Framework

General Non-Life
Life Insurance
Concepts Insurance

Summary of
Payment of Grounds for
Amendments in
Proceeds Rescission
Insurance Code

PDIC Law
 PART THREE

NON-LIFE INSURANCE
 Topics
• What may be insured against

• Insurable interest

• Non-life insurance policy

 Topics
• Premiums

• Parties

• Double insurance v reinsurance

• Different kinds of non-life insurance

 WHAT MAY BE
INSURED AGAINST
 Contingent Unknown
Event- may or Event- time
may not of occurrence
happen is unknown
Which will
damnify a person
OR
create a liability
against him
 Requirement for recovery

• Peril insured against must be the PROXIMATE CAUSE of the loss

or damage (sec. 86)

• NO liability if insured risk is only a remote cause or if proximate

cause is an excepted peril

• Concept of loss - injury, damage, liability, loss of income or

profits sustained by the insured in consequence of the happening
of one or more perils insured against (Bonifacio Bros. V. Mora, 20
SCRA 261)
 Proximate Cause

• That which in the natural and continuous sequence,

unbroken by any NEW INDEPENDENT cause, produces
an event without which the event would not have
occurred.

• Also called the EFFICIENT CAUSE, or one that sets the

others in motion

• NOT equivalent to IMMEDIATE CAUSE

 Proximate Cause: Examples

• Fire causes an explosion which results in loss.

Fire is the proximate cause of the loss. If fire
is a covered peril, the insurer is liable.

• A house is insured against fire. The house is

destroyed due to the falling of a wall. The
wall fell due to fire. The insurer is liable
 Immediate Cause v. Proximate Cause

Immediate cause – cause or peril which

appears closest in time to the loss

Immediate cause is NOT necessarily the

proximate cause and vice versa
 Bar 2007

Alfredo took out a policy to insure his

commercial building against fire. A fire broke
out and destroyed the building. It was found
that the proximate cause of the fire was
explosion but fire was the immediate cause of
the loss. There is no excepted peril in the
policy. Can there be recovery under the policy.
 ANSWER

• Alfredo cannot recover from the policy. Section

84 of the Insurance Code provides that before
there can be recovery under property insurance,
the proximate cause of the loss must be the
covered peril. In the instant case, the proximate
cause of the loss was not the peril insured
against. Hence, there can be no recovery under
the policy.
 Hostile v. Friendly Fire
• Friendly - fire burns in a place where it is
intended to burn

• Hostile - occurs outside the confines or begins as

a friendly fire and becomes hostile by escaping
from the place where it ought to be

• Hostile fire is the one covered by fire insurance

 Section 87:
Loss in the course of rescue

• Insurer is liable if the thing is rescued

from peril insured against if in the
course of rescue, the thing is exposed to
a peril not insured against
 Illustration
• An owner gets fire insurance for his house and all
furniture inside.

• In the course of rescuing the furniture from fire, the

furniture is damaged due to water.

• The insurer is liable to the owner although the

damage is not due to fire since it was in the course
of rescuing the furniture from fire that it suffered
some damage.
 If loss due to willful act or
connivance of insured
• Section 89 - insurer is not liable if
insured, through his willful act or
connivance caused the loss

• Ex. Arson, owner hiring other people to

rob his property
 If loss due to willful act or connivance of
insured
• Section 89 - if loss is through SIMPLE negligence of
insured or his agents, insurer is STILL LIABLE

• Insurer is NOT liable if loss is caused by GROSS

negligence of insured
 Bar 2007

• If the fire was found to have been caused

by Alfredo’s own negligence, can he still
recover from the policy?
 ANSWER

• I qualify. If the negligence was simple in

nature then Alfredo can still recover
under the policy. However, if there was
gross negligence on the part of Alfredo
then he is barred from recovering under
the policy.
 Bar 2014
• On February 21, 2013, Barrack entered into a contract of insurance with
Matino Insurance Company (Matino) involving a motor vehicle. The
policy obligates Matino to pay Barrack the amount of Six Hundred
Thousand Pesos (P600,000.00) in case of loss or damage to said vehicle
during the period covered, which is from February 26, 2013 to February
26, 2014.

• On April 16, 2013, at about 9:00 a.m., Barrack instructed his driver, JJ, to
bring the motor vehicle to a near by auto shop for tune-up. However,
JJno longer returned and despite diligent efforts to locate the said
vehicle, the efforts proved futile. Resultantly, Barrack promptly notified
Matino of the said loss and demanded payment of the insurance
proceeds of P600,000.00.
•
 Bar 2014
• In a letter dated July 5, 2013. Matino denied the
claim, reasoning as stated in the contract that
"the company shall not be liable for any
malicious damage caused by the insured, any
member of his family or by a person in the
insured’s service. Is Matino correct in denying
the claim? (4%)
 Suggested Answer
• No, Matino is wrong in denying the claim.

• Under the Insurance Code, an insurance policy is

intended to cover losses due to acts of simple negligence.
It is only when the insured is guilty of willfull connivance
in bringing about the risk insured against or gross
negligence that an insurer can deny compensation.

• In this case, the act of Barrack of allowing his driver to

bring the car for tune up is simple negligence, which
should be covered by an insurance policy.
 Suggested Answer

• Further, the act of JJ, Barrack’s driver in running

away with the vehicle, cannot be considered as
malicious damage. It is a crime, which is an act
covered by an insurance policy. Hence, Matino
cannot use this exlusionary clause to defeat
payment of proceeds.
INSURABLE INTEREST
 Concept, Section 13
 Every interest in property, whether real or
personal (owner)

 Any relation thereto (lessee, agent)

 Liability in respect of property (carrier, depositary)

 Which will directly damnify the insured when a

contemplated peril happens
 Forms, Sec. 14

 Existing interest (owner)

 Inchoate interest founded on an existing interest

(shareholder)

 Expectancy coupled with an existing interest

(usufructuary, expected profit)
 Examples of Insurable Inchoate Right in
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.
 Factual Expectation

• Mere factual expectation of loss not arising from

any legal right or duty in connection with the SM
does NOT constitute an insurable interest.

• NOTE: Factual expectation is enough basis in life

insurance.
Beneficiary is required to have insurable
interest

Insurable interest is required before

a person can benefit from a property
insurance (Sec. 18)
 Bar 2000

A is an elderly bachelor. He insured his

house against fire. He named his
companion-friend as beneficiary. A died
in a fire which also destroyed his home.
The insurer refused payment to B due
to absence of insurable interest on the
life of A. Is the insurer correct?
 ANSWER

The insurer is correct. The beneficiary

in property insurance must have
insurable interest on the property. The
companion-friend of A does not have
insurable interest on the house of A.
Hence, he cannot recover from the fire
insurance policy.
 Bar 2001

JQ, the owner of a condominium

insured the same against fire with XYZ
Company and made the loss payable to
his brother MLQ. In case of loss by fire,
who can recover from the policy. State
the reason for your answer (5%)
 ANSWER

• JQ can recover since he has insurable

interest over his own condominium unit.
MLQ cannot recover since it is required
that a beneficiary must have insurable
interest over the property.
 Bar 2014

• A person is said to have an insurable interest in the subject

matter insured where he has a relation or connection with,
or concern in it that he will derive pecuniary benefit or
advantage from its preservation. Which among the
following subject matters is not considered insurable? (1%)
• (A) A partner in a firm on its future profits
• (B) A general creditor on debtor’s property
• (C) A judgment creditor on debtor’s property
• (D) A mortgage creditor on debtor’s mortgaged property
 Suggested answer

• (B) A general creditor on debtor’s

property
 Bar 2015
• Novette entered into a contract for the
purchase of certain office supplies. The goods
were shipped. While in transit, the goods were
insured by Novette. Does she have an insurable
interest over the goods even before delivery of
the same to her? Explain. (2%)
 Suggested Answer
• It depends. If there was already transfer of ownership to
Novette even before the goods were delivered to her,
which may be caused by payment of full purchase price,
then she can insure the goods. The loss of the goods shall
cause damage to Novette.

 However, if the goods are still owned by the seller, Novette

cannot insure them. Only an existing interest, inchoate
interest founded on an existing interest or expectancy
coupled with an existing interest shall justify an insurance
policy on the goods.
 BAR 2017
• The newly restored Ford Mustang muscle car was just released from the car
restoration shop to its owner, Seth, an avid sportsman. Given his passion for
sailing, he needed to go to a round-the-world voyage with his crew on his
brand-new 180-meter yacht. Hearing about his coming voyage, Sean, his
bosom friend, asked Seth if he could borrow the car for his next roadshow.
Sean, who had been in the business of holding motor shows and promotions,
proposed to display the restored car of Seth in major cities of the country. Seth
agreed and lent the Ford Mustang to Sean. Seth further expressly allowed Sean
to use the car even for his own purposes on special occasions during his
absence from the country. Seth and Sean then went together to Bayad Agad
Insurance Co. (BAIC) to get separate policies for the car in their respective
names.
• BAIC consults you as its lawyer on whether separate policies could be issued to
Seth and Sean in respect of the same car.
  What is insurable interest?
• Do Seth and Sean have separate insurable interests? Explain briefly your
answer.
 Suggested Answer
• What is insurable interest?

Every interest in property, whether real or

personal, or any relation thereto or liability in
respect of property, which will directly damnify
the insured when a contemplated peril
happens
 Suggested Answer
• What is insurable interest?

Every interest in property, whether real or

personal, or any relation thereto or liability in
respect of property, which will directly damnify
the insured when a contemplated peril
happens
 Suggested Answer
• Do Seth and Sean have separate insurable
interests? Explain briefly your answer.

Only Seth has insurable interest. As the owner of

the Mustang, Seth has an interest on the vehicle
and stands to be damnified if something happens
to the vehicle. On the other hand, Sean as a mere
bailor has no insurable interest and suffers no
damage when something happens to the vehicle.
Insurable interest in a
mortgaged property (Sec. 8)

• Both the mortgagor and the mortgagee have insurable

interest on the mortgaged property

• The II of the mortgagor is to the full value of the SM

• The II of the mortgagee is only up to the extent of the

indebtedness
 Bar 2012
A house and lot is covered by a real estate mortgage (REM) in favor of ZZZ Bank. The
bank required that the house be insured. The owner of the policy failed to endorse
nor assign the policy to the bank. However, the Deed of Real Estate Mortgage has·
an express provision which says that the insurance policy is also endorsed with the
signing of the REM. Will this be sufficient?
A. No, insurance policy must be expressly endorsed to the bank so that the bank
will have a right in the proceeds of such insurance in the event of loss.
B. The express provision contained in the Deed of Real Estate Mortgage to the
effect that the policy is also endorsed is sufficient.
C. Endorsement of Insurance Policy in any form is not legally allowed.
D. Endorsement of the Insurance Policy must be in a formal document to be valid.

SUGGESTED ANSWER: B
 Bar 1999

• A businessman obtained a fire insurance policy on his

stocks for P5 M. Three months later, a fire broke out
and destroyed the grocery and stocks. The insurer
denied the claim since the stocks were mortgaged to
another person who also insured the same stocks for
P5 M. May the businessman and the creditor obtain
different insurance policies on the same stocks?
 ANSWER

Yes. The businessman, as the owner

and the creditor, as the mortgagee
have insurable interest over the
stocks. Hence, they may obtain
separate policies on the same
stocks.
 Measure

 Measure of insurable interest is the extent the

insured might be damnified by loss or injury (Sec.
17)

 Section 25: Void stipulations – payment of loss

whether insured has insurable interest or not or
that policy shall be proof of interest
 INSURABLE INTEREST:
jurisprudence

• Fire insurance taken on a property belonging to

another is VOID, although the insurer had full
knowledge of fact of ownership and even if insured
subsequently acquired insurable interest (Cha v.
CA, 277 SCRA 690)
 INSURABLE INTEREST:
jurisprudence
• Where the real intention of insured was to
insure his goods for P15,000 but insurer
mistakenly insured the building where the
goods were contained and not owned by
insured, in case of loss of goods insured was
allowed to recover (Garcia v. Hongkong, 45
Phil 122)
 When insurable interest must exist in
property insurance

Time the insurance takes effect and

when the loss occurs, but NEED NOT
exist in the meantime
 Bar 2002

• Distinguish insurable interest in

property insurance from insurable
interest in life insurance (5%)
 ANSWER
•In property insurance, the expectation of benefit must have a legal basis. In life
insurance, insurable interest can be based on mere factual expectation.

•In property insurance, the actual value of the interest is the limit of the
insurance. There is no such limit in life insurance except if insurable interest is
capable of pecuniary estimation.

•In property insurance, insurable interest must exist when the insurance takes
effect and at the time of the loss but not in the meantime. In life insurance,
insurable interest must exist only at the time the insurance takes effect.

•In life insurance, the beneficiary is not required to have insurable interest on
the life of cestui que vie, unless the beneficiary was the one who got the policy.
In property, the beneficiary must have insurable interest on the property.
 Bar 2012
For both the Life Insurance and Property Insurance, the
insurable interest is required to be -
A. existing at the time of perfection of the contract and at
the time of loss.
B. existing at the time of perfection and at the time of
loss for property insurance but only at the time of
perfection for life insurance.
C. existing at the time of perfection for property
insurance but for life insurance both at the time of
perfection and at the time of loss.
D. existing at the time of perfection only.
 ANSWER
• B. existing at the time of perfection and at the
time of loss for property insurance but only at
the time of perfection for life insurance.
 Change of ownership of property

Section 20 and 58: A change of interest in any

part of a thing insured unaccompanied by a
corresponding change of interest suspends
the insurance until the interest in the thing
and interest in the insurance are vested on
the same person
 Illustration
•A owns a car which is insured against theft

•A sells the car to B. The policy was not included in the sale.

•If the car is carnapped, neither A nor B can recover under the policy.

•A cannot recover because he does not own the car at the time of
the theft.

•B cannot recover because he does not own the policy

 Transfer of property
by succession

When the insured dies, and the subject

matter is transferred by succession, the new
owner of the thing will also own the
insurance. (Sec. 23)
 Illustration

• A owns a car which has theft insurance

• A bequeath the car to B under his will
• A dies
• B now owns the car, together with the
insurance policy
POLICY
NEW

KINDS
Open – Value of thing is not agreed upon
but is to be ascertained at time of loss.
The amount of the insurance merely
represents the insurer’s maximum
liability.
 KINDS
Valued – expresses on its face an
agreement that the thing shall be valued at
a specific sum

Running – successive insurances

 TWO KINDS OF VALUES
• Face value – maximum amount which may
be recovered under the policy

• Valuation- value of the subject matter

agreed on by the parties
 Open v. Valued

• Open - has a face value but has NO

valuation of the thing. Valuation is
done after the loss

• Valued - has both face value and

valuation of the thing
 Illustration: Open

Value of the building: to be determined at time of

loss
Face Value: P100 Million
If the valuation is more than the face value,
recovery is limited to the face value
 Illustration: Valued
Valuation of the car : P20 Million
Face Value : P 10 Million
GENERAL RULE: Recovery will be based on valuation
EXCEPTION: If valuation is obtained through fraud or
misrepresentation. Recovery is limited to the face value or
insurer may deny the claim
 Illustration: Running

As of June 1, 2018 – value of goods – P1

Million
As of June 8, 2018 - value of goods –
P500,000
PREMIUM
 PREMIUM
• Cash and carry basis rule is followed

• Section 77 - insurer is entitled to premium as

soon as the thing insured is exposed to the
peril insured against

• Premium - is the agreed price for assuming

and carrying the risk
 PREMIUM
 General Rule: Cash and carry basis – nonpayment of
the first premium prevents the contract from
becoming binding

 Premium must be paid in cash as a condition

precedent for non-life insurance policy to be valid
and binding
 PREMIUM
• In Suretyship, payment of premium is also
necessary for the contract to be binding

• EXCEPT: if obligee has accepted the bond,

suretyship is binding even if premium has not
been paid, subject to the right of the insurer
to recover the premium from its principal
(SEC. 177)
NEW

Exceptions to Cash and Carry Basis, Sec. 77

• Life/industrial life when the grace period
applies
• whenever under the broker and agency
agreements with duly licensed
intermediaries, a ninety (90)-day credit
extension is given. No credit extension to a
duly licensed intermediary should exceed
ninety (90) days from date of issuance of
the policy.
 Exceptions to Cash and Carry Basis, Sec. 77
• An acknowledgment in a policy or contract of insurance or
the receipt of premium is conclusive evidence of its
payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be
binding until the premium is actually paid.

• When the parties have agreed on installment payment

(Makati Tuscany case)

• When the insurer has renewed the insurance over the years
under a clear credit term arrangement (UCPB case)
 Exceptions to Cash and Carry Basis, Sec. 77

• In Suretyship where the obligee accepts

the bond even if premium has not been
paid (Sec. 177)
 When there is a credit scheme

• UCPB v. Masagana April 4, 2001 - insured is entitled to

proceeds even if he has not fully paid premiums when:

– for years, insurer has been issuing fire insurance

policies to insured and the policies were renewed

– insurer has been granting 60-90 day credit

extension
 When there is a credit scheme
– no valid notice of non-renewal

– premium was paid by insured within credit

extension period
 Bar 2007
• Alfredo took out a policy to insure his
commercial building. The broker agreed to give
a 15-day credit to Alfredo within which to pay
the premium. Upon delivery of the policy on
May 15, 2006, Alfredo issued a postdated check
dated May 30, 2006. On May 28, 2006, fire
destroyed the building. May Alfredo recover
from the policy?
 ANSWER

• Alfredo can recover from the policy. In a

decided case by the Supreme Court, it was
held that parties may agree on a credit
extension in paying the premium. The
happening of the peril during the credit
extension will entitle the insured to proceeds,
less the unpaid premiums.
 Premium by installment:
Makati Tuscany v. CA

• Makati and American Assurance agreed

that premiums will be paid via three
installments
• Makati paid premiums for 3 consecutive
years in three installments
• On the 4th year, Makati paid only the 1st
2 installments.
 Premium by installment:
Makati Tuscany v. CA
• American collected the 3rd installment

• Makati’s defense: Section 77 provides

that no policy will be effective unless the
premium has been paid. Since premiums
were paid on installments, there was no
valid policy.
 Premium by installment:
Makati Tuscany v. CA
• Makati and American Assurance agreed that
premiums will be paid on three installments

• After paying premiums for 3 consecutive years,

Makati refused to pay the third installment on the 4th
year

• American sought to collect the balance from Makati

 Premium by installment:
Makati Tuscany v. CA

• SC: Section 77 merely precludes the parties from

stipulating that the policy is valid even if premiums are
not paid, but does not expressly prohibit an agreement
granting credit extension, and such an agreement is not
contrary to morals, good customs, public order or public
policy (De Leon, the Insurance Code, at p. 175). So is an
understanding to allow insured to pay premiums in
installments not so proscribed. At the very least, both
parties should be deemed in estoppel to question the
arrangement they have voluntarily accepted
 Bar 2006

• A Insurance Company issued an policy on the new

car of B. The premium of P60,000 was to be paid in
6 months. B paid only the 1st two months
installments. Despite demands, B failed to pay the
rest of the installments. Five months after the
issuance of the policy, the vehicle was carnapped. A
denied the claim of B since B did not pay the
premium resulting to cancellation of the policy. Can
B recover from A?
 ANSWER

• B can recover from A the proceeds of the policy less

the unpaid premiums. In a decided case by the
Supreme Court, it was held that when the parties
agreed on payment of premiums by installment, the
policy becomes effective upon payment of first
installment. Absent any provision that non-payment
of subsequent installments will cause cancellation,
the policy between A and B continue to exist.
 Bar 2010

• Enrique obtained from Seguro Insurance Company a

comprehensive motor vehicle insurance to cover his
top of the line Aston Martin. The policy was issued on
March 31, 2010 and, on even date, Enrique paid the
premium with a personal check postdated April 6,
2010.
• On April 5, 2010, the car was involved in an accident
that resulted in its total loss.
 Bar 2010

• On April 10, 2010, the drawee bank returned Enrique’s

check with the notation "Insufficient Funds." Upon
notification, Enrique immediately deposited additional
funds with the bank and asked the insurer to
redeposit the check.

• Enrique thereupon claimed indemnity from the

insurer. Is the insurer liable under the insurance
coverage? Why or why not? (3%)
 Suggested Answer
• Enrique cannot recover. In a decided case, the Supreme Court
said that an insurer and the insured may agree on a credit
scheme for payment of premiums, which will give rise to a
perfected contract of insurance. However, the insurer must
make payment within the period agreed on (UCPB v.
Masagana).
• In this case, Enrique’s check bounced on April 6. He only
funded the check on April 10 or 4 days late than the date of the
check. Thus, there was no perfected contract of insurance
which can cover the April 5 accident. Enrique cannot recover
under the policy.
 Bar 2014
• On September 25, 2013, Danny Marcial (Danny)
procured an insurance on his life with a face
value of P5,000,000.00 from RN Insurance
Company (RN), with his wife Tina Marcial(Tina)
as sole beneficiary. On the same day, Danny
issued an undated check to RN for the full
amount of the premium.
 Bar 2014
• On October 5, 2013, Danny met a tragic accident
and died. Tina claimed the insurance benefit,
but RN was quick to deny the claim because at
the time of Danny’s death, the check was not yet
encashed and therefore the premium remained
unpaid.

• Is RN correct? Will your answer be the same if

the check is dated October 15, 2013? (4%)
 Suggested Answer
• RN is correct in denying the claim.

• Based on jurisprudence, an insurer can be held liable for loss if

the insurer and the insured agreed on a credit scheme where is
a definite period when premium should be fully paid.

• In this case, there was no clear credit extension period or

scheme since the check issue by Danny was undated. Since
there was no payment of premiums or even a definite time
when payment should be made, there was no valid insurance
policy at the time of Danny’s death. Hence, there can be no
recovery of proceeds.
 Suggested Answer
• My answer will not be the same if the check was
dated October 15, 2014.

• If the check was properly dated, this means that

there was a valid credit extension scheme or
period between the parties. Hence, there was a
valid policy and there should be payment of
proceeds, less the amount of premiums.
 Bar 2015

Will an insurance policy be binding even if

the premium is unpaid? What if it were a
partially paid premium? (3%)
 Suggested Answer
No. The general rule is the cash and carry rule. This means that an insurance
policy will only be effective when premium has been paid. However, there
are exceptions to this rule. These are:

•Life/industrial life when the grace period applies

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

•An acknowledgment in a policy or contract of insurance or the receipt of

premium is conclusive evidence of its payment, so far as to make the policy
binding, notwithstanding any stipulation therein that it shall not be binding
until the premium is actually paid.
 Suggested Answer
• When the parties have agreed on installment payment (Makati
Tuscany case)

• When the insurer has renewed the insurance over the years
under a clear credit term arrangement (UCPB case)

• Unless any of these exceptions is present, a

policy without the payment of premium shall
have no legal effect.