2019 BAR REVIEW MERCANTILE LAW

Handout No. 16
INSURANCE LAW

Contract of Insurance

A "contract of insurance" is an agreement whereby one undertakes for a consideration to

indemnify another against loss, damage or liability arising from an unknown or contingent event.
Sec. 2[a], Insurance Code

Retirement Insurance

Retirement insurance is primarily intended for the benefit of the employee to provide for his old
age, or incapacity, after rendering service (in the government) for a required number of years. If
the employee reaches the age of retirement, he gets the retirement benefits even to the
exclusion of the beneficiary or beneficiaries named in his application for retirement insurance.
The beneficiary of the retirement insurance can only claim the proceeds of the retirement
insurance if the employee dies before the retirement. Vda De Consuegra vs. GSIS, 37 Phil 315.

Rescission due to concealment

Citing Section 27 of the Insurance Code, however, Insular Life asserts that in cases of rescission
due to concealment, i.e., when a party "neglect[s] to communicate that which [he or she] knows
and ought to communicate," proof of fraudulent intent is not necessary. Section 27 reads:

Section 27. A concealment whether intentional or unintentional entitles the injured party
to rescind a contract of insurance. (Emphasis supplied)

The statutory text is unequivocal. Insular Life correctly notes that proof of fraudulent intent is
unnecessary for the rescission of an insurance contract on account of concealment.

This is neither because intent to defraud is intrinsically irrelevant in concealment, nor because
concealment has nothing to do with fraud. To the contrary, it is because in insurance contracts,
concealing material facts is inherently fraudulent: "if a material fact is actually known to the
[insured], its concealment must of itself necessarily be a fraud." When one knows a material fact
and conceals it, "it is difficult to see how the inference of a fraudulent intent or intentional
concealment can be avoided." Thus, a concealment, regardless of actual intent to defraud, "is
equivalent to a false representation." The Insular Assurance Co., Ltd. vs. The Heirs of Jose H.
Alvarez, G.R. No. 207526, October 03, 2018

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Section 26 defines concealment as "[a] neglect to communicate that which a party knows and
ought to communicate." However, the insured did not withhold information on or neglect to
state his age. He made an actual declaration and assertion about it.

What this case involves, instead, is an allegedly false representation. Section 44 of the Insurance
Code states, "A representation is to be deemed false when the facts fail to correspond with its
assertions or stipulations." If indeed Alvarez misdeclared his age such that his assertion fails to
correspond with his factual age, he made a false representation, not a concealment. The Insular
Assurance Co., Ltd. vs. The Heirs of Jose H. Alvarez, G.R. No. 207526, October 03, 2018

Not being similarly qualified as rescission under Section 27, rescission under Section 45 remains
subject to the basic precept of fraud having to be proven by clear and convincing evidence. In
this respect, Ng Gan Zee's and similar cases' pronouncements on the need for proof of
fraudulent intent in cases of misrepresentation are logically sound, albeit the specific reference
to Argente as ultimate authority is misplaced.

The absence of the requirement of intention definitely increases the onus on the insured.
Between the insured and the insurer, it is true that the latter may have more resources to
evaluate risks. Insurance companies are imbued with public trust in the sense that they have the
obligation to ensure that they will be able to provide succor to those that enter into contracts
with them by being both frugal and, at the same time, diligent in their assessment of the risk
which they take with every insurance contract. However, even with their tremendous resources,
a material fact concealed by the insured cannot simply be considered by the insurance company.
The insurance company may have huge resources, but the law does not require it to be
omniscient.

On the other hand, when the insured makes a representation, it is incumbent on them to assure
themselves that a representation on a material fact is not false; and if it is false, that it is not a
fraudulent misrepresentation of a material fact. This returns the burden to insurance companies,
which, in general, have more resources than the insured to check the veracity of the insured's
beliefs as to a statement of fact. Consciousness in defraudation is imperative and it is for the
insurer to show this. The Insular Assurance Co., Ltd. vs. The Heirs of Jose H. Alvarez, G.R. No.
207526, October 03, 2018

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Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and

the duty to establish such defense by satisfactory and convincing evidence rests upon the
insurer.

“The fraudulent intent on the part of the insured must be established to entitle the insurer to
rescind the contract. Misrepresentation as a defense of the insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the insurer.” For failure of Manulife to prove intent to defraud on the part
of the insured, it cannot validly sue for rescission of insurance contracts. Manulife Philippines,
Inc. vs. Ybañez, 810 SCRA 516, G.R. No. 204736 November 28, 2016

The RTC correctly held that the CDH’s medical records that might have established the insured’s
purported misrepresentation/s or concealment/s was inadmissible for being hearsay, given the
fact that Manulife failed to present the physician or any responsible official of the CDH who
could confirm or attest to the due execution and authenticity of the alleged medical records.

Manulife had utterly failed to prove by convincing evidence that it had been beguiled, inveigled,
or cajoled into selling the insurance to the insured who purportedly with malice and deceit
passed himself off as thoroughly sound and healthy, and thus a fit and proper applicant for life
insurance. Manulife’s sole witness gave no evidence at all relative to the particulars of the
purported concealment or misrepresentation allegedly perpetrated by the insured. In fact,
Victoriano merely perfunctorily identified the documentary exhibits adduced by Manulife; she
never testified in regard to the circumstances attending the execution of these documentary
exhibits much less in regard to its contents. Of course, the mere mechanical act of identifying
these documentary exhibits, without the testimonies of the actual participating parties thereto,
adds up to nothing. These documentary exhibits did not automatically validate or explain
themselves.

“The fraudulent intent on the part of the insured must be established to entitle the insurer to
rescind the contract. Misrepresentation as a defense of the insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the insurer.” For failure of Manulife to prove intent to defraud on the part
of the insured, it cannot validly sue for rescission of insurance contracts. Manulife Philippines,
Inc. vs. Ybañez, 810 SCRA 516, G.R. No. 204736 November 28, 2016

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Rescission of life insurance due to fraud

After the two-year period lapses, or when the insured dies within the period, the insurer must
make good on the policy, even though the policy was obtained by fraud, concealment, or
misrepresentation. (Manila Bankers Life Insurance Corporation vs. Aban, 702 SCRA 417, G.R. No.
175666, July 29, 2013)

The insurer has two years from its issuance to investigate and verify whether the policy was
obtained by fraud, concealment, or misrepresentation. Upon the death of the insured within the
two-year period from the issuance of the policy, the insurer loses its right to rescind the policy.
Sun Life of Canada (Philippines), Inc. v. Ma. Daisy’s Sibya, G.R. No. 211212, June 8, 2016.

A contract of reinsurance is one by which an insurer (the “direct insurer” or “cedant”) procures
a third person (the “reinsurer”) to insure him against loss or liability by reason of such original
insurance.

The reinsurer’s contractual relationship is with the direct insurer, not the original insured, and
the latter has no interest in and is generally not privy to the contract of reinsurance. Put simply,
reinsurance is the “insurance of an insurance.” Communication and Information Systems
Corporation vs. Mark Sensing Australia Pty. Ltd., 815 SCRA 449, G.R. No. 192159 January 25,
2017

In mathematical terms, the amount of retained risk is computed by deducting ceded/reinsured

risk from insurable risk. If the resulting amount is below twenty percent (20%) of the insurer’s
net worth, then the retention limit is not breached.

Section 215 of the old Insurance Code, the law in force at the time Plaridel issued the attachment
bond, limits the amount of risk that insurance companies can retain to a maximum of 20% of its
net worth. However, in computing the retention limit, risks that have been ceded to authorized
reinsurers are ipso jure deducted. Communication and Information Systems Corporation vs.
Mark Sensing Australia Pty. Ltd., 815 SCRA 449, G.R. No. 192159 January 25, 2017

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Handout No. 16
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The general rule in insurance laws is that unless the premium is paid, the insurance policy is not
valid and binding.

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. Just like any other
contract, it requires a cause or consideration. The consideration is the premium, which must be
paid at the time and in the way and manner specified in the policy. If not so paid, the policy will
lapse and be forfeited by its own terms. The law, however, limits the parties’ autonomy as to
when payment of premium may be made for the contract to take effect. The general rule in
insurance laws is that unless the premium is paid, the insurance policy is not valid and binding.
Gaisano vs. Development Insurance and Surety Corporation, 818 SCRA 603, G.R. No. 190702
February 27, 2017

The notice of the availability of the check, by itself, does not produce the effect of payment of
the premium.

Here, there is no dispute that the check was delivered to and was accepted by respondent’s
agent, Trans-Pacific, only on September 28, 1996. No payment of premium had thus been made
at the time of the loss of the vehicle on September 27, 1996. While petitioner claims that Trans-
Pacific was informed that the check was ready for pickup on September 27, 1996, the notice of
the availability of the check, by itself, does not produce the effect of payment of the premium.
Trans-Pacific could not be considered in delay in accepting the check because when it informed
petitioner that it will only be able to pick up the check the next day, petitioner did not protest to
this, but instead allowed Trans-Pacific to do so. Thus, at the time of loss, there was no payment
of premium yet to make the insurance policy effective. There are, of course, exceptions to the
rule that no insurance contract takes effect unless premium is paid.

Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an

insurance company is valid and binding unless and until the premium thereof has been paid. We
cannot sustain petitioner’s claim that the parties agreed that the insurance contract is
immediately effective upon issuance despite nonpayment of the premiums. Even if there is a
waiver of prepayment of premiums, that in itself does not become an exception to Section 77,
unless the insured clearly gave a credit term or extension. This is the clear import of the fourth
exception in the UCPB General Insurance Co., Inc. v. Masagana Telemart, Inc. (2001). To rule
otherwise would render nugatory the requirement in Section 77. Gaisano vs. Development
Insurance and Surety Corporation, 818 SCRA 603, G.R. No. 190702 February 27, 2017

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The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract
or upon written assignment of claim. It accrues simply upon payment of the insurance claim by
the insurer.

The right of subrogation is however, not absolute. “There are a few recognized exceptions to this
rule. For instance, if the assured by his own act releases the wrongdoer or third party liable for
the loss or damage, from liability, the insurer’s right of subrogation is defeated. xxx Similarly,
where the insurer pays the assured the value of the lost goods without notifying the carrier who
has in good faith settled the assured’s claim for loss, the settlement is binding on both the assured
and the insurer, and the latter cannot bring an action against the carrier on his right of
subrogation. xxx And where the insurer pays the assured for a loss which is not a risk covered by
the policy, thereby effecting ‘voluntary payment,’ the former has no right of subrogation against
the third party liable for the loss xxx.” Loadstar Shipping Company, Incorporated vs. Malayan
Insurance Company, Incorporated, 742 SCRA 627, G.R. No. 185565 November 26, 2014

Subrogation is the substitution of one person in the place of another with reference to a lawful
claim or right, so that he who is substituted succeeds to the rights of the other in relation to a
debt or claim, including its remedies or securities. The rights of a subrogee cannot be superior
to the rights possessed by a subrogor.

The rights to which the subrogee succeeds are the same as, but not greater than, those of the
person for whom he is substituted, that is, he cannot acquire any claim, security or remedy the
subrogor did not have. In other words, a subrogee cannot succeed to a right not possessed by
the subrogor. A subrogee in effect steps into the shoes of the insured and can recover only if the
insured likewise could have recovered.” Loadstar Shipping Company, Incorporated vs. Malayan
Insurance Company, Incorporated, 742 SCRA 627, G.R. No. 185565 November 26, 2014

An insurer indemnifies the insured based on the loss or injury the latter actually suffered from.
If there is no loss or injury, then there is no obligation on the part of the insurer to indemnify
the insured.

Should the insurer pay the insured and it turns out that indemnification is not due, or if due, the
amount paid is excessive, the insurer takes the risk of not being able to seek recompense from
the alleged wrongdoer. This is because the supposed subrogor did not possess the right to be
indemnified and therefore, no right to collect is passed on to the subrogee. As the Court
discussed in the Decision dated November 26, 2014, Malayan was not able to prove the pecuniary
loss suffered by PASAR for which the latter was indemnified. This is in line with the principle that

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a subrogee steps into the shoes of the insured and can recover only if the insured likewise could
have recovered. Loadstar Shipping Company, Incorporated vs. Malayan Insurance Company,
Incorporated, 825 SCRA 14, G.R. No. 185565 April 26, 2017

In Government Service Insurance System v. Manila Railroad Company, 1 SCRA 553 (1961), the
Supreme Court (SC) held that the provisions of a gate pass or of an arrastre management
contract are binding on an insurer-subrogee even if the latter is not a party to it.

We have repeatedly held that, by availing himself of the services of the arrastre operator and
taking delivery therefrom in pursuance of a permit and a pass issued by the latter, which were
“subject to all the terms and conditions” of said management contract, including, inter alia, the
requirement thereof that “a claim is filed with the Company within 15 days from the date of
arrival of the goods,” the consignee — and, hence, the insurer, or plaintiff herein, as successor to
the rights of the consignee — became bound by the provisions of said contract. Oriental
Assurance Corporation vs. Ong, 842 SCRA 337, G.R. No. 189524 October 11, 2017

As subrogee, petitioner merely stepped into the shoes of the consignee and may only exercise
those rights that the consignee may have against the wrongdoer who caused the damage.

“It can recover only the amount that is recoverable by the assured.” And since the right of action
of the consignee is subject to a precedent condition stipulated in the Gate Pass, which includes
by reference the terms of the Management Contract, necessarily a suit by the insurer is subject
to the same precedent condition. Oriental Assurance Corporation vs. Ong, 842 SCRA 337, G.R.
No. 189524 October 11, 2017

The Supreme Court (SC) has ruled that the purpose of the time limitation for filing claims is “to
apprise the arrastre operator of the existence of a claim and enable it to check on the validity
of the claimant’s demand while the facts are still fresh for recollection of the persons who took
part in the undertaking and the pertinent papers are still available.”

Despite the changes introduced in the Management Contract on filing claims, the purpose is still
the same. This Court, in a number of cases, has liberally construed the requirement for filing a
formal claim and allowed claims filed even beyond the 15-day prescriptive period after finding
that the request for bad order survey or the provisional claim filed by the consignee had

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sufficiently served the purpose of a formal claim. Oriental Assurance Corporation vs. Ong, 842
SCRA 337, G.R. No. 189524 October 11, 2017

On the requirement to present Marine Insurance Policy, before insurer may recover in the
exercise of its subrogatory right, the Court allowed exception

In Delsan Transport Lines, Inc. v. CA, the Court ruled that the right of subrogation accrues simply
upon payment by the insurance company of the insurance claim. Hence, presentation in evidence
of the marine insurance policy is not indispensable before the insurer may recover from the
common carrier the insured value of the lost cargo in the exercise of its subrogatory right. The
subrogation receipt, by itself, was held sufficient to establish not only the relationship between
the insurer and consignee, but also the amount paid to settle the insurance claim. The
presentation of the insurance contract was deemed not fatal to the insurer's cause of action
because the loss of the cargo undoubtedly occurred while on board the petitioner's vessel.

The same rationale was the basis of the judgment in International Container Terminal Services,
Inc. v. FGU Insurance Corporation, wherein the arrastre operator was found liable for the lost
shipment despite the failure of the insurance company to offer in evidence the insurance contract
or policy. As in Delsan, it was certain that the loss of the cargo occurred while in the petitioner's
custody.

To reiterate, in this case, petitioner was able to present as evidence the marine open policy that
vested upon it, its rights as a subrogee. Subrogation is designed to promote and to accomplish
justice and is the mode which equity adopts to compel the ultimate payment of a debt by one
who injustice, equity and good conscience ought to pay. Equitable Insurance Corporation vs.
Transmodal International, Inc., G.R. No. 223592 August 7, 2017

In Lalican v. The Insular Life Assurance Company, Limited (613 Phil. 518; 597 SCRA 159), it was
there held that the reinstatement of the insured’s policy is to be reckoned from the date when
the application was processed and approved by the insurer.

There, we stressed that: To reinstate a policy means to restore the same to premium-paying
status after it has been permitted to lapse. xxx

In the instant case, Eulogio’s death rendered impossible full compliance with the conditions for
reinstatement of Policy No. 9011992. True, Eulogio, before his death, managed to file his
Application for Reinstatement and deposit the amount for payment of his overdue premiums

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and interests thereon with Malaluan; but Policy No. 9011992 could only be considered reinstated
after the Application for Reinstatement had been processed and approved by Insular Life during
Eulogio’s lifetime and good health.

Thus, it is settled that the reinstatement of an insurance policy should be reckoned from the date
when the same was approved by the insurer. The Insular Life Assurance Company, Ltd. vs. Khu,
789 SCRA 544, G.R. No. 195176 April 18, 2016

In the Endorsement, the obscurity is patent. In the first sentence of the Endorsement, it is not
entirely clear whether the phrase “effective June 22, 1999” refers to the subject of the sentence,
namely “the reinstatement of this policy,” or to the subsequent phrase “changes are made on
the policy.”

Given the obscurity of the language, the construction favorable to the insured will be adopted by
the courts. Accordingly, the subject policy is deemed reinstated as of June 22, 1999. Thus, the
period of contestability has lapsed.

Indeed, more than two years had lapsed from the time the subject insurance policy was
reinstated on June 22, 1999 vis-a-vis Felipe’s death on September 22, 2001. As such, the subject
insurance policy has already become incontestable at the time of Felipe’s death. The Insular Life
Assurance Company, Ltd. vs. Khu, 789 SCRA 544, G.R. No. 195176 April 18, 2016

Insurance contracts are wholly prepared by the insurer with vast amounts of experience in the
industry purposefully used to its advantage. More often than not, insurance contracts are
contracts of adhesion containing technical terms and conditions of the industry, confusing if at
all understandable to laypersons, that are imposed on those who wish to avail of insurance.

As such, insurance contracts are imbued with public interest that must be considered whenever
the rights and obligations of the insurer and the insured are to be delineated. Hence, in order to
protect the interest of insurance applicants, insurance companies must be obligated to act with
haste upon insurance applications, to either deny or approve the same, or otherwise be bound
to honor the application as a valid, binding, and effective insurance contract. The Insular Life
Assurance Company, Ltd. vs. Khu, 789 SCRA 544, G.R. No. 195176 April 18, 2016

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Co-insurance

Co-insurance is type of insurance in which the insured pays a share of the payment made against
a claim. This is common in marine insurance, as a marine insurer is liable upon a partial loss, only
for such proportion 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. 159, ICP). There is a co-insurance, when the
property is insured for less than its value. In such case, the insured is, by operation of law,
considered a co-insurer for the difference between the amount of insurance and the value of the
property. Commercial Law Recap: Book One, Villanueva-Castro, p. 133, 2017

Loss Payable Clause vs. Standard or Union Mortgage Clause

Under a Loss Payable Clause, the mortgagee is made merely a beneficiary under the contract.
Any default on the part of the mortgagor, which by the terms of the policy defeat his rights, will
also defeat all rights of the mortgagee under the contract, even though the latter may not have
been in any fault.

On the other hand, a Standard or Union Mortgage Clause create collateral independent contracts
between the insurer and the mortgagee and provide that the rights of the mortgagee shall not
be defeated by the acts or defaults of the mortgagor. Vance, pp. 654-655

No-Fault Indemnity Claim

The no-fault indemnity clause of the Compulsory Motor Vehicle Liability Insurance allows the
victim of a vehicular incident to recover indemnity from the insurer of the relevant insurer
without the necessity of showing fault.

Claim may be made against one motor vehicle only. In the case of an occupant of a vehicle, claim,
shall lie against the insurer of the vehicle in which the occupant is riding, mounting or
dismounting from. In any other case, claim shall lie against the insurer of the directly offending
vehicle. In all cases, the right of the party paying the claim to recover against the owner of the
vehicle responsible for the accident shall be maintained. Sec. 391, ICP

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Double insurance exists where the same person is insured by several insurers separately in
respect to the same subject and interest.

The requisites in order for double insurance to arise are as follows:

1. The person insured is the same;

2. Two or more insurers insuring separately;
3. There is identity of subject matter;
4. There is identity of interest insured; and
5. There is identity of the risk or peril insured against.

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