INSURANCE LAW REVIEWER

Q. How should insurance contracts be interpreted?

In case there is no doubt as to the terms of an insurance contract, the provision must be construed liberally plain, ordinary and popular sense. However, when the terms of the policy are ambiguous, uncertain doubtful, they should be interpreted strictly against the insurer and liberally in favor of the insured , because the insured has no voice in the selection of the words used, and the language of the contract is selected by legal advisers of the insurance company.

Q. Why are contracts of Insurance called contracts of adhesion?

They are prepared only by the insurer and imposed upon parties dealing with it which may not be changed, the latter’s participation in the agreement being reduced to the alternative to “take it or leave it”, in contrast to those entered into by parties bargaining on an equal footing and, therefore, any ambiguity thereon must be resolved against the insurer, the party preparing the contract. (Qua Chee Gan vs. Law Union Rock Ins., Ltd., 52 O.G. 1982).

Producers Bank obtained an insurance against robbery which excluded any loss caused by any criminal act of the insured or any of its authorized representative. While transferring funds from one branch to another, the insured's armored truck was robbed. The driver of the truck was assigned by a labor contractor to the insured while the security guard was assigned by a security agency contracted by the insured. Both the driver and the security guard were found involved in the robbery. Was the loss of the insured excluded by the policy?

The loss was excluded by the policy because it was caused by authorized representatives of the insured. While both the driver and security guard were only assigned by labor contractors, they were both authorized representatives of the insured. The terms of the contract are clear and unambiguous and therefore, there is no room for construction and such terms cannot be enlarged or diminished by judicial construction. (Fortune Insurance & Surety Co., Inc. vs Court of Appeals, 61 SCAD 297, 244 SCRA 308).

Ty obtained personal accident policies which provided for payment for “loss hand”. Such term was defined in the policies as the amputation of the hand through the bones of the wrist. Ty had an accident which resulted in temporary total disability of his left hand. His hand was not amputated. Is the insurer liable?

The insurer is not liable. The terms of the policies are clear, express and specific that only amputation of the hand should be considered as a loss thereof. An interpretation that would include a mere fracture or other temporary disability not covered by the policies would be unwarranted. (Ty vs First national Surety & Assur. Co., Inc., 1 SCRA 1324; Also 17 SCRA 364).

A personal accident policy was issued covering “loss of legs”. The policy defined “loss of legs” as amputation of either leg. The insured met an accident resulting in total paralysis of both legs. The insurer refused to pay because there was no “loss of legs” since the legs of the insured were not amputated. Was the insurer liable?

The insurer was liable because “loss of legs” should include the permanent and total paralysis of both legs. To exclude a permanent total paralysis of both legs from the term “loss of legs” would be contrary to public policy, public good and sound morality. It would force a desperate man to cause an amputation to be performed since his legs are no use for life, in order to avail of the benefits of the policy. This is different from the case of Ty cited above where the injuries sustained only caused temporary total disability of his left hand. In this case, the injury produced a total paralysis of both legs resulting in the complete loss of the use of both legs. (Panaton vs Malayan Ins. Co., 2 Court of appeals Report 783).

A warranty in a fire insurance policy prohibited the storage in the premises insured of “oils (animal and/or vegetable and/or mineral and/or their liquid products having a flash point below 300 Fahrenheit)”. Gasoline which ahs a flash point below 300 Fahrenheit was stored therein. Was the warranty violated?

No. the clause containing the prohibition was ambigous and must be constructed strictly against the insurer and liberally in favor of the insured. In ordinary parlance, “oil” means “lubricants” and not gasoline or kerosene. There was no reason why the prohibition against keeping gasoline in the premises could not be expressed clearly and in the language and terms that the general public can readily understand. (Qua Chee Gan vs Law Union and Rock Ins. Co., Ltd., 52 O.G. 1962).

Define Insurance.

Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.

What are the characteristics of insurance? Explain each one.

It is an aleatory and not a wagering contract because it depends upon some contingent even against the occurrence of which is intended to provide;

It is a contract of indemnity because recovery is commensurate with the amount of the loss suffered. However, life insurance is not a contract of indemnity except one procured by a creditor on the life of the debtor.

It is a personal contract because an insurer contracts with reference to the character of the insured for integrity and prudence;

It is executory payment of premiums that is, executed on the part of the insured upon payment of the premium and wholly executory on the part of the insurer.

It is a conditional contract in the sense that the insurer is not obligated to pay unless the loss arises from the specified perils.

When is suretyship deemed to be an insurance contract?

Suretyship is deemed to be an insurance contract only if made by a surety who or which, as such, is doing an insurance business, i.e., making, or proposing to make, as surety, any contract of suretyship as a vocation and not merely incidental to any other legitimate business activity of the surety.

What may be insured?

Any contingent or unknown event, whether past or future, which may indemnify a person having an insurable interest, or create a liability against him, may be insured against?

May a past event be insured?

A past event may be covered by insurance provided the loss is unknown to both parties and they expressly stipulated that prior loss is insured by the policy.

May a married woman procure insurance without the consent of the husband?

A married woman may insure her own life and that of her children without the consent of the husband. (Sec. 3). She may likewise insure her separate property without the consent of the husband. (Art. 145, Family Code)

What are the effects of a contract of insurance procured by a person who is 18 years or above?

It is valid regardless of whether the insurance is on property of life because a person who is 18 years old or more is no longer a minor but of majority age. (R.A. No. 6809).

What is the effect of death of the original owner of the policy which covers the life of the minor, ahead of the minor?

All rights, title and interest in the policy shall automatically vest in the minor unless otherwise provided in the policy. (Sec. 3. par. 5).

May gambling be insured? Why?

Gambling cannot be insured because gambling may possibly result in proofit, which is not true in insurance which only seeks to indemnify the insured against losses. (Sec. 4)

Who may be an: (a) insurer, and (b) insured?

(a) Every person, partnership, association or corporation duly authorized by the Insurance Commission to transact insurance business may be an insurer; and (b) Anyone except a public enemy may be insured. (Secs. 6 and 7).

For purposes of insurance, who is a public enemy? Why can they not be insured?

Public enemy is a nation at war with the Philippines and every citizen or subject of such nation. Such term does not include robbers, thieves and riotous mobs. A public enemy cannot be insured because the purposes of war is to cripple the power and exhaust the resources of the enemy and repay in insurance the value of what has been so destroyed. (1 Joyce, 667.)

Who may insure a mortgaged property?

Both mortgagor and the mortgagee take out separate policies with the same or different insurance companies. The mortgagor may insure the property mortgaged to the full value of such property while the mortgagee can insure the same only to the extent of the amount of his credit. (Cosio vs Panlilio. 17 SCRA 196).

What are the effects of insurance procured by the mortgagor without assigning the loss to the mortgagee?

Only the mortgagor may recover from the insurer since the policy taken by the mortgagor shall be applied exclusively to his interest. However, the mortgage constituted shall extend to the proceeds of the indemnity paid by the insurer of the mortgaged property upon the occurrence of the loss and therefore, the mortgagee has a lien on the proceeds of the policy. (Sec. 53; 46 C.J.S. 26; Art. 2127, Civil Code).

What are he consequences where the mortgagor insures the property mortgaged in his own name but makes the loss payable to the mortgagee or assigns the policy to the latter?

The insurance still deemed to be upon the interest of the mortgagor who does not cease to be a party to the original contract. Hence, if the policy is cancelled, notice of cancellation must be given to the mortgagor and not to the mortgagee. (Sec. 8; Saura Import & Export Co., Inc. v Philippine International Ins. Co., Inc., L-15184, May 31, 1963).

Any act of the mortgagor, prior to the loss, which would otherwise avoid the insurance, will have the same effect, although the property in the hands of the mortgagee. Thus, violation by the mortgagor of the policy entitles the insurer to rescind and will prevent the beneficiary (mortgagee) from recovering from the insurer. (Sec. 8).

Any act, which under the contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagor. As for example, the policy requires the insured to give notice and proof of loss without unnecessary delay. Notice or proof of loss may be given by the mortgagee to whom the loss is made payable with the same effect as if the same was given by the mortgagor. (sec 8; 45 C.J.S. 1254).

Upon the occurrence of the loss, the mortgagee is entitled to recover to the extent of his credit and the balance, if any, is payable to the mortgagor since such policy is for the benefit of both the mortgagor and mortgagee. (Sec. 8; Filipinas Investment & Finance Corp. vs Empire Ins. Co., CA-G.R. No. 3904-R, Sept. 28, 1972).

Upon recovery by the mortgagee to the extent of his credit form the insurer, the mortgagor is released from his indebtedness.

What are the effects of insurance procured by the mortgagee without reference to the right of the mortgagor? The mortgagee may collect from the insurer upon the

occurrence of the loss to the extent of his credit. (San Miguel vs Law Union Rock Ins. Co., 40 Phil. 674, 678)

Unless otherwise stated in the policy, the mortgagor has no right to collect the balance of the proceeds of he policy after payment of the interest of the mortgagee.

The insurer, upon payment to the mortgagee insured, becomes subrogated to the rights of the mortgagee against the mortgagor and may collect the debt of the mortgagor to the extent of the amount paid to the mortgagee. This principle applies only where the policy obtained by the mortgagee covers his interest alone. (Art. 2207, Civil Code).

The mortgagee-insured can no loner collect the mortgagor’s indebtedness after receiving full payment of his credit from the insurer since the latter thereby acquires the right to collect from the mortgagor by virtue of subrogation. However, if the mortgagee-insured is unable to collect the whole amount of his credit from the insurer, he may still charge the mortgagor for the deficiency. (Palileo vs Cosio, 51 O.G. 6181).

What is a “Union Mortgage Clause” and what is the effect thereof?

“Union Mortgage Clause” creates the relation of insured and insurer between the mortgagee and the insurer independent of the contract with the mortgagor. In such case, any act of the mortgagor can no longer affect the rights of the mortgagee (Sec. 9), since the purpose of the “union mortgage clause” is to provide an independent contract between the mortgagee and the insurer so that the mortgagee will be responsible only for his own acts. (Fidelity Phoenix Ins. Co v Bronnan, 158 A. 124, 85 N.H. 291).

In general, when does a person have insurable interest in the subject-matter insured?

When he has such a relation or connection with, or concern in, such subject-matter that he will derive pecuniary benefit or advantage from its preservation or will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening event insured against. (Sandin’s Adm’x v Allen. 90 S.W. 350, 262)

Why is insurable interest necessary?

If the person procuring insurance has no insurable interest in the subject-matter of the insurance, the contract is void. This is a consequence of the principle that insurance is a contract of indemnity. If the insured has no insurable interest in the subject-matter of the insurance, he will not stand to suffer any loss or damage by the happening of the event insured against.

Upon whose life and health does a person have insurable interest?

Every person has insurable interest on the life and health:

a. Of himself, of his spouse and of his children;

b. Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;

c. Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and

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

What can be the basis of insurable interest in life?

Insurable interest in life exits when there is reasonable ground founded on the relation of the parties, either pecuniary or contractual or by blood or affinity, to expect some benefit from one another. (44 C.J.S. 903; 3 Couch 2d)

As of what time must insurable interest in life exists?

Insurable interest in life must exist at the time of the effectivity of the policy and need not exist at the time of death of the insured, as life insurance is not a contract of indemnity. However,, insurable interest of a creditor on the life of the debtor must exist not only at the time the policy takes effect but also at the time of the debtor’s death, for such kind of life insurance is a contract of indemnity. (3 Couch 2d., 230).

Who may be a beneficiary in life insurance?

Anyone may be designated as beneficiary in life insurance except those who are forbidden by law to receive donation from the insured such as:

1. Those made between persons who are guilty of adultery or concubinage at the time of the designation.

2. Those made between persons found guilty of the same criminal offense, in consideration thereof.

3. Those made to a public officer or his wife, descendants and ascendants, by reason of his office. (Art. 739, Civil Code)

To disqualify the beneficiary, is prior conviction for adultery or concubinage necessary?

Criminal conviction for the disqualifying offense is not required. The guilt of the insured and the beneficiary may be proven by preponderance of evidence in the same action for declaration of nullity of the designation. (Insular Life Assur. CO., Ltd vs Ebrado 80 SCRA 161).

May adulterous children be designated as life insurance beneficiaries by their parents?

The disqualification of persons guilty of adultery or concubinage does not extend to the illegitimate children born out of illicit relation between the parties to the adultery or concubinage. As a matter of fact, both the Civil Code and the Family Code recognize certain successional rights of illegitimate children. (Southern Luzon Employees Association vs Golpeo, 95 Phil. 83, 87; Art. 287, Civil Code; Art. 176, Family Code).

Must the beneficiary in life insurance have insurable interest on the life of the insured?

The insured may name anyone he chooses as beneficiary in his life insurance, even though he is a stranger and has no insurable interest in the life of the insured except those disqualified to receive donations under Art. 739 of the Civil Code. (4 Couch 2d., 504). However, such designation should be made in good faith without fraud or intent to enter into a wagering contract. Thus, the policy is not valid if it was procured by the insured on the inducement of the beneficiary for the purpose of enabling the latter to effect insurance on the life of a person in whom he has no insurable interest and thereby evade the law against speculative and wagering insurance. (44 C.J.S. 901).

San Juan, a common laborer obtained several life insurance policies which he could not afford. In all the policies, Parco was designated as beneficiary and none of the insured’s five minor children or his spouse was made a beneficiary. Premiums were paid by Parco who did not have insurable interest on the life of San Juan. Were the policies valid?

The policies were void for reasons of public policy. Said policies belonged to the wagering or speculative classes designed to perpetrate a massive fraud against the insurance companies. (The Lincoln National Life Ins. Co vs San Juan, CA-G.R. Nos. 34586-88-R, May 27, 1971).

What is the effect of failure to designate a beneficiary designated is disqualified?

The life insurance proceeds should accrue to the estate of the insured. (Insular Life vs. Ebrado, 80 SCRA 181).

May the beneficiary designated in a life insurance policy be changed?

The insured shall have the right to change the beneficiaries he designated in the policy, unless he has expressly waived this right in the policy. (Sec. 11). If the right to change the beneficiary has been waived, the beneficiary becomes an irrevocable beneficiary.

What is the extent of the interest of the irrevocable beneficiary in a life insurance contract?

An irrevocable beneficiary has a vested interest in the policy which can not be taken away from him without his consent. Should the insured discontinue paying premiums, the beneficiary may continue paying. In such case, the insured may not even obtain a policy loan or cash surrender value on the policy without the consent of the irrevocable beneficiary. (Nario vs. Phil-Am Life Ins. Co., 20 SCRA 434). When a minor, however, was designated as irrevocable beneficiary and the interest of the minor in the policy does not exceed Twenty thousand pesos (P 20, 000.00), his consent may be given by his judicial guardian or in the absence of one, by his father or mother. (Sec. 180, par. 3).

Dimayuga procred a life insurance policy and designated his wife and minor children as irrevocable beneficiaries. The wife died. Dimayuga filed a petition in court to change his beneficiaries. The minors gave their consent to the change to the change of beneficiaries. Should the court grant the petition?

The petition should be denied. It is only with the consent of all the irrevocable beneficiaries that a change of beneficiaries. (Phil-Am Life Ins. Co vs Pineda, 175 SCRA 416).

What is the beneficiary’s interest in endowment policy?

The interest of the beneficiary in endowment policy is a contingent one, and the benefits of the policy will only accrue to such beneficiary in case the assured dies before the end of the period designated in the policy. If the insured survives the endowment period, the benefits are payable to him or his assignee, notwithstanding, the designation of a beneficiary in the policy. (Villanueva vs Oro, 81 Phil. 464).

Who may recover the proceeds of a life insurance if the beneficiary predeceases the insured?

It depends. If the beneficiary who predeceases the insured is irrevocable, the legal representatives of such beneficiary are entitled to the proceeds of the insurance unless the proceeds were made payable to the beneficiary only “if living”. On the other hand, where the beneficiary is revocable, the right to the proceeds passes to the estate of the insured where the proceeds were payable to the beneficiary “if living” or “if surviving”, and he died before the insured’ death. )4 Couch 2d.; Vance, 2d., ed., 604).

What is the effect of the death of the original owner of a life insurance policy covering the life of a minor?

All rights, title and interest in the policy shall automatically vest in the minor. (Sec. 3, par. 5).

What happens to the interest of the beneficiary in the life insurance policy where he willfully kills the insured?

The interest of a beneficiary in a life 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. (Sec. 12)

Would the interest of a beneficiary in a life insurance policy be forfeited where he brought about the death of the insured without any intention of doing so?

No. The killing of the insured by the beneficiary must not only be “willfully” done but it must likewise be felonious so that the interest of the beneficiary in the policy would not be forfeited. Hence, where the killing was unintentional or not felonious, the beneficiary will not be denied recovery by reason of his act causing the death of the insured. (Hull v Metropolitan Life Ins. CO., 26 Pa. Dist. 197)

What is the test determining the existence of insurable interest on the property insured?

The test is whether the insured has such a right, title or interest in property insured that he will be benefited by its preservation and continued existence, or suffer a direct pecuniary loss from its destruction or injury be the peril insured against. (Suter vs Union Surety & Ins. Co., Inc., 51 O.G.).

What is insurable interest in property?

Every interest in property, whether real or personal any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly indemnify the insured, is insurable interest. (Sec. 13).

An insurable interest in property may consist in:

An existing interest;An inchoate interest founded on an existing interest; or

An expectancy, coupled with an existing interest in that of which the expectancy arises. (Sec. 14).

By means of a conditional deed of sale, S sold his house for P1, 000, 000 to B who paid a down-payment of P400, 000. Prior to the full payment of the price and the execution of a final deed of sale, who has insurable interest over said house?The buyer, B has insurable interest

to the extent of the down-payment because in case the house is destroyed he will suffer a loss equivalent to the payment already made. S, the seller who has a lien for the balance unpaid has insurable interest to the extent of the balance unpaid. (Robinson vs Wade, 127 So. 170, 220 Ala. 693).

What is an inchoate interest? Give example of insurable inchoate interest.

Inchoate interest is an interest in real estate which is not a present interest, but which may ripen into a vested interest, if not barred, extinguished or divested. For example, a stockholder in a corporation owning ship, cargo or other property has an inchoate interest in such corporate property which is founded on an existing interest which gives him insurable interest in the said property to the extent of hi shares. (Seamen v Enterprise Fire & Marine Ins. Co., 21 F. 778)

When may expectancy be insured?

Expectancy to be insurable must be coupled with an existing interest (Sec. 14) or founded on an actual right to the thing nor upon any valid contract for it. (Sec. 16)

State whether there is insurable interest in the following case: (a) the son, on the property of his father; (b) the owner of a parcel of land, on expected crops; and (c) the owner of a ship on expected freightage.

A son has no insurable interest in the property of his father as his interest in such property is a mere expectancy not founded on an actual right or a valid contract for it. (Baldwin v State Ins. Co., 15 N.W. 300);

The owner of a parcel of land has insurable interest on expected crops even before they are sown (3 Couch 2d);

The owner of a ship has insurable interest on expected freightage (2 Joyce 2d).

Distinguish insurable interest in property from insurable interest in life.

Insurable interest in property is based on pecuniary interest while in life, the interest need not necessarily be strictly and exclusively a pecuniary one, as in case of consanguinity or affinity;

In property insurance, the interest must exist at the time the policy takes effect and at the time of the loss, while in life insurance, interest need exist only at the time the insurance takes effect, (Sec. 15 and Sec. 19) except insurance taken by a creditor on the life of the debtor wherein interest must also exist at the time of the loss; and

Insurable interest in property is limited to the actual value of the damage the insured may suffer, while in life there is no limit on the amount of insurable interest unless it is based on creditor-debtor relationship. (1 Couch 2d).

What is the measure of insurable interest in property?

The measure of insurable interest in property is the extent to which the insured might be indemnified by loss or injury thereof. Said principle however, applies only to property insurance and not to life insurance which is not regarded as a contract of indemnity.

Must the beneficiary in property insurance have insurable interest on the property insured?

Yes. No contract or policy of insurance on property shall be enforceable except for benefit of some person having an insurable interest in the property insured. (Sec. 18). This principle does not apply to life insurance wherein insurable interest on the part of the beneficiary is not necessary.

A, the owner of a building insured the same against fire and made the loss payable to B, his nephew. In case of loss, who may recover from the insurer?

B cannot enforce the insurance contract since he has no insurable interest in the property insured. A, the insured may recover from the insurer because what is unenforceable is only the designation as beneficiary of a person who has no insurable interest in the property, and not the entire policy itself. (Sec. 18).

In the contract of lease entered into by Cha with the lessor, CKS it was provided that should the lessee insure the contents of the leased premises without the consent of CKS, the insurance policy is deemed transferred to CKS for its own benefit. Cha insured the contents of the leased premises without the consent of CKS. The insured merchandise was burned. CKS demanded the proceeds of the insurance. Who may recover from the insurer?

CKS had no insurable interest on the insured merchandise and therefore, it cannot be designated as beneficiary in the fire insurance policy taken by Cha. Thus, the insurer cannot be compelled to pay the proceeds of the policy to CKS. The proceeds of the said insurance rightfully belong to Cha. (Cha vs Court of Appeals, 86 SCAD 102 [1998], 227 SCRA 690)

As of what time must insurable interest exist?

An interest in property insured must exist when the insurance takes effect, and when the loss occurs, but need not exist in the meantime; while 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. (Sec. 19).

What is the effect of change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the insurance? Give exception, if any.

The policy is suspended to the extent of the interest in the insurance are vested in the same person. (Sec. 20). The following are the exceptions:

when there is a prohibition against alienation or change of interest without the consent of the insurer, in which case, the policy is not merely suspended but avoided;

In cases of life, accident and health insurance; A change of interest in any part of a thing insured, after the

occurrence of an injury which results in a loss; A change of interest, by will or succession, on the death of the

insured passes the interest in the insurance to the person taking the interest in the thing insured;

A transfer of interest by one of several partners, joint owners in common, who are jointly insured, to the others; and

When the policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk may become the owner of the interest insured. (Secs. 19-24).

Garcia bought a house and lot from Gatchalian. After receiving the agreed price, Gatchalian delivered to Garcia the deed of sale, certificate of title, fire insurance policy for the building and other documents. The deed of sale was registered and a new title was issued in the name of Garcia but no request was made for the transfer of the fire insurance policy. After the one month, the building was destroyed by fire. Who may collect from the insurer?

No one may recover from the insurer because when Gatchalian sold the house insured to Garcia without effecting the transfer of the policy, the contract of insurance was thereby suspended. Since the loss occurred while the policy was suspended, the insurer was not liable.

What is the meaning of “change of interest” that suspends an insurance contract?

The change of interest contemplated by law is an absolute transfer of the insured’s entire interest in the property insured to one not previously interested or insured. (45 C.J.S. 318, 343, citing Hoffman v. Atena Fire Ins. Co., 32 N.Y. 405, 80 Am. D.0337).

State whether or not there was a change of interest in the following cases as to as to suspend the policy: (a) mortgage of the property insured;

The insured retains insurable interest in the property insured and therefore, the policy is not suspended. Thus, the policy was not suspended by the execution of a mortgage since the interest in the property insured did not pass by mere execution of a mortgage (Bachrach vs British American Assur. Co., 17 Phil. 555);

(b) Lease of the insured property;

The insured retains insurable interest in the property insured and therefore, the policy is not suspended. Thus, a lease of the insured property is not a case of alienation or change of title of interest in the property insured (Krieg v Phoenix Ins. Co. of Hartford, Conn. 185 A. 2125, 116 N.J. Law 467);

(c) Sale on execution of the property insured;

The insured retains insurable interest in the property insured and therefore, the policy is not suspended. Thus, a judgment debtor whose property has been sold on execution retains insurable interest therein until the right to redeem or have the sale set aside has been lost (44 C.J.S. 881);

(d) Foreclosure of the property insured;

The insured retains insurable interest in the property insured and therefore, the policy is not suspended. Thus, a mortgagor whose property has been foreclosed still has insurable interest on such property for he retains the equity or right of redemption. Such interest is terminated only by a failure to redeem within the specified time (44 C.J.S. 883);

(e) Sale an insured property where the insured has not been paid in full.

The insured retains insurable interest in the property insured and therefore, the policy is not suspended. Thus, a vendor who has a lien on the property sold until the purchase price is paid or the conditions of the sale are performed retains insurable interest is such property. (44 C.J.S. 886).

What is the reason why change of interest will not affect an insurance upon life, accident or health

Insurance policies upon life, accident or health are not regarded as contracts of indemnity and therefore, insurable interest need exist only at the time the insurance is effected. (Secs. 19 and 20). Accordingly, the loss of insurable interest at the time of the happening of the event insured against will affect the right of recovery from the insurer.

A insured two separate houses, Nos. 10 and 12 against fire under one policy. A then sold house No. 10. both houses were later on burned. Was the insurer liable for the loss of said house?

The insurer was liable only for the loss of house No. 12 since the sale of house No. 10 did not affect the insurance as to house No. 12. however, the insurer was not liable for the loss of house No.010 since the policy was suspended insofar as No. 10 was concerned because the sale thereof was not accompanied by a transfer of interest in the policy.

A and B were co-owners of a house. They jointly insured the house against fire. A then sold hisninterest to B. Was the policy suspended?

The policy was not suspended because transfer of interest by one of the co-owners to another will not suspend the policy. (Sec. 24). However, if A sold his interest to X, a third person, the policy is suspended insofar as the interest sold is concerned.

Ordinarily, transfer of interest in the thing insured will not carry with it the transfer of interest in the insurance policy. When will transfer of interest in the insurance policy. When will transfer of interest in the thing insured carry with it the transfer of interest in the policy?

In the following cases, a transfer of interest in the thing insured carries with it a transfer of the policy:

1. when by express stipulation of the parties, the policy is made to run with the subject-matter, or the contract is so framed as to attach the risk inseparably to the property, as where the insurance is on account of the “owners” of “for whom it may concern” or where the loss is payable to “bearer” (1 couch 2d., 35 & Sec. 57);

2. A change of interest, by will or succession, on the death of the insured, passes the interest in the insurance to the person taking his interest in the thing insured (Sec. 23);

3. Transfer of interest by one of several partners, joint owners, or owners in common who are jointly insured, to the others. (Sec. 24).

A fire insurance policy provided that the loss was “Payable to the San Miguel Brewery, mortgagee, as its interest may appear, the remainder to whomsoever during the continuance of the risk may become the owner of the interest insured.” The property insured was sold without transferring the policy to the buyer. May the buyer recover the proceeds of the insurance?

The buyer may recover because the transfer of the thing insured need not be accompanied by the transfer of the policy, as it was 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. (San Miguel Brewery vs Law Union and Rock Insurance Co., 40 Phil. 674).

When will the suspended policy be revived?

Where a policy is suspended by the transfer of interest in the thing insured unaccompanied by a corresponding transfer of interest in the insurance, the insurance is revived when the interest in the thing and the interest in the insurance are vested in the same person again. (See Sec. 20). This may occur by the assignment of the policy to the transferee of the property insured or by the reacquisition by the insured of the property previously transferred.

What are void stipulations in an insurance contract?

Void stipulations in an insurance contract:

a. for the payment of loss, whether the person insured has or not any insurable interest in the subject-matter of insurance, or

b. that the policy shall be received as proof of such interest, and

c. Every policy executed by way of gaming or wagering is void. (Sec. 25).

The insurance agent knew that the insured did not have insurable interest in the subject-matter of insurance, but he proceeded to issue the policy. The loss insured against occurred but the insurer refused to pay on the ground of lack of insurable interest. The insured contended that lack of insurable interest as a ground of objection by the insurer was waived? Decide with reasons.

Waiver could not validate the policy so as to permit recovery, since the policy was illegal as against public policy. Aside therefrom, the policy was void for lack of insurable interest and such ground of objection cannot be waived. (Elmoro v Life Ins. Co. of Virginia, 198 S.E. 5, 187 S.C. 504).

What is concealment?

Concealment is a neglect to communicate that which a party knows and ought to communicate. (Sec. 26)

Who must prove knowledge of the fact concealed?

The party claiming the existence of concealment must prove that there was knowledge of the fact concealed on the part of the party charged with concealment. Thus, where the insured stated that there “was no hereditary taint on either side of the family to my knowledge”, in order to show concealment, the insurer must prove that the hereditary taint alleged to exist was known to the insured. (Northwestern Mut. L. Ins. Co. v Griely, 100 U.S. 614).

As of what time must the party charged with concealment have knowledge of the fact concealed?

To be guilty of concealment, a party must have knowledge of the fact concealed at the time of the effectivity of the policy. Even if a party did not know of the existence of a material fact at the time of the application but acquired knowledge thereof after the application but before the effectivity of the policy, he is guilty of concealment should he fail to communicate such fact to the other. There is a continuing duty on the part of the applicant to disclose newly discovered matters arising between the application for, and the effectivity of the policy, where they come to the applicant’s knowledge and render his former answers n longer true. (9 Couch 2d., 346-347).

Must information be acquired after the effectivity of the policy be communicated to the other party?

Failure to communicate information acquired after the effectivity of the policy will not be a ground to rescind the contract on the ground of concealment. After the policy has taken effect, information subsequently acquired could no longer be material as it will not influence the other party anymore to enter into such contract. (9 Couch 2d., 352; Vance 2d., 349). However, in case of reinstatement of a lapsed policy, facts known after effectivity of the policy but before its reinstatement must be revealed if material.

The insured in applying for a reinstatement of a lapsed life insurance policy, concealed his disease of both kidneys and enlarged liver. After his death, an action was filed against the insurer. Was the insurer liable?

The insurer was not liable because concealment of material facts before reinstatement of a lapsed policy entitled the other to rescind the contract. (Henson vs Philam Life Ins. Co., 56 O.G. 7329).

Must concealment be intentional to entitle the injured party to rescind the contract?

A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance. (Sec. 27). If concealment must be intentional to entitle the injured party to rescind, the latter will be wholly at the mercy of anyone who wished to apply for insurance, as it would be impossible to show actual fraud except in extreme cases. In such case, there would be no incentive to an applicant to tell the truth. (Saturnino vs Phil-Am Life Ins. Co., 7 SCRA 316,319).

Ngo Hing, an authorized agent for Great Pacific Life Assurance applied with the said company for an endowment policy for his one-year old daughter. Ngo Hing was aware that his daughter was a Mongoloid child but he withheld such information from the insurer. The policy was issued and the insured child died of influenza with broncho-pneumonia. Was the concealment sufficient to relieve the insurer from liability?

The insurer is not liable. Had Ngo Hing divulged that his daughter was a Mongoloid child, the insurer would have disapproved the application. His daughter’s physical defect could not be disguised and Ngo Hing’s failure to disclose the same was concealment which relieved the insurer of any liability. (Great Pacific Life Assurance Co. vs Court of Appeals, 89 SCRA 543).

What facts must be communicated by one party to the other?

Such facts must be within his knowledge

Must be material to the contractThe other party has not the

means of ascertaining such fact; and

He makes no warranty as to such facts. (Sec. 28).

Must facts covered by a warranty be communicated?

It is not necessary to communicate or disclose matters concerning which the insured makes a warranty, express or implied. The reason is that where a fact is covered by a warranty, express or implied, it is superfluous to require disclosure. (3 Joyce 2975). However, when a fact proves or tends to prove the falsity of a warranty, it must be revealed to the other. (Sec. 29).

What matters need not be communicated except in answer to the inquiries of the other?

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 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 which prove or tend to prove the existence of a risks excluded by a warranty, and which are not otherwise material; and

d. Those which relate to a risk excepted from the policy and which are not otherwise material. (Sec. 30)

A applied for life insurance policy. He informed B, the agent of the insurer, that he had tuberculosis. B filled up the application for life insurance and did not state therein that A had tuberculosis. The policy was issued and later, the insurer died. Is the insurer liable?

The insurer is liable because any information material to the risk, either possessed by the agent at the time of the transaction or acquired by him before its completion, is deemed to be knowledge of the principal at least in so far as the transaction is concerned even though the information is not communicated to the principal at all. (Leonor vs Filipinas Cia. de Seguros, CA-G.R. No. 3659-R, January 10, 1950). Knowledge therefore, of the insurer’s agent is knowledge of the insurer. (Insular Life vs Feliciano, 73 Phil. 201). However, where the insurer’s agent fraudulently conspired with the insured, knowledge of the agent will not bind the insurer. When such conspiracy exists, the insurer is not liable. (Insular Life Assur. Co. vs Feliciano, 74 Phil. 468).

A applied for a fire insurance contract. The insurer’s agent and surveyor viewed the premises and the neighboring buildings. Will the omission of the insured to mention the neighboring buildings to the insurer entitle the latter to rescind the contract?

Such omission will not avoid the policy for the insurer’s agent knew the fact that was not revealed. (9 Couch 2d., 344-345).

What are the facts that the other party ought to know?

(a) All the general causes which are open to his inquiry, equally with that of the other, and which may affect either the political or material perils contemplated, and

(b) all general usages of trade. (Sec. 32).

Is communication still necessary when information is waived? How many information be waived?

Information need not be revealed to the other where communication thereof was waived. Waiver of information may either be: Express, when made by the terms of

the insurance or contained in the policy; or

When there was neglect to make inquiry as to such facts distinctly implied from other facts of which information is communicated. (Sec. 33).

Explain when implied waiver of information occurs.

Where an application for insurance is made in writing, and the questions therein as to material facts are unanswered or incompletely answered, and the insurer without further inquiry issues the policy, it thereby waives all right to a disclosure, or to a more complete answer with respect to the fact which the unanswered question relates, and the policy cannot be avoided on the ground of concealment. (Aranilla vs Insular Life Ins. Co., Ltd., CA-G.R. No. 374-R, Dec. 22, 1971; 9 Couch 2d., 382-383).

However, where the answer of the applicant to a direct question of the insurer purports to be a complete answer to the, any substantial misstatement or omission to the answer avoids a policy issued on the faith of the application. (Aranilla vs Insular Life Ins. Co., supra). For example, if one applying for insurance upon a building against fire is asked whether the property is encumbered, and for what amount, and his answer discloses only one mortgage, when in fact there are two the policy issued thereon is avoided. But if to the same question he merely answers that the property is encumber, without stating the amount of encumbrance, the issuance of the policy

MARINE INSURANCE

Under the present law, must the subject of marine insurance be exposed to the perils of marine navigation? The present law has expanded the

coverage of marine insurance so as to include risks that would, otherwise, have been classified as some other form of insurance .

Thus, the present law includes within the coverage of marine insurance risks not connected with marine navigation such as insurance of aircraft, goods while being packed or assembled, injury to passengers, precious stones, jewels, jewelry whether in the course of transportation or not. (Sec. 99).

Distinguish perils of the sea from the perils of the ship.

Perils of the sea - all kinds of marine casualties and damages done to the ship or goods at sea by the violent action of the winds or waves, one that could not be foreseen and not attributable to the fault of anybody.

Distinguish perils of the sea from the perils of the ship.

Perils of the ship, on he other hand, are losses or damages from: (a) natural and inevitable action of the

sea; (b) ordinary wear and tear of the ship; or (c) negligent failure of the ship’s owner

to provide the vessel with proper equipment to convey the cargo under ordinary condition. (Go Tiaco y Hnos vs Union Ins. Society of Canton, 40 Phil. 40).

Is rusting of steel pipes a peril of the sea?

Cathay Ins., vs Court of Appeals151 SCRA 710

Rusting of steel pipes in the course of a voyage is a peril of the sea in view of the toll on the cargo of wind, water and salt conditions.

Are perils of the ship ordinarily covered by marine insurance?

Go Tioco y Hnos. vs Union Ins. Society of Canton 40 Phil. 40

Unless otherwise stated in the policy, loss due to perils of the ship is not within the coverage of marine insurance. A marine policy in the usual form, therefore, includes only perils of the sea and not perils of the ship, and accordingly, a marine insurer upon a policy in the usual form is not liable for a loss caused by a peril of the ship.

A policy of insurance upon a cargo of rice stipulated that the insurer should be liable for losses incident to the perils of the sea. During the voyage, sea water entered the compartment where the cargo was stored through a defective drain pipe, and damaged the rice. Was the insurer liable?

Go Tioco y Hnos. vs Union Ins. Society of Canton40 Phil. 40

The insurer is not liable for the cause of the loss was a peril of the ship and not peril of the sea. The defect in the pipe was the result of the ordinary use of the ship that was lacking of necessary repairs.

Roque vs Intermediate Appellate Court139 SCRA 596

Insured improperly loaded logs covered by marine insurance on board a barge. The barge sank due to improper loading of the logs and leaks because the barge was not provided with necessary cover or tarpaulin so that ordinary splash of sea waves brought more water inside the barge. Was the cause of the damage a peril of the sea for which the insurer could be made liable?

The cause of the loss was a peril of the ship; therefore, the insurer was not liable. A loss which, in the ordinary course of events, results from the natural and inevitable action of the sea, from the ordinary wear and tear of the ship, or from the negligent failure of the ship’s owners to provide the vessel with proper equipment to convey the cargo under ordinary conditions, is not peril of the sea.

Who must check the seaworthiness of the vessel in marine insurance?

Roque vs Intermediate Appeal Court, 139 SCRA 596

Since the law provides for an implied warranty of seaworthiness in every contract of ordinary marine insurance, it becomes the obligation of a cargo owner or insured to look for a reliable common carrier which keeps its vessels in seaworthy condition. The insured may have no control over the vessel but has full control in the choice of the common carrier that will transport his goods.

What perils are included in an “All Risks Policy” in marine insurance?

Filipino Merchant Ins., Co., Inc. vs CA, 179 SCRA 638; ChoaTiek eng vs CA , 183 SCRA 223

A marine insurance policy providing that the insurance was “against all risks” must be construed as creating a special insurance and extending to other risks than are usually contemplated, and covers all losses except such as may arise from the fraud of the insured, intentional misconduct on the part of the insured or, otherwise, excluded in the policy. It covers all losses during the voyage whether arising from a marine peril or not, including pilferage losses during war.

ChoaTiekSeng vs CA, supra.

Insured imported lactose crystals which he insured against all risks. Upon arrival of the cargo in Manila, out of 600 bags, 403 were in bad order due to spillage. The insured filed a claim with the insurer which refused to pay on the ground that the cause of the damage was not a peril of the sea but a peril of the ship . Insurer further claimed that a loss under an insurance against “all risks” will be covered by the policy only if caused by fortuitous event which did not occur in this case.

Was the contention of the insurer correct?HELD: No. An insurance against “all risks” covers all losses during the

voyage whether arising from a marine peril or not, including pilferage losses during war. The insurer can avoid coverage only upon demonstrating that a specific provision expressly excludes the loss by pilferage from coverage, otherwise, the insurer liable.

Malayan Insurance Corp. vs. Court of Appeals80 SCAD 898, 270 SCRA 243

The insured cargo was loaded on a vessel that was arrested and detained at an intermediate port by civil authorities because of a lawsuit on a question of ownership and possession of the ship. As a result, the insured cargo had to be sold at a loss because of its perishable nature. The policy included among the risks covered seizure, arrest, restraint or detainment. The insurer refused to pay the loss on the ground that the “arrests” covered by the policy were those arising from political or executive acts, and the arrest of the vessel by judicial authorities was excluded.

Was the contention of the insurer correct?

HELD:

Wrong. If the risk of arrest occasioned by ordinary judicial process was expressly indicated as an exception in the policies, there would have been no controversy with respect to the interpretation of the subject clauses. Exceptions to the general coverage are construed most strongly against the insurer. Since the term “arrest” did not exclude an arrest ordered by judicial authorities, then the policy must be construed so as to include the same within the coverage.

What is the extent of the insurable interest of the owner of the ship is covered by a charter party?

The owner of a ship has in all cases an insurable interest in it, even when it has been chartered by one who covenants to pay him its value in case of loss; provided, that in this case, the insurer shall be liable for only that part of the loss which the insured cannot recover from the charterer. (Sec. 100).

What is loan on bottomry or respondentia?

Art. 719, Code of Commerce A loan in which under any condition whatever, the repayment of the sum loaned, and of the premium stipulated, depends upon the safe arrival in port of the goods on which it is made or of the price they may receive in case of accident.

It is a loan on bottomry when the security is a vessel, and respondentia when the security is cargo.

What is the insurable interest of the owner of a ship hypothecated by bottom?

Only the excess of its value over the amount secured by bottomry is lost. (Sec. 101).

The reason is that when the vessel hypothecated by bottomry is lost, the owner need not pay the loan on bottomry and, therefore, he is benefited to the extent of the amount of the loan obtained and actually the loss he suffers is only the difference between the actual value of the vessel and the loan on bottomry.

Does the lender have insurable interest over the vessel hypothecated by bottomry?

Cassa Maritima v Phoenix Ins. Co., N.E. 962, 129 N.Y. 490

Yes, to the extent of the amount of the loan granted for the reason that the loss of the vessel or cargo hypothecated by way of bottomry or respondentia produces the extinguishment of the loan and therefore, the lender stands to suffer by the loss of the vessel or cargo.

Distinguish concealment in marine insurance from concealment in other insurance.

In ordinary insurance, opinion or belief of a third person or the own judgment of the insured is not material and need not be communicated (Sec. 35), while in marine insurance information of the belief or expectation of a third person in reference to a material fact, is material and must be communicated to the other party (Sec. 108);

In ordinary insurance, causal connection between the fact concealed and the cause of the loss is not necessary to entitle the other party to rescind the contract. (Henson vs Phil. Am. Life Ins., Co., 56 O.G. 7328; Sec. 31)., while in marine insurance, concealment of any of the matters mentioned in Sec. 110 exonerates the insurer only if the loss resulted the risk concealed.

What are the instances when concealment will not vitiate the entire contract but will only exonerate the insurer from a loss resulting from the risk concealed?

Sec. 110 , Insurance Code

The national character of the insured;

The liability of the thing insured to capture and detention;

The liability to seizure from breach of foreign laws of trade;

The want of necessary documents; and

The use of false and simulated papers.

When may misrepresentation entitle the insurer to rescind a contract of marine insurance?

If a representation by a person insured by a contract of marine insurance is intentionally false in any material respect, or in respect of any fact on which the character and nature of the risk depends, the insurer may rescind the entire contract. (Sec. 11).

What warranties are implied in marine insurance?

The ship is seaworthy;

No improper deviation from the voyage will be made;

The vessel will not engage in illegal venture; and

Where nationality or neutrality of a ship or cargoexpressly warranted, it is implied that the ship will carrythe requested documents to show such nationality orneutrality and will not carry any document which cats reasonable suspicion thereon. (Secs. 113, 120, 123, and 125).

When is a vessel seaworthy?

A ship is seaworthy, when reasonable fit to perform the services, and to encounter the ordinary perils of the voyage contemplated by the parties to the policy. (Sec. 114).

What is the effect of violation of the implied warranty of seaworthiness?

Richelieu & O. Nav. Co. v Boston M. Ins. Co., 136 U.S. 408, 10 Sup. Ct. Rep., 934

Whenever the vessel is unseaworthy, the insurer will not be liable for a loss occasioned thereby whether such fact was known or unknown to the insured.

Philippine American General Insurance Co. vs. CA83 SCAD 226, 273 SCRA 262

The insured loaded on board a vessel 7,500 cases of soft drink bottles to be transported from Zamboanga to Cebu City. Said cargo was covered by marine insurance. The vessel was top-heavy as 2,500 cases of soft drink bottles were improperly stowed on deck. The inordinate loading of cargo on deck resulted in the decrease of the vessel’s metacentric height, thus, making it unstable.

As a result, the vessel sank bringing down the entire cargo. The insurer refused to pay on the ground that the vessel was unseaworthy for purposes of carrying its cargo. The insured on the other hand, claimed that he had no control as to how his cargo would be loaded on the vessel. Was the insurer liable?

Insurer not liable. In every marine insurance, the insured impliedly warrants to the insurer that the vessel is seaworthy and such warranty is as much a term of the contract as if expressly written on the face of the policy.

It is the obligation of the cargo owner who insures his cargo to look for a reliable common carrier which keeps its vessel but he has full control in the selection of the common carrier that will transport his goods. Hence, the insurer can not be made liable unless there is a waiver of seaworthiness of the vessel.

When must the vessel be seaworthy?

As a general rule, seaworthiness of the vessel required

only at the commencement of the risk, except in the

following cases:

a) When the insurance made for a specific period, in which case, the vessel must be seaworthy at the commencement of every voyage she may undertake during such period;

a) When the insurance is upon cargo required to be transhipped at the intermediate port, in which case, each vessel upon which the cargo is shipped, or transhipped, must be seaworthy at the commencement of each particular voyage; and

a) Where different portions of the voyage contemplated by the policy differ in respect to things to make the sip seaworthy, in which case the ship must be seaworthy at the commencement of each portion with reference to that portions. (Secs. 115 and 117).

Will the policy be avoided if the vessel becomes unseaworthy after the commencement of the voyage?

As a general rule, seaworthiness of the vessel is necessary only at the commencement of the risk, and therefore, the insured does not warrant that the ship will be seaworthy during the entire voyage or throughout the life of the policy. Accordingly, if a vessel is seaworthy at the inception of the voyage, subsequent unseaworthiness does not avoid the policy. (9 Couch 2d., 242).

What must be done if the ship becomes unseaworthy during the voyage?

When a ship becomes unseaworthy during the voyage to which an insurance relates, an unreasonable delay in repairing the defect exonerates the insurer from liability from any loss arising therefrom. (Sec. 118).

May a vessel be seaworthy for the purpose of insurance upon the ship and yet unseaworthy for the purpose of insurance upon cargo?

A ship is seaworthy for the purpose of an insurance upon the ship may, nevertheless, by reason of being unfitted to receive the cargo be unseaworthy for the purpose of insurance upon the cargo. (Sec. 119)

What is the course of the voyage insured?

When the voyage contemplated by a marine insurance policy is described by the places of beginning and ending, the course of the voyage insured is:

The one agreed upon by the parties;

In the absence of agreement, the course of sailing is not fixed by mercantile usage; and

If the course of sailing is not fixed by mercantile usage, one which to a master of ordinary skill and direction would seem the most natural, direct and advantageous. (Secs. 121 and 122).

What is deviation?

A departure from the course of the voyage insured;

An unreasonable delay in pursuing the voyage; or

The commencement of an entirely different voyage. (Sec 123).

What is the effect of improper deviation?

An insurer is not liable for any loss happening to a thing insured subsequent to an improper deviation (Sec. 126), even if the risk has not increased or even it has been apparently diminished.

Kinds of losses in marine insurance.

Total loss may either be: Actual total loss which is caused by:▪ A total destruction of the thing insured;▪ The irretrievable loss of the thing by sinking,

being broken up;▪ Any damage to the thing which renders it

valueless to the owner for the purpose for which he held it; or▪ Any other event which effectively deprives

the owner of the possession, at the port of destination, of the thing insured. (Sec. 130).

Constructive total loss is one which gives to a person insured a right to abandon. (Sec. 131).

Partial loss which is a loss other than a total loss. (Sec. 128).

Was there an actual total loss where a shipment of rice seeds or palay became wet and the seeds started to germinate or sprout?

Pan Malayan Insurance Corporation201 SCRA 282

There was actual total loss as the palay was rendered valueless to the owner. Where a cargo by the process of decomposition or other chemical agency no longer remains the same kind of thing as before, an actual total loss has been suffered.

Constructive total loss or “technical total loss”.

A constructive total loss is actually a partial loss. However,

by making an abandonment in the cases provided by law,

the loss is thereby converted to a total loss.

Illustration:A vessel valued at P100 million was insured for the said amount. The vessel suffered damage amounting to P80 million. Although the loss was partial, upon making an abandonment, the insured was entitled to recover to recover the full value of the vessel, P100 million which was equivalent to a total loss. In such case, the insurer becomes the owner of whatever may remain of the vessel. But if no abandonment was made, the insured may recover only P80 million.

How is constructive total loss determined where the cargo insured under one policy are loaded on different vessels?

Oriental Assurance Corporation vs C A 200 SCRA 459

In case the contract of marine insurance covers a single shipment under one policy and one premium, the contract of insurance is one and indivisible, and the fact that the subject matter of insurance is loaded on board different vessels will not alter the situation. In such case, the constructive total loss will be determined loaded on one vessel alone.

Kind of averages.

Simple or particular average includes all expenses and damages caused to

the vessel or to her cargo which have not inured to the common benefit and profit of all the persons interested in the vessel and her cargo (Sec. 809, Code of Commerce); or

General or gross average includes all the damages and expenses which

are deliberately caused in order to save the vessel, its cargo, or both at the same time, from real and known risk. (Sec. 811, Code of Commerce).

Must formal requirements be complied with to entitle a party to contribution arising from general or gross average?

The right to contribution arising from a general or gross average could not be claimed unless the formal requirements of the law are complied with. (Art. 811, Code of Commerce).

In order to incur the expenses and cause the damage corresponding to gross average, there must be a resolution of the captain, adopted after deliberation with the sailing mate and other officers of the vessels, and after hearing the persons interested in the cargo who may by present. The said resolution must be entered I the log book. (Secs. 813 [par. 1], 814 [par. 1].

Philippine Home Assurance Corp. vs CA 71 SCAD 199, 257 SCRA 468

A Company loaded its vessel with various cargoes which were insured. While the vessel was off Okinawa, Japan, a small flame was detected on the acetylene cylinder located near the engine room. The acetylene cylinder exploded causing the death and injuries to the crew and instantly setting fire to the vessel. The master and the crew abandoned the ship. The cargoes which were saved were loaded on another vessel for delivery to their ports of destination. The formal requirements of a general or gross average were not met.

Should the owners of the cargoes saved or their insurance contribute to the general average?

HELD: NO.

Since the formalities of the law were not complied with, there was no right to claim contribution for a general or gross average loss.

What are the effects of a stipulation that the marine insurance shall be free from particular average?

If the damage to the thing insured is a particular average, the insurer shall not be liable unless the loss suffered is total, i.e., the insured is deprived of the whole of such thing;

If the damage to the thing insured is a general average, the insurer shall be liable whether the loss is partial or total or for the contribution of the insured for his proportion of all general average losses assessed upon the thing insured which was saved. (Secs. 136, 164 and 165).

What is abandonment in marine insurance?

Abandonment, in marine insurance is the act of the insured by which after a constructive total loss, he declares the relinquishment to the insurer of his interest in the thing insured. (Sec. 138).

What are the effects of abandonment?

a partial loss becomes a total loss. (Sec. 131.);

insured is surrendering to the insurer whatever is left of the property insured, and resorting to the policy for indemnity; and

insurer then becomes the owner of whatever may remain of the insured thing and the insured may recover a total loss. (Sec. 139).

Grounds of Abandonment

more than ¾ of the value of the thing insured is actually lost;

more than ¾ of the value of the thing insured would have to be expended to recover it from the peril;

injured to such an extent as to reduce its value by more than ¾;

Grounds of Abandonment

If the thing insured a ship and the contemplated voyage cannot be lawfully performed without an expense to the insured of more than ¾ of the value of the thing abandoned;

If the thing insured, is a ship and the contemplated voyage cannot be lawfully performed without incurring risk which a prudent man would not take under the circumstances;

Grounds of Abandonment

If the thing insured, being cargo or freightage, and the voyage cannot be performed nor another ship procured by the master, within reasonable time and with reasonable diligence, to forward the cargo, without incurring an expense of more than ¾ of the value of the thing or without incurring a risk which a prudent man would not under take under the circumstances.

What may be recovered by the insured when abandonment is properly made? When abandonment is properly made, the

insured may recover a total loss, and the insurer acquires all the interests of the insured in the thing with all chances of recovery and indemnity.

But if the insured omits to abandon, he may recover only his actual loss. (Secs. 146 and 155).

What is the effect of valuation in a policy of marine insurance?

A valuation in a policy of marine insurance is conclusive between the parties thereto in the adjustment of either a partial or total loss, provided:

(a) the insured has some interest at the risk and

(b) there is no fraud on his part. In such case, the insured does not have to prove the value of the thing insured at the time of the loss except when it has been hypothecated by bottomry or respondentia before its insurance, and without the knowledge of the person actually procuring the insurance, in which case the real value thereof must be shown. (Sec. 156)

Effect of Overvaluation.

Co Teng vs Goodyear Ins. Co., CA-G.R. No. 37777-R, October 12, 1973

If overvaluation is fraudulent, it entirely avoids the insurance whether done at the time of making the contract or at the time of submitting proof of loss.

But the mere fact of overvaluation, even though great, is not alone sufficient proof of fraud.

Effect of Overvaluation

It must be alleged and clearly proved by the insurer that the insured, in overvaluing his property, did so knowingly and with fraudulent intent.

Overvaluation may be due to a perfectly honest, though mistaken, estimate as to the real value of the property insured. (Vance on Insurance, 3rd ed., Hornbook Series, pp.838-839)

Co-insurance.

Co-insurance is a form of insurance in which the person who insures the property for less than the entire value is understood to be his own insurer for the difference which exists between the true value of the property and the amount of insurance. (44 C.J.S.).

In what kind of insurance does co-insurance exist?

In marine insurance, there is always co-insurance (Sec. 157) while in fire insurance, there is no co-insurance unless expressly stipulated in the policy. (Secs. 171 and 172).

In life insurance there is no co-insurance since the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. (Sec. 183).

Effect of Co-insurance.

Whenever co-insurance exists, the insurer is liable upon a partial loss only for such portion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured. (Sec. 157). It results in a proportionate division of risk between the insured and the insurer with the following formula:

Loss x Insurance = Liability of Insurer

Value

Who has the burden of proving under-insurance so that the principle of co-insurance will apply?

Development Insurance Corp. vs IAC 143 SCRA 62

In order that the principle of co-insurance can apply, the insurer must prove that the value of the property insured is more than the amount of the policy obtained or stated, otherwise, the property must be under-insured. In case the insurer should fail to do so, there can not be any pro rata sharing of the loss under the policy can not exceed the face value of the policy.

The insured obtained a fire policy on its building for P2,500,000. The policy stipulated on the existence of co-insurance. The building was partially damaged to the extent of P508, 867. The insurer refused to pay the full amount of the loss and claimed that the value of the building was P5, 800,000 and therefore, the insured was considered as its own insurer for the difference between that amount and the face value of the policy and should share pro rata in the loss sustained. The insurer was not able to prove that the value of the property insured was P5,800,000. How much is the liability of the insurer?

The insurer is liable for P508, 867 since that amount was proven to be actual loss suffered by the insured. Co-insurance can not apply as the insurer failed to prove that the amount of insurance taken was less than the value of the thing insured and there, a pro rata sharing of the loss can not apply.

Development Insurance Corp. vs IAC143 SCRA 62).

For what kind of fire is the insurer liable in fire insurance?

Canson vs Phoenix Ins. Co.., 110 Ga. 583, 35 S.F. 775, 78 Am. SR. 124

The insured is entitled to recover the loss suffered where the cause of the damage is a hostile fire, that is, one which burns at a place where it is not intended to be, or breaks out from where the fire caused the loss is a friendly fire, that is, one which is confined within the place where it was intended to be and employed for the ordinary purpose of lighting, heating or manufactured, recovery cannot be had for loss or damaged caused thereby.

hostile fire

One which burns at a place where it is not intended to be, or

breaks out from where the fire caused the loss is a friendly fire, that is, one which is confined within the place where it was intended to be and employed for the ordinary purpose of lighting, heating or manufactured, recovery cannot be had for loss or damaged caused thereby.

Examples of damages caused by a friendly fire for which the insurer is not liable.

Damages were caused by a fire that remained at the place where it was intended to be and accordingly, such fire was a friendly fire for which there was no recovery for the damage caused thereby;

Damage caused by smoke from a lamp when no ignition occurred outside of the lamp; and

Damage done to sugar by the heat of the usual fires employed for refining, being accumulated by the mismanagement of the insured, who inadvertently kept the top of their chimney closed

Effect of alteration in the use or condition of the thing insured

Alteration in the use or condition of the thing insured will entitle the insurer to rescind the contract of insurance provided the following requisites are present, to wit:

(a) there must be a violation of the provisions of the policy;

(b) the alteration was made without the consent of the insurer;

(c) the alteration was made by means within the control of the insured; and

(d) the alteration increased the risk of loss. (Secs. 168 and 169).

Is increase in the risk of loss alone sufficient to entitle the insurer to rescind the contract of insurance?

No. There must be a corresponding violation of the provision of the policy otherwise there is no right to rescind the policy.

A contract of fire insurance is not affected by any act of the insured subsequent to the execution of the policy, which (act) does not violate its provisions, even though it increases the risk and is the cause of the loss. (Sec. 170).

Must alteration in the use or condition of the thing insured increase the risk of loss? Why?

Young vs Midland Textile Ins., Co., 30 Phil. 617

The right of the insurer to rescind a contract of insurance is premised on the fact that an insured paid premium based upon the risk at the time the policy was issued, and when the insured does not pay premium upon the increased risk, the insurer is entitled to rescind the contract.

The alteration in the use or condition of the thing insured in violation of the provision of the policy must increase the risk of loss, otherwise, the policy is not affected thereby.

However, although increase in the risk of loss, as a rule is necessary, when the policy provides that a violation of specified provisions shall avoid it, increase in the risk of loss is not necessary to enable the insurer to escape liability. (Sec. 75)

Must alteration be within the control of the insured?

An alteration in the use or condition of the thing insured must be by means within the control of the insured so as to entitle the insurer to rescind the contract. Thus, where the alterations were made by a tenant of the insured without the consent of the insured, the policy was not thereby avoided. (Nebraska & I. Ins., Co. vs Christienson, 45 N.W. 924, 29 Neb. 572). But a material alteration made by a tenant with the knowledge of the insured will forfeit the policy. (Lyman vs State Mut. Fire Ins., Co., 14 Allen 329).

What is the measure of indemnity in open or unvalued fire insurance policy, and in valued policy?

In case of open or unvalued policy, the measure of indemnity in fire insurance is the expense it would be to the injured to replace the thing lost or insured in the condition in which it was not at the time of the injury. (Sec. 171).

In case of valued policy, the valuation

agreed upon shall be conclusive between the parties in the adjustment of the loss. (Sec. 156).

When there is prima facie evidence of arson?

If the building or property is insured for substantially more than its actual value at the time of the issuance of the policy;

If during the lifetime of the corresponding fire insurance policy more than two fires have occurred in the same or other premises owned or under the control of the offender and/ or insured;

When there is prima facie evidence of arson?

If shortly before the fire, a substantial portion of the effects insured on a building or property had been withdrawn from the premises except in the ordinary course of business; and

If a demand for money or other valuable consideration was made before the fire in exchange for the desistance of the offender or for the safety of the person or property of the victim.

Casualty Insurance.

is insurance covering the loss or liability arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine. (Sec. 174).

Contract of Suretyship.

A contract of suretyship is an agreement whereby a party called the principal or obligor of an obligation or undertaking in favor of a third party called the obligee. (Sec. 175)

Liability of the surety.

The liability of the surety shall be joint and several with the obligor and shall be limited to the amount of the bond. (Sec. 176).

Torrento purchased steel bars from Nassco on a 120- day credit. To secure the payment of the price., Torrento posted a surety bond issued by Mutual. Torrento did not pay within period agreed upon and Nassco filed an action against Torrento and Mutual. Torrento claimed that inasmuch as she paid the premium on the surety bond, the right of action, in case of her failure to pay, was exclusively against her surety. Was Torrento’s contention correct?

NASSCO vs TORRENTO, 20 SCRA 427).

No. Torrento’s bound herself together with the surety, solidarily for the payment of the obligation and therefore, the creditor may bring an action against anyone of them. The surety may be sued either alone or together with the principal debtor.

NASSCO vs TORRENTO, 20 SCRA 427).

Is a suretyship contract valid and binding where premium thereon has not been paid?

Generally, payment of premium is a condition precedent for the validity of suretyship contract or bond and therefore unless and until the premium is pad, the suretyship contract or bond is not valid.

However, when a bond or suretyship contact is issued and accepted by the oblige or creditor, said bond or suretyship contract shall be valid and binding notwithstanding the non-payment of premium. (Sec. 177).

Life Insurance.

Life insurance is insurance on human lives and insurance appertaining thereto or connected therewith. (Sec. 179).

Annuity.

Is a contract to pay the insured, or a named person or persons, a sum periodically during life or a certain period.

Distinctions: Annuity vs. Life Insurance. Annuity is payable during the lifetime of the

annuitant while life insurance is usually payable upon the death of the insured;

The annuitant pays a single premium while the insured in life insurance pays premiums by instalments;

In annuity, the insurer undertakes to pay annuities until the death of the annuitant, while in life insurance, the insurer pays a lump sum upon the death of the insured.

Is insurer liable when the insured suffered a violent death and assault or murder is excluded in the policy?

In a life insurance policy where death by the insured by “assault or murder, or intentional killing” is excepted from its coverage, the mere fact that the insured suffered a violent death by the hands of another person will not necessarily relieve the insurer of liability. The insurer’s liability in such case will depend on whether the insured’s death was intended or not.

Kanapi vs Insular Life Assurance Co., Ltd., 94 Phil. 398; Biagtan vs Insular Life Assurance Co., Ltd., 44 SCRA 58

If the insured was killed by another person intentionally the insurer is not liable.

Calanoc vs Court of Appeals98 Phil 79

But where the insured was not an intended victim of a felonious assault, the insurer is still liable.

Basilio, a security guard, had a life insurance policy with a supplementary contract covering death by accident. The policy excepted death by assault or murder. Ojeda, whose house was a block away from Basilio’s workplace, asked for the latter’s help because Ojeda noticed something suspicious in house. Basilio refused because he was not a regular policeman.

Calanoc vs Court of Appeals, 98 Phil 79

Ojeda then sought help from a policeman who prompted Basilio to come along. While they were standing in front of the main gate of Ojeda’s residence, a robber fired a shot that hit Basilio’s abdomen and caused his death. The insurer refused to pay proceeds of the policy on the ground that Basilio’s death was caused by murder or assault and therefore, excepted from the policy.

Calanoc vs Court of Appeals98 Phil 79

Was the insurer liable?

Yes. There was no proof that Basilio’s death was caused by murder or assault nor can it be said that the killing was intentional for there was possibility that the robber fired the shot merely to scare away the people around and not necessarily to kill the victim. It cannot be pretended that the robber aimed at the deceased precisely because he wanted to take his life.

Can a life insurer be made liable where the insured was executed for a crime?

Burt vs Union Cent. L. Ins. Co., 187 U.S. 362, 23 Sup. Ct. 139

A policy of life insurance does not insure against the legal execution of the insured for crime even though he may in fact have been innocent, and, therefore, unjustly convicted and executed.

Is the insurer in a life insurance contract liable where the insured committed suicide?

YES, but only when it is committed after the policy has been in force for a period of two years from the date of its issue or of its last reinstatement, unless the policy provides a shorter period; provided, however, that SUICIDE committed in the state of insanity shall be compensable regardless of the date of commission. (Sec. 180-A).

Who has the burden of proving suicide?Edralin vs Insular Life Co., Ltd., [CA] 73 O.G. 976

The basic instinct of self-preservation militates against the commission of suicide. Hence, it is incumbent upon a party alleging suicide as a defense, especially in actions involving insurance policies to prove it by clear and convincing proof.

Del Val vs. Del Val, 29 Phil. 334

However, where the proceeds are payable to an irrevocable beneficiary and not to the conjugal estate of the person whose life was insured although the premiums were paid out of conjugal funds.

Will an industrial life insurance lapse by non-payment of premiums where the insurer failed to send a collector of the premiums?

Industrial life insurance shall not lapse for non-payment of premiums if such non-payment was due to failure of the insurer to send its representative or agent to the insured at the residence of the insured or some other place indicated by him for the purpose of collecting such premium. However, this does 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. (Sec. 229, par.2).

May a life or health insurance policy be transferred?

A policy insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered. (Sec. 181).

Is notice to the insurer necessary for the transfer or bequest of the life insurance policy?

Notice to an insurer of a transfer or bequest thereof is not necessary to preserve the validity of a policy of insurance upon life of health, unless thereby expressly required. (Sec. 182).

Is consent of the beneficiary necessary for the validity of an assignment of a life insurance policy?

If the designation of the beneficiary is irrevocable, the consent of such beneficiary to the assignment of the policy must be obtained since the beneficiary in such case has a vested right on the policy that cannot be defeated by an assignment or transfer without his consent. (Morgan vs Penn. Mut. Life Ins., Co. 94 F. 2d., 129).

On the other hand, the consent of the beneficiary to an assignment of the policy is not necessary where the beneficiary is revocable for such case the beneficiary has no vested right as the insured may still change him. (Aetna Life Ins., Co. vs Philipps, 39 F. 2d., 901; Sec. 11).

Must the assignee of a life insurance policy have insurable interest in the life of the insured?

He need not have. (Sec. 181).

Banker’s Reserve Life Co. vs Mathews, 39 F 2d., 528; Midland Nat. Bank of Minneapolis vs Dakota Life Ins. Co., 48 S. Ct. 532, 277 U.S. 346)

However, assignment of a policy should not be used to circumvent the provision of the law prohibiting insurance without insurable interest.

An assignment of a policy of life insurance to one without insurable interest on the life of the insured may invalidate the policy where the assignment is substantially contemporaneous with the issuance of the policy and made with intent to evade the rule against wagering contracts, but where the assignment is made in good faith, the fact that it is made its inception.

What is the measure of indemnity in life insurance?

Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. (Sec. 183).

By reason of this rule it has been said that life insurance contract is a valued policy. (1 Joyce, 133).

However, when the insurable interest is susceptible of pecuniary estimation, then the amount of the loss suffered should be the basis of payment as in the case of insurance procured by a creditor on the life of the debtor, for then, life insurance of such nature is a contract of indemnity. (1 Joyce, 134).