01 CONCEALMENT COMPARED

AND

MISREPRESENTATION

unknown factors. If a loss is absolutely certain to happen or not to happen, no risk is involved.9

1. In concealment, the insured withholds information of material facts from the insurer, whereas in misrepresentation, the insured makes erroneous statements of 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 as 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. 02 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. cits, 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.) 03 EXCEPTION TO INCOTESTABILITY

2.

In contrast to risk, peril is the contingent or unknown event which may cause a loss. It is the contingency that one insures against, (see Sec. 3, par. 1.) Its existence creates the risk, and its occurence results in loss. It may be covered or excluded by a policy of insurance. Examples of perils are fires, flood, theft, automobile accidents, illness, death, and hundreds of other causes of uncertainty.

3.

Hazard is the condition or factor, tangible or intangible, which may create or increase the chance of loss from a given peril. Ordinarily, there are many separate hazards that attach to any particular object or person. The sum total of the hazards constitute the perils which cause the risk. A practice of the insurance business divides hazards into two (2) major classifications, to wit: a. Physical hazards. The term includes everything relating to location, structure, occupancy, exposure, and the like such as waste paper piled under a staircase, gasoline stored in the premises, unsafe brake in a car, weak construction which may fail in a heavy wind, and many others; and Moral hazards. The term is applied to those factors that have their inception in mental attitudes. Included in this second group are the hazards created by dishonesty, insanity, carelessness, indifference, 10 and other causes psychological in nature. Appraisal of moral hazards requires the study of the character of the person under consideration in the light of his reputation. It involves a consideration of the personal character of the insured that increases the possibility of loss.

b.

1.

The FRAUD is of a particularly vicious type, as when 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 kiss the insured The beneficiary FAILED to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened That the PREMIUMS have not been paid That the person taking the insurance lacked INSURABLE INTEREST as required by law The cause of the death of the insured is an EXCEPTED RISK That the conditions of the policy relating to military or naval service have been VIOLATED The ACTION was not brought within the time specified

4.

2. 3. 4. 5. 6. 7.

Use of term to mean another. In practice, however, the terms are sometimes given more'than one meaning. This is true even in the insurance business. Risk may be used when what is in mind is peril or degree of hazard (e.g., Sec. 51 [f].), while a risk may refer to the subject matter of insurance. Thus, one is said to be insured against fire risks, and a risk (meaning a building) which is slated or tiled is a better risk than one which is attached, (see Dinsdale & McMurdie, op. cit., p. 5; D.L. Bickelhaupt, op. cit., pp. 6-8.) Section 99 (1, f) refers to "risks or perils of navigation" while Section 64 (b, d) speaks of "the hazard insured against." Thus, the word "risk" is also loosely used to refer to the subject matter insured and also as a synonym of the words "peril" and "hazard."

05 ISSUANCE AND RENEWAL OF COVER NOTES. Cover notes (also called a binder) may be issued to afford immediate provisional protection to the insured until the insurer can inspect or evaluate the risk in question and issue the proper policy (Sec. 52, par. 1.), or until the risk is declined and notice thereof given. 1. Being of temporary nature, it is sufficient, for example, that the cover note shows by necessary implication an agreement to pay whatever rate may be fixed. (43 Am. Jur. 2d 277.)

04 RISK, PERIL, AND HAZARDS DISTINGUISHED.

1.

Risk is the chance of loss,8 or the possibility of the occurrence of a loss, based on known and

2.

The fact that no separate premium was paid on the cover note before the loss insured against occurred, does not militate against its binding effect as an insurance contract. By their nature, cover notes do not contain particulars that would serve as basis for the computation of the premiums and consequently, no separate premiums are intended or required to be paid therefor. (Pacific Timber Export Corp. vs. Court of Appeals, 112 SCRA199 [1982].) If a cover note is to be treated as a separate policy instead of integrating it to the regular policy to be subsequently issued, its purpose and function would be set at naught or rendered meaningless, for it is in a real sense a contract, not a mere application for insurance which is a mere offer. (Ibid.)

insurance coverage but in no case less than P500.00. (Ins. Cir. Letter, Jan. 17,1980.) 06 PROXIMATE, REMOTE, IMMEDIATE Meaning of proximate cause. Proximate cause is that which, in a natural and continuous sequence, unbroken by any new independent cause, produces an event and without which the event would not have occurred. (Milwaukee vs. Kellog, 94 U.S. 469.) It is to be observed that the proximate cause is the efficient cause the one that sets others in motion to which the loss is to be attributed, although other and incidental causes may be nearer in time to the result and operate more immediately in producing the loss. (Lanasa Fruit S.S. & Importing Co. vs. Universal Ins. Co., 302 U.S. 556.) Proximate cause is "immediate cause."2 not, therefore, equivalent to

3.

The Code prescribes the requirements regarding the issuance and extension or renewal of cover notes. (Sec. 52.) Rules on cover notes Insurance companies doing business in the Philippines may issue cover notes to bind insurance temporarily, pending the issuance of the policy. 1. A cover note shall be deemed to be a contract of insurance within the meaning of Section 1(1) of the Code. No cover note shall be issued or renewed unless in the form previously approved by the Insurance Commission. A cover note shall be valid and binding for a period not exceeding sixty (60) days from the date of its issuance, whether or not the premium therefor has been paid, but such cover note may be cancelled by either party upon at least seven (7) days notice to the other party. If a cover note is not so cancelled, a policy of insurance shall, within sixty (60) days after the issuance of such cover note, be issued in lieu thereof. Such policy shall include within its terms the identical insurance bond under the cover note and the premium therefor. A cover note may be extended or renewed beyond the aforementioned period of sixty (60) days with the written approval of the Insurance Commission, provided that such written approval may be dispensed with upon the certification of the president, vice-president, or general manager of the insurance company concerned that the risks involved, the values of such risks and/or the premiums therefor have not as vet been determined or established and that such extension or renewal is not contrary to and is not for the purpose of violating any provisions of the Insurance Code, or of. any of the rulings, instructions, circulars, orders or decisions of the Insurance Commissioner. (Ins. Memo. Cir. No. 3-75, Sept. 29,1975, effective Oct. 21,1976.) Insurance companies may impose on cover notes a deposit premium equivalent to at least 25% of the estimated premium of the intended

2.

The doctrine of proximate cause has been defined as follows: "Was there an unbroken connection between the wrongful act and the injury, a continuous operation? Did the facts constitute a continuous succession of events, so linked together as to make a natural whole, or was there some new and independent cause intervening between the wrong and the injury?" (Milwaukee vs. Kellog, supra.) The question that needs to be asked is: If the event did not happen, could the injury have resulted? If the answer is NO, then tthe event is the proximate cause. (Allied Banking Corp. vs. Lim Sio Wan, 549 SCRA 504 [2008].) What is Proximate cause? Proximate cause is the active efficient cause which sets in motion a train of events which in turn brings about a result without the intervention of any force operating and working actively from a new and independent force What is a remote cause? Remote cause is a cause that does not necessarily or immediately produce an event or injury Immediate cause? it is the happening immediately before the loss. It is possible that the happening before the loss is not the proximate cause. 07 PERILS OF THE SEA

3.

4.

5.

1.

Perils covered. Ocean marine insurance protects ships at sea and the cargo or freight on such ships from standard "perils of the sea." The phrase "perils of the sea" or "perils of navigation" includes only those casualties due to the unusual violence or extraordinary action of wind and wave, or to other extraordinary causes connected with navigation. (Vance, p. 296.) a. The phrase thus embraces all kinds of marine casualty such as shipwreck, foundering, stranding, collision, and every specie of damage done to the ship or goods at sea by the violent action of the wind and waves (45 C.J.S., 934.) or losses occasioned by the jettisoning of cargo if it is made for the purpose of Saving a vessel rendered unworthy during the voyage, not through the fault of the

6.

captain. (Dabney vs. New England Mut. Marine Ins. Co., 14 Allen 300.)

b.

The phrase extends to barratry which in American insurance law is "any willful misconduct on the part of the master or crew in pursuance of some unlawful or fraudulent purpose without the consent of the owners, and to the prejudice of the owner's interest." Barratry requires a willful and intentional act in its commission. No honest error of judgment or mere negligence, unless criminally gross, can be barratry.5 (Roque vs. Intermediate Appellate Court, 139 SCRA596 [1985].)

2.

Perils not covered. It does not include losses resulting from ordinary wear and tear or other damage usually incident to the voyage. The mere fact that an injury is due to the violence of some marine force does not necessarily bring it within the protection of the policy if such violence was not unusual or unexpected. Thus, the insurer is not liable for a sail carried away by the violence of a tempest, for tempests are not unusual nor is the loss of a sail. But the carrying away of a mast, or the loss of an anchor by a storm, will entail liability upon the insurer, for such damage is due only to unusual violence in the elements, and is not ordinarily to be expected as incident to navigation. (Vance, op. cit., p. 927.) A relative term. "Perils of the sea" is a relative term and the meaning may vary with the circumstances. Thus, where a vessel designed for inland waters was insured while being towed in the Gulf of Mexico and the insurer was fully aware of the hazardous nature of the journey and charged an extra premium, the loss was held to be due to perils of the sea although a sea-going vessel would not have been damaged by the moderate waves encountered. {Ibid.; Compania de Navegacion vs. Fireman's Fund Ins. Co., 277 U.S. 66.)

It is also the general rule that everything which happens through the inherent vice of the thing, or by the act of the owner, master or shipper shall not be reputed a peril if not otherwise borne in the policy. (Roque vs. Intermediate Appellate Court, supra.) Thus, it has been held that loss caused to cargo of rice by the entrance of sea water through the ship's defective pipe, of which the shipowner was apprised but failed properly to repair, was one more analogous to that which directly resulted from simple seaworthiness than to that which resulted from perils of the sea. The owner of the damaged rice must look to the shipowner for redress and not to the insurer. (Go Tiaco vs. Union Ins. Society of Canton, 40 Phil. 401 [1919]; see Cathay Insurance Co. vs. Court of Appeals, 151 SCRA 710 [1987].) Perils of the sea must be the proximate cause of loss. As with other kinds of insurance, in ocean marine insurance, the insurer is liable only for such losses or damages proximately caused by the perils insured against. 08 REINSURANCE DISTINGUISHED FROM DOUBLE INSURANCE. The following are the distinctions: 1. In double insurance, the insurer remains as the insurer of the original insured, while in reinsurance, the insurer becomes the insured, insofar as the reinsurer is concerned; In double insurance, the subject of the insurance is property, while in reinsurance, it is the original insurer's risk (Sec. 97.); Double insurance is an insurance of the same interest while reinsurance is an insurance of a different interest; In double insurance, the insured is the party in interest in all the contracts, while in reinsurance, the original insured has no interest in the contract of reinsurance which is independent of the original contract of insurance (Sec. 98.); and In double insurance, the insured has to give his consent, while in reinsurance, the consent of the original insured (who is hardly even aware of the reinsurance transaction) is not necessary.

3.

2.

3.

4.

PERILS OF THE SEA DISTINGUISHED FROM PERILS OF THE SHIP

1.

A loss which, in the ordinary course of events, results (a) from the natural and inevitable action of the sea, (b) from the ordinary wear and tear of the ship, or (c) from the negligent failure of the ship's owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions, is not a peril of the sea. Such a loss is rather due to what has been aptly called the perils of the ship. The insurer does not undertake to insure against perils of the ship. The purpose of an ocean marine policy is to secure an indemnity against accidents which may happen not against event which must happen.

5.

09 WHAT CONSTITUTES SEAWORTHINESS. Seaworthiness is a relative term depending upon the nature of the ship, the voyage, and the service in which she is at the time engaged. (American Merchant Marine Ins. Co. vs. Margaret M. Ford Corp., 269 R 768.) Generally, for a vessel to be seaworthy, it must be adequately equipped for the voyage and manned with a sufficient number of competent officers and crew. The failure of a common carrier to maintain in seaworthy condition the vessel involved in the contract of carriage is a clear breach of its duty prescribed in Article 1755 of the Civil Code. (Caltex [Phils.], Inc. vs. Sulpicio Lines, Inc., 315 SCRA 709 [1999].) 1. Nature of ship. To comply with the implied warranty of seaworthiness, the vessel must be in a fit state as to repair, equipment, crew and in all

2.

"Perils of the sea" has been said to include only such losses as are of extraordinary nature or1 arise from some overwhelming power which cannot be guarded against by the ordinary exertion of human skill or prudence, as distinguished from the ordinary wear and tear of the voyage and from injuries suffered by the vessel in consequence of her not being seaworthy.

other respects to perform the voyage insured and to encounter the ordinary perils of navigation. She must also be in a suitable condition to carry the cargo put on board or intended to be put on board, (see 45 C.J.S. 563.) It is not necessary that the cargo itself shall be seaworthy, (see Sec. 119.) 2. Nature of voyage. What is reasonable fitness to encounter the perils expected to arise in the course of the voyage vary, naturally, with the character of the particular voyage. A vessel well fitted for the navigation of the Mississippi might be wholly unfit for a voyage on the Great Lakes, while a lake streamer would scarcely be seaworthy in the Atlantic. A crew that could be quite adequate for a vessel while passing through a canal might be insufficient for the proper handling of the same vessel on the high seas. (Vance, op. cit., pp. 922923.) Nature of service. The seaworthiness of a vessel is also to be determined with regard to the nature of the cargo which she undertakes to transport, the requirement being that she shall be reasonably capable of safely carrying the cargo to its port of destination. (Schults vs. Pacific Ins. Co., 14 Fla. 73; see Sec. 119.)

so damaged as no longer to exist in its original character. (Vance, op. cit., p. 935.) MEANING OF CONSTRUCTIVE TOTAL LOSS. Aconstructive total loss, or, as it is sometimes called, a "technical total loss," is one in which the loss, although not actually total, is of such a character that the insured is entitled, if he thinks fit, to treat it as total by abandonment. (45 C.J.S. 1150.) IMPORTANCE OF DISTINCTION BETWEEN ACTUAL AND CONSTRUCTIVE TOTAL LOSS. It is highly important that the two kinds of total loss be carefully differentiated, for upon them depends the whole doctrine of abandonment (see Sees. 138, 139.), so important in the law of marine insurance. In cases of actual total loss, no abandonment is necessary; but if the loss is merely constructively total, an abandonment becomes necessary in order to recover as for a total loss. (38 C.J. 1136.) 12 MEANING OF ABANDONMENT. Section 138 gives the definition of abandonment in marine insurance. It has also been defined as the act of an insured in notifying the insurer that owing to damage done to the subject of the insurance, he elects to take the amount of the insurance in the place of the subject thereof, the remnant of which he cedes to the insurer. (Camberling vs. M'Call, 1 Am. Dec. 314.) Requisites for valid abandonment. The requisites for a valid abandonment in marine insurance are: 1. There must be an actual relinquishment by the person insured of his interest in the thing insured (Sec. 138.); There must be a constructive total loss (Sec. 139.); The abandonment be neither partial nor conditional (Sec. 140.); It must be made within a reasonable time after receipt of reliable information of the loss (Sec. 141.); It must be factual (Sec. 142.); It must be made by giving notice thereof to the insurer which may be done orally or in writing (Sec. 143.); and The notice of abandonment must be explicit and must specify the particular cause of the abandonment. (Sec. 144.)

3.

CRITERION OF SEAWORTHINESS. The warranty of seaworthiness is not an absolute guaranty that the vessel will safely meet all possible perils. (Vance, op. cit., p. 923.) A perfect vessel or one impervious to the assaults of the elements is not required; nor is the best and most skillful form of construction required, but only such as is sufficient for the kind of vessels insured with reference to their physical and mechanical condition, the extent of its fuel and provisions supply, the quality of its officers and crew, and its adaptability for the service in which they are employed. (45 C.J.S. 563; San Miguel Corporation vs. Heirs of S. Inguito, 384 SCRA 87 [2002].) 10 MEANING OF DEVIATION. Section 123 defines deviation. In other words, any unexcused departure from the regular course or route of the insured voyage or any other act which substantially alters the risk constitutes deviation. (45 C.J.S. 564.) 1. Departure from the course of sailing fixed by mercantile usage between the places of beginning and ending specified in 'the policy (Sec. 121.); Departure from the most natural, direct, and advantageous route between the places specified if the course of sailing is not fixed by mercantile usage (Sec. 122.); S . Unreasonable delay in pursuing the voyage (Sec. 123.); and The commencement of an entirely different voyage, (ibid.)

2. 3. 4.

5. 6.

7.

2.

3.

4.

11 MEANING OF ACTUAL TOTAL LOSS. An actual total loss exists when the subject matter of the insurance is wholly destroyed or lost or when it is

The international rule is to the effect that the right of abandonment of vessels, as a legal limitation of a shipowner's liability, does not apply to cases where the injury or average was occasioned by the shipowner's own fault. Article 587 (supra.) of the Code of Commerce speaks only of situations where the fault or negligence is committed solely by the captain. Where the shipowner is likewise to be blamed, Article 587 will not apply and such situation will be covered by the provisions of the Civil Code on Common Carriers. (Phil. American General Insurance Co., Inc. vs. Court of Appeals, 273 SCRA 262 [1997].)