Insurance Law Reviewer Article 1-75

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P.D. 612 Insurance Code

(As amended R.A. 10607)

"GENERAL PROVISIONS” "Section 1, IC. This Decree shall be known as ‘The Insurance Code’. "Section 2, IC. Whenever used in this Code, the following terms shall have the respective meanings hereinafter set forth or indicated, unless the context otherwise requires: "(a) A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. "A contract of suretyship shall be deemed to be an insurance contract, within the meaning of this Code, only if made by a surety who or which, as such, is doing an insurance business as hereinafter provided. "(b) The term doing an insurance business or transacting an insurance business, within the meaning of this Code, shall include: "(1) Making or proposing to make, as insurer, any insurance contract; "(2) Making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; "(3) Doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; "(4) Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. "In the application of the provisions of this Code, the fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business. "(c) As used in this Code, the term Commissioner means the Insurance Commissioner.

NOTES:

·       Test to determine whether a contract is one of insurance = when the assumption of risk and the indemnification of loss is the principal object and purpose of the contract (National Auto Service Corp. v. State, Texas Civ. App)

·       Pre-need plans are also under the powers of the Insurance Commission, but they shall be distinguished from insurance contracts.

Pre need plans are contracts, agreements, deeds or plans for the benefit other planholders which provide for the performance of future service/s, payment of monetary considerations or delivery of other benefits at the time of actual need or agreed maturity date, as specified therein, in exchange for cash or installment amounts with or without interest or insurance coverage and includes life, pension, education, interment and other plans, instruments, contracts or deeds as may in the future be determined by the Commission. (Sec. 4b RA 9829)

·       Section 10(b), IRR of the Pre-Need Code. The pre-need company may be licensed and authorized to issue plans falling under any or all of the following plan types:

i.                Educational plan;

ii.               Pension plan; and

iii.              Life or Memorial plan

·       The Insurance Code also governs “variable contracts”.

Sec. 238 (b), IC. The term variable contract shall mean any policy or contract on either a group or on an individual basis issued by an insurance company providing for benefits or other contractual payments or values thereunder to vary so as to reflect investment results of any segregated portfolio of investments or of a designated separate account in which amounts received in connection with such contracts shall have been placed and accounted for separately and apart from other investments and accounts.

This contract may also provide benefits or values incidental thereto payable in fixed or variable amounts, or both. It shall not be deemed to be a security or securities as defined in The Securities Act, as amended, or in the Investment Company Act, as amended, nor subject to regulations under said Acts.

·       Concepts related to Insurance:

Bancassurance - "Section 375, IC. The term bancassurance shall mean the presentation and sale to bank customers by an insurance company of its insurance products within the premises of the head office of such bank duly licensed by the Bangko Sentral ng Pilipinas or any of its branches under such rules and regulations which the Commissioner and the Bangko Sentral ng Pilipinas may promulgate.

To engage in bancassurance arrangement, a bank is not required to have equity ownership of the insurance company. No insurance company shall enter into a bancassurance arrangement unless it possesses all the requirements as may be prescribed by the Commissioner and the Bangko Sentral ng Pilipinas.

Mutual Insurance Companies - an insurance company owned entirely by its policyholders. Any profits earned by a mutual insurance company are either retained within the company or rebated to policyholders in the form of dividend distributions or reduced future premiums.

It has no capital stock and the premiums/contributions of the members are the only sources of funds to meet losses and expenses.

·       Applicable Laws:

1.      P.D. 602 as amended by R.A. 10607 (Insurance Code) - governs primarily

2.      Civil Code of the Philippines – governs suppletorily.

Article 2011, Civil Code. The contract of insurance is governed by special laws. Matters not expressly provided for in such special laws shall be regulated by this Code. 

Article 2012, Civil Code. Any person who is forbidden from receiving any donation under article 739 cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him, according to said article. (n)

Article 2207, Civil Code. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.

(Also see. Provisions re: perfection of contract in Title IV of the Civil Code)

3.      Corporation Code

"Section 191, IC. The provisions of the Corporation Code, as amended, shall apply to all insurance corporations now or hereafter engaged in business in the Philippines insofar as they do not conflict with the provisions of this chapter.

ELEMENTS OF INSURANCE CONTRACT:

An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk; (risk-spreading device) and

5. In consideration of the insurer's promise, the insured pays a premium. (gulf resorts, inc v. philippine charter insurance corporation)

Note: The insurance must still have all the essential elements of a valid contract.

Article 1318, Civil Code. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

CHARACTERISTICS OF INSURANCE CONTRACT:

1.      Risk- distributing device – risk of loss is not actually transferred to the insurer but a number of people constituting the clients of the insurer contribute to a common fund by paying premiums. In theory, insurer gets the amount to be paid to the insured from this pool or common fund.

2.      Aleatory – Article 2010, Civil Code. By an aleatory contract, one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time. 

3.      Unilateral – upon payment of the premium, there is only one party who has the obligation, that is, the insurer’s obligation to pay the proceeds of the insurance in case of loss.

4.      Personal – contract is entered into with due consideration to the circumstances of the parties (character, credit, conduct, etc.)

5.      Consensual – perfected by mere consent without need of delivery or any formality.

Article 1319, Civil Code. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made.

6.      Contract of adhesion - one in which one of the parties imposes a ready-made form of contract, which the other party may accept or reject, but which the latter cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his "adhesion" thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. It must be borne in mind, however, that contracts of adhesion are not invalid per se. Contracts of adhesion, where one party imposes a ready-made form of contract on the other, are not entirely prohibited. The one who adheres to the contract is, in reality, free to reject it entirely; if he adheres, he gives his consent.

7.      Contract of indemnity or principle of indemnity – means that the insured should not collect more than the actual cash value of the loss.

Exceptions:

o   Life insurance – amount to be paid by the insurer can never equal the value of the life being insured

o   Valued policies under which the insurer will pay the value fixed in the policy regardless of the actual cash value in case of total loss     

8.      Uberrimae Fidae – means that the contract is one of perfect good faith. Thus, both parties must not only perform their obligations in good faith but they must also avoid material concealment or misrepresentations. The caveat emptor rule is generally not applicable.

Right of subrogation of insurer to rights of insured against wrongdoer.

(1) Basis of right. — The doctrine of subrogation is basically a process of legal substitution; the insurer, after paying the amount covered by the insurance policy, stepping into the shoes of the exist against the wrongdoer at the time of the loss. It has its roots in equity. It 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 in justice and good conscience ought to pay. (Phil. American General Insurance Co., Inc. vs. Court of Appeals, 273 SCRA 262 [1997]; Delsan Transport Lines, Inc. vs. Court of Appeals, 369 SCRA 24 [2001].)

(2) Purposes of subrogation condition in policy. — Its principal purpose is to make the person who caused the loss, legally responsible for it and at the same time prevent the insured from receiving a double recovery from the wrongdoer and the insurer. The insurer is entitled to recover either directly in a suit against the wrongdoer (third party) or as the real party in interest in a suit brought by the insured and thereby fully recover or at least lessen the amount of loss it may have paid the insured.

The rule likewise prevents tortfeasors from being free from liabilities and is thus founded on considerations of public policy. There exists a wealth o f U.S . jurisprudence that whenever the wrongdoer settles with the insured without the consent of the insurer and with knowledge of the insurer' s payment and right of subrogation, such right is not defeated by the settlement. (Danza's Corporation vs. Abrogar, 478 SCRA 80 [2006].)

(3) Right of subrogation applicable only to property insurance. — The right of subrogation under Article 2207 applies only to property, and not to life insurance. The value of human life is regarded as unlimited and , therefore, no recovery from a third party can be deemed adequate to compensate the insured' s beneficiary. The pecuniary value of a human life to the beneficiary of a life insurance policy can seldom be determined with accuracy (except where the insurance is taken by a creditor on the life of a debtor to secure a debt).

Life insurance contracts are not ordinarily contracts of indemnity, (see Chap. II, Title 2.)

(4) Privity of contract or assignment by insured of claim not essential. — Payment by the insurer to the insured operates as an equitable assignment to the former of al l the remedies which the latter may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment of claim. I t accrues simply upon payment of the insurance claim by the insurer , (see Pan Malayan Insurance Corp. vs . Court of Appeals, 184 SCRA 54 [1990] ; Phil. American Genera l Insuranc e Co. , Inc . vs . Cour t o f Appeals , supra; Aboiti z Shippin g Corp . vs . Insuranc e Company o f South America, 561 SCRA 262 [2008].)

The presentation in evidence of the insurance polic y is not indispensable before the insurer may recover. The subrogation receipt, by itself , is sufficient to establish not only the relationship of th e insurer and the insured, but also the amount paid to settle the insurance . (Delsa n Transpor t Lines , Inc . vs . Cour t of Appeals, supra; Federal Express Corporation vs. American Home Assurance Company, 437 SCRA 50 [2004].)

(5) Loss or injury for risk must be covered by the policy. — Under Article 2207, the cause of the loss or injury must be a risk covered by the policy to entitle the insurer to subrogation. Thus, where the insurer pays the insured for a loss which is not a risk covered by the policy, thereby effecting 'Voluntary payment/' the insurer has no right of subrogation against the third party liable for the loss. Nevertheless, the insurer may recover from the third party responsible for the damage to the insured property under Article 1236 of the Civi l Code . (Sverige s Anfartygs Assurance Forening vs. Qua Chee Gan , 21 SCRA 12 [1967] ; see also St . Pau l Fire & Marine Insurance Co . vs . Macondray & Co. , Inc. , 70 SCRA 122 [1976]; Fireman's Fund Ins. Co. & Firestone Tire & Rubber Co. vs. Jamila, Inc., 70 SCRA 23 [1976].)

(6) Right of insured to recover from both insurer and third party. — The right of subrogation given to the insurer prevents the insured from obtaining more than the amount of his loss. It is a method of implementing the principle of indemnity that is at the heart of all insurance, (see Sec . 18.) The right exists after indemnity has been paid by the insurer to the insured who can no longer go after the third party. He can only recover once. Note, however, that if the amount paid by the insurance company does not fully cover the injury or loss, it is the aggrieved party, i.e., the insured, not the insurer, who is entitled to recover the deficiency from the person responsible for the loss or injury, (see F.F. Cruz & Co., Inc. vs. Court of Appeals, 164 SCRA 731 [1988].) This is true in case of under-insurance.

(7) Right of insured to recover from insurer instead of the third party. — The insurer cannot defeat the insured's claim for indemnity on the ground that the insured has a right to be indemnified by a third person. Having been paid a premium to make good the insured's loss, the insurer cannot compel him to seek indemnity elsewhere.

(8) Right of insurer against third party limited to amount recoverable from latter by the insured. — The literal language of Article 2207 makes it clear that the insurance company that has paid indemnity "shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract." As the insurer is subrogated merely to the rights of the insured, it can necessarily recover only the amount recoverable by the insured from the party responsible for the loss. It cannot recover in full the amount it paid to the insured if it is greater than that to which the insured could lawfully lay claim against the person causing the loss. 6 (Riza l Surety & Insurance Co . vs. Manila Railroad Co., 23 SCRA 205 [1968].)

(9) Exercise of right of subrogation by insurer discretionary. — Whether or not the insurer should exercise the rights of the insured to which it had been subrogated lies solely within the former's sound discretion . Since its identity is not of record, it has to claim its right to reimbursement of the amount paid to the insured. (F.F . Cruz & Co., Inc. vs. Court of Appeals, supra.)

(10) Loss of right of subrogation by act of insured or insurer. — The right of subrogation has its limitations to wit : (a ) both the insurer (of goods covered by a bill of lading) , and the consignee are bound by the contractual stipulations under the bill of lading; and (b ) the insurer can be subrogated only to the rights as the insured may have against the wrongdoer . Should the insured, after receiving payment from the insurer, release by his own act the wrongdoer or third party responsible for the loss or damage from liability , the insurer loses his rights against the wrongdoer since the insurer can be subrogated to only such rights as the insured may have. For defeating the insurer's right of subrogation, the insured is under obligation to return to the insurer the amount paid thereby entitling the latter to recover the same.

Under Article 2207, the insurer is the real party-in-interest with regard to the portion of the indemnity paid for he is deemed subrogated to the rights of the insured with respect thereto . (Manila Mahogany Manufacturing Corp. vs . Cour t of Appeals, 154 SCRA 650 [1987]; Pioneer Insurance & Surety Corp. vs. Court of Appeals , 17 5 SCRA 668 [1989] ; Aboiti z Shippin g Corp . vs . Insurance Company of South America, supra.)

Similarly, where the insurer pays the insured the value of the lost goods without notifying the carrier who has in good faith settled the claim for loss of the insured, the settlement is binding on both the insured and the insurer, and the latter cannot bring an action against the carrier on his right of subrogation, (see Pan Malayan Insurance Corp. vs. Court of Appeals, supra.)

(11) Effect of assignment by insured of its rights against third party to insurer. — Where the insured (shipper/consignee of goods) has assigned its rights against defendant (carrier of goods) for damages caused to the cargo shipped to the insurer which paid the amount represented by the loss, the case is not between the insured and the insurer but one between the shipper and the carrier because the insurance company merely stepped into the shoes of the shipper. And if the shipper has a direct cause of action against the carrier on account of the damage to cargo, such action can be asserted or availed of by the insurer as a subrogee of the insured and the carrier cannot set up as a defense any defect in the insurance policy because it is not a privy to it. (Compania Maritima vs. Insurance Co. of North America, 12 SCRA 213 [1964].)

"CHAPTER I "THE CONTRACT OF INSURANCE

"TITLE 1 "WHAT MAY BE INSURED”

"Section 3, IC. Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against, subject to the provisions of this chapter. "The consent of the spouse is not necessary for the validity of an insurance policy taken out by a married person on his or her life or that of his or her children. "All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of the person insured shall automatically vest in the latter upon the death of the original owner, unless otherwise provided for in the policy.

Terminologies:

Risk – uncertainty of loss

Peril – specific cause of loss that is insured against

Pure risk – results in either loss or no loss.  This is the type of risk that may be assumed by the insurer.

Speculative risk – results in either loss or gain.

Hazards – circumstances/conditions that create or increase the risk of loss.

Loss- end result of the risk. Involves diminution/disappearance of value

Inherent Vice – losses that arise from the very nature or condition of the property. These are not generally covered by the insurance unless expressly provided for in the policy.

Requisites of a contract of insurance.

(1) A subject matter in which the insured has an insurable interest (see Sees. 12-14.);

(2) Event or peril insured against which may be any (future) contingent or unknown event, past or future (Sec . 3.), and a duration for the risk thereof (see Sec. 51 [g].);

(3) A promise to pay or indemnify in a fixed or ascertainable amount (see Sec. 2.);

(4) A consideration for the promise, known as the premium,, (see Sec. 77.) ; and

(5) A meeting of minds of the parties upon all the foregoing essentials, (see Arts. 1318,1319 , Civil Code.)

Of course , the parties must be competent to enter into the contract, (see Arts. 1327-1329, Civil Code; Sees. 6-7.) Under Section 226, it is provided that "no policy of insurance shall be issued o r delivered within the Philippine s unless in the form previously approved by the Insurance Commissioner.  Of course, the contract must not be for a purpose contrary to law or public policy

Insurance by a married woman.

A married woman may take ou t an insurance on her life or that of her children without the consent of her husband (Sec . 3, par. 2.) , or that of her husband, she having an insurable interest in the latter, (see Sec. 10.) She may also take out insurance on her paraphernal or separate property, or on property given to her by her husband. (Harding vs. Comm. Union Assurance Co., 38 Phil. 464 [1918] ; see Art. 39 , Civi l Code; Arts. 110 , 111 , Family Code [Exec. Order No . 209].)

Insurance by a minor.

(1) Life, health, o r accident insurance. — Under Section 3 (par. 3.), a minor may enter into a valid contract of insurance provided that:

(a) He is 18 years of age or over;

(b) The contract is for life, health, or accident insurance;

(c) The insurance is taken on his life ; and

(d) The beneficiary (the person designated to receive the proceeds of the insurance upon the happening of the event insured against) is any of those enumerated by law. (2) Other insurance. — A contract of insurance other than life, health, or accident insurance, such as fire or marine insurance, entered into by a minor is not entirely void. It is one which is merely voidable, that is, i t i s valid unti l annulle d i n a proper action in cour t by th e mino r o r hi s lega l representative . (Art . 1390, Civil Code.) If the contrac t i s no t disaffirmed by th e minor , th e insurer cannot escape liability by pleading minority as a defense because "persons who are capable canno t allege the incapacity o f those with whom they contracted." (Art . 1397 , ibid.) But if the contract is fai r an d n o frau d o r undu e influenc e wa s practice d b y the insurer, th e mino r canno t recove r th e premium s paid , i f he cannot return the benefits received, (see Arts. 1385 , 1241, par. 1, 1427, ibid.; Johnson vs. Northwestern Mut. L . Ins . Co. , 59 N.W. 992.) The result is tha t an insurance company contracting with a minor is bound by the contract; the minor ordinarily is not.

"Section 4, IC. The preceding section does not authorize an insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize.

·       NOTES: This is to avoid wagering contracts; and because a loser in a game of chance is not damnified by the loss because he can recover his loss from the winner.

Article 2014, Civil Code. No action can be maintained by the winner for the collection of what he has won in a game of chance. But any loser in a game of chance may recover his loss from the winner, with legal interest from the time he paid the amount lost, and subsidiarily from the operator or manager of the gambling house.

RULE ON ACCEPTANCE BY AGENT:

1.      The first rule which Joyce lays down is this: If the act of acceptance of the risk by the agent and the giving by him of a receipt, is within the scope of the agent's authority, and nothing remains but to issue a policy, then the receipt will bind the company.

2.      The second rule laid down by Joyce is this: Where an agreement is made between the applicant and the agent whether by signing an application containing such condition, or otherwise, that no liability shall attach until the principal approves the risk and a receipt is given buy the agent, such acceptance is merely conditional, and it subordinated to the act of the company in approving or rejecting; so in life insurance a "binding slip" or "binding receipt" does not insure of itself.

3.      The third rule announced by Joyce is this: Where the acceptance by the agent is within the scope of his authority a receipt containing a contract for insurance for a specific time which is not absolute but conditional, upon acceptance or rejection by the principal, covers the specified period unless the risk is declined within that period.  (De Lim v. Sun Life Assurance)

CLASSIFICATION OF INSURANCE ACCORDING TO OBJECT:

·       Life / Health Insurance

·       Property Insurance

·       Liability Insurance

SPECIAL TYPES OF INSURANCE:

·       Marine Insurance

·       Casualty Insurance

·       Fire Insurance

·       Life Insurance

·       Compulsory Third Party Liability Insurance

·       Microinsurance

"Section 187, IC. Microinsurance is a financial product or service that meets the risk protection needs of the poor where:

"(a) The amount of contributions, premiums, fees or charges, computed on a daily basis, does not exceed seven and a half percent (7.5%) of the current daily minimum wage rate for nonagricultural workers in Metro Manila; and

"(b) The maximum sum of guaranteed benefits is not more than one thousand (1,000) times of the current daily minimum wage rate for nonagricultural workers in Metro Manila.

"TITLE 2 "PARTIES TO THE CONTRACT

"Section 6. Every corporation, partnership, or association, duly authorized to transact insurance business as elsewhere provided in this Code, may be an insurer. "Section 7. Anyone except a public enemy may be insured. "Section 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. "Section 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.

NOTES:

·       Effect of war:

If there is no war yet at the time of taking the policy but war ensues between the Philippines and the country of the insured, the insurance policy is deemed abrogated. (United States Rule)

·       Under the new law, individuals no longer identified as persons who can be an insurer.

Domestic and Foreign companies,  Mutual Benefit Association (Art. 184), Mutual Insurance Companies (Art. 268) and Cooperatives (Art. 190) are allowed to be insurers.

·       "Section 192. No corporation, partnership, or association of persons shall transact any insurance business in the Philippines except as agent of a corporation, partnership or association authorized to do the business of insurance in the Philippines, unless possessed of the capital and assets required of an insurance corporation doing the same kind of business in the Philippines and invested in the same manner; unless the Commissioner shall have granted it a certificate to the effect that it has complied with all the provisions of this Code.

"Every entity receiving any such certificate of authority shall be subject to the insurance and other applicable laws of the Philippines and to the jurisdiction and supervision of the Commissioner.

"Section 193. No insurance company shall transact any insurance business in the Philippines until after it shall have obtained a certificate of authority for that purpose from the Commissioner upon application therefor and payment by the company concerned of the fees hereinafter prescribed.

"The Commissioner may refuse to issue a certificate of authority to any insurance company if, in his judgment, such refusal will best promote the interest of the people of this country. No such certificate of authority shall be granted to any such company until the Commissioner shall have satisfied himself by such examination as he may make and such evidence as he may require that such company is qualified by the laws of the Philippines to transact business therein, that the grant of such authority appears to be justified in the light of local economic requirements, and that the direction and administration, as well as the integrity and responsibility of the organizers and administrators, the financial organization and the amount of capital, reasonably assure the safety of the interests of the policyholders and the public.

"In order to maintain the quality of the management of the insurance companies and afford better protection to policyholders and the public in general, any person of good moral character, unquestioned integrity and recognized competence may be elected or appointed director or officer of insurance companies in accordance with the pertinent provisions contained in the corporate governance circulars prescribed by the Commissioner. In addition hereto, the Commissioner shall prescribe the qualifications of directors, executive officers and other key officials of insurance companies for purposes of this section.

"No person shall concurrently be a Director and/or Officer of an insurance company and an adjustment company.

"Before issuing such certificate of authority, the Commissioner must be satisfied that the name of the company is not that of any other known company transacting a similar business in the Philippines, or a name so similar as to be calculated to mislead the public. The Commissioner may issue rules and regulations on the use of names of insurance companies and other supervised persons or entities.

"The certificate of authority issued by the Commissioner shall expire on the last day of December, three (3) years following its date of issuance, and shall be renewable every three (3) years thereafter, subject to the company’s continuing compliance with the provisions of this Code, circulars, instructions, rulings or decisions of the Commission.

"Every company receiving any such certificates of authority shall be subject to the provisions of this Code and other related laws and to the jurisdiction and supervision of the Commissioner.

"No insurance company may be authorized to transact in the Philippines the business of life and non-life insurance concurrently, unless specifically authorized to do so by the Commissioner: Provided, That the terms life and non-lifeinsurance shall be deemed to include health, accident and disability insurance.

"No insurance company shall have equity in an adjustment company and neither shall an adjustment company have equity in an insurance company.

"No insurance company issued with a valid certificate of authority to transact insurance business anywhere in the Philippines by the Insurance Commissioner, shall be barred, prevented, or disenfranchised from issuing any insurance policy or from transacting any insurance business within the scope or coverage of its certificate of authority, anywhere in the Philippines, by any local government unit or authority, for whatever guise or reason whatsoever, including under any kind of ordinance, accreditation system, or scheme. Any local ordinance or local government unit regulatory issuance imposing such restriction or disenfranchisement on any insurance company shall be deemed null and void ab initio.

·       "Section 53, IC. The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy.

Notes:

Insurer has no obligation to turn over the proceeds of the insurance to third persons even if the third persons are immediate relatives if there is a designated beneficiary. (Heirs of Maramag v. Eva Maramag)

*If no beneficiary: forms part of the estate

·       Generally revocable nature of insurance

"Section 11, IC. The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy. Notwithstanding the foregoing, in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable.

NOTES:

Exception to irrevocability in the case of express waiver of revocability:

Art. 64, Family Code. After the finality of the decree of legal separation, the innocent spouse may revoke the donations made by him or by her in favor of the offending spouse, as well as the designation of the latter as beneficiary in any insurance policy, even if such designation be stipulated as irrevocable. The revocation of the donations shall be recorded in the registries of property in the places where the properties are located. Alienations, liens and encumbrances registered in good faith before the recording of the complaint for revocation in the registries of property shall be respected. The revocation of or change in the designation of the insurance beneficiary shall take effect upon written notification thereof to the insured.

The action to revoke the donation under this Article must be brought within five years from the time the decree of legal separation become final.

·       "Section 12, IC. The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured. In such a case, the share forfeited shall pass on to the other beneficiaries, unless otherwise disqualified. In the absence of other beneficiaries, the proceeds shall be paid in accordance with the policy contract. If the policy contract is silent, the proceeds shall be paid to the estate of the insured.

·       Disqualification of Beneficiaries

Article 2012, Civil Code. Any person who is forbidden from receiving any donation under article 739 cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him, according to said article. (n)

Article 739, Civil Code. The following donations shall be void:

(1) Those made between persons who were guilty of adultery or concubinage at the time of the donation;

(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.

In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of the donor or donee; and the guilt of the donor and donee may be proved by preponderance of evidence in the same action. (n)

Notes: If the concubine is disqualified, her shares in the insurance proceeds must be awarded to the illegitimate children who are also designated as beneficiaries. (Heirs of Maramag v. Maramag)

"TITLE 3 "INSURABLE INTEREST

"Section 10. Every person has an insurable interest in 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.

NOTES:

·       Public policy requires an insurable interest to prevent wagering under the guise of insurance and to reduce to a safe level the temptation to destroy the insured property. It is for the benefit of society.

Other purposes of insurable interest:

1.      Reduces moral hazard – dishonesty or character defects in the individual that increase the chance of loss

2.      Helps in measuring the loss of the insured

·       INSURABLE INTEREST IN LIFE INSURANCE (enumerated in Sec. 10 of IC)

Classes of Insurable Interest in Life Insurance:

1.      Own life

2.      Life of another

a.      Blood relationship – only to spouse and children

The persons under Art. 105 of the Family Code, have insurable interest to one another by reason of legal obligation to support.

Art. 105. Subject to the provisions of the succeeding articles, the following are obliged to support each other to the whole extent set forth in the preceding article:

(1) The spouses;

(2) Legitimate ascendants and descendants;

(3) Parents and their legitimate children and the legitimate and illegitimate children of the latter;

(4) Parents and their illegitimate children and the legitimate and illegitimate children of the latter; and

(5) Legitimate brothers and sisters, whether of full or half-blood (291a)

b.     Pecuniary Interest – reasonable expectation of a financial benefit from the continuation of the life of the insured or a reasonable expectation of expenses upon the death of the insured. (e.g. employers to his employees, partners, surety to the principal

"Section 11. The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy. Notwithstanding the foregoing, in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable. "Section 12. The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured. In such a case, the share forfeited shall pass on to the other beneficiaries, unless otherwise disqualified. In the absence of other beneficiaries, the proceeds shall be paid in accordance with the policy contract. If the policy contract is silent, the proceeds shall be paid to the estate of the insured. "Section 13. Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest. "Section 14. An insurable interest in property may consist in: "(a) An existing interest; "(b) An inchoate interest founded on an existing interest; or "(c) An expectancy, coupled with an existing interest in that out of which the expectancy arises.

NOTES:

·       Test in determining insurable interest in property: Whether or not one will derive pecuniary benefit or advantage from its preservation, or will suffer pecuniary loss or damage from its destruction, termination, injury by the happening of the event insured against. (Harvardian Colleges of San Fernando, Pampanga v. Country Bankers Insurance Corp.)

·       Insurable interest exists in any of the following cases:

1.      Insured possesses a legal title to the property

2.      Insured has equitable title to the property

3.      Insured has possesses a qualified property or possessory right in the subject matter of the insurance

4.      Insured has possession or right of possession

5.      He may suffer from its destruction, loss of a legal right dependent upon its continued existence.

·       Inchoate interest with existing interest (e.g. shareholder over the properties of the corporation, purchaser of a property in a judicial sale subject to redemption, etc.)

·       Expectancy coupled with existing interest (e.g. profits that are to be earned by an establishment, future crops of farmers, expected commissions, etc.),

·       Insurable Interest of Mortgagor and Mortgagee: Both have independent insurable interest over the property. May be covered in one policy or separate policy.

For mortgagor: insurable interest up to the value of the property

For mortgagee: only up to the extent of the debt, it serves as security

Loss payable clause vs. Union Mortgage Clause (see Sec. 9 of Insurance Code)

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

Standard/Union Mortgage Clauses – rights of the mortgagee shall not be defeated by the acts or defaults of the mortgagor. A collateral independent contract between the insurer and mortgagee is created.

"Section 15. A carrier or depository of any kind has an insurable interest in a thing held by him as such, to the extent of his liability but not to exceed the value thereof. "Section 16. A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable. "Section 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof. "Section 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some person having an insurable interest in the property insured. "Section 19. An interest in property insured must exist when the insurance takes effect, and when the loss occurs, but need not exist in the meantime; and 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. "Section 20. Except in the cases specified in the next four sections, and in the cases of life, accident, and health insurance, a change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person.

NOTES:

·       "Section 58. The mere transfer of a thing insured does not transfer the policy, but suspends it until the same person becomes the owner of both the policy and the thing insured.

·       "Section 57. A policy may be 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.

"Section 21. A change of interest in a thing insured, after the occurrence of an injury which results in a loss, does not affect the right of the insured to indemnity for the loss. "Section 22. A change of interest in one or more of several distinct things, separately insured by one policy, does not avoid the insurance as to the others. "Section 23. A change of interest, by will or succession, on the death of the insured, does not avoid an insurance; and his interest in the insurance passes to the person taking his interest in the thing insured. "Section 24. A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others, does not avoid an insurance even though it has been agreed that the insurance shall cease upon an alienation of the thing insured. "Section 25. Every stipulation in a policy of insurance for the payment of loss whether the person insured has or has not any interest in the property insured, or that the policy shall be received as proof of such interest, and every policy executed by way of gaming or wagering, is void.

DISTINCTIONS BETWEEN INSURABLE INTEREST IN PROPERTY AND LIFE INSURANCE

Property Insurance	Life Insurance
Extent: Value of property	Extent: unlimited, except it secured by creditor
Time when it must exist: At perfection and time of loss	Time when it must exist: At perfection
Expectation of benefit must have legal basis	Expectation of benefit need not have have legal basis; or not based on legally enforceable obligation
Beneficiary must have insurable interest	Taken out of his own life: Beneficiary’s insurable interest not necessary Taken on the life another: Beneficiary must have insurable interest
Assignment of policy to another person: Consent of insurer needed (see Sec. 184)	Assignment of policy to another person: Consent of insurer not needed

"TITLE 4" CONCEALMENT

"Section 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment.

NOTES:

Four primary concerns of the parties to an insurance contract. In making a contract, so highly aleatory as that of insurance, the parties have four primary concerns, to wit:

(1) The correct estimation of the risk which enables the insurer to decide whether he is willing to assume it, and if so, at what rate of premium;

(2) The precise delimitation of the risk which determines the extent of the contingent duty to pay undertaken by the insurer;

(3) Such control of the risk after it is assumed as will enable the insurer to guard against the increase of the risk because of change in conditions; and

(4) Determining whether a loss occurred and if so, the amount of such loss. (Vance, op. ext., pp. 364-365.)

Requisites of concealment. Read together with Section 28, there can be no concealment unless:

(1) a party knows the fact which he neglects to communicate or disclose to the other;

(2) such party concealing is duty bound to disclose such fact to the other;

(3) such party concealing makes no warranty of the fact concealed; and

(4) the other party has not the means of ascertaining the fact concealed.

Where a warranty is made of the fact concealed, the non-disclosure of such fact is not concealment but constitutes a violation of warranty. (Title 7.)

 "Section 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance.

NOTES:

Effect of concealment.

(1) By the insured. — As a rule, failure on the party of the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer's option. (45 C.J.S. 153.)

The reason is that insurance policies are traditionally contracts uberrimae fidae (Stipcith vs. Metropolitan Life Ins . Co., 277 U.S. 311.), that is, contracts of the utmost good faith.

This doctrine is essential on account of the fact that the full circumstances of the subject matter of insurance are, as a rule, known to the insured only, and the insurer , in deciding whether or not to accept a risk, must rely primarily upon the information supplied to him by the applicant. It is strictly interpreted by the courts and is not limited to material facts which the applicant knows, but extends to those which he ought to know (Dindsdale & McMurdie , op. cit., pp . 85-86.) they being necessary for the insurer to evaluate the risk, either to charge a higher premium or to refuse to issue a policy altogether. Therefore, it is no defense to plead mistake or forgetfulness.

 (2) By the insurer. — The contractual duty of disclosure imposed by utmost good faith is not required of the insured alone, but is imposed with equal stringency upon the insurer; in fact , it is more upon the latter , since his dominant bargaining position carries with it stricter responsibility . (Qu a Che e Gan vs. Law Union & Rock Ins . Co. , 98 Phil . 85 [1955] ; Fieldmen's Insurance Co., Inc. vs. Vda. de Songco, 25 SCRA 70 [1968].)

The duty of utmost good faith is breached by concealment or misrepresentation. (See. 44, 45.) Section 27 "entitles" the injured party to rescind a contract of insurance by reason of concealment, implying that it is optional on his part whether or not to exercise his right of rescission

"Section 28. Each party to a contract of insurance must communicate to the other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining.

NOTES:

Matters that must be communicated even in the absence of inquiry. This section makes it the duty of each party to a contract of insurance to communicate in good faith all facts within his knowledge only when:

(1) they are material to the contract (Sees. 31, 34, 35.);

(2) the other has not the means of ascertaining the said facts (see Sees. 30, 32, 33.); and

(3) as to which the party with the duty to communicate makes no warranty, (see Sees. 67-76.)

The test is: If the applicant is aware of the existence of some circumstances which he knows would influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked. (Vance, op. cit., p. 372.)

Effect of failure of insurer to verify.

The effect of material concealment cannot be avoided by the allegation that the insurer could have known and discovered the illness or disease which the insured had concealed.

The insurance company has the right to rely on the statements of the insured as to material facts such as to his previous sickness, for he knows the facts, and the matter is not one of which disclosure is excused by the law. 3 (De Leon vs. Crown Life Ins . Co. , [C.A.] L-44842, June 20,1939.)

"Section 29. An intentional and fraudulent omission, on the part of one insured, to communicate information of matters proving or tending to prove the falsity of a warranty, entitles the insurer to rescind. "Section 30. 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 the 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 of which the other waives communication; "(d) Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material; and "(e) Those which relate to a risk excepted from the policy and which are not otherwise material.

NOTES:

Matters made the subject of special inquiries material.

As a general proposition, matters made the subject of inquiry must be deemed material, even though otherwise they might not be so regarded (North Am. Fire Ins. Co. vs. Throop, 22 Mich. 146.) and the insured is required to make full and true disclosure to questions asked. (Smith vs. Ins. Co., 49 N.Y. 211.)

The failure of an apparently complete answer to make full disclosure will avoid the policy. But an answer incomplete on its face will not defeat the policy in the absence of bad faith. (Vance, op. cit, p. 376.)

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 one mortgage when in fact there are two, the policy issued thereon is avoided. (Rowne vs. Fifthburg Mut. Fire Ins. Co., 7 Allen [Mass.] 57.) But if to the same question he merely answers that the property is encumbered, without stating the amount of encumbrances, the issue of the policy without further inquiry, is a waiver of the omission to state the amount. (Nichol s vs. Fayetee Mut. Fire Ins. Co., 1 Allen [Mass.] 63.)

When there is no duty to make disclosure. The circumstances of the parties to an insurance contract, or the conditions under which it is executed may be such as to render it unnecessary, in the absence of questions requiring it, for the insured to disclose to the insurer, facts that would otherwise be material. (Vance, op. cit., p. 381.) Thus:

(1) Matters known to, or right to be known by insurer, or of which he waives disclosure. — The insured cannot be penalized for failure to disclose matters already known to the insurer (Sec . 30[a].) for obviously, the insurer cannot say there is deception; or ought to be known to the insurer or his agent (ibid., [b] ; Sec. 32.) for to hold otherwise would be to charge the insured with the default of the insurer or his agent (Bates vs. Hewit, 1867 L.R. 2 Q.B. 595.); or of which the insurer waives communication (Sec. 30[c]; Sec. 33.) for the insurer is in estoppel.

(2) Risks excepted from the policy. — The insurer cannot complain of the insured's failure to disclose facts that concern only risks excepted from the policy, either expressly or by warranty, from the liability assumed under the policy . (Thoma s & Mersey Marin Ins. Co. vs. Guaford Ship Co., [1911] A.C. 529.) It is important to note, however, that in this case, the undisclosed fact must not be material (Sec . 30[d] , [e]. ) for otherwise , the rule will not apply.

(3) Nature or amount of insured's interest. — Also, information of the nature or amount of the interest of one insured need not be communicated unless in answer to an inquiry except as prescribed by Section 51. (Sec . 34.)

(4) Where fact concealed not material — The insured cannot be guilty of concealment where the fact concealed is not material. Thus, where the insured underwent an ECG (electrocardiogram) test and the results showed a normal condition but he gave a negative answer to the question whether he had such test, it was held that the failure of the insured to reveal the fact did not amount to concealment as would vitiate the contract. Since the result of the test was negative, even if the test was related to the insurer, the same would not have affected its decision to insure the deceased. (E. Agos v. The Phil. American Life Insurance Co.)

"Section 31. Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries.

NOTES:

Determination of materiality.

(1) Test of materiality. — The test is in the effect which the knowledge of the fact in question would have on the making of the contract. To be material, a fact need not increase the risk or contribute to any loss or damage suffered. It is sufficient if the knowledge of it would influence the parties in making the contract. (Vance, op. cit., p. 375.) The matter must, of course, be determined ultimately by the court.

EXAMPLE: When D insured his house against fire, he did not disclose the fact that he received two letters threatening to set his house on fire if he did not pay P50,000.00 to the sender. D's house was destroyed by an accidental fire. The insurer can deny liability for the loss.

(2) From the standpoint of the insurer. — A fact is material if the knowledge of it would have a "probable and reasonable influence upon the insurer in assessing the risk involved and in making or omitting further inquiries , and cause him either to reject the risk or to accept it only at a higher premium rate or on different terms though that fact may not even remotely contribute to the contingency upon which the insurer would become liable , or in any wise affect the risk, (ibid., p. 326; see Argente vs. West Coast Life Ins. Co., 51 Phil . 725 [1928]; Canilang vs. Court of Appeals, 223 SCRA 443 [1993].)

(3) When concealment regarded as intentional — A man' s state of mind or subjective belief is not capable of proof in our judicial process, except through proof of external acts or failure to act from which inference s a s to his subjective belief may be reasonably drawn.

The nature of the facts not conveyed to the insurer may be such that the failure of the insured to communicate must have been intentional rather than inadvertent. (Canilang vs. Court of Appeals, supra.)

Time when information acquired

1.     After contract has become effective – Concealment must take place at the time the contract is entered into in order that the policy may be avoided and not afterwards. The duty of disclosure ends with the completion and effectivity of the contract. The rule is different in reinsurance. (see Sec. 98)

2.     Before contract becomes effective – If the contract is to be effective only upon the issuance of the policy, an applicant for life insurance, for instance, is under a duty to disclose to the insurer, changes in his health occurring or coming to his knowledge between the date of submitting his application after successful medical examination and the date the policy is delivered. (Stipcich v. Metropolitan Life Insurance Co.)

"Section 32. Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated; and all general usages of trade. "Section 33. The right to information of material facts may be waived, either by the terms of insurance or by neglect to make inquiry as to such facts, where they are distinctly implied in other facts of which information is communicated.

NOTES:

Right to information may be waived.

The right to information of material facts may be waived either expressly, that is, by the terms of insurance, or impliedly, that is, by neglect to make inquiry as to the facts already communicated. If the applicant has answered the questions asked in the application, he is justified in assuming that no further information is desired. (Commonwealth Life Ins. Co. vs. Reder, 154 S.W. 906.) A waiver is a type of estoppel.

EXAMPLE: In an answer to a question, the insured communicated to the insurer that he had once stayed in a hospital. The insurer did not inquire as to the cause of the confinement. In this case, the law presumes that there is implied waiver on the part of the insurer of its right to be informed of the kind of sickness which caused insured's confinement in the hospital.4 (see Sec. 30[c].) The Insurer is estopped in the future from using that former right to its advantage. But there is no waiver where the failure of the insurer to make further inquiries was due precisely to concealment on the part of the insured, (see Sec. 27.)

Illustrative Cases:

·       The insurer had every means to ascertain the truth of the matter alleged in the application. The failure of the insurer to make inquiry constituted a waiver of its right to information of the facts. (AG. Factor vs. The Phil. American Life Insurance Co., I.C. Case No. 310, Aug. 29,1977.)

·       In the absence of evidence that the insured had sufficient medical knowledge as to enable him to distinguish between "peptic ulcer" and a "tumor, " his statement, that said tumor was "associated with peptic ulcer of the stomach" should be construed as an expression made in good faith of his belief as to the nature of his ailment and operation. Indeed, such statement must be presumed to have been made by him without knowledge of its incorrectness and without any deliberate intent on his part to mislead the insurer. While from the viewpoint of a medical expert, the information communicated was imperfect, the same was nevertheless sufficient to have induced the insurer to make further inquiries about the ailment and operation of the insured. Where "upon the face of the application, a question appears to be not answered at all or to be imperfectly answered and the insurer issues a policy without any further inquiry, it waives the imperfection of the answer and renders the omission to answer more fully immaterial." (Ng Zee vs. Asian Crusader Life Assurance Corp., 122 SCRA 461 [1983].)

"Section 34. Information of the nature or amount of the interest of one insured need not be communicated unless in answer to an inquiry, except as prescribed by Section 51.

NOTES:

Disclosure of nature and extent of interest of insured.

Under Section 51(e), it is required that a policy of insurance must specify "the interest of the insured in property insured, if he is not the absolute owner thereof. So, a mortgagee must disclose his particular interest even if no inquiry is made by the insurer in relation thereto. Such requirement is made so that the insurer may determine the extent of the insured's insurable interest, (see Sees. 17,18.)

But there is no need to disclose the interest in the property insured if it is absolute.

EXAMPLE: A fire insurance policy was issued to D (insured). He was described as the owner of the insured residential property. D was only given the privilege of occupying the house, rent-free for life, by the terms of his father's will. D represented himself as the owner. Is the policy valid? No. D is guilty of misrepresentation. He should have disclosed the nature of his interest in the property inasmuch as he is not the absolute owner thereof.

"Section 35. Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question.

NOTES:

Disclosure of judgment upon the matters in question.

The duty to disclose is confined to facts. (Hart vs. British & F. Marine Ins. Co., 22 P. 302.) Hence, there is no duty to disclose mere opinion, speculation, intention or expectation. (Folsom vs. Mercantile Mut. Ins. Co., 18 Wall. 237; 38 C.J. 1056; see Sec. 101.) This is true even if the insured is asked.

"TITLE 5 "REPRESENTATION

"Section 36. A representation may be oral or written.

NOTES:

Representation defined.

Representation is a statement made by the insured at the time of, or prior to, the issuance of the policy (Sec. 37.), as to an existing or past fact or state of facts, or concerning a future happening, to give information to the insurer and otherwise induce him to enter into the insurance contract. It may also be made by the insurer but as the insured seldom desires to avoid the contract, the cases nearly always involve to representations made by the insured.

Misrepresentation defined.

Misrepresentation1 in insurance is

(1) a statement as a fact of something which is untrue,

(2) which the insured stated with knowledge that it is untrue and with an intent to deceive, or which he states positively as true without knowing it to be true and which has a tendency to mislead, and

(3) where such fact in either case is material to the risk. (43 Am. Jur. 2d 1019.)

Such a misrepresentation by the insured renders the insurance contract voidable at the option of the insurer, even though innocently made and without wrongful intent.

Misrepresentation may be viewed as the active form of concealment.

"Section 37. A representation may be made at the time of, or before, issuance of the policy.

NOTES:

Time when representation may be made.

The very nature of representation requires that it precede the execution of the contract, (see Sec. 41.) The insurer must be induced by the misrepresentation of the insured to issue the policy at a specified premium. Clearly, a representation made after the policy is issued could not have influenced either party to enter into the contract. However, a representation may be performed after the issuance of the policy, (see Sec. 39.)

"Section 38. The language of a representation is to be interpreted by the same rules as the language of contracts in general.

NOTES:

Construction of representations.

Representations are construed liberally in favor of the insured, and are required to be only substantially true. Warranties (Sec. 67.), by contrast, must be literally true, or the contract will fail.

The circumstances under which representations are usually made to the insurer justify this rule. If the representation is written in the policy, the language in which it is expressed was chosen by the insurer; if in answer to an inquiry, the agent of the insurer usually phrases the answer to a question worded by the insurer. The great number and particularity of the inquiries made and the nature of the information asked, are such that "no human being could, with safety, undertake to answer correctly and warrant the correctness of his answers." (Vance, op. cit., p. 399.)

The rules referred to in Section 38 are the provisions of the Civil Code on "Interpretation of Contracts" from Article 1370 to Article 1379.

"Section 39. A representation as to the future is to be deemed a promise, unless it appears that it was merely a statement of belief or expectation.

NOTES:

Kinds of representation. A representation may be:

(1) oral or written (Sec. 36.);

(2) made at the time of issuing the policy or before (Sec. 37.); and

(3) affirmative or promissory. (Sees. 39, 42.)

(1) An affirmative representation is any allegation as to the existence or non-existence of a fact when the contract begins, (see Sec. 42.) Thus, the statement of the insured that the house to be insured is used only for residential purposes is an affirmative representation.

(2) A promissory representation is any promise to be fulfilled after the contract has come into existence or any statement concerning what is to happen during the existence of the insurance.

Nature of promissory representations.

The term "promissory representation" is used in two senses:

(1) First, it is used to indicate a parol or oral promise made in connection with the insurance, but not incorporated in the policy. The non-performance of such a promise cannot be shown by the insurer in defense to an action on the policy, but proof that the promise was made with fraudulent intent will serve to defeat the insurance; and

(2) Secondly, an undertaking by the insured, inserted in the policy, but not specifically made a warranty, is called also a "promissory representation." It is, however, in such a case, merely an executory term of the contract, and not properly a representation. (Vance, op. cit., p. 396.)

A promissory representation is, therefore, substantially a condition or a warranty.

EXAMPLE: An applicant for fire insurance on a building makes a promise contained in the policy that it shall be occupied, which promise induces the insurer to issue the policy at a lower rate. It is clear that the promise is not representation at all but a term of the contract, the performance of which may be made a condition of the insurer's liability.

But if the promise is oral, the insurer may not be allowed to prove it by the operation of the rule of evidence forbidding the admission of parol testimony to add prior or contemporaneous terms to a written instrument. (Rules of Court, Rule 130, Sec. 9.) The promise, however, may be proved for a different purpose, that is, to prove that the insured had made the promise in bad faith.

Effect on policy of expressions of opinion or expectation.

(1) Good faith/bad faith of the insured. — A representation of the expectation , intention , belief , opinion or judgment of the insured, although false , will not avoid a policy of insurance if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium; and this is likewise the rule although the statement is material to the risk , if such statement is obviously of the foregoing character since in such case the insurer is not justified in relying upon such a statement, but is obligated to make further inquiry. (43 Am. Jur. 2d 1023; see Philamcare Health Systems, Inc. vs. Court of Appeals, 379 SCRA 356 [2002].)

(2) Liability of the insurer. — As to such representations, the good faith of the insured furnishes the criterion of truth, for they can be false only when the intention, opinion or belief as stated is not honestly entertained. (Vance, op. cit., p. 394.) To avoid liability, the insurer must prove both materiality of the insured's opinion and the latter's intent to deceive.

If the representation is one of fact, all the insurer need to prove is its falsity and materiality as defined in Sections 44, 45, and 46. The intent to deceive is presumed.

When representation deemed a mere expression of opinion.

An oral representation as to a future event or condition, over which the insured has no control, with reference to property or life insured, will be deemed a mere expression of opinion which will avoid a contract only when made in bad faith. (Bryan t vs. Ocean Ins. Co., 22 Pick [Mass.] 200.)

EXAMPLE: The insured made an oral promise that the building insured shall be occupied. The subsequent failure to fulfill the promise if made in good faith, will not avoid the policy even though the risk be increased by the building's being unoccupied.

"Section 40. A representation cannot qualify an express provision in a contract of insurance, but it may qualify an implied warranty. "Section 41. A representation may be altered or withdrawn before the insurance is effected, but not afterwards.

NOTES:                                

When representation may be altered or withdrawn.

A representation, not being a part of the contract of insurance, may be altered or withdrawn before the contract actually takes effect but not afterwards since the insurer has already been led by the representation in assuming the risk contemplated in the contract.

"Section 42. A representation must be presumed to refer to the date on which the contract goes into effect.

NOTES:

Time to which representation refers.

Representations refer only to the time of making the contract. As already shown, statements promissory of conditions to exist subsequent to the completion of the contract may be conditions or warranties. They cannot be representation. Hence, conditions represented as existing must be so during the making of the contract but not necessarily afterwards (Vance , op. cit., p . 405; but se e Sec . 96.) , and representations found to be untrue may be withdrawn prior to the completion of the contract but not afterwards. (Sec. 41.)

It results that there is no false representation, if it is true at the time the contract takes effect although false at the time it was made and vice versa, there is false representation if it is true at the time it was made but false at the time the contract takes effect.

EXAMPLES:

(2) A t the time X applied for a life insurance policy on June 10, 2002, he had never suffered from any of the enumerated diseases including pneumonia. On July 12, 2002, he became ill with pneumonia and completely recovered on July 25, 2002. When the policy was delivered and the first premium paid on July 30, 2002, X did not disclose his having been sick with pneumonia. Is there false representation? Yes, and, therefore, the insurer is entitled to rescind the contract, (see Sec. 45.)

(3) But the truth of the statement made by the insured at the date of the application that, for example, his age at his nearest birthday is thirty-five, is surely to be tested as of the date of the application. It would be absurd to say that this representation was fatally false because at the time of the acceptance of the application and the completion of the contract it was no longer true. (Vance, op. cit., p. 406.)

"Section 43. When a person insured has no personal knowledge of a fact, he may nevertheless repeat information which he has upon the subject, and which he believes to be true, with the explanation that he does so on the information of others; or he may submit the information, in its whole extent, to the insurer; and in neither case is he responsible for its truth, unless it proceeds from an agent of the insured, whose duty it is to give the information.

NOTES:

Effect where information obtained from third persons.

Under this section, the insured is given discretion to communicate to the insurer what he knows of a matter of which he has no personal knowledge. If the representation turns out to be false, he is not responsible therefor, provided he gives explanation that he does so on the information of others.

EXAMPLE: If the insured has no personal knowledge of the cause of the death of his parents because they died when the insured was still an infant, he may report information obtained from friends and relatives, expressly stating that he does not possess knowledge personally but through others. In this case, the insured is not responsible for the truth of the information. On the other hand, where a party orders insurance, and afterwards receives information material to the risk, or has knowledge of a loss , he ought to communicate it to his agent as soon as , with due and reasonable diligence , i t can be communicated for the purpose of countermanding the order, or laying the circumstances before the insurer. If he omits to do so, the policy is avoided. (M. Lanahen vs. Universal Ins. Co., 7 L. Ed. 98,105.)

Effect where information obtained from agent of insured/insurer.

(1) Agent of the insured. — If the information proceeds from an agent of the insured, whose duty it is in the ordinary course of business to communicate such information to his principal, and it was possible for the agent under such circumstances in the exercise of due diligence to have made such communication before the making of the contract, the insured will be liable for the truth.

EXAMPLE: A captain of a ship is bound to communicate its loss to the owner and if the latter effects an insurance on the ship "lost or not lost" in ignorance of the antecedent loss due to the fraud or negligence of the captain, the insured cannot recover on the policy, (see Proudfoot vs. Montefine, L.R. 2 Q.B. 511.)

(2) Agent of the insurer. — It must be borne in mind that the same principle applies to the insurer though in the nature of things, the question does not occur so frequently.

EXAMPLE: If an insurer would effect an insurance upon a vessel "lost or not lost," when his agent under a duty of disclosing to the insurer, knew that the vessel had , in fact , arrived safely , the insurance would be void, and the insured would be entitled to a return of premium. (Vance, op- cit., p. 383.)

"Section 44. A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations.

NOTES:

When representation deemed false.

Section 44 defines misrepresentation, (see also the definition under Sec. 36.) Unlike in the case of warranties (see Sec. 67.), representations are not required to be literally true; they need only be substantially true. In order that a policy shall be avoided, a representation relied upon must be false in a substantial and material respect. (Sec. 45.) A representation is substantially true when it is true in every particular material to the risk, or is so far true that the conduct of the insurer would not have been different if the exact truth had been alleged. Where a representation partly fails but is true or is complied with so far as is essential to the risk insured against, the policy remains in force. (32 C.J. 1290.)

In marine insurance, substantial truth o f a representation is not sufficient. The insured is required to state the exact and whole truth in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose. (Sec. 107.)

Construction of representation as affirmative.

A representation written in the policy even in such form as to admit of its being construed as an executory agreement or promissory representation (Sec. 39.) will rather be construed, when possible, as an affirmative representation of a present fact (see Sec. 42.) in order to save the policy from avoidance.

EXAMPLE: The insured states that a building is used for a certain purpose or that no smoking is allowed on the premises. The truth of the representation at the time the contract takes effect is sufficient to validate the insurance which will not be affected by a subsequent change in the use to which the building is put or in the practice as to smoking in the premises, (see Home Ins. Co. vs. North Little Rock Ice & Elec. Co., Ill S.W. 994; Hasford vs. Insurance Co., 127 U.S. 399.)

"Section 45. If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time when the representation becomes false.

NOTES:

Effect of falsity of representation. Fraud or intent to misrepresent facts is not essential to entitle the injured party to rescind a contract of insurance on the ground of false representation.

To be deemed false, it is sufficient if the representation fails to correspond with the facts (Sec. 44.) in a material point. (Sec . 45.) Representations of fact are the foundation of the contract; and if the foundation does not exist, the superstructure does not arise. (Kimmball vs . Aetna Ins . Co. , 9 Allen 540.) In other words, the minds of the parties never meet.

EXAMPLES: (1) An applicant for life insurance denied in his application that any member of his family had been sick or that he himself had the disease, although he knew that a brother and a sister of his had died previously of pulmonary tuberculosis and he himself was already spitting blood at the time he filed his application. The misrepresentation is material and sufficient to avoid the contract of insurance (Sison vs. Manufacturer's Life Ins. Co., [C.A.] 37 O.G. 1563.) even if not intentional.

(2) But it is not misrepresentation for the insured to state that he did not drink beer or other intoxicants if he drank but very seldom. (Insular Life Assurance Co. vs. Pineda, [C.A.] 40 O.G. 285.) Here, the representation is false but not in a material point.

"Section 46. The materiality of a representation is determined by the same rules as the materiality of a concealment.

NOTES:

Materiality of representation.

(1) Test of materiality. — The materiality of the representation is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the representation is made, in forming his estimates of the disadvantages of the proposed contract or in making his inquiries. (Sec. 31.)

(2) Materiality, a judicial question. — Who determines the materiality of the representation? It is not left to the insurance company to say after the loss has occurred that it would or would not have issued the policy had an answer been truly given. No sound principle of law would permit a determination of this question solely upon the say so of the company. The matter misrepresented must be of that character which the court can say would reasonably affect the insurer's judgment.

No misrepresentation of a mere trifling matter in the applicant's health if he might honestly be mistaken about it, will render the statement false so as to avoid the policy, merely because an insurance company says that it would not have issued the policy otherwise. (Volunteer State Life Ins. Co. vs. Richardson, 244, S.W. 44.)

Concealment and misrepresentation compared.

(1) In concealment, the insured withholds information of material facts from the insurer, whereas in misrepresentation, the insured makes erroneous statement so facts with the intent of inducing the insurer to enter into the insurance contract.

(2) The materiality of a concealment is determined by the same rules as applied in cases of misrepresentation.

(3) A concealment on the part of the insured has the same effect a s a misrepresentation and gives the insurer a right to rescind the contract.

(4) Whether intentional or not, the injured party is entitled to rescind a contract of insurance on ground of concealment or false representation.

(5) Since the contract of insurance is said to be one of utmost good faith on the part of both parties to the agreement, the rules on concealment and representation apply likewise to the insurer.

"Section 47. The provisions of this chapter apply as well to a modification of a contract of insurance as to its original formation. "Section 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract. "After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two (2) years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent.

NOTES:

When an insurer must exercise his right to rescind.

(1) In general. — A contract of insurance may be rescinded on the ground of concealment, or false representation, or breach of warranty. An action to rescind a contract, as contemplated by the first paragraph of Section 48, is founded upon and presupposes the existence of the contract, which is rescinded. Hence, a defense to an action to recover insurance that the policy was obtained through false representations, fraud and deceit is not in the nature of an action to rescind and is, therefore, not barred by the provision . There is no time limit imposed for interposing this defense. (Tan Chay vs. West Coast Life Ins . Co. , 51 Phil . 80 [1927].)

(2) In non-life policy. — Under the first paragraph of Section 48, in order that the insurer may rescind a contract of insurance, such right must be exercised prior to the commencement of an action on the contract. In other words, the insurer is no longer entitled to rescind a contract of insurance after the insured has filed an action to collect the amount of the insurance. It has been held, however, that where any of the material representations is false, the insurer's tender of the premiums and notice that the policy is cancelled before commencement of the suit thereon, operates to rescind a contract of insurance. (Argente vs . West Coast Life Ins. Co., 51 Phil. 275 [1927].)

(3) In life policy. — With reference to life insurance contracts, the foregoing rulings should be understood t o be qualified by the second paragraph of Section 48 . By virtue of the second paragraph, the defenses mentioned are available only during the first two years of a life insurance policy.

Incontestability of life policies.

Clauses in life insurance policies known as incontestable clauses stipulating that the policy shall be incontestable after a stated period are in general use, and are now required by statutes in force in many states. (Vance, op. cit., p. 575.) They create a kind of contractual statute of limitations on certain defenses that may be raised by the insurer. Incontestability means that after the requisites are shown to exist, the insurer shall be estopped from contesting the policy or setting up any defense, except as is allowed, on the ground of public policy, (infra.)

Theory and object of the incontestable clause.

(1) As to the insurer. — The theory is that an insurer should have a reasonable opportunity to investigate the statements which the applicant makes in procuring his policy and that after a definite period, the insurer should not be permitted to question the validity of the policy (ibid., p . 577.),eithe r b y affirmative action or by defense to a suit brought on the life policy by the beneficiary (Powell vs. Mut. Life Ins. Co., 144 N.E. 825.)

(2) As to the insured. — The clause has as its object to give the greatest possible assurance to a policyholder that his beneficiaries would receive payment without questions to the validity of the policy (Newton vs. New York Life Ins., 325 F . 2d 498.) or the existence of the coverage once the period of contestability passes.

It is designed to protect the policyholder or beneficiary from a lawsuit contesting the validity of the policy after a considerable time has passed and evidence of the facts surrounding the purchase may be unavailable. (Note , 6 2 Harvard L . Rev . 890 [1949].) It is a sufficient answer to the various tactics employed by insurance companies to avoid liability.

Requisites for incontestability. Under our law, in order that the insurance shall be incontestable, the following requisites must be present:

(1) The policy is a life insurance policy;

(2) It is payable on the death of the insured; and

(3) I t has been in force during the lifetime of the insured for at least two (2) years from its date of issue or of its last reinstatement.3 (see Sees. 227[b], 228[b], 230[b].)

The period of two (2) years for contesting a life insurance policy by the insurer may be shortened but it cannot be extended by stipulation. The phrase "during the lifetime " simply means that the policy is no longer considered in force after the insured has died. The key phrase is "for a period of two years." (Tan vs. Court of Appeals, 174 SCRA 403 [1989].)

Effect when policy becomes incontestable. When a policy of life insurance becomes incontestable, the insurer may not refuse to pay the same by claiming that:

(1) the policy is void ab initio; or

(2) it is rescissible by reason of the fraudulent concealment of the insured or his agent, no matter how paten t or well-founded; or

(3) it is rescissible by reason of the fraudulent misrepresentations of the insured or his agent. Since the law speak s of a policy in force for two years, the expression "void ab initio" should be understood in the sense of "voidable" and the fraud contemplated should refer to fraud in the inducement.4 (see Art. 1338 , Civil Code.) In case of reinstated policy, the period of contestability should be counted from the date of reinstatement and not from the date of the issuance of the policy.

A policy of insurance, after it has lapsed or become forfeited, as for nonpayment of premiums or breach of a warranty or condition, may be revived or reinstated pursuant to a provision contained in the policy or the agreement of the parties. (Perm. F . Ins. Co. vs. Malone, 56 ALR 1075.)

EXAMPLE: X procured insurance on his life through fraudulent concealment or misrepresentations. (1) I f X die s within two years from the issuance of the policy, the rule on incontestability does not apply because the law says that the policy must have been in force during the lifetime of the insured for a period of two years. Hence, his beneficiary cannot recover on the policy.

(2) Whether or not X is dead or alive, the insurer cannot exercise the right after two years from the time the policy is issued. The fraud committed by X is cured by the lapse of the said two-year period. But if the policy is payable not upon the death of the insured but upon maturity by lapse of a certain period of time, the insurer can still ask for its annulment or rescission.

Defenses not barred by incontestable clause. The incontestability of a policy under the law is not absolute; otherwise, a beneficiary of any person who had procured a life policy more than two years before his death would automatically be entitled to the proceeds upon that person's death. Incontestability only deprives the insurer of those defenses which arise in connection with the formation and operation of the policy prior to loss. (Business Law, Wyatt and Wyatt , 1963 Ed., p. 878.) The insurer may still contest the policy by way of defense to a suit brought upon the policy or by action to rescind the same, on any  f the following grounds:

(1) That the person taking the insurance lacked insurable interest as required by law;

(2) That the cause of the death of the insured is an excepted risk;

(3) That the premiums have not been paid (Sees . 77, 227[b], 228[b], 230[b].);

(4) That the conditions of the policy relating to military or naval service have been violated (Sees. 227[b], 228[b].);

(5) That the fraud is of a particularly vicious type, as where the policy was taken out in furtherance of a scheme to murder the insured, or where the insured substitutes another person for the medical examination, or where the beneficiary feloniously kills the insured (Vance, op. cit., pp. 582-583.);

"TITLE 7 "WARRANTIES

"Section 67. A warranty is either expressed or implied.

NOTES:

Warranty defined.

Warranty is a statement or promise by the insured set forth in the policy itself or incorporated in it by proper reference, the untruth or nonfulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such untruth or nonfulfillment, renders the policy voidable by the insurer, (see Vance, op. cit., p. 408.) A warranty may also be made by the insurer, (see Sec. 74.)

Kinds of warranties. In the law of insurance, warranties are either affirmative (see Sec. 68.) or promissory (see Sec. 72.) and either express or implied, and there may be several warranties of different kinds in one policy.

(1) An express warranty is an agreement contained in the policy or clearly incorporated therein as part thereof whereby the insured stipulates that certain facts relating to the risk are or shall be true or certain acts relating to the same subjects have been or shall be done.

(2) An implied warranty is a warranty which from the very nature of the contract or from the general tenor of the words, although no express warrant y is mentioned, is necessarily embodied in the policy as a part thereof and which binds the insured as though expressed in the contract, (see 29 Am. Jur. 428.)

Thus, in every policy of marine insurance, there is an implied warranty that the ship is seaworthy when the policy attaches. (Sec. 113; see Sec. 126.) It would seem that implied warranties are generally warranties in marine insurance although it is infrequently applied in other than marine insurance. (43 Am. Jur. 2d 1027.) It is only in marine insurance that the law provides for implied warranties.

(3) An affirmative warranty is one which asserts the existence of a fact or condition at the time it is made, (see ibid., p. 428; Vance, op. cit., p. 410.) The warranty is continuing if it is one that must be satisfied during the entire coverage period of the insurance.

(4) A promissory warranty, not infrequently called "executory" warranty, is one where the insured stipulates that certain facts or conditions pertaining to the risk shall exist or that certain things with reference thereto shall be done or omitted, (see ibid.) It is in the nature of a condition subsequent. (45 C.J.S. 159.)

Warranty presumed affirmative. Unless the contrary intention appears, the courts will presume that the warranty is merely affirmative.

EXAMPLES: (1) Where the policy describes the property as being "a two-storey structure used as a residence" there is no warranty that such structure would continue to be used. (2) The statement "watchman on premises at night" made in the policy was held to refer only to the time of making the contract and not to be a warranty that a watchman would be kept continuously on the premises thereafter. (Virginia Fire & Marine Ins. Co. vs. Buck, 13 S.E. 973.)

"Section 68. A warranty may relate to the past, the present, the future, or to any or all of these.

NOTES:

Time to which warranty refers. Although the provision employs the term "warranty " in general, in the case of a promissory warranty, the same may refer only to future events.

"Section 69. No particular form of words is necessary to create a warranty.

NOTES:

Intention of parties governs. The word "warranty" used in an insurance contract does not necessarily constitute a warranty nor is the use of such word necessary to constitute a warranty. Whether a statement made by the insured in the policy is a warranty depends upon the intention of the parties in regard thereto. (43 Am. Jur. 2d 1030.) In case of doubt, a statement will be construed as a representation rather than a warranty especially if such statement is contained in any instrument other than the policy like an application which is, in itself, collateral merely to the contract of insurance. The parties must intend a statement to be a warranty and it must be included as a part of the contract.

Warranties distinguished from representations.

There are well recognized distinctions between warranties and representations in contracts of insurance, to wit:

(1) Warranties are considered parts of the contract, while representations are but collateral inducements to it;

(2) Warranties are always written on the face of the policy, actually or by reference, while representations may be written in a totally disconnected paper or may be oral;

(3) Warranties must be strictly complied with, while in representations, substantial truth only is required (Vance, op. cit., p. 412.);

(4) The falsity or nonfulfillment of a warranty operates as a breach of contract, while the falsity of a representation renders the policy void on the ground of fraud (45 C.J.S. 157.) ; and

(5) Warranties are presumed material, while the insurer must show the materiality of a representation in order to defeat an action on the policy. Before a representation will be considered a warranty, it must be expressly included or incorporated by clear reference in the policy and the contract must clearly show that the parties intended that the rights of the insured would depend on the truth or fulfillment of the warranty. Obviously, where a statement is true, it is ordinarily immaterial whether it is a warranty or a representation.

"Section 70. Without prejudice to Section 51, every express warranty, made at or before the execution of a policy, must be contained in the policy itself, or in another instrument signed by the insured and referred to in the policy as making a part of it. "Section 71. A statement in a policy, of a matter relating to the person or thing insured, or to the risk, as fact, is an express warranty thereof. "Section 72. A statement in a policy, which imparts that it is intended to do or not to do a thing which materially affects the risk, is a warranty that such act or omission shall take place.

NOTES:

The act or omission is material to the risk if it increases the risk, and under the law, only substantial increase of risk works forfeiture of the policy which is avoided for increase in hazard. (45 C.J.S . 287.)

"Section 73. When, before the time arrives for the performance of a warranty relating to the future, a loss insured against happens, or performance becomes unlawful at the place of the contract, or impossible, the omission to fulfill the warranty does not avoid the policy.

NOTES:

When insurer barred by waiver or estoppel.

Breach of warranty operates to discharge the insurer from liability unless the insurer is liable because o f a waiver of the warranty or an estoppel. The doctrines of waiver and warranty are two devices which frequently have been used to modify the harsh operation of the rules on concealment and warranty.

Under estoppel, the insurer is precluded, because of some action or inaction on its part, from relying on an otherwise valid defense as against the insured who has been induced to enter into the contract by the insurer's representation or conduct. The ground of estoppel is that it would be against equity and good conscience for the insurer to assert such defense . Estoppel is different from waiver, but the result is much the same.

"Section 74. The violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the other to rescind. "Section 75. A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy. "Section 76. A breach of warranty without fraud merely exonerates an insurer from the time that it occurs, or where it is broken in its inception, prevents the policy from attaching to the risk.

NOTES:            

Effect of breach of warranty by insured.

The breach referred to under Section 76 is one without fraud. In order that the insurer may be entitled to rescind a contract of insurance on the ground of a breach of warranty, fraud is not essential, (see Sec. 74.) Falsity, not fraud, is the basis of liability on a warranty. (Leonard vs. State Mut. L. Assur. Co., 24 R.I. 7, 51 A. 1049. )

(1) Without fraud. — Where there is no fraud, the policy is avoided only from the time of breach (Sec. 76.) and the insured is entitled (a) to the return of premium paid at a pro rata rate from the time of breach (see Sec. 79[b].) if it occurs after the inception of the contract; or (b) to all the premiums if it is broken during the inception of the contract. In the latter case, the contract is void ab initio and never becomes binding.

(2) With fraud. — Where there is fraud, the policy is avoided ab initio, and the insured is not entitled to the return of the premium paid.

EXAMPLE: Suppose the warranty stipulates that the insured will not store inflammable materials in the building insured. If the policy is issued on June 10 , 2002 and the insured violates the warranty on June 25,2002, the insurer is exonerated only from June 25, 2002 . Consequently, the insurer is liable for any loss arising before June 25, 2002 but not as to a loss occurring thereafter. In this case, the insurer is entitled to retain the premium up to June 25, 2002, the time of the breach.

If the insured, without fraud, makes a false warranty at the time he signs the contract, he cannot recover for any loss arising thereafter because the breach prevents the policy from attaching to the risk. In other words, the contract is void ab initio but all the premiums should be returned to the insured. If the insured is guilty of fraud, he is not entitled to the return of the premiums paid.

Conditions in insurance policy.

Insurers may impose whatever conditions they please upon their obligations, as long as they are not contrary to law, morals, good customs, public order, or public policy . (Art . 1306 , Civil Code.) Conditions in an insurance policy are of two kind s — precedent and subsequent.

(1) A condition precedent calls for the happening of some event or the performance of some act after the terms of the contract have been agreed upon, before the contract shall be binding on the parties, such as that the policy shall not take effect until delivery and payment of the first premium during the good health of the applicant.

(2) A condition subsequent is that which pertains not to the attachment of the risk and the inception of the policy, but to the contract of insurance after the risk has attached and during the existence thereof (43 Am. Jur . 2d 1035.) , such as the condition requiring notice and proof of loss in case of loss upon an insurance against fire, (see Sees. 88-89.)

Warranties and conditions distinguished. The term s "warranty" and "conditions precedent" are often used interchangeably or synonymously. However, some courts have recognized material differences.

(1) As to effect. — The best recognized distinction between the two is that warranty does not suspend or defeat the operation of the contract, but a breach affords either the remedy expressly provided in the contract or that furnished by law, while condition precedent is one without the performance of which the contract, although in form executed by the parties and delivered, does not spring into life. In other words, a condition precedent is a limitation to the attachment of the risk, whereas a warranty does not necessarily have that effect.

(2) As to nature. — If the insured person contracts and warrants that if the representations made by him in his application for insurance are not true, the policy shall be null and void, such statements are not conditions precedent but rather of the nature of a defeasance. Also, promissory warranties are usually regarded as conditions subsequent to be performed after the policy has become a valid contract, non-performance of which will work a defeasance. (43 Am. Jur. 2d 1036.)

Exceptions in insurance policy.

Exceptions are inserted in a contract of insurance for the purpose of withdrawing from the coverage of the policy, a s delimited by the general language describing the risk assumed, some specific risks which the insurer declares himself unwilling to undertake. Thus, the insurer who issues his policy covering a certain store and its contents against loss or damage by fire may cut down the meaning of  "contents" by excepting money and securities, and restrict the peril of "fire" by excepting fire caused by lightning. (Vance , op. cit, p. 426.)