30

INSURANCE CODE
(P.D. No. 1460)

I. GENERAL CONCEPTS
CONTRACT OF INSURANCE
An agreement whereby one undertakes
for a consideration to indemnify another
against loss, damage or liability arising
from an unknown or contingent event.
(Sec. 2, par. 2, IC)
DOING AN INSURANCE BUSINESS OR
TRANSACTING
AN
INSURANCE
BUSINESS (Sec. 2, par. 4)
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, not as a mere incident to
any other legitimate business of a
surety;
3. Doing any insurance business,
including a reinsurance business;
4. Doing or proposing to do any
business in substance equivalent to
any of the foregoing
II. CHARACTERISTICS OF AN INSURANCE
CONTRACT (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. Consensual it is perfected by the
meeting of the minds of the parties.
2. Voluntary the parties may
incorporate
such
terms
and
conditions as they may deem
convenient.
3. Aleatory it depends upon some
contingent event.
4. Unilateral imposes legal duties only
on the insurer who promises to
indemnify in case of loss.
5. Conditional It is subject to
conditions the principal one of
which is the happening of the event
insured against.
6. Contract of indemnity Except life
and accident insurance, a contract
of insurance is a contract of
indemnity whereby the insurer

promises to make good only the loss

of the insured.
7. Personal each party having in view
the character, credit and conduct of
the other.
REQUISITES OF A CONTRACT OF
INSURANCE (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. A subject matter which the insured
has an insurable interest.
2. Event or peril insured against which
may be any future contingent or
unknown event, past or future and a
duration for the risk thereof.
3. A promise to pay or indemnify in a
fixed or ascertainable amount.
4. A consideration known as premium.
5. Meeting of the minds of the parties.
5 CARDINAL PRINCIPLES IN INSURANCE
1. Insurable Interest
2. Principle of Utmost Good Faith
An insurance contract requires utmost
good faith (uberrimaefidei) between the
parties. The applicant is enjoined to
disclose any material fact, which he
knows or ought to know.
Reason: An insurance contract is an
aleatory contract. The insurer relies on
the representation of the applicant, who
is in the best position to know the state
of his health.
3. Contract of Indemnity
It is the basis of all property
insurance. The insured who has insurable
interest over a property is only entitled
to recover the amount of actual loss
sustained and the burden is upon him to
establish the amount of such loss
(Reviewer
on
Commercial
Law,
Professors Sundiang and Aquino)
Rules:
a. Applies
only
to
property
insurance except when the
creditor insures the life of his
debtor.

31

b. Life insurance is not a contract

of indemnity.
c. Insurance contracts are not
wagering contracts. (Sec. 4)
4. Contract of Adhesion (Fine Print Rule)
Most of the terms of the contract do
not result from mutual negotiations
between the parties as they are
prescribed by the insurer in finalprinted
form to which the insured may adhere
if he chooses but which he cannot
change. (Rizal Surety and Insurance Co.,
vs. CA, 336 SCRA 12)
5. Principle of Subrogation
It is a process of legal substitution
where the insurer steps into the shoes of
the insured and he avails of the latters
rights against the wrongdoer at the time
of loss.
The principle of subrogation is a
normal incident of indemnity insurance
as a legal effect of payment; it inures to
the
insurer
without
any
formal
assignment or any express stipulation to
that effect in the policy. Said right is not
dependent upon nor does it grow out of
any private contract. Payment to the
insured makes the insurer a subrogeein
equity. (Malayan Insurance Co., Inc. v.
CA, 165 SCRA 536; see also Art. 2207,
NCC)
Purposes: (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. To make the person who caused the
loss legally responsible for it.
2. To prevent the insured from
receiving a double recovery from the
wrongdoer and the insurer.
3. To prevent tortfeasors from being
free from liabilities and is thus
founded on considerations of public
policy.
Rules:
1. Applicable only to property insurance.
2. The insurer can only recover from the
third person what the insured could have
recovered.
3. There can be no subrogation in cases:
a. Where the insured by his own act
releases the wrongdoer or third party
liable for the loss or damage;

b. Where the insurer pays the insured the

value of the loss without notifying the
carrier who has in good faith settled
the insureds claim for loss;
c. Where the insurer pays the insured for
a loss or risk not covered by the policy.
(Pan Malayan Insurance Company v.
CA, 184 SCRA 54)
d. In life insurance
e. For recovery of loss in excess of
insurance coverage
CONSTRUCTION
OF
INSURANCE
CONTRACT
The ambiguous terms are to be
construed strictly against the insurer,
and liberally in favor of the insured.
However, if the terms are clear, there is
no room for interpretation. (Calanoc vs.
Court of Appeals, 98 Phil. 79)
III. DISTINGUISHING ELEMENTS OF AN
INSURANCE CONTRACT
1. The insured possesses an insurable
interest susceptible of pecuniary
estimation;
2. The insured is subject to a risk of loss
through
the
destruction
or
impairment of that interest by the
happening of designated perils;
3. The insurer assumes that risk of loss;
4. Such assumption is part of a general
scheme to distribute actual losses
among a large group or substantial
number of persons bearing somewhat
similar risks; and
5. The insured makes a ratable
contribution (premium) to a general
insurance fund.
A contract possessing only the first 3
elements above is a risk-shifting device.
If all the elements, it is a riskdistributing device. (The Insurance Code
of the Philippines Annotated, Hector de
Leon, 2002 ed.)
IV. PERFECTION OF AN INSURANCE
CONTRACT
An insurance contract is a consensual
contract and is therefore perfected the
moment there is a meeting of minds with
respect to the object and the cause or
consideration.

32

What is being followed in insurance

contracts is what is known as the
cognition
theory.
Thus,
an
acceptance made by letter shall not bind
the person making the offer except from
the time it came to his knowledge.
(Enriquez vs. Sun Life Assurance Co. of
Canada, 41 Phil. 269)
Binding Receipt
A mere acknowledgment on behalf of
the company that its branch office had
received from the applicant the
insurance premium and had accepted
the application subject to processing by
the head office.
Cover Note (Ad Interim)
A concise and temporary written
contract issued to the insurer through its
duly authorized agent embodying the
principal terms of an expected policy of
insurance.
Purpose: It is intended to give
temporary insurance protection coverage
to the applicant pending the acceptance
or rejection of his application.
Duration: Not exceeding 60 days
unless a longer period is approved by
Insurance Commissioner (Sec. 52).
Riders
Printed stipulations usually attached
to the policy because they constitute
additional stipulations between the
parties. (AngGiok Chip vs. Springfield, 56
Phil. 275)
In case of conflict between a rider
and the printed stipulations in the
policy, the rider prevails, as being a
more deliberate expression of the
agreement of the contracting parties.
(C. Alvendia, The Law of Insurance in
the Philippines, 1968 ed.)
Clauses
An agreement between the insurer and
the insured on certain matter relating to
the liability of the insurer in case of loss.
(Prof. De Leon, p.188)
Endorsements
Any provision added to the contract
altering its scope or application. (Prof.
De Leon, p.188)

POLICY OF INSURANCE
The written instrument in which a
contract of insurance is set forth. (Sec.
49)
Contents: (Sec. 51)
1. Parties
2. Amount of insurance, except in open
or running policies;
3. Rate of premium;
4. Property or life insured;
5. Interest of the insured in the
property if he is not the absolute
owner;
6. Risk insured against; and
7. Duration of the insurance.
Persons entitled to recover on the
policy (sec. 53): The insurance proceeds
shall be applied exclusively to the proper
interest of the person in whose name or
to whose benefit it is made, unless
otherwise specified in the policy.
Kinds:
1. OPEN POLICY value of thing insured
is not agreed upon, but left to be
ascertained in case of loss. (Sec. 60)
The actual loss, as determined,
will represent the total indemnity
due the insured from the insurer
except only that the total indemnity
shall not exceed the face value of
the policy. (Development Insurance
Corp. vs. IAC, 143 SCRA 62)
2. VALUED POLICY definite valuation of
the property insured is agreed by both
parties, and written on the face of
policy. (Sec. 61)
In the absence of fraud or
mistake, the agreed valuation will be
paid in case of total loss of the
property, unless the insurance is for
a lower amount.
3. RUNNING POLICY contemplates
successive insurances and which provides
that the object of the policy may from
time to time be defined (Sec. 62)
V. TYPES OF INSURANCE CONTRACTS
1. Life insurance
a.
Individual life (Secs. 179183, 227)

33

Group life (Secs. 50, last par., 228)

c. Industrial life (Secs. 229231)
2. Non-life insurance
a. Marine (Secs. 99166)
b. Fire (Secs. 167173)
c. Casualty (Sec. 174)
3.
Contracts
of
bonding
or
suretyship(Secs. 175178)
Note:
1. Health and accident insurance are
either covered under life (Sec. 180) or
casualty insurance. (Sec. 174).
2. Marine, fire, and the property aspect
of casualty insurance are also referred to
as property insurance.
b.

VI. PARTIES TO INSURANCE CONTRACT

1. Insurer-Person who undertakes to
indemnify another.
For a person to be called an
insurance agent, it is necessary
that he should perform the
function
for
compensation.
(Aisporna vs. CA, 113 SCRA 459)
2. Insured - The party to be indemnified
upon the occurrence of the loss. He must
have capacity to contract, must possess
an insurable interest in the subject of
the insurance and must not be a public
enemy.
A public enemy- a nation with
whom the Philippines is at war
and it includes every citizen or
subject of such nation.
3. Beneficiary - A person designated to
receive proceeds of policy when risk
attaches.
Rules in the designation of the
beneficiary:
a. LIFE
i. A person who insures his own
life can designate any person
as his beneficiary, whether
or not the beneficiary has an
insurable interest in the life
of the insured subject to the
limitations under Art. 739
and Art. 2012 of the NCC.
Reason: in essence, a life
insurance policy is no
different
form
a
civil
donation insofar as the
beneficiary is concerned.
Both are founded on the
same
consideration
of

liberality. (Insular Life vs.

Ebrado, 80 SCRA 181)
ii. A person who insures the life
of another person and name
himself as the beneficiary
must have an insurable
interest in such life. (Sec.
10)
iii. As a general rule, the
designation of a beneficiary
is revocable unless the
insured expressly waived the
right to revoke in the policy.
(Sec. 11)
iv. 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 which
event, the nearest relative
of the insured shall receive
the
proceeds
of
said
insurance if not otherwise
disqualified. (Sec. 12)
b. PROPERTY
The beneficiary of property
insurance must have an insurable
interest in such property, which
must exist not only at the time
the policy takes effect but also
when the loss occurs. (Sec. 13
and 18).
Effects of Irrevocable Designation Of
Beneficiary
Insured cannot:
1. Assign the policy
2. Take the cash surrender value of
the policy
3. Allow his creditors to attach or
execute on the policy;
4. Add new beneficiary; or
5. Change
the
irrevocable
designation to revocable, even
though the change is just and
reasonable.
The insured does not even retain the
power to destroy the contract by
refusing to pay the premiums for the
beneficiary can protect his interest by
paying such premiums for he has an
interest in the fulfillment of the
obligation. (Vance, p. 665, cited in de
Leon, p. 101, 2002 ed.)

34

VII. INSURABLE INTEREST

A. In General
A person has an insurable interest in
the subject matter if he is so connected,
so situated, so circumstanced, so
related, that by the preservation of the
same he shall derive pecuniary benefit,
and by its destruction he shall suffer
pecuniary loss, damage or prejudice.
B.Life
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;
c. of any person under a legal
obligation to him to pay money
or
respecting
property
or
services, of which death or
illness might delay or prevent
performance; and
d. of any person upon whose life
any estate or interest vested in
him depends. (Sec. 10)
When it should exist: When the
insurance takes effect; not thereafter or
when the loss occurs.
Amount:
GENERAL RULE: There is no limit in
the amount the insured can insure his
life.
EXCEPTION: In a creditor-debtor
relationship where the creditor insures
the life of his debtor, the limit of
insurable interest is equal to the
amountof the debt.
Note: If at the time of the death of the
debtor the whole debt has already been
paid, the creditor can no longer recover
on the policy because the principle of
indemnity applies.
C. Property
Every interest in property whether
real or personal, or any relation thereto,
or liability in respect thereof, of such
nature that the contemplated peril
might directly damnify the insured (Sec.
13), which may consist in:
1. an existing interest;
2. any
inchoate
interest
founded on an existing
interest; or

3. an expectancy coupled with

an existing interest in that
out of which the expectancy
arises. (Sec. 14)
When it should exist: When the
insurance takes effect and when the loss
occurs, but need not exist in the
meantime.
Amount: The measure of insurable
interest in property is the extent to
which the insured might be damnified by
loss or injury thereof. (Sec. 17)
INSURABLE
INTEREST IN LIFE

INSURABLE
INTEREST IN
PROPERTY

Must exist only at the

time the policy takes
effect and need not
exist at the time of
loss
Unlimited except in
life
insurance
effected by creditor
on life of debtor.
The expectation of
benefit to be derived
from the continued
existence
of
life
need not have any
legal basis whatever.
A
reasonable
probability
is
sufficient
without
more.
The beneficiary need
not have an insurable
interest over the life
of the insured if the
insured
himself
secured the policy.
However, if the life
insurance
was
obtained
by
the
beneficiary,
the
latter must have
insurable
interest
over the life of the
insured.

Must exist at the

time the policy
takes effect and
when the loss
occurs
Limited to actual
value of interest in
property insured.
An expectation of
a benefit to be
derived from the
continued
existence of the
property
insured
must have a legal
basis.
The
beneficiary
must
have
insurable interest
over
the
thing
insured.

SPECIAL CASES
1. In case of a carrier or depositary
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
(Sec. 15)
2. In case of a mortgaged property

35

The mortgagor and mortgagee each

have an insurable interest in the
property mortgaged and this interest is
separate and distinct from the other.
a. Mortgagor As owner, has an
insurable interest therein to the
extent of its value, even though the
mortgage debt equals such value.
The reason is that the loss or
destruction of the property insured
will not extinguish the mortgage
debt.
b. Mortgagee His interest is only up
to the extent of the debt. Such
interest
continues
until
the
mortgage debt is extinguished.
The lessor cannot be validly a
beneficiary of a fire insurance policy
taken by a lessee over his merchandise,
and the provision in the lease contract
providing for such automatic assignment
is void for being contrary to law and
public policy. (Cha vs. Court of Appeals,
227 SCRA 690)
STANDARD OR
UNION
MORTGAGE
CLAUSE
Subsequent acts
of the mortgagor
cannot affect the
rights
of
the
assignee

OPEN OR LOSS
PAYABLE
MORTGAGE
CLAUSE
Acts
of
the
mortgagor affect
the mortgagee.
Reason:
Mortgagor does
not cease to be a
party
to
the
contract. (Secs.
8 and 9)

Effects of Loss Payable Clause

a. The contract is deemed to be upon
the interest of the mortgagor; hence, he
does not cease to be a party to the
contract.
b. Any act of the mortgagor prior to the
loss, which would otherwise avoid the
insurance affects the mortgagee even if
the property is in the hands of the
mortgagee.
c. Any act, which under the contract of
insurance is to be performed by the
mortgagor, may be performed by the
mortgagee with the same effect.

d. In case of loss, the mortgagee

entitled to the proceeds to the extent
his credit.
e. Upon recovery by the mortgagee
the extent of his credit, the debt
extinguished.

is
of
to
is

In case a mortgagee insures his own

interest and a loss occurs, he is entitled
to the proceeds of the insurance but he
is not allowed to retain his claim against
the mortgagor as the claim is discharged
but it passes by subrogation to the
insurer to the extent of the money paid
by such insurer. (Palileo vs. Cosio)
VIII. RISK
What may be insured against:
1. Future contingent event resulting in
loss or damage Ex. Possible future
fire
2. Past unknown event resulting in loss
or damage Ex. Fact of past sinking
of a vessel unknown to the parties
3. Contingent liability Ex. Reinsurance
IX. PREMIUM PAYMENTS
Consideration paid an insurer for
undertaking to indemnify the insured
against a specified peril.
Basis of the right of the insurer to
collect premiums: Assumption of risk.
GENERAL RULE: No policy issued by an
insurance company is valid and binding
until actual payment of premium. Any
agreement to the contrary is void. (Sec.
77)
EXCEPTIONS:
1. In case of life or industrial life
insurance, when the grace periods
applies; (Sec. 77)
2. When the insurer makes a written
acknowledgment of the receipt
premium; (Sec. 78)
3. Section 77 may not apply if the
parties have agreed to the payment
of the premium in installments and
partial payment has been made at
the time of the loss. (Makati

36

4.

5.

Tuscany Condominium Corp. v. CA,

215 SCRA 462)
Where a credit term has been
agreed
upon.
(UCPB
vs.
MasaganaTelemart, 308 SCRA 259)
Where the parties are barred by
estoppel.
(UCPB
vs.
MaaganaTelemart, 356 SCRA 307)

Section 77 merely precludes the

parties from stipulating that the policy is
valid even if the premiums are not paid.
(Makati Tuscany Condominium Corp. v.
CA, 215 SCRA 462)
Effect of Acknowledgment of Receipt
of Premium in Policy: Conclusive
evidence of its payment, so far as to
make
the
policy
binding,
notwithstanding any stipulation therein
that it shall not be binding until the
premium is actually paid. (Sec. 78)

ENTITLEMENT OF INSURED TO RETURN

OF PREMIUMS PAID
A. Whole:
1. If the thing insured wasnever
exposed to the risks insured
against; (Sec. 79)
2. If contract is voidable due to the
fraud or misrepresentation of
insurer or his agents; (Sec. 81)
3. If contract is voidable because of
the existence of facts of which
the insured was ignorant without
his fault; (Sec. 81)
4. When by any default of the
insured other than actual fraud,
the insurer never incurred
liability; (Sec. 81)
5. When rescission is granted due
to the insurers breach of
contract. (Sec. 74)
B. Pro rata:
1. When the insurance is for a
definite period and the insured

surrenders his policy before the

termination thereof;
Exceptions:
a. policy not made for a
definite period of time
b. short period rate is agreed
upon
c. life insurance policy
2. When there is over-insurance
(Sec. 82);
Instances when premiums are not
recoverable:
1. When the risk has already
attached and the risk is entire and
indivisible.
2. In life insurance.
3. When the contract is rescindable
or rendered void ab initio by the
fraud of the insured.
4. When the contract is illegal and
the parties are in pari delicto.
PREMIUM

ASSESSMENT

Levied and paid to

meet
anticipated
losses.

Collected to meet
actual losses.

Payment
is
not
enforceable against
the insured.

Payment
is
enforceable once
levied
unless
otherwise
agreed
upon.

Not a debt.

It becomes a debt
once
properly
levied
unless
otherwise agreed.

X. TRANSFER OF POLICY
1. Life Insurance
It can be transferred even without the
consent of the insurer except when
there is a stipulation requiring the
consent of the insurer before transfer.
(Sec. 181)
Reason: The policy does not represent
a personal agreement between the
insured and the insurer.
2. Property insurance
It cannot be transferred without the
consent of the insurer.

37

Reason: The insurer approved the

policy
based
on
the
personal
qualification and the insurable interest
of the insured.
3. Casualty insurance
It cannot be transferred without the
consent of the insurer. (Paterson cited in
de Leon p. 82)
Reason: The moral hazards are as
great as those of property insurance.
CHANE OF INTEREST IN THE THING
INSURED
The mere (absolute) transfer of the
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. (Sec. 58)
Reason:
Insurance
contract
is
personal.
GENERAL RULE: 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 interestsin the thing
and the interest in the insurance are
vested in the same person. (Sec. 20)

EXCEPTIONS:
1. In life, health and accident
insurance.(Sec. 20);
2. Change in interest in the thing
insured after occurrence of an
injury which results in a loss.
(Sec. 21);
3. Change in interest in one or
more of several distinct things
separately insured by one policy.
(Sec. 22);
4. Change of interest, by will or
succession, on the death of the
insured. (Sec. 23);
5. Transfer of interest by one of
several partners, joint owners,
or owners in common, who are
jointly insured, to others. (Sec.
24);
6. When a policy is 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. (Sec. 57);

7. When there is an express

prohibition against alienation in
the policy, in case of alienation,
the contract of insurance is not
merely suspended but avoided.
(Art. 1306, NCC).
XI. ASCERTAINMENT AND CONTROL OF
RISK AND LOSS
A. Four Primary Concerns of the
Parties:
1. Correct estimation of the risk;
2. Precise delimitation of the risk;
3. Control of the risk;
4. Determining whether a loss occurred
and if so, the amount of such loss.
B. Devices used for ascertaining and
controlling risk and loss:
1. Concealment A neglect to
communicate that which a party knows
and ought to communicate (Sec. 26)
Requisites:
a. A party knows a fact which he
neglects to communicate or
disclose to the other.
b. Such party concealing is duty
bound to disclose such fact to
the other.
c. Such party concealing makes no
warranty as to the fact
concealed.
d. The other party has not the
means of ascertaining the fact
concealed.
e. Material
Effects:Entitles insurer to rescind,
even if the death or loss is due to a
cause not related to the concealed
matter (Sec. 27).
Note: Good Faith is not a defense in
concealment. Sec. 27clearly provides
that,
the
concealment
whether
intentional or unintentional entitles the
injured party to rescind the contract of
insurance.
Test of Materiality: 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 advantages of the
proposed contract, or in making his
inquiries (Sec. 31).

38

Exception to Sec. 31:

a. Incontestability clause
b. Matters under Sec.110
insurance)

(marine

The waiver of medical examination in

a non-medical insurance contract
renders even more material the
information required of the applicant
concerning the previous conditions of
health and diseases suffered. (Sunlife v.
Sps. Bacani, 246 SCRA 268).
The right to information of material
facts may be waived, either by the terms
of the insurance or by neglect to make
inquiries as to such facts where they are
distinctly implied in other facts of which
information is communicated. (Sec.33)
Where matters of opinion or judgment
are called for, answers made in good
faith and without intent to deceiver will
not avoid the policy even though they
are untrue. Reason: The insurer cannot
rely on those statements. He must make
further inquiry. (Philamcare Health
Systems vs. CA, G.R. No. 125678, March
18, 2002).
2.
Representations

Factual
statements made by the insured at the
time of, or prior to, the issuance of the
policy to give information to the insurer
and induce him to enter into the
insurance contract. They are considered
an active form of concealment.
Requisites of a false representation
(misrepresentation):
a. The insured stated a fact which
is untrue.
b. Such fact was stated with
knowledge that it is untrue and
with intent to deceive or which
he states positively as true
without knowing it to be true
and which has a tendency to
mislead.
c. Such fact in either case is
material to the risk.
Characteristics:
a. It is not a part of the contract but
merely a collateral inducement to it.
b. It may be oral or written.
c. It is made at the same time of issuing
the policy or before but not after.

d. It may be altered or withdrawn before

the insurance is effected but not
afterwards.
e. It always refers to the date the
contract goes into effect.
Kinds:
a. AFFIRMATIVE affirmation of a fact
when the contract begins; and
b.
PROMISSORY
promise
to
be
performed after policy was issued.

Effect
of
Misrepresentation:theinjured
partyis
entitled to rescind from the time when
the representation becomes false.
Test of Materiality: Same as that in
concealment.
Where the insured merely signed the
application form and made the agent of
the insurer fill the same for him, it was
held that by doing so, the insured made
the agent of the insurer his own agent
and he was responsible for his acts for
that purpose. (Insular Life Assur.Co. vs.
Feliciano, 74 Phil. 469)
3. Warranties Statement or promise
by the insured set forth in the policy or
by reference incorporated therein, the
untruth or non-fulfillment of which in
any respect, and without reference to
whether insurer was in fact prejudiced
by such untruth or non-fulfillment,
renders the policy voidable by the
insurer.
Purpose:To eliminate potentially
increasing hazards which may either be
due to the acts of the insured or to the
change to the condition of the property.
Kinds:
a. EXPRESS an agreement expressed in
a policy whereby the insured stipulates
that certain facts relating to the risk are
or shall be true, or certain acts relating
to the same subject have been or shall
be done.
b. IMPLIED - it is deemed included in the
contract
although
not
expressly
mentioned.
Example:
In
marine
insurance, seaworthiness of the vessel.
Effects of breach of warranty:
a. Material
GENERAL RULE:Violation of material
warranty or of a material provision of a

39

policy will entitle the other party to

rescind the contract. (Sec. 74)
EXCEPTIONS:
a. Loss occurs before the time of
performance of the warranty.
b. The
performances
becomes
unlawful at the place of the
contract.
c. Performance
becomes
impossible. (Sec. 73)
b. Immaterial (ex. Other insurance
clause)
GENERAL RULE: It will not avoid the
policy.
EXCEPTION:When the policy expressly
provides or declares that a violation
thereof will avoid it. (Sec. 75)
WARRANTY

REPRESENTATION

Part of the contract

Mere collateral
inducement

Written on the
policy, actually or by
reference

May be written in
the policy or may
be oral.

Presumed material

Must be proved to
be material
Requires only
substantial truth
and compliance

Must be strictly
complied with

4. Conditions Events signifying in its

broadest sense either an occurrence or a
non-occurrence
that
alters
the
previously existing legal relations of the
parties to the contract. They may be
conditions precedent or conditions
subsequent.
Effect of breach:
a. Condition precedent prevents
the accrual of cause of action
b. Condition subsequent avoids
the policy or entitles the insurer
to rescind
The insurer may also protect himself
against fraudulent claims of loss and this
he attempts to do by inserting in the
policy various conditions which take the
form of conditions precedent.
For
instance, there are conditions requiring
immediate notice of loss or injury and
detailed proofs of loss within a limited
period.
5. Exceptions Provisions that may
specify excepted perils. It makes more
definite the coverage indicated by the

general description of the risk by

excluding certain specified risk that
otherwise would be included under the
general language describing the risks
assumed.
Effect: Limit the coverage of the
contract.
RESCISSION
Grounds:
A. Concealment
B. Misrepresentation
C. Breach of material warranty
D. Breach of a condition subsequent
Waiver of the right to rescind:
Acceptance of premium payments
despite the knowledge of the ground for
rescission. (Sec. 45)
Limitations on the right of the
insurer to rescind:
1. Non-life such right must be
exercised prior to the commencement of
an action on the contract;
2.Life such right must be availed of
during the first two years from the date
of issue of policy or its last
reinstatement;
prior
to
incontestability. (Sec. 48)
CANCELLATION
OF
NON-LIFE
INSURANCE POLICY
Right of the insurer to abandon the
contract on the occurrence of certain
grounds after the effectivity date of a
non-life policy.
Grounds:
1. Non-payment of premium;
2. Conviction of a crime out of acts
increasing the
hazard
insured
against;
3. Discovery of fraud or material
misrepresentation;
4. Discovery of willful or reckless acts
of omissions increasing the hazard
insured against;
5. Physical changes in property making
the property uninsurable; and
6. Determination by the Insurance
Commissioner that the continuation
of the policy would violate the
Insurance Code. (Sec. 64)
Requirements:

40

1. Prior notice of cancellation to

the insured;
2. Notice must be in writing,
mailed or delivered to the
named insured at the address
shown in the policy;
3. Notice must state which of the
grounds set forth in Sec. 64 is
relied upon and upon request of
the insured, the insurer must
furnish facts on which the
cancellation is based;
4. Grounds should have existed
after the effectivity date of the
policy.
XII. INCONTESTABILITY CLAUSE
Clause in life insurance policy that
stipulates that the policy shall be
incontestable after a stated period.
Requisites:
1. Life insurance policy
2. Payable on the death of the insured
3. It has been in force during the
lifetime of the insured for a period
of at least two years from the date
of its issue or of its last
reinstatement
Note: The period of 2 years may be
shortened but it cannot be extended by
stipulation.
Incontestability only deprives the
insurer of those defenses which arise in
connection with the formation and
operation of the policy prior to loss.
(Prof. De Leon, p. 173 citing Wyatt and
Wyatt, p. 878)

1.
2.

BARRED
DEFENSES
OF THE INSURER

DEFENSES NOT
BARRED

Policy is void ab
1.
initio
Policy
is
rescindable
by
reason
of
the
fraudulent
2.
concealment
or
misrepresentation of
the insured or his
agent
3.

That the person

taking the insurance
lacked
insurable
interest as required
by law;
That the cause of
the death of the
insured
is
an
excepted risk;
That the premiums
have not been paid

4.

5.
6.

7.

(Secs. 77, 227[b],

228[b], 230[b]);
That the conditions
of
the
policy
relating to military
or naval service
have been violated
(Secs.
227[b],
228[b]);
That the fraud is of
a
particularly
vicious type;
That the beneficiary
failed to furnish
proof of death or to
comply with any
condition imposed
by the policy after
the
loss
has
happened; or
That the action was
not brought within
the time specified.

XIII.
A.OVER-INSURANCE results when the
insured insures the same property for an
amount greater than the value of the
property with the same insurance
company.
Effect in case of loss:
1. The insurer is bound only to pay to
the extent of the real value of the
property lost;
2. The insured is entitled to recover
the
amount
of
premium
corresponding to the excess in value
of the property;
B. DOUBLE INSURANCE exists where
same person is insured by several
insurers separately in respect to same
subject and interest. (Sec. 93)
Requisites:
1. Person insured is the same;
2. Two or more insurers insuring
separately;
3. Subject matter is the same;
4. Interest insured is also the same;
5. Risk or peril insured against is
likewise the same.
Effects: Where double insurance is
allowed, but over insurance results:
(Sec. 94)

41

1.

The
insured, unless the policy otherwise
provides, may claim payment from
the insurers in such order as he may
select, up to the amount for which
the insurers are severally liable
under their respective contracts;
Where
the policy under which the insured
claims is a valued policy, the insured
must give credit as against the
valuation for any sum received by
him under any other policy without
regard to the actual value of the
subject matter insured;
Where
the policy under which the insured
claims is an unvalued policy he must
give credit, as against the full
insurable value, for any sum
received by him under any policy;
Where
the insured receives any sum in
excess of the valuation in the case of
valued policies, or of the insurable
value in the case of unvalued
policies, he must hold such sum in
trust for the insurers, according to
their right of contribution among
themselves;
Each
insurer is bound, as between himself
and the other insurers, to contribute
ratably to the loss in proportion to
the amount for which he is liable
under his contract.

1. To prevent an increase in the

moral hazard
2. To prevent over-insurance and
fraud.
To constitute a violation of the clause,
there should have been double
insurance.

Additional or Other Insurance Clause

A condition in the policy requiring the
insured to inform the insurer of any
other insurance coverage of the property
insured. It is lawful and specifically
allowed under Sec. 75 which provides
that (a) policy may declare that a
violation of a specified provision thereof
shall avoid it, otherwise the breach of an
immaterial provision does not avoid it.
A stipulation against double insurance.
Purposes:

2. Automatic reinsurance The

reinsured is bound to cede and the
reinsurer is obligated to accept a fixed
share of the risk which has to be
reinsured under the contract. (Prof. De
Leon, p. 305)
3. Facultative reinsuranceThere is no
obligation
to
cede
or
accept
participation in the risk each party

2.

3.

4.

5.

C. REINSURANCE a contract by which

the insurer procures a third person to
insure him against loss or liability by
reason of an original insurance (also
known as Reinsurance Cession). (Sec.
95)
In every reinsurance, the original
contract of insurance and the contract of
reinsurance are covered by separate
policies.
DOUBLE
INSURANCE

REINSURANCE

Involves the same

interest
Insurer remains in
such capacity

Involves
different
interest
Insurer
becomes
theinsured
in
relation to reinsurer
Original insured has
no interest in the
reinsurance
contract.
Subject of insurance
is
the
original
insurers risk
Insureds
consent
not necessary

Insured is the party

in interest in the 2
contracts
Subject
of
insurance
is
property
Insured has to give
his consent

TERMS:
1. Reinsurance treaty Merely an
agreement between two insurance
companies whereby one agrees to cede
and the other to accept reinsurance
business pursuant to provisions specified
in the treaty. (Prof. De Leon, p. 306)

42

having a free choice. But once the share

is accepted, the obligation is absolute
and the liability thereunder can be
discharged only by payment. (Equitable
Ins. & Casualty Co. vs. Rural Ins. &
Surety Co., Inc. 4 SCRA 343)
4. Retrocession A transaction whereby
the reinsurer in turn, passes to another
insurer a portion of the risk reinsured. It
is really the reinsurance of reinsurance.
(Prof. De Leon, p. 305)
XIV.
A. LOSS, IN INSURANCE
Injury or damage sustained by the
insured in consequence of the happening
of one or more of the accidents or
misfortune against which the insurer, in
consideration of the premium, has
undertaken to indemnify the insured.
(Bonifacio Bros. Inc. vs. Mora, 20 SCRA
261)

1.

2.

3.

4.

Loss for which

insurer is liable

Loss for which

insurer is not
liable

Loss
the
1.
proximate cause of
which is the peril
insured
against
2.
(Sec. 84);
Loss
the
immediate cause of
which is the peril
3.
insured
against
except
where
proximate cause is
an excepted peril;
Loss
through
negligence
of
insured
except
where there was
gross
negligence
amounting to willful
acts; and
Loss caused by
efforts to rescue the
thing from peril

Loss
by
insureds
willful
act;
Loss due to
connivance of the
insured (Sec. 87);
and
Loss where the
excepted peril is
the
proximate
cause.

5.

insured against;
If during the
course of rescue,
the thing is exposed
to a peril not
insured
against,
which permanently
deprives the insured
of its possession, in
whole or in part
(Sec. 85).

Proximate Cause An event that sets all

other events in motion without any
intervening
or
independent
case,
without which the injury or loss would
not have occurred.
REQUISITES FOR RECOVERY UPON
INSURANCE
1. The insured must have insurable
interest in the subject matter;
2. That interest is covered by the policy;
3. There must be a loss; and
4. The loss must be proximately caused
by the peril insured against.
NOTICE OF LOSS
In fire insurance

In other types of
insurance

Required

Not required

Failure
to
give
notice will defeat
the right of the
insured to recover.

Failure to give
notice will not
exonerate
the
insurer,
unless
there
is
a
stipulation in the
policy
requiring
the insured to do
so.

B. CLAIMS SETTLEMENT
The indemnification of the loss of the
insured.
TIME FOR PAYMENT OF CLAIMS

43

LIFE POLICIES
a.
Maturing
upon
the
expiration of the
term

The
proceeds
are
immediately
payable to the
insured,
unless
they are made
payable
in
installments or as
annuity, in which
case,
the
installments
or
annuities shall be
paid
as
they
become due.
b. Maturing at
the death of the
insured, occurring
prior
to
the
expiration of the
term stipulated
The proceeds are
payable to the
beneficiaries
within 60 days
after presentation
and filing of proof
of death.

NON-LIFE
POLICIES
The proceeds shall
be paid within 30
days
after
the
receipt
by
the
insurer of proof of
loss,
and
ascertainment
of
the loss or damage
by agreement of the
parties
or
by
arbitration but not
later than 90 days
from such receipt of
proof
of
loss
whether
or
not
ascertainment
is
had or made.

In case of an unreasonable delay in

the payment of the insureds claim by
the insurer, the insured can recover: 1)
attorneys fees; 2) expenses incurred by
reason of the unreasonable withholding;
3) interest at double the legal interest
rate fixed by the Monetary Board; and 4)
the amount of the claim. (Zenith
Insurance Corp. vs. CA, 185 SCRA 398)
XV. PRESCRIPTIVE PERIOD (Secs. 63 &
384)
Rules:
1. In the absence of an express
stipulation in the policy, it being based
on a written contract, the action
prescribes in 10 years.
2. However the parties may validly agree
on a shorter period provided it is not less
than one year from the time the cause of
action accrues.
3. The cause of action accrues from the
rejection of the claim of the insured and
not from the time of loss.

It shall commence from the denial of

the claim, not from the resolution of the
motion for reconsideration, otherwise it
can be used by the insured as a scheme
or device to waste time until the
evidence which may be used against him
is destroyed. (Sun Insurance Office, Ltd.
v. CA, 195 SCRA)
4. In CMVLI, the written notice of claim
must be filed within 6 months from the
date of the accident otherwise the claim
is deemed waived. The suit for damages
either with the proper court or with the
Insurance Commissioner should be filed
within 1 year from the date of the denial
of the claim by the insurer, otherwise
claimants right of action shall prescribe.
(Sec. 384)
PARTICULAR
CONTRACTS

KINDS

OF

INSURANCE

XVI. MARINE INSURANCE

Insurance against risks connected with
navigation, to which a ship, cargo,
freightage, profits or other insurable
interest in movable property, may be
exposed during a certain voyage or a
fixed period of time. (Sec. 99)
Coverage:
A.
1. Vessels, goods, freight, cargo,
merchandise,
profits,
money,
valuable papers, bottomry and
respondentia, and interest in respect
to all risks or perils of navigation;
2. Persons or property in connection
with marine insurance;
3. Precious stones, jewels, jewelry and
precious metals whether in the
course
of
transportation
or
otherwise; and
4. Bridges, tunnels, piers, docks and
other aids to navigation and
transportation. (Sec. 99)
Cargo can be the subject of
marine insurance, and once it is
entered
into,
the
implied
warranty
of
seaworthiness
immediately
attaches
to

44

whoever is insuring the cargo,

whether he be the shipowner or
not. (Roque v. IAC, 139 SCRA
596)
B. Marine Protection and Indemnity
Insurance
Classes of inland marine insurance:
(Prof. De Leon, p. 325)
1. Property in transit provides
protection
to
property
frequently exposed to loss while
it is transportation form one
location to another.
2. Bailee liability - insurance for
those who have temporary
custody of the goods.
3. Fixed transportation property
they are so insured because they
are held to be an essential part
of the transportation system
such as bridges, tunnels, etc.
4. Floater provides insurance to
follow the insured property
wherever it may be located,
subject always to the territorial
limits of the contract.
Insurable interest:
A.
1.Shipowner
a. Over the vessel to the
extent of its value, except
that if chartered, the
insurance is only up to the
amount not recoverable
from the charterer. (Sec.
100).
b. He also has an insurable
interest
on
expected
freightage. (Sec. 103).
c. No insurable interest if he
will be compensated by
charterer for the value of
the vessel, in case of loss.
2. Cargo owner
Over the cargo and expected
profits (Sec. 105).
3. Charterer

Over the amount he is liable

to the shipowner, if the ship is
lost or damaged during the
voyage (Sec. 106).
B.
In loans on bottomry and respondentia
Repayment of the loan is subject to
the condition that the vessel or goods,
respectively, given as a security, shall
arrive safely at the port of destination.
1. Owner/Debtor
Difference between the value
of vessel or goods and the
amount of loan. (Sec. 101)
2. Creditor/lender
Amount of the loan
Note: If a vessel is hypothecated by
bottomry, only the excess is insurable,
since a loan on bottomry partakes of the
nature of an insurance coverage to the
extent of the loan accommodation. The
same rule would apply to the
hypothecation
of
the
cargo
by
respondentia.(Pandect of Commercial
Law and Jurisprudence, Justice Jose
Vitug, 1997 ed.)
PERILS OF THE
PERILS OF THE
SEA
SHIP

1.
2.

3.

Includes only those

casualties due to
the:
unusual
1.
violence; or
extraordinary
2.
action of wind and
wave; or
Other
extraordinary causes
connected
with
navigation.

A loss which in the

ordinary course of
events,
results
from the:
natural
and
inevitable action of
the sea
ordinary wear and
tear of the ship or
3.
Negligent
failure of the ships
owner to provide
the vessel with
proper equipment
to
convey
the
cargo
under
ordinary
conditions.

Note: It is only perils of the sea which

may be insured against unless perils of
the ship is covered by an all-risk policy.

45

SPECIAL MARINE INSURANCE

CONTRACTS AND CLAUSES
A. All Risks Policy insurance against all
causes of conceivable loss or damage,
except: 1) as otherwise excluded in the
policy; or 2) due to fraud or intentional
misconduct on the part of the insured.
The insured has the initial burden of
proving that the cargo was in good
condition when the policy attached and
that the cargo was damaged when
unloaded from the vessel; thereafter,
the burden then shifts to the insurer to
show the exception to the coverage.
(Filipinas Merchants Insurance vs. Court
of Appeals, 179 SCRA 638)
B. Barratry Clause
A clause which provides that there
can be no recovery on the policy in case
of anywillful misconduct on the part of
the master or crew in pursuance of some
unlawful or fraudulent purpose without
consent of owners, and to the prejudice
of the owners interest. (Roque vs. IAC,
139 SCRA 596)
C. Inchamaree Clause
A clause which makes the insurer
liable for loss or damage to the hull or
machinery arising from the:
1. Negligence
of
the
captain,
engineers, etc.
2. Explosions, breakage of shafts; and
3. Latent defect of machinery or hull.
(Bar Review Materials in Commercial
Law, Jorge Miravite, 2002 ed.)
D. Sue and Labor Clause
A clause under which the insurer may
become liable to pay the insured, in
addition to the loss actually suffered,
such expenses as he may have incurred
in his efforts to protect the property
against a peril for which the insurer
would have been liable. (Sec. 163)

MATTERS ALTHOUGH CONCEALED, WILL

NOT VITIATE THE CONTRACT EXCEPT
WHEN THEY CAUSED THE LOSS (Sec.
110)
1. National character of the insured;
2. Liability of the thing insured to
capture or detention;
3. Liability to seizure from breach of
foreign laws;
4. Want of necessary documents; and
5. Use of false or simulated papers.
Note: This should be related to the
general
rule
regarding
material
concealment.
DISTINCTIONS
CONCEALMENT(Commercial
Reviewer, A.F. Agbayani, 1988 ed.)

ON
Law

MARINE INSURANCE

OTHER
PROPERTY
INSURANCE

The information of
the
belief
or
expectation of 3rd
persons is material
and
must
be
communicated

The information or
belief of a 3rd party
is not material and
need
not
be
communicated
unless it proceeds
form an agent of
the insured whose
duty it is to give
information
Concealment
of
any material fact
will vitiate the
entire
contract,
whether or not the
loss results for the
risk concealed.

The concealment of
any fact in relation to
any of the matters
stated in Sec. 110
does not vitiate the
entire contract but
merely exonerates the
insurer from a risk
resulting from the
fact concealed

IMPLIED WARRANTIES
1. Seaworthiness of the ship at the
inception of the insurance (Sec.
113);
2. Against improper deviation (Sec.
123, 124, 125);
3. Against illegal venture;
4. Warranty of neutrality: the ship will
carry the requisite documents of
nationality or neutrality of the ship
or cargo where such nationality or

46

neutrality is expressly warranted;

(Sec. 120)
5. Presence of insurable interest.

stages, the ship must be seaworthy

at the commencement of each
portion

While the payment by the insurer for

the insured value of the lost cargo
operates as a waiver of the insurers
right to enforce the term of the implied
warranty against the assured under the
marine insurance policy, the same
cannot be validly interpreted as an
automatic admission of the vessels
seaworthiness by the insurer as to
foreclose recourse against the common
carrier for any liability under the
contractual obligation as such common
carrier. (Delsan Transportation Lines vs.
CA, 364 SCRA 24)

Applicability of implied warranty of

seaworthiness to cargo owners:
It
becomes the obligation of a cargo owner
to look for a reliable common carrier,
which keeps its vessels in seaworthy
conditions. The shipper may have no
control over the vessel but he has
control in the choice of the common
carrier that will transport his goods
(Roque v. IAC, 139 SCRA 596).

Seaworthiness
A relative term depending upon the
nature of the ship, voyage, service and
goods, denoting in general a ships
fitness to perform the service and to
encounter the ordinary perils of the
voyage, contemplated by the parties to
the policy (Sec. 114).
GENERAL RULE: The warranty of
seaworthiness is complied with if the
ship be seaworthy at the time of the
commencement of the risk. Prior or
subsequent unseaworthiness is not a
breach of the warranty nor is it material
that the vessel arrives in safety at the
end of her voyage.
EXCEPTIONS:
1. In the case of a time policy, the ship
must
be
seaworthy
at
the
commencement of every voyage she
may undertake
2. In the case of cargo policy, each
vessel upon which the cargo is
shipped or transshipped, must be
seaworthy at the commencement of
each particular voyage
3. In the case of a voyage policy
contemplating a voyage in different

Deviation
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.123)
Instances:
1. Departure of vessel from the
course of the sailing fixed by
mercantile usage
2. Departure of vessel from the
most
natural,
direct
and
advantageous route if not fixed
by mercantile usage
3. Unreasonable delay in pursuing
voyage
4. Commencement of an entirely
different voyage (Secs. 121-123)
Kinds:
1. Proper a. When caused by circumstances outside
the control of the ship captain or ship
owner;
b. When necessary to comply with a
warranty or to avoid a peril;
c. When made in good faith to avoid a
peril;
d. When made in good faith to save
human life or to relieve another vessel
in distress (Sec. 124)
Effect: In case of loss, the
insurer is still liable.

47

2. Improper - Every deviation not

specified in Sec. 124 (Sec. 125).
Effect: In case of loss or
damage, the insurer is not liable.
(Sec. 126)

LOSS
1. Total:
a. Actual i. Total destruction;
ii. Irretrievableloss by sinking;
iii. Damage rendering the thing
valueless; or
iv. Total deprivation of owner of
possession of thing insured.
(Sec. 130)
b. Constructive i. Actual loss of more than
of the value of the object;
ii. Damage reducing value by
more than of the value of
the vessel and of cargo; and
iii. Expense of transshipment
exceed of value of cargo.
(Sec. 131, in relation to Sec.
139)
In case of constructive
total loss, insured may:
1. Abandon goods or
vessel to the insurer and
claim for whole insured
value (Sec. 139), or
2. Without abandoning
vessel, claim for partial
actual loss. (Sec. 155)
2. Partial: That which is not total (Sec.
128).
AVERAGE
Any extraordinary or accidental
expense incurred during the voyage for
the preservation of the vessel, cargo, or
both, and all damages to the vessel and
cargo from the time it is loaded and the
voyage commenced until it ends and the
cargo unloaded.

GENERAL

PARTICULAR

Has inured to the

common benefit and
profit of all persons
interested in the
vessel and cargo
To be borne equally
by all of the interests
concerned in the
venture.

Has not inured to the

common benefit and
profit of all persons
interested in the
vessel and her cargo.
To be borne alone by
the owner of the
cargo or the vessel,
as the case may be.

Requisites for the

right
to
claim
contribution:
1. Common
danger to the
vessel
or
cargo;
2. Part of the
vessel or cargo
was sacrificed
deliberately;
3. Sacrifice must
be
for
the
common safety
or
for
the
benefit of all;
4. Sacrifice must
be made by
the master or
upon
his
authority;
5. It must be not
be caused by
any fault of
the
party
asking
the
contribution;
6. It must be
successful, i.e.
resulted in the
saving of the
vessel
or
cargo; and
Necessary.
RIGHT OF INSURED IN CASE OF
GENERAL AVERAGE
GENERAL RULE: The insured may
either hold the insurer directly liable for
the whole of the insured value of the
property sacrificed for the general
benefit, subrogating him to his own right
of contribution or demand contribution
from the other interested parties as soon
as the vessel arrives at her destination
EXCEPTIONS:

48

1. After the separation of interests

liable to contribution
2. When the insured has neglected or
waived his right to contribution
FPA Clause (Free From Particular
Average)
A clause agreed upon in a policy of
marine insurance in which it is stated
that the insurer shall not be liable for a
particular average, such insurer shall be
free therefrom, but he shall continue to
be liable for his proportion of all general
average losses assessed upon the thing
insured. (Sec. 136)
ABANDONMENT
The act of the insured by which, after
a constructive total loss, he declared the
relinquishment to the insurer of his
interest in the thing insured. (Sec. 138)
Requisites for validity:
1. There
must
be
an
actual
relinquishment by the person insured
of his interest in the thing insured
(Sec. 138);
2. There must be a constructive total
loss (Sec. 139);
3. The abandonment be neither partial
nor conditional (Sec. 140);
4. It must be made within a reasonable
time after receipt of reliable
information of the loss (Sec. 141);
5. It must be factual (Sec. 142);
6. It must be made by giving notice
thereof to the insurer which may be
done orally or in writing (Sec. 143);
and
7. The notice of abandonment must be
explicit and must specify the
particular cause of the abandonment
(Sec. 144).
Effects:
1. It is equivalent to a transfer by the
insured of his interest to the insurer
with all the chances of recovery and
indemnity (Transfer of Interest)
(Sec.146)
2. Acts done in good faith by those who
were agents of the insured in respect
to the thing insured, subsequent to
the loss, are at the risk of the
insurer and for his benefit. (Transfer
Of Agency)(Sec.148)

If an insurer refuses to accept a valid

abandonment, he is liable upon an
actual total loss, deducting form the
amount any proceeds of the thing
insured which may have come to the
hands of the insured. (Sec.154)
CO-INSURANCE
A marine insurer is liable upon a
partial loss, only for such proportion of
the amount insured by him as the loss
bears to the value of the whole interest
of the insured in the property insured.
(Sec. 157)
When the property is insured for less
than its value, the insured is considered
a co-insurer of the difference between
the amount of insurance and the value of
the property.
Requisites:
1. The loss is partial;
2. The amount of insurance is less than
the value of the property insured.
Rules:
1. Co-insurance applies only to marine
insurance
2. Logically, there cannot be coinsurance in life insurance.
3. Co-insurance applies in fire insurance
when expressly provided for by the
parties.
CO-INSURANCE

REINSURANCE

A percentage in the
value of the insured
property which the
insured himself
assumes to act as
insurer to the extent
of the deficiency in
the insurance of the
insured property. In
case of loss or
damage, the insurer
will be liable only for
such proportion of
the loss or damage as
the amount of the
insurance bears to
the designated
percentage of the
full value of the
property insured.
(Bar Review
Materials in
Commercial Law,

Situation where the

insurer procures a 3rd
party called the
reinsurer to insure
him against liability
by reason of an
original insurance.
Basically, reinsurance
is an insurance
against liability
which the original
insurer may incur in
favor of the original
insured.

49

Jorge Miravite, 2002

ed.)

XVII. FIRE INSURANCE

Acontract by which the insurer for a
consideration agrees to indemnify the
insured against loss of, or damage to,
property by hostile fire, including loss by
lightning,
windstorm,
tornado
or
earthquake and other allied risks, when
such risks are covered by extension to
fire insurance policies or under separate
policies. (Sec. 167)

Prerequisites to recovery:
1. Notice of loss must be immediately
given, unless delay is waived expressly
or impliedly by the insurer
2. Proof of loss according to best
evidence obtainable. Delay may also be
waived expressly or impliedly by the
insurer
HOSTILE FIRE

FRIENDLY FIRE

One that escapes

from
the
place
where
it
was
intended to burn
and ought to be.
Insurer is liable

One that burns in a

place where it was
intended to burn
and ought to be
Insurer is not liable

Measure of Indemnity
1. Open policy: only the expense
necessary to replace the thing lost or
injured in the condition it was at the
time of the injury
2. Valued policy: the parties are bound
by the valuation, in the absence of fraud
or mistake
Note: It is very crucial to determine
whether a marine vessel is covered by a
marine insurance or fire insurance. The
determination is important for 2 reasons:
1. Rules on constructive total loss
and abandonment applies only
to marine insurance;
2. Rule on co-insurance applies
primarily to marine insurance;

3. Rule on co-insurance applies to

fire insurance only if expressly
agreed upon. (Commercial Law
Reviewer, AguedoAgbayani, 1988
ed.)
ALTERATION AS A SPECIAL GROUND FOR
RESCISSION BY INSURER
Requisites:
1. The use or condition of the thing
is
specifically
limited
or
stipulated in the policy;
2. Such use or condition as limited
by the policy is altered;
3. The alteration is made without
the consent of the insurer;
4. The alteration is made by means
within the control of the
insured;
5. The alteration increases the risk;
(Sec. 168)and
6. There must bea violation of a
policy provision. (Sec. 170)
Fall-of-building clause
A clause in a fire insurance policy that
if the building or any part thereof falls,
except as a result of fire, all insurance
by the policy shall immediately cease.
Option to rebuild clause
A clause giving the insurer the option
to reinstate or replace the property
damaged or destroyed or any part
thereof, instead of paying the amount of
the loss or the damage.
The insurer, after electing to rebuild,
cannot be compelled to perform this
undertaking by specific performance
because this is an obligation to do, not
to give. Remedy: Art. 1167, NCC.
XVIII.
CASUALTY
OR
ACCIDENT
INSURANCE
Insurance covering loss or liability
arising from accident or mishap,
excluding those falling under other types

50

of insurance such as fire or marine. (Sec.

174)
Classifications:
1. Insurance against specified perils
which may affect the person and/or
property of the insured. (accident or
health insurance)

Examples:
personal
accident,
robbery/theft insurance
2. Insurance against specified perils
which may give rise to liability on the
part of the insured for claims for
injuries to or damage to property of
others. (third party liability insurance)
Insurable interest is based on the
interest of the insured in the safety of
persons, and their property, who may
maintain an action against him in case of
their injury or destruction, respectively.
Examples: workmens compensation,
motor vehicle liability
In a third party liability (TPL)
insurance contract, the insurer assumes
the obligation by paying the injured
third party to whom the insured is liable.
Prior payment by the insured to the third
person is not necessary in order that the
obligation may arise. The moment the
insured becomes liable to third persons,
the insured acquires an interest in the
insurance contract which may be
garnished like any other credit.
(PerlaComapnia de Seguro, Inc vs.
Ramolete, 205 SCRA 487)
Aside from compulsory motor vehicle
liability insurance, the Insurance Code
contains no other provisions applicable
to casualty insurance. Therefore, such
casualty insurance are governed by the
general provisions applicable to all types
of insurance, and outside of such
statutory provisions, the rights and
obligations of the parties must be
determined by their contract, taking into
consideration its purpose and always in
accordance with the general principles
of insurance law.
In burglary, robbery and theft
insurance, the opportunity to defraud
the insurer the moral hazard is so
great that insurer have found it
necessary to fill up the policies with
many restrictions designed to reduce the

hazard. Persons frequently excluded are

those in the insureds service and
employment. The purpose of the
exception is to guard against liability
should theft be committed by one having
unrestricted access to the property.
(Fortune Insurance vs. CA, 244 SCRA 208)
Right of a third party injured to sue the
insurer
1. Indemnity against liability A third
party injured can directly sue the
insurer.
2. Indemnity for actual loss or
reimbursement after actual payment by
the insured A third party has no cause
of action against the insurer (Sec. 53,
Bonifacio Bros. v. Mora, 20 SCRA 261).
The insurer is not solidarily liable with
the insured. The insurers liability is
based on contract; that of the insured is
based on torts. Furthermore, the
insurers liability is limited by the
amount of the insurance coverage (Pan
Malayan Insurance Corporation v. CA, 184
SCRA 54).

INTENTIONAL vs. ACCIDENTAL AS

USED IN INSURANCE POLICIES
1. Intentional Implies the exercise of
the reasoning faculties, consciousness
and volition. Where a provision of the
policy excludes intentional injury, it is
the intention of the person inflicting the
injury that is controlling. If the injuries
suffered by the insured clearly resulted
from the intentional act of the third
person, the insurer is relieve from
liability as stipulated. (Biagtan v. the
Insular Life Assurance Co. Ltd., 44 SCRA
58, 1972)
2. Accidental That which happens by
chance or fortuitously, without intention
or design, which is unexpected, unusual
and unforeseen.
NO ACTION CLAUSE
A requirement in a policy of liability
insurance which provides that suit and
final judgment be first obtained against
the insured; that only thereafter can the

51

person injured recover on the policy.

(Guingon vs. Del Monte, 20 SCRA 1043)
XIX. COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE (CMVLI)
A species of compulsory insurance that
provides for protection coverage that
will answer for legal liability for losses
and damages for bodily injuries or
property damage that may be sustained
by another arising from the use and
operation of motor vehicle by its owner.
Purpose:To give immediate financial
assistance to victims of motor vehicle
accidents and/or their dependents,
especially if they are poor regardless of
the financial capability of motor vehicle
owners or operators responsible for the
accident sustained (Shafer v. Judge, RTC,
167 SCRA 386).
Claimants/victims may be
a
passenger or a 3rd party
It applies to all vehicles whether
public and private vehicles.
Note: It is the only compulsory insurance
coverage under the Insurance Code.

Method of coverage
1. Insurance policy
2. Surety bond
3. Cash deposit
Passenger Any fare-paying person
being transported and conveyed in and
by a motor vehicle for transportation of
passengers for compensation, including
persons expressly authorized by law or
by the vehicles operator or his agents to
ride without fare. (Sec. 373[b])
Third Party Any person other than the
passenger, excluding a member of the
household or a member of the family
within
the
second
degree
of
consanguinity or affinity, of a motor
vehicle owner or land transportation
operator, or his employee in respect of
death or bodily injury arising out of and
in the course of employment. (Sec.
373[c])

No-Fault Clause
A clause that allows the victim
(injured person or heirs of the deceased)
to an option to file a claim for death or
injury without the necessity of proving
fault or negligence of any kind.
Purpose: To guarantee compensation
or indemnity to injured persons in motor
vehicle accidents.
Rules:
1. Total indemnity - maximum of P5,000
2. Proofs of loss a. Police report of accident;
b. Death certificate and evidence
sufficient to establish proper payee;
c. Medical report and evidence of
medical or hospital disbursement.
3. Claim may be made against one motor
vehicle only
4. Proper insurer from which to claim a. In case of an occupant: Insurer
of the vehicle in which the occupant is
riding, mounting or dismounting from;
b. In any other case: Insurer of the
directly offending vehicle. (Sec. 378)
The claimant is not free to choose
from which insurer he will claim the no
fault indemnity as the law makes it
mandatory that the claim shall lie
against the insurer of the vehicle in
which the occupant is riding, mounting
or dismounting from. That said vehicle
might not be the one that caused the
accident is of no moment since the law
itself provides that the party paying may
recover against the owner of the vehicle
responsible
for
the
accident.
(PerlaCompania de Seguros, Inc. v.
Ancheta, 169 SCRA 144)
This no-fault claim does not apply to
property damage. If the total indemnity
claim exceeds P5,000 and there is
controversy in respect thereto, the
finding of fault may be availed of by the
insurer only as to the excess. The first
P5,000 shall be paid without regard to
fault. (Prof. De Leon, p. 716)

52

The essence of the no-fault indemnity

insurance is to provide victims of
vehicular accidents or their heirs
immediate compensation although in
limited
amount,
pending
final
determination of who is responsible for
the accident and liable for the victims
injuries or death. (Ibid.)
SPECIAL CLAUSES
A. Authorized Driver Clause
A clause which aims to indemnify the
insured owner against loss or damage to
the car but limits the use of the insured
vehicle to the insured himself or any
person who drives on his order or with
his permission (Villacorta v. Insurance
Commissioner)
The requirement that the person
driving the insured vehicle is permitted
in accordance with the licensing laws or
other laws or regulations to drive the
motor vehicle (licensed driver) is
applicable only if the person driving is
other than the insured.
B. Theft Clause
A clause which includes theft as
among the risks insured against.
Where the car is unlawfully and
wrongfully taken without the owners
consent or knowledge, such taking
constitutes theft, and thus, it is the
theft clause and not the authorized
driver clause that should apply (Palermo
v. Pyramids Ins., 161 SCRA 677).
C. Cooperation Clause
A clause which provides in essence
that the insured shall give all such
information and assistance as the insurer
may
require,
usually
requiring
attendance at trials or hearings.
XX. SURETYSHIP
An agreement whereby a surety
guarantees the performance by the
principal or obligor of an obligation or
undertaking in favor of an obligee. (Sec.
175)
It
is
essentially
a
credit
accommodation.

It is considered an insurance contract

if it is executed by the surety as a
vocation, and not incidentally. (Sec. 20
When the contract is primarily drawn
up by 1 party, the benefit of doubt goes
to the other party (insured/obligee) in
case of an ambiguity following the rule
in contracts of adhesion. Suretyship,
especially in fidelity bonding, is thus
treated like non-life insurance in some
respects.
Nature of liability of surety
1. Solidary;
2. Limited to the amount of the bond;
3. It is determined strictly by the terms
of the contract of suretyship in
relation to the principal contract
between the obligor and the obligee.
(Sec. 176)
SURETYSHIP

PROPERTY
INSURANCE

Accessory contract
3 parties: surety,
obligor and oblige
Credit
accommodation
Surety can recover
from principal

Principal contract
2 parties: insurer
and insured
Contract
of
indemnity
Insurer has no such
right; only right of
subrogation
May be cancelled
unilaterally either by
insured or insurer on
grounds provided by
law
No need of
acceptance by any
third party

Bond can be
cancelled only with
consent of obligee,
Commissioner or
court
Requires
acceptance of
obligee to be valid
Risk-shifting device;
premium paid being
in the nature of a
service fee

Risk-distributing
device; premium paid
as a ratable
contribution to a
common fund

XXI. LIFE INSURANCE

Insurance on human lives and
insurance appertaining thereto or
connected therewith which includes
every contract or pledge for the
payment of endowments or annuities.
(Sec. 179)

53

Kinds: (Bar Review Materials in

Commercial Law, Jorge Miravite, 2002
ed.)
1. Ordinary Life, General Life or Old
Line Policy - Insured pays a fixed
premium every year until he dies.
Surrender value after 3 years.
2. Group Life Essentially a single
insurance contract that provides
coverage for many individuals.
Examples: In favor of employees,
mortgage redemption insurance.
3. Limited Payment Policy insured
pays premium for a limited period.
If he dies within the period, his
beneficiary is paid; if he outlives the
period, he does not get anything.
4. Endowment Policy pays premium
for specified period. If he outlives
the period, the face value of the
policy is paid to him; if not, his
beneficiaries receive the benefit.
5. Term Insurance insurer pays once
only, and he is insured for a specified
period. If he dies within the period,
his beneficiaries benefits. If he
outlives the period, no person
benefits from the insurance.
6. Industrial Life - life insurance
entitling the insured to pay
premiums
weekly,
or
where
premiums are payable monthly or
oftener.
Mortgage Redemption Insurance
A life insurance taken pursuant to a
group mortgage redemption scheme by
the lender of money on the life of a
mortgagor who, to secure the loan,
mortgages the house constructed from
the use of the proceeds of the loan, to
the extent of the mortgage indebtedness
such that if the mortgagor dies, the
proceeds of his life insurance will be
used to pay for his indebtedness to the
lender assured and the deceaseds heirs
will thereby be relieved from paying the
unpaid balance of the loan. (Great

Pacific Life Assurance Corp. vs. Court of

Appeals, 316 SCRA 677)
LIABILITY OF INSURER IN CERTAIN
CAUSES OF DEATH OF INSURED
1. Suicide
Insurer is liable in the following cases:
1. If committed after two years
from the date of the policys
issue or its last reinstatement;
2. If committed in a state of
insanity regardless of the date of
the commission unless suicide is
an excepted peril. (Sec. 180-A)
3. If committed after a shorter
period provided in the policy
Any stipulation extending the 2-year
period is null and void.
2. At the hands of the law (E.g. by legal
execution)
It is one of the risks assumed by the
insurer under a life insurance policy in
the absence of a valid policy exception.
(Vance,p.572 cited in de Leon, p. 107)
Note: Justice Vitug believes that death
by suicide (if the insured is sane) or at
the hands of the law obviates against
recovery as being more in consonance
with public policy and as being implicit
under Section 87, ICP. (Pandect of
Commercial Law and Jurisprudence,
1997 ed. P. 191)
3. Killing by the beneficiary
GENERAL RULE: 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 which event, the nearest
relative of the insured shall receive the
proceeds of said insurance if not
otherwise disqualified. (Sec. 12)
EXCEPTIONS:
1. Accidental killing
2. Self-defense
3. Insanity of the beneficiary at the
time he killed the insured
If the premiums paid came from
conjugal funds, the proceeds are

54

considered conjugal. If the beneficiary is

other than the insureds estate, the
source of premiums would not be
relevant. (Del Val v. Del Val, 29 Phil 534)
The measure of indemnity in life or
health insurance policy is the sum fixed
in the policy except when a creditor
insures the life of his debtor. (Sec. 183)
IS THE CONSENT OF THE BENEFICIARY
NECESSARY TO THE ASSIGNMENT OF A
LIFE INSURANCE POLICY?
It depends. If the designation of the
beneficiary
is
irrevocable,
the
beneficiarys
consent
is
essential
because of his vested right. If the
designation is revocable, the policy may
be assigned without such consent
because the beneficiary only has a mere
expectancy to the proceeds. (The
Insurance Code of the Philippines
Annotated, Hector de Leon, 2002 ed.)
Cash Surrender Value
As applied to a life insurance policy, it
is the amount the insured in case of
default, after the payment of at least 3
full annual premiums, is entitled to
receive if he surrenders the policy and
releases his claims upon it.
LIFE INSURANCE

FIRE INSURANCE

Contract
of
investment not of
indemnity
Valued policy
May be transferred
or assigned to any
person even if he
has no insurable
interest
Consent of insurer is
not essential to
validity of
assignment
Contingency that is
contemplated is a
certain event, the
only uncertainty
being the time when
it will take place
A long-term
contract and cannot
be cancelled by the

Contract of indemnity
Open or valued policy
The
insurable
interest
of
the
transferee
or
assignee is essential
Consent of insurer
must be secured in
the absence of waiver
Contingency insured
against may or may
not occur

May be cancelled by
either party and is
usually for a term of

insurer
Beneficiary is under
no obligation to
prove actual
financial loss

one year
Insured is required to
submit proof of his
actual pecuniary loss
as a condition
precedent to
collecting the
insurance.

XXII. VARIABLE CONTRACT

Any policy or contract on either a
group or 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 investment.
XXIII. INSURANCE COMMISSIONER
Main agency charged with the
enforcement of the Insurance Code and
other related laws.
Functions:
1.ADJUDICATORY/QUASI-JUDICIAL
a. Exclusive original jurisdiction
Any dispute in the enforcement of any
policy issued pursuant to Chapter VI
(CMVLI). (Sec. 385, par. 2)
b. Concurrent original jurisdiction
(with the RTC) Where the maximum
amount involved in any single claim is
P100,000 (Sec. 416), except in case of
maritime insurance which is within the
exclusive jurisdiction of the RTC. (BP
129; admiralty & maritime jurisdiction)
Where the amount exceeds
P100,000,
the
RTC
has
jurisdiction.

55

416 of the same Code which grants the

Commissioner
adjudicatory
powers
(Philippine American Life Insurance Co.
v. Ansaldo, 234 SCRA 509).

The Insurance Commissioner has no

jurisdiction to decide the legality of a
contract of agency entered into between
an insurance company and its agent. The
same is not covered by the term doing
or transacting insurance business under
Sec 2, ICP, neither is it covered by Sec.

2.ADMINISTRATIVE/REGULATORY
a. Enforcement of insurance laws
b. Issuance,
suspension
or
revocation of certificate of
authority
c. Power to examine books and
records, etc.
d. Rule-making authority
e. Punitive