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 (uberrimae
fidei) 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.
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 final printed 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 subrogee in 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) In life insurance
4. 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 risk-distributing
device. (The Insurance Code of the Philippines Annotated,
Hector de Leon, 2002 ed.)

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)

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.
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).

V. TYPES OF INSURANCE CONTRACTS

1. Life insurance
a. Individual life (Secs. 179183, 227)
b. 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.

Riders
Printed stipulations usually attached to the policy because
they constitute additional stipulations between the parties.
(Ang Giok 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.)

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.

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)

 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.)

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 amount of 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)

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

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.

Must exist at the time the

policy takes effect and when
the loss occurs
Limited to actual value of
interest in property insured.

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.

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

 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.

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
Tuscany Condominium Corp. v. CA, 215 SCRA 462)
4. Where a credit term has been agreed upon. (UCPB vs.
Masagana Telemart, 308 SCRA 259)
5. Where the parties are barred by estoppel. (UCPB vs.
Maagana Telemart, 356 SCRA 307)

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

OPEN OR LOSS PAYABLE

MORTGAGE CLAUSE

Subsequent acts of the

mortgagor cannot affect
the rights of the assignee

Acts of the mortgagor

affect the mortgagee.
Reason: Mortgagor does
not cease to be a party to
the contract. (Secs. 8 and
9)

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)

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

ENTITLEMENT OF INSURED TO RETURN OF PREMIUMS PAID

A. Whole:
1. If the thing insured was never 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);

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

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.

IX. PREMIUM PAYMENTS

Consideration paid an insurer for undertaking to indemnify
the insured against a specified peril.

4. When the contract is illegal and the parties are in pari

delicto.
PREMIUM

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).

ASSESSMENT

Levied and paid to meet

anticipated losses.

Collected to meet
losses.

actual

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.

XI. ASCERTAINMENT AND CONTROL OF RISK AND LOSS

A.
1.
2.
3.
4.

Four Primary Concerns of the Parties:

Correct estimation of the risk;
Precise delimitation of the risk;
Control of the risk;
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. 27
clearly provides that, the concealment whether intentional or
unintentional entitles the injured party to rescind the contract
of insurance.

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.
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 interests in the thing and the interest in the
insurance are vested in the same person. (Sec. 20)

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).
Exception to Sec. 31:
a. Incontestability clause
b. Matters under Sec.110 (marine insurance)
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).

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

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: the injured party is entitled to
rescind from the time when the representation becomes false.

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.

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)

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.

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 policy will entitle the other party to
rescind the contract. (Sec. 74)
EXCEPTIONS:
a. Loss occurs before the time of performance of the
warranty.

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:
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.

happened; or
7. 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.

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)
BARRED DEFENSES
OF THE INSURER
1.
2.

Policy is void ab initio

Policy is rescindable by
reason of the fraudulent
concealment
or
misrepresentation of the
insured or his agent

Effects: Where double insurance is allowed, but over

insurance results: (Sec. 94)
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;
2.
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;
3.
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;
4.
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;
5.
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.

DEFENSES NOT BARRED

1. That the person taking
the insurance lacked
insurable interest as
required by law;
2. That the cause of the
death of the insured is
an excepted risk;
3. That the premiums have
not been paid (Secs. 77,
227[b], 228[b], 230[b]);
4. That the conditions of
the policy relating to
military or naval service
have been
violated
(Secs. 227[b], 228[b]);
5. That the fraud is of a
particularly
vicious
type;
6. That the beneficiary
failed to furnish proof
of death or to comply
with
any
condition
imposed by the policy
after the loss has

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:
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.
4.

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
Insured is the party in
interest in the 2 contracts

Involves different interest

Insurer becomes the insured
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

Subject of insurance is
property
Insured has to give his
consent

5.

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.

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)

NOTICE OF LOSS
In fire insurance

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 reinsurance There is no obligation to cede or
accept participation in the risk each party 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)

1.
2.

3.

Loss the proximate cause

of which is the peril
insured against (Sec. 84);
Loss the immediate cause
of which is the peril
insured against except
where proximate cause is
an excepted peril;
Loss through negligence
of insured except where

2.
3.

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.

TIME FOR PAYMENT OF CLAIMS

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

Loss for which insurer is

not liable
1.

In other types of
insurance

B. CLAIMS SETTLEMENT
The indemnification of the loss of the insured.

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)
Loss for which insurer is
liable

there
was
gross
negligence amounting to
willful acts; and
Loss caused by efforts to
rescue the thing from
peril 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).

Loss by insureds willful

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

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.

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).

after presentation and filing

of proof of death.

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)

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

PARTICULAR KINDS OF INSURANCE CONTRACTS

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 SEA
PERILS OF THE SHIP

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 whoever is

Includes only those casualties

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

A loss which in the ordinary

course of events, results
from the:
1. natural
and
inevitable action of
the sea
2. 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.

contract
but
merely
exonerates the insurer from a
risk resulting from the fact
concealed

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.
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)

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 neutrality is expressly warranted;
(Sec. 120)
5. Presence of insurable interest.
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)

B. Barratry Clause
A clause which provides that there can be no recovery on the
policy in case of any willful 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.)

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 stages, the ship must be seaworthy at the
commencement of each portion

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 ON CONCEALMENT (Commercial Law Reviewer,
A.F. Agbayani, 1988 ed.)
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

The concealment of any fact

in relation to any of the
matters stated in Sec. 110
does not vitiate the entire

risk concealed.

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).
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

10

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.
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)

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:
1. After the separation of interests liable to contribution
2. When the insured has neglected or waived his right to
contribution

LOSS
1. Total:
a. Actual i. Total destruction;
ii. Irretrievable loss 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).

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).

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.

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

Requisites for the right to

claim contribution:
1. Common danger to

11

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)

Rules:
1. Co-insurance applies only to marine insurance
2. Logically, there cannot be co-insurance in life insurance.
3. Co-insurance applies in fire insurance when expressly
provided for by the parties.
REINSURANCE
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.

Insurer is liable

Insurer is not liable

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,
Aguedo Agbayani, 1988 ed.)

Requisites:
1. The loss is partial;
2. The amount of insurance is less than the value of the
property insured.

CO-INSURANCE

FRIENDLY FIRE
One that burns in a place where
it was intended to burn and
ought to be

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

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.

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, Jorge Miravite, 2002
ed.)

HOSTILE FIRE
One that escapes from the
place where it was intended to
burn and ought to be.

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 be a 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.

XVII. FIRE INSURANCE

A contract 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)

XVIII. CASUALTY OR ACCIDENT INSURANCE

Insurance covering loss or liability arising from accident or
mishap, excluding those falling under other types 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

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

12

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. (Perla Comapnia 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.

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 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 3 rd party
It applies to all vehicles whether public and private vehicles.
Note: It is the only compulsory insurance coverage under the
Insurance Code.

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)

Method of coverage
1. Insurance policy
2. Surety bond
3. Cash deposit

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).

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])

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).

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;

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)

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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)

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)

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. (Perla Compania 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)

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

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.)

Risk-shifting device;
premium paid being
in the nature of a
service fee

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.

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)
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.

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.

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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)

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.

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

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
insurer
Beneficiary is under
no obligation to
prove actual
financial loss

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
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.

If the premiums paid came from conjugal funds, the

proceeds are 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.)

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 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. 416 of the same Code which
grants the Commissioner adjudicatory powers (Philippine
American Life Insurance Co. v. Ansaldo, 234 SCRA 509).
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

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