MIRANDA, CLARISSE ANN 1

INSURANCE DELEON SUMMARY

the subject of insurance.

PARTIES TO THE CONTRACT the contract
of insurance, He is the third
Section 6 while party in a
"assured," to contract of life
Parties to a contract of insurance the person insurance
for whose - for whose
The two parties to a contract of insurance are: benefit the benefit
insurance is the policy
(1) The insurer or the party who assumes or accepts the granted. is issued
risk of loss and to
- and undertakes for a consideration to indemnify whom the
the insured or loss is
- to pay him a certain sum on the happening of a payable.
specified contingency or event.
The insurance Thus, where a wife
Under the Code, the business of insurance may be carried on company is insures the life of
by individuals just as much as by corporations and sometimes her husband for her
associations. called own
"underwriter." benefit, the wife is
Today, The business of insurance is conducted almost the assured and the
exclusively by corporations or associations. husband, the
- It has been stated that the State itself may go into insurance insured. The wife,
business the individual who
contracts with the
(2) The insured or the second party to the contract, the insurer is the owner
person of the policy but
in whose favor the contract is operative and who is she is not the
indemnified against, or is to receive a certain sum upon insured. Also, the
the happening of a specified contingency or event. owner of a life
policy is not
- He is the person whose loss is the occasion for the necessarily the one
payment of the insurance proceeds by the insurer. who contracted
with the insurer nor
The insured is not, however, always the person to whom the the insured in the
proceeds are paid. case of a purchaser
- This person may be the beneficiary designated in the of a policy on the
policy. life of another
(assuming the
It is also possible that the insured may assign the proceeds insurable interest
of the insurance to someone else. requirement is
met).
It is said that the relation between the insurer and the insured
is that of a contingent debtor and creditor, subject to the In property
conditions of the policy and not that of trustee and cestui que insurance, like fire
trust. insurance, the
insured is also
Terms used the assured where
the proceeds are
Insurer Insured and Assured payable to him.
Assured
is synonymous generally used used sometimes
with the term interchangeably; as a synonym of
"assurer" or but strictly "beneficiary."
"underwriter." speaking, the term The
"insured" refers beneficiary is
the person
- to the owner designated by
of the the
property terms of the
insured policy as the one
- or the person to receive the
whose life is proceeds of the
 MIRANDA, CLARISSE ANN
INSURANCE DELEON SUMMARY
Who may be an insurer
(1) Foreign or domestic insurance company or
corporation.
- it must first obtain a certificate of authority for that
purpose from the Insurance Commissioner
- Insurance Commissioner may refuse to issue such
certificate of authority if, in his judgment "such
refusal will best promote the interests of the people of
this country"
(2) Individual partnership, or association
- Although insurance business is ordinarily carried on
by partnerships and corporations,
- yet any individual may be an insurer, the only requisite
being that "he holds a certificate of authority from the
Insurance Commissioner."
- Any person, partnership, or association of persons may
be given a certificate of authority if such person,
partnership, or association is "possessed of the capital
assets required of an insurance corporation doing the
same kind of business in the Philippines and invested
in the same manner."
(a) "insurance corporation"
a. formed or organized to save any person or
persons or other corporations harmless
from loss, damage, or liability arising from
any unknown or future or contingent event,
or to indemnify or to compensate any
person or persons or other corporations for
any such loss, damage, or liability, or to
guarantee the performance of or
compliance with contractual obligations or
the payment of debts of others."
b. The last part of the statement of purpose
refers to suretyship,
(b) "insurer" and "insurance company"
a. include all individuals,
b. partnerships,
c. associations, or
d. corporations,
e. including government-owned or controlled
corporations or
f. entities, engaged as principals in the
insurance business,
i. excepting mutual benefit
associations.
Unless the context otherwise requires, the terms shall also
include professional reinsurers defined in Section 280.
Business of insurance affected with public interest
It is recognized that the business of insurance is one that
is affected with a public interest and, therefore,
- it is subject to regulation and control by the state by
virtue of the exercise of its police power
- or in the interest of public convenience and the general
good of the people.
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Insurance company,
- an instrumentality which gathers funds upon the basis
of equality of risk from a greater number of persons,
sufficiently large in number to arouse the element of
chance to step out and the law of averages to step in as
the controlling factor —
- and holds the numerous amounts so collected as
general fund to be paid out to those who shall suffer
losses.
- In this fund, which thus constitutes a guaranty against
individual loss, all are interested not in some vague way
but in a very real sense.
Thus, a law requiring insurance companies to file schedule of
rates and prohibiting discriminatory rates, was held valid on
the ground that the business of insurance affects the
public welfare as to invoke and require governmental
regulation.
- "Accidental fires are inevitable and extent of the loss is
very great.
- The object of the regulation is to distribute the loss over
as wide an area as possible.
- In other words, the loss is spread over the country,
the disaster to an individual is shared by many, the
disaster to a community shared by other
communities; great catastrophies are, therefore,
lessened."
Sec. 7. Anyone except a public enemy may be insured.
Capacity of party insured
(1) Natural person. —
(a) He must be competent to make a contract
and
(b) He must possess an insurable interest in the subject of
the insurance. (Vance, op. cit.f p. 143.)
A third requisite, applicable also to juridical persons, may
be added, i.e., that the insured must not be a public enemy.
(Sec. 7.)
(2) Juridical person. — A juridical person, like a partnership
or a corporation, may take out insurance on property owned
by it.
Note that Section 3 specifically authorizes minors, 18 years
or more to take out insurance payable to a limited class of
beneficiaries.
Meaning of public enemy
A public enemy designates a nation with whom the
Philippines is at war and it includes every citizen or subject
of such nation.
The term may be taken to mean "alien enemy."
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INSURANCE DELEON SUMMARY
A mob, however numerous they may be, or robbers or thieves
whoever they may be, are never considered public enemies
for purposes of the above provision
During wartime, a private corporation is deemed an enemy
corporation although organized under Philippine laws if
they are controlled by enemy aliens.
- This is the so-called "control test" whereby a
corporation is deemed to have the same citizenship as
the controlling stockholders in time of war.
Effect of war on existing insurance contracts.
(1) Where parties rendered enemy aliens. — By the law
of nations, all intercourse between citizens of belligerent
powers which is inconsistent with a state of war is
prohibited.
a. The purpose of war is to cripple the power and
exhaust the resources of the enemy.
b. It is inconsistent that the subjects of one
country should lend their assistance to protect
by insurance, the commerce or property of
belligerent alien subjects or to do anything
detrimental to their country's interests,
Of course, if the parties are not rendered enemy aliens by the
intervention of war, the policy continues to be enforceable
according to its terms and the laws governing insurance and
the general rules regarding contracts.
The effect of war between countries of the insured and the
insurer upon insurance contracts validly entered into during
peacetime is a question upon which there is a decided conflict
of authority.
(a) With respect to property insurance. — The rule
adopted in the Philippines is that an insurance policy
ceases to be valid and enforceable as soon as an
insured becomes a public enemy
(b) With respect to life insurance. — Three rules or
doctrines have arisen. One of these rules is the
United States Rule which declares that the contract
is not merely suspended but is abrogated by reason
of nonpayment of premiums, since the time of the
payments is peculiarly of the essence of the contract.
a. However, the insured is entitled to the cash
or reserve value of the policy (if any),
which is the excess of the premiums paid
over the actual risk carried during the years
when the policy had been in force.
This rule has been specifically followed by our Supreme
Court,
(2) Where loss occurs after end of war. — Since the effect
of war is not merely to suspend but to abrogate the
contract of insurance between citizens of belligerent
states, the termination of the war does not revive the
contract.
a. Consequently, the insurer is not liable even if
the loss is suffered by the insured after the end
of the war.
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Sec. 8. Unless the policy otherwise provides, where a
mortgagor of property effects insurance in his own name
providing that the loss shall be payable to the mortgagee,
or assigns a policy of insurance to a mortgagee, the
insurance is deemed to be upon the interest of the
mortgagor, who does not cease to be a party to the original
contract, and any act of his, prior to the loss which would
otherwise avoid the insurance, will have the same effect,
although the property is in the hands of the mortgagee,
but any act which, under the contract of insurance, is to
be performed by the mortgagor, may be performed by the
mortgagee therein named, with the same effect as if it had
been performed by the mortgagor.
Insurable interest of mortgagee and mortgagor
(1) Separate insurable interests. — The mortgagor and the
mortgagee have each an insurable interest in the property
mortgaged (Sec. 13.), and this interest is separate and distinct
from the other. Consequently, insurance taken by one in his
own name only and in his favor alone, does not inure to the
benefit of the other. (Sec. 53.) And in case both of them take
out separate insurance policies on the same property, or one
policy covering their respective interests, the same is not open
to the objection that there is double insurance, (see Sec. 93.)
(2) Extent of insurable interest of mortgagor. — The
mortgagor of property, as owner, has an insurable interest
therein to the extent of its value, even though the mortgage
debt equals such value. The reason is that the loss or
destruction of the property insured will not extinguish his
mortgage debt.
(3) Extent of insurable interest of mortgagee. — The
mortgagee (or his assignee) as such has an insurable
interest in the mortgaged property to the extent of the
debt secured, since the property is relied upon as security
thereof, and in insuring, he is not insuring the property
itself but his interest or lien thereon.
a. His insurable interest (Sec. 10.) is prima
facie the value mortgaged and extends only to
the amount of the debt, not exceeding the value
of the mortgaged property.
b. Such interest continues until the mortgage debt
is extinguished.
c. Thus, separate insurances (see Sec. 93.)
covering different insurable interests may be
obtained by the mortgagor and the mortgagee.
(4) Extent of amount of recovery. — The mortgagor cannot
recover upon the insurance beyond the full amount of his loss
and the mortgagee, in excess of the credit at the time of the
loss nor the value of the property mortgaged.
EXAMPLE:
R is the owner of a house worth P1,000,000.00 which he
mortgaged to E to secure a loan of P500,000.00. The
insurable interest of R, mortgagor, is P1,000,000.00, while
that of E, mortgagee, is P500,000.00.
The insurance taken by R upon his own interest only does
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INSURANCE DELEON SUMMARY
not inure to the benefit of E. R may claim in case of loss, the
entire proceeds or amount of his loss and may sue thereon
in his own name. E has no right to claim the proceeds of the
policy.
Conversely, R has no interest in the insurance taken out
by E on his own interest (San Miguel Brewery vs. Law Union,
Inc., 40 Phil. 674 [1920].) but if the loss occurs after the debt
has been discharged by payment or otherwise, E may not
recover because insurance is merely a contract of indemnity.
(Sec. 17.)
Insurance by mortgagee of his own interest
(1) Right of mortgagee in case of loss. — Where the
mortgagee, independently of the mortgagor, insures his own
interest in the mortgaged property, he is entitled to the
proceeds of the policy in case of loss before payment of the
mortgage.
(2) Subrogation of insurer to right of mortgagee. — In
such case, the mortgagee is not allowed to retain his claim
against the mortgagor but it passes by subrogation to the
insurer to the extent of the insurance money paid.
(3) Change of creditor. — In other words, the payment of
the insurance to the mortgagee by reason of the loss does not
relieve the mortgagor from his principal obligation but only
changes the creditor, So, in the preceding example, the
insurer can collect from R, mortgagor, to the extent of the
amount paid to E, creditor mortgagee. E cannot collect both
the insurance and the mortgage debt.
Insurance by mortgagor of his own interest.
(1) For his own benefit. — The mortgagor may insure his
own interest as owner for his benefit.
a. In case of loss, the insurance proceeds do not
inure to the benefit of the mortgagee
b. who has no greater right than unsecured
creditors in the same.
(2) For the benefit of mortgagee. — It is competent,
however, for the mortgagor to take out insurance for the
benefit of the mortgagee,
a. where he pays the insurance premium, making
the loss payable to the mortgagee. Indeed, this
is the usual practice.
The mortgagee may be made the beneficial payee in
several ways:
(a) He may become the assignee of the policy with the
consent of the insurer;
(b) He may be the mere pledgee without such consent;
(c) A rider (see Sec. 50.) making the policy payable to the
mortgagee "as his interest may appear" may be attached;
(d) A "standard mortgage clause" containing a collateral
independent contract between the mortgagee and the insurer
may be attached; or
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(e) The policy, though, by its terms payable absolutely
to the mortgagor; may have been procured by a mortgagor
under a contract duty to insure for the mortgagee's benefit,
in which case the mortgagee acquires an equitable lien upon
the proceeds.
Insurance by mortgagor for benefit of mortgagee, or
policy assigned to mortgagee.
Under Section 8, where the mortgagor of property effects
insurance in his own name providing that the loss shall be
payable to the mortgagee, or assigns a policy of insurance to
the mortgagee, the following are the legal effects:
(1) The contract is deemed to be upon the interest of the
mortgagor; hence, he does not cease to be party to the
contract;
(2) Any act of the mortgagor prior to the loss, which would
otherwise avoid the insurance (like storing inflammable
materials in the insured house) affects the mortgagee even if
the property is in the hands of the mortgagee;
(3) Any act which under the contract of insurance is to be
performed by the mortgagor (like payment of the premium)
may be performed by the mortgagee with the same effect;
(4) In case of loss, the mortgagee is entitled to the proceeds
to the extent of his credit; and
(5) Upon recovery by the mortgagee to the extent of his
credit, the debt is extinguished.
The rule on subrogation by the insurer to the right of the
mortgagee does not apply in this case.
EXAMPLE:
R insured his house worth Pl,200,000.00 for P1,000,000.00,
with the policy providing that the loss shall be payable to E
(or R subsequently, assigns the policy to E). The house was
mortgaged to E as security for a loan of P600/000.00. It was
totally destroyed by accidental fire.
Who may recover on the policy?
E, mortgagee, is entitled to the insurance proceeds to the
extent of his credit of P600,000.00. He shall hold as trustee
for R, mortgagor, the excess of P400,000.00. If before the
loss, the mortgage debt had already been paid, R would be
entitled to recover the P1,000,000.00 from the insurer. R
effected the insurance in his own name and he did not cease
to be a party to the original contract although the policy
provided that the loss shall be payable to E (or he assigned
the policy to E).
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INSURANCE DELEON SUMMARY
Effect of standard and open clauses in fire insurance
policy.
(1) If a fire insurance policy contains a standard or union
mortgage clause, the acts of the mortgagor do not affect the
mortgagee. The purpose of the clause is to make a separate
and distinct contract of insurance on the interest of the
mortgagee.
Thus, a mortgagee may procure a policy, as a contracting
party in accordance with the terms of an agreement by which
the mortgagor is to pay upon such insurance.
(2) An open or loss-payable mortgage clause merely
provides for the payment of loss, if any, to the mortgagee as
his interest may appear (see Sec. 57.) and under it, the acts of
the mortgagor affect the mortgagee.
If the policy is obtained by the mortgagor with a loss-
payable clause in favor of the mortgagee as his interest
may appear,
- the mortgagee is only a beneficiary under the contract
and recognized as such by the insurer but not made a
party to the contract itself.
Hence, any act of the mortgagor which defeats his right will
also defeat the right of the mortgagee. This kind of policy
covers only such interest as the mortgagee has at the issuing
of the policy.
Thus, where the insurance policies issued by the insurer
name the mortgagor as the assured and contain a mortgage
clause which reads: "Loss, if any, shall be payable to X
(mortgagee) as its interest may appear subject to the terms of
this policy/' it was held that this is clearly a simple loss
payable clause, not a standard mortgagee clause.
Right of mortgagee under mortgagor's policy
The contract of indemnity under such policy is primarily with
the mortgagor, but the mortgagee is a third party beneficiary.
Before Loss After Loss
the mortgagee is a If the loss happens when the
conditional appointee of the credit is not
mortgagor entitled to due, the mortgagee is
receive so much of any sum entitled to receive the
that may become due under money to apply to the
the policy as does not extinguishment of the debt
exceed his interest as as fast as it becomes due.
mortgagee.
Such right becomes - On the other hand, if
absolute upon the the loss happens after
occurrence of the loss. the credit has
matured, the
mortgagee may apply
the proceeds to the
extent of his credit.
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Effect of insurance by mortgagee on behalf of mortgagor
(1) Discharge of debt. — Practically the same rules obtain
when the mortgagee himself procures the policy as a
contracting party in accordance with the terms of an
agreement by which the mortgagor is to pay the premiums
upon such insurance.
Upon the destruction of the property, the mortgagee is entitled
to receive payment from the insured but such payment
discharges the debt if equal to it, and if greater than the debt,
the mortgagee holds the excess as trustee for the mortgagor.
(2) Right to subrogation. — If there is a stipulation that the
insurer shall be subrogated to the rights of the mortgagee, the
payment of the policy will not discharge the debt even though
the mortgagee may have procured the policy by arrangement
with the mortgagor. (Vance, op. cit, p. 775.) If there is no
such stipulation, the rule on subrogation does not apply
except where the mortgagee insures only his interest, (supra.)
EXAMPLE:
Suppose, in the preceding example, the house was insured
by E for P150,000.00.
If the loss by fire occurred before the payment of the loan
of P100,000.00, E would be entitled to collect from the
insurer P100,000.00 only, the amount of his credit.
If the loss occurred after the payment of the loan, E cannot
recover because he had no insurable interest in the property
mortgaged at the time of the loss.
In either case, R cannot recover because he is not the insured.
Sec. 9.
If an insurer assents to the transfer of an insurance from a
mortgagor to a mortgagee, and, at the time of his assent,
imposes further obligations on the assignee, making a new
contract with him, the acts of the mortgagor cannot affect the
rights of said assignee.
Assignment or transfer of insurance policy
The effect of an assignment or transfer is to substitute the
assignee or transferee in place of the original insured in
respect to the right to claim indemnity or payment for a loss
as well as the obligation to perform the conditions, if any, of
the policy.
The assignee, unless he makes a new contract with the
insurer, acquires no greater right under the insurance than the
assignor had, subject to insurer's defenses.
(1) As to fire policy. — By the great weight of authorities, a
fire policy before it becomes a fixed liability is not subject to
assignment, being strictly a personal contract, in the absence
of provision in the contract or subsequent consent of the
insurer.
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INSURANCE DELEON SUMMARY

The insurer is naturally concerned about the moral character
of the insured and should not be compelled to become an
insurer to an assignee to whom he would have declined to
issue a policy and who could materially alter the risks
assumed by the insurer without his consent.
(2) As to marine policy. — It is generally recognized,
however, that a policy of marine insurance is assignable even
without the consent of the insurer unless required by the terms
of the policy. Nevertheless, it is believed that a marine
policy4 just like a fire policy, is not assignable without the
consent of the insurer
(3) As to casualty policy. - The insurer's consent is also
required.
- Commonly involves moral hazards at least as great as
those of fire insurance.
- Thus, theft and burglary insurance and motor vehicle
insurance involve obvious moral hazards;
- hence, such policies are not freely assignable without
the insurer's consent.
convert the contract into one of indemnity to the mortgagee.
The contract remains with the mortgagor as it is his interest
alone that is covered.
- The assignment operates merely as an equitable
transfer of the policy so as to enable the mortgagee to
recover the amount due in case of loss subject to the
conditions of the policy.
However, where a new and distinct consideration passes
from the mortgagee to the insurer, a new contract is created
between them,
- A novation of the original contract takes place.
- Hence, the acts of the mortgagor cannot affect the
rights of the mortgagee, the assignee.

(3) As to life policy. –

- The policy may freely be assigned before or after the
loss occurs, to any person whether he has an insurable
interest or not.
- However, an assignment of a life policy to a person
without an insurable interest, which the insured makes
in bad faith and under such circumstances as where
there was a preconceived agreement that the policy was
to be assigned for the purpose of accomplishing an
illegal purpose, that is, permitting the assignee of the
policy to wager on the length of life of the insured, will
not be upheld.

Note: A distinction must be made between the assignment or

transfer
(a) of the policy itself which transfers the rights to the
contract to another insured,
(b) of the proceeds of the policy after a loss has happened,
which involves a money claim under, or a right of action on,
the policy, and
(c) of the subject matter of the insurance,
- such as a house insured under a fire policy which
has the effect of suspending the insurance until the same
person becomes the owner of both the policy and the thing
insured

Right of mortgagor to assign insurance policy to

mortgagee.

Gives the effect: if the insurer agrees to the transfer of the

policy and, at the time of his assent, imposes new obligations
on the assignee.

However, neither section makes a distinction as to the kind of

insurance policy that is assignable.

Effect of new contract between insurer and mortgagee-

assignee.

The assignment of a fire insurance policy by the mortgagor

to the mortgagee with the consent of the insurer does not