INSURANCE CODE

P.D. 612
R.A. 10607

Atty. Jobert O. Rillera, CPA, REB, REA

Terminology
 (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.
CHARACTERISTICS OF AN
INSURANCE CONTRACT
 1. Consensual
 – it is perfected by the meeting of the minds of the parties.

 2.Voluntary
 – the parties may incorporate such terms and conditions as they
may deem convenient.

 3.Aleatory
 – it depends upon some contingent event.

 4.Unilateral
 – imposes legal duties only on the insurer who promises to
indemnify in case of loss.
CHARACTERISTICS OF AN
INSURANCE CONTRACT
 5.Conditional
 – It is subject to conditions the principal one of which is the
happening of the event insured against.

 6.Contract of indemnity
 – Except life and accident insurance, a contract of insurance is a
contract of indemnity whereby the insurer promises to make good
only the loss of the insured.

 7.Personal
 – each party having in view the character, credit and conduct of the
other
REQUISITES OF A CONTRACT
OF INSURANCE
 1. A subject matter which the insured has
an insurable interest.
 2. Event or peril insured against which
may be any future contingent or unknown
event, past or future and aduration for the
risk thereof.
 3. A promise to pay or indemnify in a fixed
or ascertainable amount.
 4. A consideration known as “premium”.
 5. Meeting of the minds of the parties.
There are six (6) major
principles of insurance
 a. Indemnity

b. Contribution

c. Utmost Good Faith

d. Subrogation

e. Proximate Cause

f. Insurable Interest
INDEMNITY
 The purpose of the insurance contract is to
restore the insured to the same financial
condition he was in at the time of the loss.
This principle is more applicable in
property insurance than life insurance. In
property insurance, the total sum insured
serves as a cap to the potential liability of
the insurer and not the amount of liability
itself in case of a loss. The amount of the
indemnity is subject to evaluation by the
insurer in order to determine the actual
extent of loss of the insured.
INDEMNITY
 It is the basis of all property insurance. The
insured who has insurable interest over a
property is only entitled to recover the amount
of actual loss sustained and the burden is upon
him to establish the amount of such loss

 Rules:
 a.Applies only to property insurance except when
the creditor insures the life of his debtor.
 b.Life insurance is not a contract of indemnity.
 c.Insurance contracts are not wagering contracts.
(Sec. 4)
 Optimus Prime insured his property against
fire for Php 4,000,000.00. The property was
totally burned and the value of the house
was determined to be Php 3,500,000.00
only.

 How much will be the indemnification of

Optimus Prime? It is Php 3,500,000.00 or
Php4,000,000.00?
CONTRIBUTION
 The principle of contribution follows the
concept of indemnity and it applies in
double insurance. According to this
principle, in case of a loss, all the co-
insurers shall share in the loss in
proportion to their participation in the
risk.
The purpose of this principle is to prevent
the insured from recovering more than the
full amount of his loss where two (2) or
more policies exist over the subject matter
of insurance.
 Frodo insured his Php 2,000,000.00
property against fire for Php 2,000,000.00
each with Shire and Rivendale Insurance
Company, respectively. The property was
partially burned and the value of the loss
was determined to be Php 1,200,000.00.

 If you were Frodo’s insurance consultant,

what will be your advice to him?
SUBROGATION
 Subrogation is another principle that closely related
with the principle of indemnity. Consequently, the
amount that the insurer can recover against the
offending party is limited to the amount it has
actually paid to its insured.
It is the legal effect of the payment of claim by the
insurer. Upon payment of the claim, the insurer
assumes all the legal rights and remedies available to
the insured against any and all parties liable for the
loss.
According to the New Civil Code, the cause of the
loss or injury must be a risk covered by the policy to
entitle the insurer to subrogation.
Principle of Subrogation
 It is a process of legal substitution where the insurer
steps into the shoes of the insured and he avails of
the latter’s rights against the wrongdoer at the time
of loss.

 The principle of subrogation is a normal incident of

indemnity insurance as a legal effect of payment;

 It inures to the insurer without any formal assignment

or any express stipulation to that effect in the policy.
Said right is not dependent upon nor does it grow
out of any private contract. Payment to the insured
makes the insurer a subrogee in equity.
Principle of subrogation
 It is the legal effect of the payment of claim by the insurer.
Consequently, -
a. There is no need for a written assignment of rights in
order to enforce one’s right of subrogation. However, the
Supreme Court stated that the signing of a Loss and
Subrogation Receipt was a valid pre-condition before the
insurer could be compelled to turn over the whole amount
of the insurance to the insured.
b. The insurer can only recover from the offending party
up to the amount it had paid to the insured.
c. The insured can no longer recover from the offending
party what was paid to him by the insured. However, the
insured can still recover for the deficiency if the actual
damages were more than what the insurer paid.
Cases when there is no right of
subrogation
 They are as follows:
a. When the insurer pay the insured for a
loss not covered by the policy.
b. The insurer by his own act releases the
wrongdoer.
c. In case of life insurance.
d. Recovery of loss in excess of the limits
provided by the policy.
UTMOST GOOD FAITH
 An insurance contract is one of perfect good
faith not for the insured alone, but equally so
for the insurer; in fact, it is more so for the
latter, since its dominant bargaining position
carries with it a stricter responsibility.

It refers to duty of both the insurer and

insured to exercise honesty in dealing with
each other. Both parties are obligated to
declare all facts that are considered material
to the contract of insurance. The application of
the concept of utmost good is applied and
discussed in the section dealing concealment
and misrepresentation.
Principle of Utmost Good Faith
 An insurance contract requires utmost good
faith (uberrimae fidei ) between the parties.
 The applicant is enjoined to disclose any
material fact, which he knows or ought to
know.

 Reason:
 An insurance contract is an aleatory
contract. The insurer relies on the
representation of the applicant, who is in the
best position to know the state of his health.
How is materiality determined?
 It 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.

 Cite examples of facts/circumstances which are deemed material.

 The following facts/circumstances were deemed to be material which was the

basis for denial of claim:
a. That the insured is suffering from:
1. Incipient pulmonary tuberculosis
2. Cerebral congestion and Bells Palsy
3. Cardiovascular disease
b. That he has been treated or hospitalized from some ailment like
pneumonia, diabetes or syphilis
c. That he was hospitalized for two (2) weeks prior to his application for
insurance.
 Marine insurance was secured upon goods on board a ship which
departed from Madagascar to Manila, without any disclosure to the
insurer of the fact that the ship had been reported at Lloyd’s of
London as seen at sea, deep in water and leaky. This report turned
out to be wrong because the ship was at no time during the voyage
leaky or in trouble, but was lost thru another insured risk. The
insurer refuses to pay the insured, claiming concealment. The
insured counters that the fact not disclosed was erroneous and did
not increase the risk and therefore immaterial. Decide the dispute
with reasons. (1979 Bar Examination)

 The insured may not recover under the marine insurance.

While the report was erroneous, it nonetheless was lost
through another risk. This is material because it could
influence the decision of the underwriter in deciding
whether to provide insurance cover or otherwise.
 “A” applied for a non-medical life insurance. The
insured did not inform the insurer that one week
prior to his application, he was examined and
confined at St. Luke’s Hospital where he was
diagnosed for lung cancer. The insured soon
thereafter died in a plane crash. Is the insurer liable
considering the fact concealed had no bearing with
the cause of death of the insured? Why? (2001 Bar
Examination)

 No. The concealed fact is material to the

approval and issuance of the insurance policy.
The insured need not die of the disease he
failed to disclose to the insurer.
 Simba insured his vessel with Hakuna Matata
Insurance Company effective September 21, 2001.
Three days after, it was discovered that the vessel had
sunk a week before the effectivity of the policy.

 Can Simba recover against his marine insurance with

Hakuna Matata Insurance Company?

 Yes. Under a marine insurance, past unknown event

can be covered, thus, coverage may be have for a
vessel which had already sunk. The presumption is
Simba acted in good faith when he sought cover for
his vessel. The burden of proving otherwise lies on
the part of the insurer.
INSURABLE INTEREST
 Define insurable interest. (1965 Bar Examination)

 The legal relationship of the insured with the subject matter of

insurance whereby the former stands to benefit from the
preservation of the latter or be prejudiced by the loss thereof.
Consequently, no contract of insurance on property shall be
enforceable except for the benefit of some person having
insurable interest in the property insured.
Also, the following stipulations shall be void:
a. for the payment of loss whether the person insured has or
has not any interest in the property insured;
b. that the policy shall be received as proof of such interest; and
c. every policy executed by way of gaming or wagering.
Notes:
 a. 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 obviously contrary to public interest.
b. Insurable interest over the thing insured minimize, if
not eliminate, the temptation to destroy it in order gain
from the proceeds of the policy.
c. A policy issued to a person without insurable interest
in the subject matter is a mere wager policy having
nothing in common with insurance except name and form
and is void and unenforceable on grounds of public policy.
d. A carrier or depositary 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.
 What is the purpose of the law in requiring
that the insured must have an insurable
interest in the life of the person insured?

 The purpose of the law in requiring the

existence of insurable interest in the
life of the insured is to eliminate the
temptation to destroy the life of the
insured on account of his life insurance.
 When may there be insurable interest in the life of another.
(1966 Bar Examination)
A person may have insurable in the life another in
the following situations:
a. Of any person on whom he depends wholly or in
part for education or support, or in whom he has a
pecuniary interest;
b. Of any person under a legal obligation to him for
the payment of money, or respecting property or
services, of which death or illness might delay or
prevent the performance; and
c. Of any person upon whose life any estate or
interest vested in him depends.
 Define insurable interest in life. (1966 Bar Examination)
An insurable interest in life may be the in the following
forms:
a. Of himself, of his spouse and of his children;
b. Of any person on whom he depends wholly or in part
for education or support, or in whom he has a pecuniary
interest;
c. Of any person under a legal obligation to him for the
payment of money, or respecting property or services, of
which death or illness might delay or prevent the
performance; and
d. Of any person upon whose life any estate or interest
vested in him depends.
 In what cases has corporation an
insurable interest in the lives of its
officers? (1965 Bar Examination)

A corporation may have insurable

interest in the lives of its officers
when the death or illness of said
officers would materially and
injuriously affect the corporation.
 What does insurable interest in property consist of? Explain your
answer. (1953 and 1967 Bar Examination)
Under Section 14, an insurable interest in property may
consist of the following:
a. An existing interest. An example of which includes
ownership over a property
b. An inchoate interest founded on an existing
interest. Examples of which includes the stockholder’s
interest in the property of the corporation and partner’s
interest in the partnership’s property.
c. An expectancy coupled with an existing interest in that
of which the expectancy arises. An example of which a
farmer’s interest future crops to be grown on the land he
owned.
 Give an example of insurable inchoate right in the
property? (1955 Bar Examination)
The following are examples of insurable
inchoate right in the property:
a. Contractor’s interest in the completed
building for unpaid construction cost;
b. Lessor’s interest in the improvement
made by the lessee;
c. Naked owner’s interest over property
which another person has beneficial title.
How is insurable interest measured?
 It depends on the type of insurance, thus:

 In Property Insurance, the measure of insurable interest in a

property is the extent to which the insured may be damnified by
loss or injury thereof.

 In Life Insurance, insurable interest cannot be measured on

account of the fact that the value of one’s life cannot be
estimated or even valued for that matter. According to some
financial planners, the rule of thumb is determining the
maximum total sum insured is 5 times of the annual salary of the
insurance applicant.The rationale behind this is that it is
assumed that a family of the decedent will take at least five (5)
years to adjust to the financial loss brought about by the death of
breadwinner.

 However, in the case of creditor-debtor relationship where the

creditor insures the life of the debtor, the limit of insurable
interest by the creditor is equal to the amount of debt.
 Megatron is the lessee of Decepticon
Corporation (Decepticon). Under the lease
agreement, Megatron cannot insure the
properties stored in the leased property without
first obtaining the consent of Decepticon. If
consent is not obtained, the policy is deemed
assigned and transferred to the lessor for its own
benefit. Megatron insured the merchandize in the
leased property without obtaining the consent of
the lessor. A fire broke out which destroyed the
merchandize stored.

 Is the lessor entitled to the proceeds of the

policy?
 Distinguish insurable interest in property insurance from
insurable interest in life insurance. (2002 Bar Examinations)

 The differences are as follows:

a. As to the existence thereof. In the former, it must
exist both at the inception of the policy and at the
time of the loss, whereas, in the latter, it need not
exist at the time of the loss.
b. As to the extent thereof. In the former, it is limited
by the actual value of interest in the property,
whereas, in the latter, there is no limit, except the
one taken by creditor on the life of the debtor.
 John took out a life insurance on the life of his
wife Marsha. Two months after the decree of
annulment of their marriage became final, she
died.

 Can John recover under the life insurance?

 Yes. At the time he took out the life

insurance, he still has insurable interest
over the life of his wife. The subsequent
annulment of their marriage will not effect
his right to recover under the policy.
 What is the legal effect of the change in insurable
interest after the loss?

 The change in insurable interest after the

loss will not affect the insurer’s liability.
Upon the happening of the loss, the liability
of the insurer becomes fixed.

 The answer would have been different if

the change occurred before the loss. In the
case, the claim will be denied on account of
the insured’s lack of insurable interest.
 What is the legal effect of the death of
insured?

 The death of the insured will not

affect the liability of the insurer to
pay.The interest in the insurance
shall automatically pass on to the
insurer’s heirs.
 A piece of machinery was shipped to Mr. Pablo on the
basis of C&F, Manila. Mr. Pablo insured the said
machinery with Talaga Merchants Insurance Corp.
(TAMIC) for loss or damage during the voyage. The
vessel sank en route to Manila. Mr. Pablo then filed a
claim with TAMIC which was denied for the reason
that prior to delivery, Mr. Pablo had no insurable
interest. Decide the case. (1991 Examination)

 The reasoning of the insured is untenable. The

purchase of goods under a perfected contract
of sale already vests equitable interest on the
property in favor of the buyer pending the
delivery.
 On February 3, 1987, while Jose Palacio was in the
hospital preparatory to a heart surgery, he called his
only son, Boy Palacio, and showed the latter a will
naming his son as the sole heir to all the father’s
estate including the family mansion in Forbes Park.
The following day, Boy Palacio took out a fire
insurance on the Forbes Park mansion. One week
later, the father died. After the father’s death, Boy
Palacio moved his wife and his children to the family
mansion which he inherited. On March 30, 1987, a fire
occurred razing the mansion to the ground. Boy
Palacio then proceeded to collect on the fire
insurance he took earlier on the house. Should the
insurance company pay? (1987 Examination)
 Should the insurance company pay? (1987 Examination)
No. In property insurance, the insured is required to
have insurable interest over the property at the
inception of the policy and at the time of the loss. At
the time the policy was issued, the owner of the
mansion is his father Palacio.
Also, the insurable interest must be an existing.
Unfortunately for Boy Palacio, the fact that he was
the expected sole heir of the property does not give
rise to an existing interest over the mansion prior to
the death of his father Palacio.
 JQ, owner of the condominium unit, insured the same
against fire with XYZ Insurance Co., and made the
loss payable to his brother, MLQ. In case of loss by
fire of the said condominium unit, who may recover
on the fire insurance policy? State the reason(s) for
your answer. (2001 Bar Examination)

 JQ is the one entitled to receive the proceeds

of insurance being the owner thereof. MLQ
despite being the designated as the payee in
case loss cannot be entitled to receive the
premium since he has no insurable interest
over the condominium unit.
 Is it necessary for the beneficiary to have an insurable
interest in the life of the insured (1949 Bar Examination)?

 It depends.

 If the policy is secured by the insured on his own life,

the designated beneficiaries need not have an
insurable interest in the life of the insured.

 If the policy is secured by a third person on the life of

the insured and said third person designates himself
as the beneficiary, the third person must have
insurable interest on the life of the insured as at the
inception of the policy.
 Juan takes an insurance policy on the life of
his friend Luis, becoming himself as the
beneficiary. Is the policy valid? (1946 Bar
Examination)

 Yes. However, the designation of Juan

as beneficiary is not valid. Juan does
not have an insurable interest in the
life of Luis. Mere friendship is not
enough to create insurable interest on
the life of another person.
 Batman secured a loan from Superman in the amount of Php
1,000,000.00. To guarantee payment of the loan in case
something happens to Batman, Superman bought an
insurance on the life of the Batman equal to the amount of
the latter’s loan. Six (6) months later, Batman died. Prior to
that, Batman was able to pay-off the eighty percent (80%) of
his loan already.

 How much can Superman collect from the insurer?

 Superman can collect only up to Php 200,000.00. His

insurable interest over Batman’s life was reduced to
20% on account of the payments made by Batman
prior to his death. Accordingly, the payment by the
insurer shall be reduced in proportion to his reduced
insurable interest.
 A obtains a fire insurance on his house and as a generous
gesture names his neighbor as his beneficiary. If A’s house is
destroyed by fire, can B successfully claim against the policy?
(1997 Bar Examination)

 No. B has no insurable interest over the house of A.

In fire insurance, 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.

 Unlike life insurance, fire insurance does not have a

provision for beneficiary designation unlike life
insurance. A could have just assigned his rights under
policy in favor of B after the loss.
INSURABLE INTEREST ON A
Mortgaged Property
 Who may insure a mortgaged property?

 Both the mortgagor and mortgage

may insure the mortgage property
as their interest may appear. It is a
settled that a mortgagor and
mortgagee have a separate and
distinct insurable interest in the
same mortgaged property.
Differentiate the interest of a
mortgagee and the mortgagor
 Both the mortgagee and the mortgagor have each as
separate and distinct insurable interest in the
mortgaged property. They may procure separate
policies with the same or different insurance
companies.

 a. The basis of insurable interest of the former is

the loan by the debtor which is supported by its
property, whereas, the latter’s interest is based upon
his ownership over the property.

 b. The extent of insurable interest of the former’s

insurable interest is the value of the property
mortgage, whereas, the latter’s extent of insurable
interest is the extent of debt secured.
 Glenn secured a loan from Jaypee in the amount of Php
10,000,000.00. As a guarantee for the loan, Glenn mortgaged
his house for worth the same amount to Jaypee. On the
other hand, Jaypee insured Glenn’s house for Php
10,000,000.00 which is equivalent to the value of the latter’s
indebtedness to the former. Six (6) months later, a fire
occurred which burned Glenn’s house to the ground. Prior
to that, Glenn was able to pay-off the fifty (50%) of the loan
already.

 How much can Jaypee collect from the insurer?

 Jaypee can collect Php 5,000,000.00 from the insurer.

His insurable interest over Glenn’s mortgaged
property was reduced to 50% on account of the
payments made by Glenn during the lifetime of the
policy. Accordingly, the payment by the insurer shall
be reduced proportionately.
 Is it possible for both Jaypee and Glenn
insure the same property without
violating the principle of indemnity?

 Yes.The basis of insurable interest of

the Jaypee is the loan which is
secured by the mortgagor’s
property, whereas, the Glenn’s
interest is based upon his ownership
over the property.
What are rules in case the insurance is
taken by the mortgagor?
 The rules are as follows:

 a. A mortgagor may take an insurance payable

either to: (1) himself, or (2) the mortgagee.

 b. If the mortgagor takes an insurance for his own

benefit, only he can recover from the insurer but the
mortgagee has a lien on the proceeds by virtue of
the mortgage.
 c. Where the mortgagor takes an insurance payable
to the mortgagee or where the mortgagor assigns
the policy taken by him to the mortgagee, the legal
effects are:
1. The insurance is still deemed to be upon the
interest of the mortgagor.

2. The mortgagor does cease to be a party to the
insurance contract.
3. Any act prior to the loss which would otherwise
render the insurance null and void still renders it null
and void although the property is in the hands of the
mortgagee and the proceeds are payable to the
mortgagee.
4. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit. The remaining
balance shall accrue in favor of the mortgagor.
5. Upon recovery by the mortgagee to the extent
of his credit, the debt is extinguished and the
mortgagor is released from his indebtedness.
What are the rules in case the insurance
is taken by the mortgagee?
 The rules are as follows:

 a. The mortgagee is entitled to the proceeds of the policy in

case of a loss to the extent of his credit.

 b. If the proceeds are more than the total amount of this credit,
the mortgagor has no right to collect the balance.

 c. If the proceeds are equal to the amount of the credit, the

mortgagee can no longer recover the mortgagor’s indebtedness
since the insurer is subrogated to the mortgagee’s rights.

 d. If the proceeds are less that the total amount of credit, the
mortgagee can still recover from the mortgagor for deficiency.

 e. Upon payment, the insurer is subrogated to the rights of the

mortgagee against the mortgagor to the extent of the amount
paid.The insurer can therefore collect the debt of the mortgagor
to the mortgagee.
 “A” owns a house valued at Php 50,000.00 which he had
insured against fire for Php 100,000.00. He obtained a loan
from “B” in the amount of Php 100,000.00, and to secure
payment thereof, he executed a deed of mortgage on the
house, but without assigning the insurance policy to the
latter. For “A”’s failure to pay the loan on maturity, “B”
initiated a foreclosure proceedings and in the ensuing public
sale, the house was sold by the sheriff to “B” as highest
bidder. Immediately upon issuance of the sheriff’s certificate
of sale in his favor, “B” insured the house against fire for Php
120,000.00 with another insurance company. In order to
redeem the house, “A” borrowed Php 100,000.00 from “C”
and, as a security device, he assigned the insurance policy of
Php 100,000.00 to “C”. However, before “A” could pay “B”
his obligation of Php 100,000.00, the house was accidentally
and totally burned.
Does “A”, “B” or “C” have any insurable interest in the
house, if so, how much? May “A”, “B” or “C” recover under
the policies? If so, how much? (1982 Bar Examination)
 Insofar as “A” is concerned, he has an insurable
interest in the property as the owner thereof. At the
time of the loss, it was still within the redemption
period, thus, the title has yet to be consolidated
under the name of the “B.” However, “A”’s insurable
interest over the property is up to the actual value of
house which is Php 50,000.00. Since he is over-
insured, he can seek reimbursement for the excess
premium paid to the insurer.

 Insofar as “B” is concerned, he has an inchoate

insurable interest in the property on account of the
foreclosure of the property in his favor. “B”’s
insurable interest over the property amounts to Php
50,000.00 which is the actual value of house.

 Insofar as C is concerned, he cannot recover under

the policy since the assignment was made without
the prior consent of the insurer.
 A owns a house worth P500,000. He insured it against fire
for P250,000.00 for the period from January 1, 1977 to
January 1, 1978. At the instance of B, who is a judgment
creditor of A, the said house was levied upon by the sheriff
and sold at a public auction on March 15, 1997.It was
adjudicated to B for P150,000 at the auction sale. B insured
the house against fire for P150,000 for the period from
March 16, 1977 to March 16, 1978. The house was
accidentally burned on April 1, 1977.

 May A recover under his policy? Give reasons.

 May A recover under his policy? Give reasons. (1947 and

1974 Bar Examination)
 Yes to both.

 Insofar as A is concerned, he can recover since

he is the owner of the property. While his
property was already sold at a public auction,
the loss occurred within the one-year
redemption period.

 Insofar as B is concerned, he can also recover

since he has an inchoate right over an existing
right as the auction buyer of the property. The
extent of his insurable interest is equal to the
amount he paid at the auction.
 “X” insured his house for Php 8,000.00 on
September 1, 1972. The house is worth Php
20,000.00. On said date “X” obtained a loan from “Y”
and the latter insured the said house for Php 5,000.00
because the total loan was without security. On
September 10, 1978, “X” sold the house to “Y”
without transferring his policy to “Y.” On September
27, 1972, the house was totally burned by fire of
accidental origin. Can “X” and “Y” recover on their
respective policies? Explain fully. (1972 Bar
Examination)

 Insofar as “X”’s policy, both “X” and “Y”

cannot recover thereunder.
 “X” cannot recover because he is no longer
the owner of the property at the time of the
loss, thus, he lacks insurable interest.

 “Y” cannot recover because “X’s” policy was

not endorsed under his name. While he has
insurable interest by virtue of being the new
owner thereof, he cannot claim against the
policy of “X” for not being a party thereto. He
has no legal personality to file a claim against
the policy.

 Insofar as “Y”’s policy, “Y” cannot recover

thereunder.
PROXIMATE CAUSE
 Define proximate cause.

Is efficient and dominant cause of the

loss in a chain of continuous event,
unbroken by any new independent
cause. Simply put, it is the ultimate
cause of the loss. Under this principle,
an insurance contract will respond to a
claim unless the peril covered is the
proximate cause of the loss.
 A marine insurance policy on a cargo states that “the
insurer shall be liable for losses incident to perils of
the sea.” During the voyage, seawater entered the
compartment where the cargo was stored due to the
defective drainpipe of the ship. The insured filed an
action on the policy for recovery of the damages
caused to the cargo. May the insured recover
damages? (1998 Bar Examination)
No. Perils of the sea refer to losses attributable
to the unusual or extraordinary action of wind
or wave or to other extraordinary causes
connected with navigation. Clearly, the
defective drainpipe is not a peril of the sea. It
was incidental to ordinary usage of the ship.
The proximate cause of the loss not being a
peril of the sea, the claim should be denied.
 An insurance company issued a marine insurance
policy covering a shipment by sea from Mindoro
to Batangas of 1,000 pieces of Mindoro garden
stones “against total loss only”. The stones were
loaded in two lighters, the first with 600 pieces
and the second with 400 pieces. Because of the
rough seas, damage was caused to the second
lighter resulting loss of 325 out of the 400 pieces.
The owner of the shipment filed claims against
the insurance company on the ground of
constructive total loss as more than three-fourths
of the value of the stones had been lost in one of
the lighters. (1992 Bar Examination)
Is the insurance company liable under its policy?
 No. The insurance company is not
liable to pay since its policy covers
“total loss” claims only. The contention
of the insured regarding the existence
of a constructive total loss is
misplaced. While the stones were
loaded in two separate lighters, the
subject matter did not become two (2)
separate risks. There is no constructive
total loss since only 32.5% of the stones
were lost.
 What is/are the exceptions to the principle of
proximate cause?

 Under this principle, an insurance contract will

not respond to a claim unless the peril covered
is the proximate cause of the loss.The
exceptions are as follows:

 a. If the proximate cause of the loss in an

excluded peril under the policy.

 b. Loss by willful act or through the

connivance of the insured.
Contract of Adhesion (Fine Print Rule)
 Most of the terms of the contract do not
result from mutual negotiations between
the parties as they are prescribed by the
insurer in final printed form to which the
insured may “adhere” if he chooses but
which he cannot change.
CONSTRUCTION OF
INSURANCE CONTRACT
 The ambiguous terms are to be
construed strictly against the insurer, and
liberally in favor of the insured. However,
if the terms are clear, there is no room
for interpretation.
DISTINGUISHING ELEMENTS OF
AN INSURANCE CONTRACT
 1. The insured possesses an insurable interest susceptible of
pecuniary estimation;
 2. The insured is subject to a risk of loss through the
destruction or impairment of that interest by the happening
of designated perils;
 3. The insurer assumes that risk of loss;
 4. Such assumption is part of a general scheme to distribute
actual losses among a large group or substantial number of
persons bearing somewhat similar risks; and
 5. The insured makes a ratable contribution ( premium) to a
general insurance fund.

 A contract possessing only the first 3 elements above is a

risk-shifting device. If all the elements, it is a risk-distributing
device
PERFECTION OF AN INSURANCE
CONTRACT
 An insurance contract is a consensual
contract and is therefore perfected the
moment there is a meeting of minds with
respect to the object and the cause or
consideration.

 What is being followed in insurance

contracts is what is known as the “cognition
theory” . Thus, “an acceptance made by
letter shall not bind the person making the
offer except from the time it came to his
knowledge”.
Binding Receipt
 A mere acknowledgment on behalf of the
company that its branch office had
received from the applicant the insurance
premium and had accepted the
application subject to processing by the
head office.
Cover Note (Ad Interim)
 A concise and temporary written contract issued to
the insurer through its duly authorized agent
embodying the principal terms of an expected policy
of insurance.

 Purpose:
 It is intended to give temporary insurance protection
coverage to the applicant pending the acceptance or
rejection of his application.

 Duration:
 Not exceeding 60 days unless a longer period is
approved by Insurance Commissioner (Sec. 52).
Riders
 Printed stipulations usually attached to the
policy because they constitute additional
stipulations betweenthe parties. (Ang Giok
Chip vs. Springfield, 56 Phil. 275)

 In case of conflict between a rider and the

printed stipulations in the policy, the rider
prevails, as being amore deliberate
expression of the agreement of the
contracting parties.
 Clauses
 An agreement between the insurer and the
insured on certain matter relating to the liability
of the insurer incase of loss.

 Endorsements
 Any provision added to the contract altering its
scope or application.

 POLICY OF INSURANCE
 The written instrument in which a contract of
insurance is set forth.
 What are the two (2) essential
policy conditions which if violated
will void the entire policy?
 a) Willful concealment or
misrepresentation by the insured of any
material fact or circumstance concerning
the subject thereof or the interest of the
insured therein; and
b) Any fraud or false swearing by the
insured relating thereto.
What is the difference between
suretyship and insurance?
 In suretyship, three persons or entities are
involved: the surety, the principal and the
obligee. In insurance, there are only two: the
insurer and the insured.
 In insurance, there is a theoretical
distribution of losses over a group or
classification of risks, the insurance company
assuming the losses of the individual insured.
In suretyship, no losses is anticipated as the
surety guarantees the obligation of the
principal.
 In property insurance, is the insured
entitled to a return of premium if he
should decide to discontinue his
policy?
 Yes, to a proportionate amount
corresponding to the unexpired term of
the policy; generally under the short
period scale provided for in the policy
 How soon may the amount of any loss or damage for
which an insurer may be liable under a non-life policy
be paid? If the insurer refuses or fails to; pay the
claim within the time prescribed by law, may the
insured collect interest for the duration of the delay?

 The amount of any loss or damage shall be paid within 30

days after proof of loss is received by the insurer and
ascertainment of the loss or damage is made either by
agreement between the insured and the insurer or by
arbitration; but if such ascertainment is not paid or made
within 60 days after such receipt by the insurer of the proof
of loss, then the loss or damage shall be paid within 90 days
after such receipt. Refusal or failure to pay the loss or
damage will entitle the assured to collect interest on the
proceeds of the policy for the duration of the delay at the
rate of twice the ceiling prescribed by the Monetary Board,
unless such failure or refusal to pay is based on the ground
the claim is fraudulent.
May the insurance company cancel a policy? If
so, how? May the insured cancel a policy?

 Yes, upon prior notice thereof to the insured.

However, no notice of cancellation is effective unless
it is based on the occurrence, after the effective date
of the policy, of one or more of the following:
 - Non-payment of premium;
- Conviction of a crime arising out of acts increasing
the hazard insured against;
- discovery of fraud or material misrepresentation;
- discovery of willful or reckless act or omission
increasing the hazard insured against;
- physical changes in the property insured which
result in the property becoming uninsurable; or
- determination by the Commissioner that the
continuation of the policy would place the insurer in
violation of this Code.
 If the insured has any right of
recovery against another party, may
he be required to assign such right
to the insurance company?
 Yes, the company may require from the
insured an assignment of all rights of
recovery against any party for loss to the
extent that payment therefore is made by
the company.
 Once a property is insured, must the
insured inform the company of any
change of the description, occupation
or construction of the property
insured.
 The insured must inform the company of any
change thereto, otherwise, the company
would be relieved from liability unless the
insured before the occurrence of any loss or
damage obtained the sanction of the
company signified by an endorsement upon
the policy.
 Is it the duty of an agent to determine
the value of the property insured and
the amount of insurance to be carried?
Explain.
 No, the value of the property should be
determined by the insured, rather than the
agent. However, the agent should guard as
far as possible against over insurance and
should check the amount of insurance in
relation to the actual value with the insured.
 What is the basis of the value of the
insured property at the time of loss?
 The actual cash value at the time of loss,
that is, what it would cost to replace the
property.
 What are the effects of non-
payment of premium?

 Forfeiture of all rights under the policy.

 What is Compulsory Motor Vehicle
Liability Insurance?

 The Insurance Code (as amended) requires

this coverage for the registration of motor
vehicles. This insurance covers passengers or
third parties who may be killed or injured as
a result of accidents arising from the use of
operation of such vehicles. The maximum
amount of benefit under this policy is
P100,000.00
 What is the meaning of “Authorized
Driver” in a motor vehicle policy?

 An authorized driver within the meaning

of the policy is any of the following:
1. The insured; or
2. Any person driving on the Insured’s
order or with his permission.
 What is the purpose of the errors and
omissions insurance policy (professional
liability or professional indemnity policy)
required of insurance or reinsurance
broker before a license could be issued.

To indemnify the applicant against any claim for

breach of duty as insurance broker or
reinsurance broker, as the case may be, which may
be available against such applicant by reason of
any negligent act, error or omission.
What do you understand by
the “no fault claim”?
 An insurance company issuing the cover shall pay
any claim for death or bodily injuries sustained by
a passenger or third party without the necessity
of proving fault or negligence of any kind.
Immediate payment shall be made provided that
the total indemnity shall not exceed P10,000.00
upon presentation of the following proofs of loss,
namely:
 1. police report of accident, and
2. death certificate and evidence sufficient to
establish the proper payee, or medical report and
evidence of medical or hospital disbursement in
respect of which refund is being claimed.
 Does the “no fault claim” apply to
claims on property wherein the
insurance company is under
obligation to make payment
immediately?
 No, because the “no fault claim” applies
only to death or bodily injuries and does
not respond to claims for third party
property damage.