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)
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 risk-distributing 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.
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. (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.)
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)
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. 175
178)
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.
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.)
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 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.

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.

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)

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)

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

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.

Limited to actual value of

interest
in
property
insured.

The beneficiary must

have insurable interest
over the thing insured.

SPECIAL CASES
1. In case of a carrier or depositary

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)

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.
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 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)
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
PREMIUMS PAID

INSURED

TO

RETURN

OF

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);
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.
Payment
is
not
enforceable against
the insured.

Collected to meet actual

losses.
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.
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)

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.
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.
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 nonmedical 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: the injured party is

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 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

Must be strictly complied

with

Requires only substantial

truth and compliance

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:
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
2.
reason
of
the
fraudulent
3.
concealment
or
misrepresentation of
the insured or his
4.
agent

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 (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.

5.
6.

7.

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)
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.
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.
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
Involves
the
same
interest
Insurer remains in such
capacity
Insured is the party in
interest
in
the
2
contracts
Subject of insurance is
property
Insured has to give his
consent

undertaken to indemnify the insured. (Bonifacio

Bros. Inc. vs. Mora, 20 SCRA 261)

1.

2.

3.

REINSURANCE
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

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)
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)
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

4.

5.

Loss for which insurer

is liable

Loss for which insurer

is not liable

Loss the proximate

1.
cause of which is the peril
insured against (Sec. 84);2.
Loss the immediate
cause of which is the peril
insured against except
3.
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 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.

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
NON-LIFE POLICIES
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.

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 KINDS OF INSURANCE CONTRACTS

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 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.)

1.
2.
3.

PERILS OF THE SEA

PERILS OF THE SHIP

Includes
only
those
casualties due to the:
unusual violence; or
1.
extraordinary action
of wind and wave; or 2.
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.
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 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.)
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

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

information
Concealment of any
material
fact
will
vitiate
the
entire
contract, whether or
not the loss results for
the risk 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
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)
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

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
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)

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).
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
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.

PARTICULAR
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:
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 co-insurance 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, Jorge
Miravite, 2002 ed.)

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.

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)

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,
Aguedo
Agbayani, 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 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.
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

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.
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 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.
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. (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)
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

Principal contract
2 parties: insurer and
insured
Contract of indemnity

Surety can recover from

principal
Bond can be cancelled only
with consent of obligee,
Commissioner or court

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

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)
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.

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

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)

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.)

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.

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)

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
Contract of investment not
of indemnity
Valued policy
May be transferred or

FIRE INSURANCE
Contract of indemnity
Open or valued policy
The insurable interest of

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

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.
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