F. Warranties

F. Warranties

R.A. No. 10607, Sections 67¹-76

"WARRANTIES

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

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

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

"Section 70. Without prejudice to Section 51², 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.

"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.

"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.

Warranties (1993 BAR)

Statements or promises by the insured set forth in the policy itself or incorporated in it by proper reference are warranties. A breach of a material warranty entitles the insurer to rescind the policy. Breach of an immaterial provision does not avoid the policy unless the policy declares that it will (Insurance Code, secs. 74–75).

Purpose of Warranties

To eliminate potentially increasing moral or physical hazards which may either be due to the acts of the insured or to the change of the condition of the property.

Basis of Warranties

The insurer took into consideration the condition of the property at the time of effectivity of the policy.

Effects of Breach of Warranty

1. Material

GR: Violation of material warranty or of material provision of a policy will entitle the other party to rescind the contract.

XPN: (with regard to “promissory” warranties)

• Loss occurs before the time of performance of the warranty;
• The performance becomes unlawful at the place of the contract; or
• Performance becomes impossible. (Sec. 73, IC)³

2. Immaterial

GR: It will not avoid the policy.

XPN: When the policy expressly provides, or declares that a violation thereof will avoid it.

For instance, an “Other Insurance Clause” which is a condition in the policy requiring the insured to inform the insurer of any other insurance coverage of the property. A violation of the clause by the insured will not constitute a breach unless there is an additional provision stating that the violation thereof will avoid the policy. (Sec. 75, IC)⁴

Effect of a Breach of Warranty without Fraud

The policy is avoided only from the time of breach and the insured is entitled:

• To the return of the premium paid at a pro rata from the time of breach or if it occurs after the inception of the contract; or
• To all premiums if it is broken during the inception of the contract.

Effect of Breach of Warranty with Fraud

• Policy is avoided ab initio and never became binding.
• Insured is not entitled to the return of the premium.

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Warranties are specific statements or promises made by the insured that are considered fundamental to the validity of the insurance contract. These warranties can be either express or implied and are crucial because they are conditions that must be strictly complied with. If a material warranty is breached, the other party is entitled to rescind under Section 74 of the Insurance Code; under Section 75, a breach of an immaterial provision does not avoid the policy unless the policy declares that its violation shall avoid it.

Types of Warranties:

• Express Warranties:
• Definition: Express warranties are explicitly stated in the insurance contract. These are clear and specific promises or statements made by the insured and are often written into the policy.
• Examples:
• A statement that a property has a functioning security system.
• A declaration that a vehicle is used only for personal purposes and not for commercial activities.
• Implied Warranties:
• Definition: Implied warranties are not explicitly stated in the contract but are assumed to be understood and accepted by both parties based on the nature of the insurance and the circumstances.
• Examples:
• In marine insurance, there is an implied warranty that the ship is seaworthy at the start of the voyage.

Characteristics of Warranties:

• Strict Compliance: Warranties require strict compliance. Violation of a material warranty entitles the other party to rescind under Section 74 of the Insurance Code. Under Section 75, breach of an immaterial provision does not avoid the policy unless the policy declares that its violation shall avoid it.
• Materiality Matters: Violation of a material warranty or other material policy provision entitles the other party to rescind under Section 74 of the Insurance Code. Under Section 75, breach of an immaterial provision does not avoid the policy unless the policy declares that its violation shall avoid it.
• Basis of the Contract: Warranties often form the basis of the insurance contract. They are fundamental terms upon which the insurer's decision to provide coverage is based.

Legal Consequences of Breach of Warranty:

• Voidance of Policy: Violation of a material warranty entitles the other party to rescind under Section 74 of the Insurance Code. Under Section 75, breach of an immaterial provision does not avoid the policy unless the policy declares that its violation shall avoid it.
• Denial of Claims: Violation of a material warranty entitles the other party to rescind under Section 74 of the Insurance Code. Breach of an immaterial provision does not avoid the policy unless the policy declares otherwise under Section 75.
• No Return of Premiums: Often, if the policy is voided due to a breach of warranty, the insured may not be entitled to a return of the premiums paid, depending on the terms of the policy and jurisdictional laws.

Examples in Context:

• Property Insurance: An insured might warrant that a property will be equipped with a sprinkler system and fire alarms. If these are found to be non-functional or absent at the time of a fire, the other party may rescind if the breach is material.
• Marine Insurance: A shipowner might warrant that a vessel is seaworthy and properly manned. If the vessel is found to be unseaworthy, the other party may rescind if the breach is material even if the unseaworthiness did not cause the loss.

Philippine Insurance Code on Warranties:

The Insurance Code of the Philippines (Presidential Decree No. 612) outlines the concept of warranties in insurance contracts:

• Section 74:⁵ "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 75:⁶ "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."

Warranties

Implied warranties in marine insurance:

• Implied warranty of seaworthiness
• Implied warranty against improper deviation
• Implied warranty of proper documentation

Implied Warranty of Seaworthiness

In every marine insurance upon a ship or freight, or freightage, or upon anything which is the subject of marine insurance, a warranty is implied that the ship is seaworthy [Sec. 113]⁷.

A vessel is seaworthy if:

• It is fit to perform the service and to encounter the ordinary perils of the voyage contemplated by the parties to the policy [Sec. 114]⁸;
• It is properly laden;
• It is provided with a competent master;
• It is provided with a sufficient number of competent officers and seamen;
• It is provided with the requisite appurtenances and equipment;
• It is provided with other necessary or proper stores and implements for the voyage [Sec. 116]⁹.

Note: There is an implied warranty of seaworthiness in every contract of ordinary marine insurance, as provided in Sec. 113¹⁰ in relation to Sec. 99¹¹. It becomes the obligation of a cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy condition [Roque v. INTERMEDIATE APPELATE COURT and PIONEER INSURANCE AND SURETY CORPORATION, G.R. No. L-66935, 11 November 1985]¹².

A vessel should be seaworthy at the time commencement of the risk or start of the voyage, except:

• Time policy: When the insurance is made for a specified length of time, the implied warranty is not complied with unless the ship be seaworthy at the commencement of every voyage it undertakes during that time;
• Cargo policy: When the insurance is upon the cargo which, by the terms of the policy, description of the voyage, or established custom of the trade, is to be transhipped at an intermediate port, the implied warranty is not complied with unless each vessel upon which the cargo is shipped, or transhipped, be seaworthy at the commencement of each particular voyage [Sec. 115]¹³.

Where different portions of the voyage contemplated by a policy differ in respect to the things requisite to make the ship seaworthy therefor, a warranty of seaworthiness is complied with if, at the commencement of each portion, the ship is seaworthy with reference to that portion [Sec. 117]¹⁴.

If the ship becomes unseaworthy during the voyage, unreasonable delay in repairing the defect exonerates the insurer on the ship or shipowner’s interest from liability for a loss arising from that defect [Sec. 118]¹⁵.

Implied Warranty Against Improper Deviation

A deviation is a departure from the course of the voyage insured, or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage [Sec.125]¹⁶.

There is proper deviation when:

• Necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured against;
• Made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or
• Made in good faith, for the purpose of saving human life or relieving another vessel in distress [Sec. 126]¹⁷.

Note: In instances when deviation is proper, insurer remains liable.

Every deviation not specified in the last section is improper [Sec. 125]¹⁸.

The effect of any loss subsequent to an improper deviation is that the insurer is not liable [Sec. 128]¹⁹.

Implied Warranty of Proper Documentation

Where the nationality or neutrality of a ship or cargo is expressly warranted, it is implied that the ship will carry the requisite documents to show such nationality or neutrality and that it will not carry any documents which cast reasonable suspicion thereon [Sec. 120]²⁰.