Requirement of Insurable Interest (a matter of public policy).

 As a deterrence to the insured. – The requirement of an insurable interest to support a contract of insurance is
based upon considerations of public policy which render wager policies invalid. A wager policy is demoralizing in
(a) It allows the insured to have an interest in the destruction of the subject matter rather than its
(b) It affords a temptation or an inducement to the insured, having nothing to lose and everything to gain,
to bring to pass the event upon the happening of which the insurance becomes payable.
 As a measure of limit of recovery. – The legal requirement has been devised with another object in view. If and to
the extent that any particular insurance contract is a contract to pay indemnity, the insurable interest of the
insured will be the measure of the upper limit of his provable loss under the contract.

4. Difference in life and non-life insurance.

 As to extent of insurable interest. – Insurable interest in life (save in the life insurance effected by creditor on life
of the debtor) is unlimited; in property, insurable interest is limited to the actual value of the interest thereon.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 23

 As to time when insurable interest must exist. – In life insurance (save that effected by creditor on life of the
debtor), it is enough that insurable interest exists at the time the policy takes effect and need not exist at the
time of the loss (§181); in property insurance, it is necessary that insurable interest must exist when the insurance
takes effect and when the loss occurs, but need not exist in the meantime. (§19).
 As to expectation of the benefit to be derived. – In life insurance, the expectation of benefit to be derived from
the continued existence of life need not have any legal basis whatever. A reasonable probability is sufficient
without more. In property insurance, the expectation of benefit, to be derived from the continued existence of
the property insured, however likely and morally certain of realization it may be, will not afford a sufficient
insurable interest unless that expectation has a basis of legal right. If such legal basis exists, an expected benefit,
however remote, constitutes an insurable interest.


Insurance Code, § 10. Every person has an insurable interest in the life and health:

(a) Of himself, of his spouse, or 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 the
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.


 In general, a person is deemed to have an insurable interest in the subject matter where he has a relation or a connection
with or concern in it that he will derive pecuniary benefit or advantage in its preservation and pecuniary loss or damage in
its termination, destruction, or injury upon the happening of the event insured against. (44 CJS 870).
 Exception to the pecuniary nature of insurable interest: The term has somewhat broader meaning in connection with life
insurance. To have an insurable interest in the life of a person, the expectation of benefit from the continued life of that
person need not necessarily be of pecuniary nature.
 In the absence of an insurable interest, the person is in effect would be gambling, ergo, the wager policy is void.
 The insurable interest requirement is held not to apply to industrial life insurance. (see § 229-231).
 Two (2) General classes of life insurance:
(a) Insurance upon one’s life. The insured took out insurance upon his own life for the benefit of himself,
of his estate, or for the benefit of a third person. Does Not usually present an insurable interest
(b) Insurance upon life of another. In this class belong policies taken out by the insured upon the life of
another. Insurable interest in the life of the person is required.

1. Insurable Interest in One’s Own Life. Every person has an unlimited insurable interest in his own life whether the
insurance is for the benefit of himself or another; and it is not at all necessary that the beneficiary designated in the
policy should have any interest in the life of the insured.
Insurance taken out by insured on his life for the benefit of another.

- The presence of insurable interest is really required only as evidence of the good faith of the parties.
- The mere fact that a man on his own motion insures his life for the benefit either of himself or of another is
sufficient evidence of good faith to validate the contract.
- The law considers the danger of the beneficiary without interest yielding to the temptation of termination of
the life of the insured as too slight for notice.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 24

- When the insurance is regarded a wager policy: (1) the original proposal to take out insurance was that of the
beneficiary; (2) the premiums are paid by the beneficiary; and (3) the beneficiary has no interest, economic
or emotional, in the continued life of the insured.
- A life insurance policy is no different from a donation insofar as the beneficiary is concerned. Both are founded
on liberality. As a consequence, the proscription under Article 739 CC and Article 87 FC should equally operate.

2. Insurable Interest in Life of Another.

Insurance for the benefit of the insured. – A person cannot lawfully procure insurance for his own benefit on the life
of another in whose life he has no insurable interest. The policy of the law requires that the assured shall have an
interest to preserve the life of the insured in spite of the insurance, rather than destroy it because of the insurance.

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

(a) In spouse, children and other close relatives. In the US, numerous decisions hold that pecuniary benefit is not the
only test. Thus, the mere relationship of brother or sister, father or child is sufficiently close to give either an
insurable interest in the life of the other. The rationale is that natural affection of this cases is considered sufficient,
if not more powerful, to protect the life of the insured than any other consideration.
(b) Upon whom one depends for education or support in whom he has a pecuniary interest. The expectation need
not have a legal basis, it sufficient that it be actual. The following have an insurable interest in each other’s life
since under the Family Code (Article 195), they are obliged to support each other:
i. The spouses;
ii. Legitimate ascendants and descendants;
iii. Parents and their legitimate children and the illegitimate or illegitimate children of the latter;
iv. Parents and their illegitimate children and the legitimate and illegitimate children of the latter;
v. Legitimate brothers and sisters, whether of the full or half-blood.
vi. (Article 196) Brothers and sisters not legitimately related, whether of the full or half-blood, are
likewise bound to support each other except when the support is due to a cause imputable to the
claimant’s fault or negligence.
(c) Under a legal obligation to him.

i. Related by contract or commercial relation.

ii. Risk that the performance of obligation might be delayed or prevented.
- The creditor may insure the life of the debtor for the purpose of protecting his debt but only to the
extent of the amount of the debt and the cost of carrying the insurance on the debtor’s life
- Strictly speaking, an insurance taken by the creditor on the life of his debtor is not purely a contract of
life insurance. The principle of indemnity applies in this kind of insurance. The creditor could only
recover such amounts as remain unpaid at the time of the death of the debtor.
- A distinction should be made between a policy taken by a debtor on his life and made payable to his
creditor and one taken by a creditor on the life of his debtor. Where a debtor in good faith insures his
life for the benefit of the creditor, full payment of the debt does not invalidate the policy; in such case
the proceeds should go to the estate of the deceased.


Facts: The deceased husband of respondent Trinos, applied for a health care coverage with petitioner. In the standard
application he answered no to the following questions: Have you or any of your family members ever consulted or been
treated for high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? The application was
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 25

approved. Upon termination of the agreement, the same was extended for another year. During the period of his coverage,
Ernani suffered a heart attack and was confined at the Manila Medical Center for one month. While her husband was in
the hospital, Trinos tried to claim benefits under the Health Care Agreement. Petitioner denied the claim on the basis of
concealment. Respondent was unable to collect so she paid the hospitalization expenses. Sometime after the discharge in
the hospital, her husband died. Respondent instituted an action for damages against petitioner. Trial court ruled in favor
of respondent Trino which was affirmed by the CA. Petitioner appealed to the Supreme Court contending that the Health
Care Agreement was not an insurance contract; hence the “incontestability clause” under the Insurance Code does not

Held: Under § 2(1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a
consideration to indemnify another for a consideration to indemnify against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of the general scheme to distribute actual losses among a large
group of persons bearing a similar risk; and
5. The insured pays a premium.
In the case at bar, the insurable interest of respondent’s husband in obtaining the health care agreement was his own
health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. Once
the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the
health care provider must pay for the same to the extent agreed upon under the contract.

Also, the theory that there was concealment cannot hold water. The answer assailed by petitioner was in response to the
question relating to the medical history of the applicant. This largely depends on opinion rather than fact, especially coming
from respondent’s husband who was not a medical doctor. Where matters of opinion or judgment are called for, answers
made in good faith and without intent to deceive will not avoid the policy even if untrue.

(d) Insurable Interest in life of person upon which an estate or interest depends.
This simply means that one may insure the life of a person where the continuation of the estate or interest vested in
him who takes the insurance depends the life of the insured. Example: Suppose A receives as legacy, the usufruct of a
house the ownership of which is vested in B. It is provided in the legacy that should B die first, both the usufruct and
ownership of the property will pass to C. In this case, A has an insurable interest in the life of B.

Query: Is the consent of the person whose life is insured essential to the validity of the insurance taken by another?

i. Professor Vance is of the opinion that the consent is essential to the validity of the policy. On clear principle and by
weight of authority, it is believed that all such contracts without the consent of the insured are contrary to public policy
and void.

ii. De Leon believes that under the law, the consent of the person insured is not essential to the validity of the policy.
So long as it could be proved that the assured has a legal insurable interest at the inception of the policy, the insurance
is valid even without such consent. The presence of an insurable interest takes the contract out of the class of forbidden
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 26

3. Beneficiaries: Designation and Change; Forfeiture of Interest

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

Kinds of Beneficiary

(1) The insured himself or his representative.

(2) A person other than the insured. In this case, he may occupy one of the three relations:

a. Insured himself. – He may himself be the person who procures the contract and pays the premiums necessary to
maintain it. Such a person is thus an immediate party to the contract and is ordinarily called the assured, as where the
creditor insures the life of his debtor;

b. Third person who paid a consideration. – The third person named as beneficiary may have paid a valuable
consideration for his selection as such; that is, the insured may have taken the policy for the benefit of the creditor or
to secure some other obligation; or

c. Third person through mere bounty of insured. – The beneficiary may be one who gives no consideration whatsoever
for any right that may be acquired in the policy but is designated as recipient of the proceeds of the policy through
mere bounty of the insured. The beneficiary designated may be the estate of the insured or a third party.

Limitations in the appointment of beneficiary

- A person may take out a policy of insurance on his own life and make it payable to whomsoever he pleases,
irrespective of the beneficiary’s lack of insurable interest, provided he acts in good faith.
- However, the Civil Code imposes limitations:
Article 2012. Any person who is forbidden from receiving any donation under Article 739 cannot be named
beneficiary of a life insurance policy by the person who cannot make any donation to him, according to said

Article 739. The following donations shall be void:

(1) Those made between persons who were guilty of adultery or concubinage at the time of the
(2) Those made between persons found guilty of the same criminal offense, in consideration
(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.

Designation of the beneficiary

B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 27

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

(1) Children. – The word children used to designate beneficiaries, is broad enough to include the following: (a) an
adopted child; or (b) an adult child not forming a part of the household of the insured; (c) after-born children even
of a marriage subsequently contracted. Where the children are named individually, other children cannot share
in the insurance proceeds unless the insured amended his designation to include them.
(2) Husband; wife or widow. – The word “wife” in the description of the beneficiary of life insurance is generally
regarded as description personae, and the fact that one who otherwise answers the description does not have the
legal status of the wife of the insured does not prevent her from taking as beneficiary, as when she is designated
by name, although the words “his wife” are added. However, if the beneficiary is not named but designated merely
by the status, the legal husband or wife as ascertained at the time of the death of the insured, is entitled to the
benefits of the insurance.
(3) Husband and Children; wife and children. – A policy payable to the wife of the insured and “their children” includes
children by another wife, although the prevailing view state that the beneficiaries are limited to children common
to both. But if the designation is made to the insured’s “wife and children”, the insurance is deemed for the benefit
of all the children.
(4) Family – The term is sometimes used to indicate the recipient of the proceeds of the policy. The court will ascertain
whether the person was so regarded by the insured.
(5) Heirs or legal heirs – These term will not ordinarily be construed as indicating merely the heirs at law but rather
that class of persons who would take the property of the insured in case he died intestate.
(6) Estate or legal representatives of the deceased. – The words “estate”, “representatives” or “legal representatives”,
when used in designating beneficiaries, are to be construed in their strict technical sense and the courts will
ordinarily assume that they are used to mean executors or administrators, unless it appears that the insured
intended to use these expressions in the sense of heirs or next of kin.
If no beneficiary is designated -> legal heirs as provided by law.

If 2 women innocently contracted marriage w/ the same man -> ½ each family (Consuegra v. GSIS)

Insurance Code, § 12. The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the
principal, accomplice or accessory in willfully bringing about the death of the insured; in which event, the nearest relative
of the insured shall receive the proceeds of said insurance if not otherwise disqualified.

 Interest means the right of the beneficiary to receive the proceeds of the life insurance policy.
 In case of forfeiture the nearest relatives of the insured are the following in order of proximity:
i. the legitimate children;
ii. the father and mother, if living;
iii. the grandfather and grandmother; or ascendants nearest in degree, if living;
iv. the illegitimate children;
v. the surviving spouse; and
vi. the collateral relatives, to wit:
 brothers and sisters of the full blood;
 brothers and sisters of the half-blood; and
 nephews and nieces
vii. in default of the above, the State.
 The death of the insured at the hands of the law – as by legal execution – is one of the risks assumed by the
insurer under a life insurance policy in the absence of a valid policy exception.
 Death by suicide – In view of §87, it is quite clear that the insurer is not liable in case the insured commits
suicide intentionally, when in sound mind. When the insured is insane. It is settled rule that, in the absence
of express conditions, the suicide of the insane does not discharge the insurer from any liabilility.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 28

 On the broad ground of public policy that prohibits anyone from profiting by his own wrong, where the
beneficiary intentionally brings about the death of the insured under such circumstances as to amount to a


1. Definition.

Insurance Code, § 13. Every interest in property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest.

 The interest may be in the property itself (e.g. ownership), or any relation thereto (e.g. interest of a trustee
or a commission agent), or liability in respect thereof (e.g. interest of a carrier or depository of goods). The
principle may be stated generally that anyone has an insurable interest in property who derives a benefit from
its existence or would suffer loss from its destruction.
 It is not necessary that the interest is such that the event would necessarily subject the insured to loss. It is
sufficient that it might do so, and that pecuniary injury would be the natural consequence.
 Although a person has no title, legal or equitable, in the property, and neither possession nor right to
possession, yet he has an insurable interest if he is so situated with respect with the property that he will
suffer loss as the proximate result of its damage or destruction.
 As a general rule, the expectation of benefit to be derived from the continued existence of property must
have a basis of legal right, although the person insured has no title.
 Mere factual expectation of loss not arising from any legal right or duty in connection with the property does
not constitute an insurable interest.

2. What it May or May Not Consist in

Same; § 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.

 Insurable interest in property need not be an existing interest. It may consist merely in an inchoate interest
or an expectancy.
 An existing interest in a property may be a legal title or beneficial title. Undoubtedly, the absolute owner of
property has an insurable interest thereon. The following are examples of persons who have an insurable
interest arising from legal title: trustee, mortgagor, lessee and sublessee.
 Where legal title is held in a representative capacity, as by an executor, administrator, trustee, or receiver,
the representative has sufficient insurable interest for the purpose of taking out insurance on the property
under his control, but any proceeds from such insurance are to be held for the benefit of those for whose
benefit the representative is acting.
 The following have insurable interest arising from equitable title: purchaser of property before delivery, or
before he has performed the conditions of sale; mortgagee of property mortgaged; mortgagor, after
foreclosure but before expiration of the period within which redemption is allowed; the beneficiary under a
deed of trust; the creditors under a deed of assignment; a judgment debtor whose property has been seized
under execution.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 29

 An inchoate interest must be founded on an existing interest. A stockholder has an inchoate interest in the
property of the corporation of which he is a stockholder, which is founded on an existing interest arising from
his ownership of shares in the corporation. Likewise, a partner has an insurable interest in the firm property
which will support a separate policy for his benefit.
 The expectancy must be coupled with an existing interest in that out of which such expectancy arises. Thus,
a farmer may insure future crops if they are to be grown on land owned by him at the time of the issuance of
the policy.

Insurance Code, § 16. A mere contingent or expectant interest in anything, not founded on an actual right to the thing,
nor upon any valid contract for it, is not insurable.

 A mere hope or expectation of benefit which may be frustrated by the happening of some event uncoupled
with any present legal right will not support a contract of insurance.
 A father cannot insure his son’s property nor can a son insure the property that he expects to inherit from his
father as his interest is merely an expectancy of inheriting.
 A general or unsecured creditor cannot insure specific property of a deceased debtor who is alive, even
though destruction of such property would render worthless any judgment he might obtain. But an unsecured
creditor may insure the property of the deceased debtor since all personal liability ceases with the death of
the debtor. The proceedings to subject the estate to the payment of the debt of the deceased debtor are in
rem. Also, an unsecured creditor who obtains a judgment in his favor have insurable interest in the debtor’s
property as he has a right to levy on such property as may be necessary to satisfy judgment.
 One named as a beneficiary in a will has no insurable interest in a property designated before the testator’s
death. His expectation has no legal basis since the will has no legal effect before the death of the testator.

3. Measure of Insurable Interest in Property

Insurance Code, § 17. The measure of an insurable interest in property is the extent to which the insured might be
damnified by loss or injury thereof.

Same, §15. A carrier or depository of any kind has an insurable interest in a thing held by him as such, to the extent of
his liability but not to exceed the value thereof.

 A contract of insurance is one of indemnity. Any contract of property insurance that gives to the insured more
than indemnity against his actual loss that may be suffered by the happening of the event insured against is
in the nature of a wagering policy contrary to public policy.

4. Property Insurance is a Contract of Indemnity.

Same, § 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some person
having an insurable interest in the property insured.

 An insurance taken out by a person on property in which he has no insurable interest is void.
 Where the insurance is invalidated on the ground that no insurable interest exists, the premium is ordinarily
returned to the insured unless he is in pari delicto with the insurer. It is consistent with the principle of
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 30

indemnity to pay the insured a benefit in an amount equal to or less than the loss but the principle is violated
if he is paid a benefit more or greater than the loss.
 The doctrine of waiver or estoppel is not applicable since the public has an interest in the matter independent
of the consent and the concurrence of the parties.
 Measure of indemnity in insurance contracts.
Contracts of marine or fire insurance. – They are contracts of indemnity. Pursuant to the general rule regarding
indemnity, the amount of insurance fixed in the policy of a marine or fire insurance is not the exact measure
of indemnity to which the insured is entitled, but the maximum indemnity which he might obtain. The insured
cannot recover in excess of his actual loss. In valued policies, however, the valuation of the thing insured is
conclusive between the parties thereto in the adjustment of the loss, if the insured has some interest at risk,
and there is no fraud on his part, although it might be proved that the actual value of the thing is less.

Liability insurance contracts. – They are considered contracts of indemnity against liability and not against
loss. In this type of insurance, the insurer’s promise is to pay the proceeds of the policy on behalf of the
insured to a third person to whom the insured is liable. If the insured suffers no loss because his liability to
the third person, for some reason, cannot be enforced, the insurer has no liability to pay the proceeds.

Life insurance contracts. – The amount fixed payable at the death of the insured is not considered as the true
value of the thing insured because the life of a person is priceless, but is simply the measure of indemnity
which the insurer has bound himself to pay the insured. The contract of the insurer may be to pay on the
happening of the event insured against, a certain or ascertainable sum of money irrespective of whether or
not the insured has suffered loss or amount of such loss if he has suffered any. The amount for which a person
is insured is governed by the amount of premium that he contracted to pay.

Personal accident insurance contracts. – Like life policies, they are not contracts of indemnity. Life and limb
are not susceptible of exact valuation. Hence, the principle of indemnity is not applicable. However, if a person
effects a personal accident insurance on the life of another person, the amount recoverable is the loss
sustained by the person who effected the policy.

Health insurance contracts. – Health insurance contracts that provide a specific periodic income to disabled
persons are not contracts of indemnity. But those that cover medical expenses are contracts of indemnity. In
these contracts, only medical expenses incurred by the insured are paid.

Health care agreement. – Such an agreement with a health maintenance organization is in a nature of non-
life insurance which is primarily a contract of indemnity. Once a member incurs hospital, medical or any other
expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the
same to the extent agreed upon under the contract. Being in the nature of a contract of indemnity, payment
should be made to the party who incurred the expenses.

4. Change of Interest Suspends Insurance

Insurance Code, § 20. Except in the cases specified in the next four sections, and in the cases of life, accident, and health
insurance, a change of interest in any part of a thing insured unaccompanied by a corresponding change in interest in
the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the
insurance are vested in the same person.

Same, § 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.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 31

Same, § 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.

Same, § 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.

Same, § 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.

Same, § 57. A policy may be so framed that it will inure to the benefit of whomsoever, during the continuance of the
risk, may become the owner of the interest insured.

Same, § 58. The mere transfer of a thing insured does not transfer the policy, but suspends it until the same person
becomes the owner of both the policy and the thing insured.


Section 19 – An interest in property must exist when the insurance takes effect and when the loss occurs, but need not exist in the
meantime; and interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist
thereafter or when the loss occurs

 Insurable interest on property should exist not only on the date of execution of contract but also on the date of the
occurrence of the risk insured against

1) As to extent of insurable interests

Life  unlimited
Property  actual value of interest

2) As to time when insurable interest must exist

Life  enough that at time the policy takes effect; need not exist at time of loss
Property  needs to exist at time policy takes effect and at time of loss but not meantime

3) As to expectation of benefit to be derived

Life from continued existence of insurable interest doesn’t need legal basis
Property  needs to have a basis of legal right; can’t just be presumed.

Section 183 – Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of the indemnity
under a policy of insurance upon life or health in the sum fixed in the policy
Life  Amount of indemnity payable at death is amount fixed; any amount as long as he can pay premium (exception
when insures life of another like a creditor on a debtor)
Property  depends on whether policy is open or valued
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 32


 Palileo v. Cosio
When a mortgagee (Cosio) independent of the mortgagor (Palileo), insures mortgaged property in his own name and for his own
interest, he is entitled to the insurance proceeds in case of loss but in such case, he is not allowed to retain his claim against the
mortgagor but it passes by subrogation to the insurer, to the extent of the insurance money paid. In other words, the proceeds of
the insurance should be delivered to Cosio but her claim against Palileo shall be considered as assigned to the insurance company
who is deemed subrogated to the rights of Cosio to the extent of the money paid as indemnity.

 Geagonia v. CA
Geogonia insured storage area for ready-to-wear outfits in public market from Country Bankers. Cebu Leasing is a stock
owner of Geogonia’s business and insured storage without Geagonia’s knowledge. When fire occurred, Country Bankers
denied insurance when it found out that there were 2 other fire insurance taken. Supreme Court held it was not double
insurance as the insurable interest was not the same. The mortgagor’s interest is the value of the whole property while
mortgagee’s interest is only to the value of the mortgage – the extent of the debt. The mortgagor (Geogonia) has loss
payable clause in favor of mortgagee as his interest may appear the mortgagee is only a beneficiary under the contract,
and recognized as such by the insurer but not made a party to the contract himself.


Section 93 – A double insurance exists where the same person is insured by several insurers separately in respect to the same
subject and interest.
 Also called additional and other insurance
 Requisites
o Person insured is the same
o Two or more insured separately
o Subject matter is the same
o Interest insured is the same
o Risk and peril insured against in the same
 Not Over-insurance
1. Over-insurance  amount of insurance is beyond the value of the insured’s insurable interest
Double insurance  no over-insurance as the sum-total of the amounts of the policies issued does not exceed the
insurable interest
2. Double insurance  several insurers
Over – insurance  one insurer
 Unless stipulated that double insurance is prohibited (like in fire insurance), then it is allowed
 Purpose of prohibition  to avoid the perpetuation of fraud, prevent over-insurance

Section 94 – Where the insured is over-insured by double insurance:

a. The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up
to the amount for which the insurers are severally liable under the respective contracts.
b. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation
for any sym received by him under any other policy without regard to the actual value of the subject matter insured
c. Where the policy under which the insured claims is an unvalued policy he must give credit as against the full insurable
value, for any sum received by him under any other policy
d. Where the insured receives any sum in excess of the valuation in the case of valued policies, he must hold such sum in
trust for the insurers, according to their right of contribution among themselves
e. Each insurer is bound, as between himself and the other insurers to the amount for which he is liable under his contract.
 These are the principle of contribution – requires each insurer to contribute ratably to the loss or damage
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 33


a. Insurance is a contract of perfect good faith
b. Four primary concerns of parties
i. 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
ii. The precise delimitation of the risk which determines the extent of the contingent duty to pay
undertaken by the insurer
iii. 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
iv. Determining whether a loss occurred and if so, the amount of loss.
c. Need to ascertain and control risk and loss

a. Definition
Section 26 – A neglect to communicate that which a party knows and ought to communicate is called concealment.
 Tools in order to insure for definite coverage
1) The device of concealment – enables the insurer to secure the same information with respect to the risk that
was possessed by the applicant for insurance
2) Warranties
3) Exceptions
4) Executory warranties – undertakings that certain conditions should or shouldn’t exist in the future
5) Condition precedent
 Requisites of concealment
1) party knows the fact which he neglects to communicate or disclose
2) party concealing is duty bought to disclose the fact
3) party concealing makes no warranty of the fact concealed
4) other party has no other means to ascertain facts
Section 28 – Each party to a contract of insurance must communicate to the other, in good faith, all the facts within his knowledge
which are material to the contract, and which the other has not the means of ascertaining, and as to which he makes no warranty.
 1) Material to contract 2) other cant ascertain facts 3) party to communicate makes no warranty
 Test: If the applicant is aware of the existence of some circumstance which he knows would influence the insurer in
acting on his application, good faith requires him to disclose.

b. Right to Rescind
Section 27 – A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance
 Voidable
 Doctrine of utmost good faith
 Existence of fraud need not be acquired
o Negligence to inform is enough
o Misleads and deceives the insurer
o Only applies to marine insurance in the US as they can’t ascertain in high seas. Not here

Section 29. An intentional and fraudulent omission, on the part of one insured, to communicate information of matters proving or
tending to prove the falsity of a warranty entitles the insurer to rescind
 Difference with 26, is that here it is intentional and fraudulent omission

c. Matters which need not be disclosed

Section 30 – Neither party to a contract of insurance is bound to communicate information of the matters following, except in
answer to the inquiries of the other:
a. Those which the other knows
b. Those which, in the exercise of ordinary care, the other ought to know, and of which the former has no reason to suppose
him ignorant
c. Those of which the other waives communication
d. Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 34

e. Those which relate to a risk excepted from the policy, and which are not otherwise material
 An answer incomplete on its face will not defeat policy unless there is bad faith
 No need to disclose when
1) Matters known to insurer but waives disclosure
2) Risks exceeds policy
3) Nature of insured interest
Section 32 – Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally
with that of the other and which may affect the political or material perils contemplated; and all the general usages of trade.
 If info is open to public, no need to inform

Section 33 – The right information of material facts may be waived, either by the terms of the insurance or by neglect to make
inquiries as to such facts where they are distinctly implied in other facts of which information is communicated.
Section 34 – Information of the nature or amount of the interest of one insured need not be communicated unless in answer to an
inquiry, except as prescribed by fifty-one
Section 35 – Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment
upon the matters in question

4. Determination of Materiality

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.

Test of Materiality: Test is the effect, which the knowledge of the fact in question would have on the making of the
contract. To be material, a fact need not increase the risk or contribute any loss or damage suffered. It is sufficient of
the knowledge of it would influence on the parties making the contract.

Eguaras v. Great Eastern Life Assurance Company

Issue: substitution of person in medical examination

Doctrine: A contract of insurance is fraudulent when the consent of the insurance company was obtained by means of
deceitful, insidious machinations or false statements, even though such do not constitute estafa or any other criminal
subject to the penal law.

Argente v. West Coast Life Insurance Co.

Issue: concealment of alcoholism and psychoneurosis, died of cerebral apoplexy

Doctrine: The basis of the rule vitiating the contract in case of concealment is that it misleads or deceives the insurer
into accepting the risk, or accepting it at the rate of premium agreed upon. The insurer, relying upon the belief that
the assured will disclose every material within his actual or presumed knowledge, is misled into a belief that the
circumstance withheld does not exist, and he is thereby induced to estimate the risk upon a false basis that it does not
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 35

Musngi v. West Coast Life Insurance Co.

Issue: concealment of tuberculosis, died one year later

Doctrine: The determination of the point whether there has or has not been a material concealment must rest largely
in all cases upon the form of questions propounded and the exact terms of the contract.

Qua Chee Gan v. Law Union and Rock Insurance Co.

Issue: Insurer’s knowledge of the lack of fire hydrants leads to estoppel.

Doctrine: It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge
of existing facts which, if insisted on, would invalidate the contract from its very inception, such knowledge constitutes
a waiver of conditions in the contract inconsistent with the facts, and the insurer is stopped thereafter from asserting
the breach of such conditions. The law is charitable enough to assume, in the absence of any showing to the contrary,
that an insurance company intends to executed a valid contract in return for the premium received; and when the
policy contains a condition which renders it voidable at its inception, and this result is known to the insurer, it will be
presumed to have intended to waive the conditions and to execute a binding contract, rather than to have deceived
the insured into thinking he is insured when in fact he is not, and to have taken his money without consideration.

Yu Pang Cheng v. CA

Issue: concealment of dizziness, died of carcinoma with dizziness as a symptom

Doctrine: In an action on a life insurance policy where the evidence conclusively shows that the answers to questions
concerning diseases were untrue, the truth or falsity of the answers become the determining factor. If the policy was
procured by fraudulent representations, the contract of insurance apparently set forth therein was never legally
existent. It can fairly be assumed that had the true facts been disclosed by the assured, the insurance would never
have been granted.

Fieldmen’s Insurance Co. v. Vda. De Songco

Issue: Insurer’s agent knowingly induced private vehicle owner get a common carrier insurance.

Doctrine: Where inequitable conduct is shown by an insurance firm, it is "estopped from enforcing forfeitures in its
favor, in order to forestall fraud or imposition on the insured.

Great Pacific Life Assurance Corp. v. CA

Issues: binding deposit receipt with no approval of insurer, concealment of child’s mongoloid syndrome, died of
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 36

Doctrine: Concealment exists where the assured had knowledge of a fact material to the risk, and honesty, good faith,
and fair dealing requires that he should communicate it to the assured, but he designedly and intentionally withholds
the same.

Ng Gan Zee v. Asian Crusader Life

Issue: Insured’s disclosure of a tumor with size of a hen’s egg deemed by the Insurer to be a concealment as it turned
out to be a peptic ulcer operation. Insured died of cancer.

Doctrine: Where, upon the face of the application, a question appears to be not answered at all or to be imperfectly
answered, and the insurers issue a policy without any further inquiry, they waive the imperfection of the answer and
render the omission to answer more fully immaterial.

Canilang v. CA

Issue: concealment of sinustachycardia or abnormally fast beating of the heart, died of heart failure

Doctrine: Materiality of the information does not depend upon the state of mind. A man's state of mind or subjective
belief is not capable of proof in our judicial process, except through proof of external acts or failure to act from which
inferences as to his subjective belief may be reasonably drawn. Neither does materiality depend upon the actual or
physical events, which ensue. Materiality relates rather to the "probable and reasonable influence of the facts" upon
the party to whom the communication should have been made, in assessing the risk involved in making or omitting to
make further inquiries and in accepting the application for insurance; that "probable and reasonable influence of the
facts" concealed must, of course, be determined objectively, by the judge ultimately.

Sun Life Assurance Co. of Canada v. CA

Issue: concealment of past urinalysis, senograph, hematology, 2 weeks later died in a plane crash

Doctrine: The waiver of a non-medical exam in a non-medical insurance contract renders even more material the
information required of the applicant concerning previous condition of health and diseases suffered.

C. Representation

1. Form and Definition

Sec. 36. A representation may be oral or written.

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 otherwise induce him to enter into the insurance contract.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 37

Misrepresentation – Statement as a fact of something which is not true, which the insured stated with knowledge that
it is not true and with an intent to deceive, or which he states positively as true without knowing it to be true and
which has a tendency to mislead and where such fact in either case is material to the risk.

 Misrepresentation is an active form of concealment.

2. When Made

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

 If made after, representation could not have influenced either party to enter into the contract.

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

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

3. Construction of Representation

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

 It must be construed liberally in favor of the accused and only required to be substantially true.
 Liquor inquiry – habituality
 Alcohol inquiry – seriousness

Sec. 40. A representation cannot qualify an express provision in a contract of insurance, but it may qualify an implied

 Representation is not part of the contract but only a collateral inducement.

4. Promissory Representations (Sec. 39)

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

5. Information from Third Persons (Sec. 43)

Sec. 43. When a person insured has no personal knowledge of a fact, he may nevertheless repeat information which he has
upon the subject, and which he believes to be true, with the explanation that he does so on the information of others; or he
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 38

may submit the information, in its whole extent, to the insurer; and in neither case is he responsible for its truth, unless it
proceeds from an agent of the insured, whose duty it is to give the information.


 The insured is given discretion to communicate to the insurer what he knows of a matter of which he has no personal
knowledge. He will not be responsible if the information turns out to be false as long as he has given an explanation that
he obtained it from another. (Ex. Insurer does not know how his parents died, he may report information given to him by
others and shall not be responsible if such turn out to be false)

Effect where information obtained from agent of insured/insurer:

1. From agent of insured whose duty it is to communicate such information to his principal, and it was possible for agent in
the exercise of due diligence to have made such communication before making the contract, the insured will be liable for
the truth.
2. From agent of insurer, insurer would be liable (same principle applies).

6. False Representations (Sec. 44 & 45)

Sec. 44. A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations.


 Representations need only to be substantially true and not literally true unlike in warranties. In order that a policy may be
avoided, it must be false in a substantial and material respect.
 A representation is substantially true when it is true in every particular material to the risk, or is so far true that the
conduct of the insurer would not have been different if the exact truth had been alleged.
 In marine insurance: substantial truth is not sufficient; required to state the whole truth.
 A representation written in the policy even in such form as to admit of its being construed as an executor agreement or
promissory representation will rather be construed, when possible, as an affirmative representation of a present fact in
order to save the policy from avoidance.

Sec. 45. If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to
rescind the contract from the time when the representation becomes false. The right to rescind granted by this Code to the
insurer is waived by the acceptance of premium payments despite knowledge of the ground for rescission


 Fraud or intent to misrepresent is not essential to entitle injured party to rescind the contract on the ground of false
representation. To be false, it is sufficient if the representation fails to correspond with the facts in a material point.

Effect of collusion or fraud of agent

1. Collusion with insured  vitiates policy even when agent is acting within the apparent scope of his authority
2. Principal of agent  where the insured merely signed the application form and made the agent of the insurer fill the
same for him, it was held that by doing so, the insure made the agent of the insurer his own agent; insurer is liable when
its agent writes a false answer into the application without the knowledge of the insured.

a) If material fact is concealed by assured it is equivalent to a false representation that it does not exist

CASE: Argente v West Coast Life Insurance Co. (supra)

B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 39

FACTS: Argente signed an application for joint insurance with his wife. The wife died of cerebral apoplexy. It was later found out
that the answers given by the insured in their medical examinations with regard to their health and previous illnesses were
untrue. She had answered in the negative when asked if she had ever consulted a physician for any ailment of the brain or nervous
system when in fact she had consulted with a doctor for cerebral congestion and Bell’s palsy. When asked if she frequently drunk
alcohol she answer that she drank beer but only occasionally when in fact she was described to be an alcoholic by others.

HELD: If a material fact is concealed by assured, it is equivalent to a false representation that it does not exist and that the
essentials are the truth of representations whether they were intended to mislead and did insurer accept them as true and act
upon them with prejudice. So it is decided that under a stipulation voiding the policy for concealment or misrepresentation of any
material fact or if his interest is not truly stated or is other than the sole and unconditional ownership the facts are unimportant
that insured did not intend to deceive or withhold information as to encumbrances even though no questions were asked.

b.) Concealment is the passive, and misrepresentation is the active form of the same thing


 In order to be a ground for rescission, the representation must:

1. refer to a material fact
2. that is false
3. known to the insured to be so

 Concealment is the passive, and misrepresentation the active form of the same thing. Rules applicable to both are similar.
In both cases 1) to be a ground for rescission, the fact concealed or misrepresented must be a material fact. 2) a party
cannot be charged with concealment or misrepresentation if he acted in good faith

c) Misstatement of age (Sec. 227, par. D)

Sec. 227. In the case of individual life or endowment insurance, the policy shall contain in substance the following conditions:

(d) A provision that if the age of the insured is considered in determining the premium and the benefits accruing under the
policy, and the age of the insured has been misstated, the amount payable under the policy shall be such as the premium
would have purchased at the correct age;


 Life policies contain a special clause which provides that if the age of the insured has been misstated, the amount payable
under the policy shall be such as the premium paid would have purchased at the correct age. This is determined by the
application of a simple proportion.

Given: P20 premium for a P1000 policy when the correct premium should have been P25
P25:20 = P1000:x
Hence, P25x=P20 000

7. Test of Materiality (Sec. 46)

Sec. 46. The materiality of a representation is determined by the same rules as the materiality of a concealment.

B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 40

 Test of materiality  determined not by the event, but solely by the probable and reasonable influence of the facts upon
the party to whom the representation Is made, in forming his estimates of the disadvantages of the propose contract or
in making his inquiries
 Materiality is a judicial question and cannot be left to the insurer

Concealment vis-à-vis Misprepresentation

Concealment Misrepresentation
1. Insured withholds information of material 1. Insured makes erroneous statements of facts
facts from the insurer with the intent of inducing the insurer to
enter into the insurance contracts
2. Rules on materiality of concealment are the same rules applied to materiality of misrepresentation
3. Same effect, right to rescind
4. Whether intentional or not, injured is entitled to rescind contract
5. Rules of concealment and representation apply to the insurer

8. Applicability of Sections 24-48 (Sec. 47)

Sec. 47. The provisions of this chapter apply as well to a modification of a contract of insurance as to its original formation.

9. Incontestibility in Life Insurance; Defenses not barred by Incontestable Clause (Sec. 48 & 227, par. D)

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


 Action to rescind in Sec. 48 presupposes existence of a contract. Hence, a defense to an action to recover insurance that
was obtained through false representations, fraud, and deceit is not in the nature of an action to rescind and is therefore,
not barred by the provision. There is no time limit imposed for interposing this defense.
 In non-life insurance policy, in order that insurer may rescind contract, such right must be exercised prior to the
commencement of an action.
 In life policy, Sec. 48 is qualified by the second paragraph where defenses mentioned are only available during 1 st two
years of the policy.
 Incontestable clauses  stipulate that the policy shall be incontestable after a stated period
 Incontestability means that after requisites are shown to exist, the insurer shall be stopped from contesting the policy
or setting up any defense except as is allowed on the ground of policy
 Theory and object of incontestable clause: As to insurer, an insurer should have a reasonable opportunity to investigate
statements and after a certain period, he is not allowed to question the validity of a policy. As to insured, the clause gives
the greatest possible assurance to a policyholder that his beneficiaries would receive payment without question as to the
validity of the policy or the existence of the coverage once the period of contestability passes.

Requisites of incontestability

1. It is a life insurance policy

B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 41

2. Payable on the death of the insured

3. In force during the lifetime of the insured for at least 2 years from its date of issue or of its last reinstatement

 Period of 2 years may be shortened but cannot be extended

 “during the lifetime” means that the policy is no longer considered in force after the insured has died

Effects when policy becomes incontestable:

Insurer may not refuse to pay by claiming
1. Policy is void ab initio
2. Rescissible by reason of fraudulent concealment
3. Rescissible by reason of fraudulent misrepresentation

 “void ab initio” should be understood as voidable

 “fraud” should be understood as fraud in inducement
 In case of reinstatement, the period shall be counted from the day of reinstatement and not from the date of the policy.

Defenses not barred by incontestable caluse

1. No insurable interest
2. Cause of death is an excepted risk
3. Premiums not paid
4. Conditions of policy relating to military or naval service have been violated
5. Fraud is of vicious type (ex. Policy was taken out of scheme to murder the insured)
6. Beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has
7. Action not brought within the specified time

Sec. 227. In the case of individual life or endowment insurance, the policy shall contain in substance the following conditions:

(b) A provision that the policy shall be incontestable after it shall have been in force during the lifetime of the insured for a
period of two years from its date of issue as shown in the policy, or date of approval of last reinstatement, except for non-
payment of premium and except for violation of the conditions of the policy relating to military or naval service in time of war

CASE: Tan Chay Heng v West Coast Life Insurance Co.

FACTS: Tan allegedly applied for an insurance policy in collusion with the agent and doctor of the insurance company. It was
falsely represented that Tan was a single and a merchant and that the petitioner was his nephew (made the beneficiary)
when in fact he was married, a mere employee and the petitioner was not his nephew. The doctor made it appear that he had
not used any drugs when in fact he was a drug addict. He later died of pulmonary tuberculosis. Temporary policy was issued
on April 10, 1925. Action was commenced on July 4, 1926. Insurer refused to pay amount in the policy. Petitioners insisted
that Sec. 47 should be applied and that insurer is barred and estopped. Defendants contend that Sec. 47 does not apply; that
if in legal effect defendant’s special defense is in the nature of an act to rescind the contract, then such must be exercised
prior to an action to enforce the contract.

HELD: They never entered into a contract of insurance. Thus, no contract to rescind and Sec. 47 does not apply. Minds of the
party never met and never agreed upon the terms and conditions of the contract. Rescission presupposes the existence of a
contract to rescind. Also, a defense to an action to recover insurance that the policy was obtained through false
representation, fraud and deceit is not in the nature of an action to rescind and hence is not barred by Sec. 47 of the
Insurance Act.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 42

CASE: Tan v CA

FACTS: Tan applied for a life insurance policy of P80 000. On April 26, 1975, he died of hepatoma. In letter dated September
11, 1975, insurer denied the claim and rescinded the policy by reason of alleged misrepresentation and concealment of
material facts made by the deceased. Petitioners contend that the insurer no longer had the right to rescind the contract of
insurance as rescission must allegedly be don during the lifetime of the insured within 2 years and prior to the
commencement of action.

HELD: Contention is of no merit. The “incontestability clause” precludes the insurer from raising the defenses of false
representations or concealment of material facts insofar as health and previous diseases are concerned if the insurance has
been in force for at least 2 years during the insured’s lifetime. The phrase “during the insured’s lifetime” found in Sec. 48
simply means that the policy is no longer considered in force after the insurance has died. The key phrase in the second
paragraph of Sec. 48 is “for a period of 2 years”. The policy was issued in Nov. 6, 1973 and the insured died on April 26, 1975.
The policy was thus in force for a period of only 1 year and 5 mos. Considering that insured died before 2-year period lapsed,
respondent company is not, therefore barred from proving that the policy is void ab initio by reason of the insured’s
fraudulent concealment or misrepresentation.

D. Warranties

1. Definition (Sec. 67 & 69)

1. Definition

 Warranty: is a statement or promise by the insured set forth in the policy itself or incorporated in it by proper reference,
the untruth or nonfulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced
by such untruth or nonfulfillment, renders the policy voidable by the insurer.
 May also be made by insurer.

Sec. 67. A warranty is either expressed or implied

Kinds of Warranties*

1. Express agreement contained in the policy or clearly incorporated therein as part thereof whereby the insured
stipulates certain facts relating to the risk are or shall be true or certain acts relating to the same subjects have been or
shall be done
2. Impliedwhich from the nature of the contract or from the general tenor of the words, although no express warranty is
mentioned, is necessarily embodied in the policy as part thereof which binds the insured as though expressed in the
contract (usually found in marine insurance)
3. Affirmative one which asserts the existence a fact or condition at the time it is made
4. Promissory  aka as executor warranty, where the insured stipulates certain facts or conditions pertaining to the risk
shall exist or that certain things with reference thereto shall be done or omitted (a condition subsequent)

 Warranty presumed affirmative unless contrary intention appears.

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

 The word “warranty” used in an insurance contract does not necessarily constitute a warranty nor is the use of such word
necessary to constitute a warranty. Whether it is a warranty depends on the intention of the parties.
 In case of doubt, a statement will be construed as representation rather than a warranty especially if such instrument is
contained in any instrument other than the policy.
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 43

Warranties vis-à-vis Representation

Warranty Representation
1. Considered part of the contract 1. Collateral inducement
2. Always written on the face of the policy 2. May be written in totally disconnected paper or
may be oral
3. Must be strictly complied with 3. Only substantial truth is required
4. Falsity is a breach of contract 4. Falsity renders policy void on ground of fraud
5. Presumed material 5. insurer must show materiality

2. Kinds

a) Express (Sec. 70 & 71)

Sec. 70. Without prejudice to section fifty-one, every express warranty, made at or before the execution of a policy, must be
contained in the policy itself, or in another instrument signed by the insured and referred to in the policy as making a part of it.

 Warranty must form part of the contract itself or contained in another instrument, signed by insured and referred to in
the policy as making a part of it
 Ang Giok Chip v Springfield Fire and Mutual Insurance Co.: “another instrument” was construed as excluding a rider.
Rider attached to a policy is part of the contract to the same extent as if it were actually embodied therein. “Another
instrument” could not mean a mere slip of paper like a rider, but something akin to the policy itself, which ins Sec. 49 is
defined as a written instrument in which a contract of insurance is set forth.

Sec. 71. A statement in a policy of matter relating to the person or thing insured, or to the risk, as a fact, is an express warranty

 Statement in the policy relating to the person or insured thing or to the risk must be as a fact and not as an opinion, or
belief, to constitute an express warranty thereof
 When the statement is in a nature of an opinion, it is not strictly speaking a warranty of its truthfulness. If deemed a
warranty at all, it is merely a limited warranty as to the honesty and good faith of the insured, a warranty that the
statement is in his honest opinion or judgment.

b) Implied (applicable in marine insurance only) *see definition above

c) Affirmative(Sec. 68) *see definition above

Sec. 68. A warranty may relate to the past, the present, the future, or to any or all of these.

d) Promisorry (Sec. 68, 72, 73) *see definition above

Sec. 68. A warranty may relate to the past, the present, the future, or to any or all of these.

Sec. 72. A statement in a policy which imparts that it is intended to do or not to do a thing which materially affects the risk, is a
warranty that such act or omission shall take place.

 Refers to a promissory warranty. Breach of promise or agreements as to future acts will not avoid a policy unless the
promises are material to the risk. The act or omission is material to the risk if it increases the risk, and under the law, only
substantial increase of risk works forfeiture of the policy which is avoided because of the increase in hazard.

Sec. 73. When, before the time arrives for the performance of a warranty relating to the future, a loss insured against happens, or
performance becomes unlawful at the place of the contract, or impossible, the omission to fulfill the warranty does not avoid the
B 2 0 1 3 | I n s u r a n c e | A t t y . B o c o b o | 44

When a breach of warranty does not avoid the policy

1. When loss occurs before the performance

2. When performance becomes unlawful
3. When performance becomes impossible