30
INSURANCE CODE
(P.D. No. 1460)
I. GENERAL CONCEPTS
CONTRACT OF INSURANCE
 An agreement whereby one
undertakes for a consideration to
indemnify another against loss, damage
or liability arising from an unknown or
contingent event. (Sec. 2, par. 2, IC)
“DOING AN INSURANCE BUSINESS OR
TRANSACTING AN INSURANCE
BUSINESS” (Sec. 2, par. 4)
1. Making or proposing to make, as
insurer, any insurance contract;
2. Making or proposing to make, as
surety, any contract of suretyship as
a vocation, not as a mere incident to
any other legitimate business of a
surety;
3. Doing any insurance business,
including a reinsurance business;
4. Doing or proposing to do any
business in substance equivalent to
any of the foregoing
II. CHARACTERISTICS OF AN INSURANCE
CONTRACT (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. Consensual – it is perfected by the
meeting of the minds of the parties.
2. Voluntary – the parties may
incorporate such terms and
conditions as they may deem
convenient.
3. Aleatory – it depends upon some
contingent event.
4. Unilateral – imposes legal duties only
on the insurer who promises to
indemnify in case of loss.
5. Conditional – It is subject to
conditions the principal one of
which is the happening of the event
insured against.
6. Contract of indemnity – Except life
and accident insurance, a contract
of insurance is a contract of
indemnity whereby the insurer
promises to make good only the loss
of the insured.
7. Personal – each party having in view
the character, credit and conduct of
the other.
REQUISITES OF A CONTRACT OF
INSURANCE (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. A subject matter which the insured
has an insurable interest.
2. Event or peril insured against which
may be any future contingent or
unknown event, past or future and a
duration for the risk thereof.
3. A promise to pay or indemnify in a
fixed or ascertainable amount.
4. A consideration known as “premium”.
5. Meeting of the minds of the parties.
5 CARDINAL PRINCIPLES IN INSURANCE
1. Insurable Interest
2. Principle of Utmost Good Faith
 An insurance contract requires utmost
good faith (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 latter’s
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 insured’s 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
31
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;
32
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. 179–183, 227)
b. Group life (Secs. 50, last par., 228)
c. Industrial life (Secs. 229–231)
2. Non-life insurance
a. Marine (Secs. 99–166)
b. Fire (Secs. 167–173)
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
33
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;
 34

b. of any person on whom he INSURABLE INSURABLE

depends wholly or in part for INTEREST IN LIFE INTEREST IN
education or support; PROPERTY
c. of any person under a legal Must exist only at the Must exist at the
obligation to him to pay money time the policy takes time the policy
or respecting property or effect and need not takes effect and
services, of which death or exist at the time of when the loss
illness might delay or prevent loss occurs
performance; and Unlimited except in Limited to actual
life insurance value of interest in
d. of any person upon whose life effected by creditor property insured.
any estate or interest vested in on life of debtor.
him depends. (Sec. 10) The expectation of An expectation of a
 When it should exist: When the benefit to be derived benefit to be
insurance takes effect; not thereafter or from the continued derived from the
when the loss occurs. existence of life need continued
 Amount: not have any legal existence of the
GENERAL RULE: There is no limit in the basis whatever. A property insured
amount the insured can insure his life. reasonable must have a legal
probability is basis.
EXCEPTION: In a creditor-debtor
sufficient without
relationship where the creditor insures more.
the life of his debtor, the limit of The beneficiary need The beneficiary
insurable interest is equal to the amount not have an insurable must have
of the debt. interest over the life insurable interest
Note: If at the time of the death of the of the insured if the over the thing
debtor the whole debt has already been insured himself insured.
paid, the creditor can no longer recover secured the policy.
on the policy because the principle of However, if the life
indemnity applies. insurance was
obtained by the
beneficiary, the
C. Property latter must have
 Every interest in property whether insurable interest
real or personal, or any relation thereto, over the life of the
or liability in respect thereof, of such insured.
nature that the contemplated peril
might directly damnify the insured (Sec. SPECIAL CASES
13), which may consist in: 1. In case of a carrier or depositary
1. an existing interest;  A carrier or depository of any kind has
2. any inchoate interest an insurable interest in a thing held by
founded on an existing him as such, to the extent of his liability
interest; or but not to exceed the value thereof
3. an expectancy coupled with (Sec. 15)
an existing interest in that 2. In case of a mortgaged property
out of which the expectancy  The mortgagor and mortgagee each
arises. (Sec. 14) have an insurable interest in the
 When it should exist: When the property mortgaged and this interest is
insurance takes effect and when the loss separate and distinct from the other.
occurs, but need not exist in the a. Mortgagor – As owner, has an
meantime. insurable interest therein to the
 Amount: The measure of insurable extent of its value, even though the
interest in property is the extent to mortgage debt equals such value.
which the insured might be damnified by The reason is that the loss or
loss or injury thereof. (Sec. 17) 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
 35

interest continues until the mortgage VIII. RISK

debt is extinguished.  What may be insured against:
1. Future contingent event resulting in
 The lessor cannot be validly a loss or damage – Ex. Possible future
beneficiary of a fire insurance policy fire
taken by a lessee over his merchandise, 2. Past unknown event resulting in loss
and the provision in the lease contract or damage – Ex. Fact of past sinking
providing for such automatic assignment of a vessel unknown to the parties
is void for being contrary to law and 3. Contingent liability – Ex. Reinsurance
public policy. (Cha vs. Court of Appeals,
227 SCRA 690) IX. PREMIUM PAYMENTS
 Consideration paid an insurer for
STANDARD OR OPEN OR LOSS undertaking to indemnify the insured
UNION PAYABLE against a specified peril.
MORTGAGE MORTGAGE  Basis of the right of the insurer to
CLAUSE CLAUSE collect premiums: Assumption of risk.
Subsequent acts Acts of the
of the mortgagor mortgagor affect GENERAL RULE: No policy issued by an
cannot affect the the mortgagee. insurance company is valid and binding
rights of the Reason: until actual payment of premium. Any
assignee Mortgagor does agreement to the contrary is void. (Sec.
not cease to be a 77)
party to the
contract. (Secs. 8 EXCEPTIONS:
and 9) 1. In case of life or industrial life
insurance, when the grace periods
Effects of Loss Payable Clause applies; (Sec. 77)
a. The contract is deemed to be upon 2. When the insurer makes a written
the interest of the mortgagor; hence, he acknowledgment of the receipt
does not cease to be a party to the premium; (Sec. 78)
contract. 3. Section 77 may not apply if the
b. Any act of the mortgagor prior to the parties have agreed to the payment
loss, which would otherwise avoid the of the premium in installments and
insurance affects the mortgagee even if partial payment has been made at
the property is in the hands of the the time of the loss. (Makati
mortgagee. Tuscany Condominium Corp. v. CA,
c. Any act, which under the contract of 215 SCRA 462)
insurance is to be performed by the 4. Where a credit term has been
mortgagor, may be performed by the agreed upon. (UCPB vs. Masagana
mortgagee with the same effect. Telemart, 308 SCRA 259)
d. In case of loss, the mortgagee is 5. Where the parties are barred by
entitled to the proceeds to the extent of estoppel. (UCPB vs. Maagana
his credit. Telemart, 356 SCRA 307)
e. Upon recovery by the mortgagee to
the extent of his credit, the debt is  Section 77 merely precludes the
extinguished. parties from stipulating that the policy is
valid even if the premiums are not paid.
 In case a mortgagee insures his own (Makati Tuscany Condominium Corp. v.
interest and a loss occurs, he is entitled CA, 215 SCRA 462)
to the proceeds of the insurance but he
is not allowed to retain his claim against Effect of Acknowledgment of Receipt
the mortgagor as the claim is discharged of Premium in Policy: Conclusive
but it passes by subrogation to the evidence of its payment, so far as to
insurer to the extent of the money paid make the policy binding,
by such insurer. (Palileo vs. Cosio) notwithstanding any stipulation therein
 36

that it shall not be binding until the losses.

premium is actually paid. (Sec. 78)
Payment is not Payment is
enforceable against enforceable once
the insured. levied unless
otherwise agreed
ENTITLEMENT OF INSURED TO RETURN upon.
OF PREMIUMS PAID

A. Whole: Not a debt. It becomes a debt

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 insurer’s 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 Collected to meet
meet anticipated actual losses.
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. Four Primary Concerns of the
Parties:
1. Correct estimation of the risk;
2. Precise delimitation of the risk;
3. Control of the risk;
4. Determining whether a loss occurred
and if so, the amount of such loss.
B. Devices used for ascertaining and
controlling risk and loss:
1. Concealment – A neglect to
communicate that which a party knows
and ought to communicate (Sec. 26)
 Requisites:
a. A party knows a fact which he
neglects to communicate or
disclose to the other.
b. Such party concealing is duty
bound to disclose such fact to
the other.
37
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 non-medical insurance contract
renders even more material the
information required of the applicant
concerning the previous conditions of
health and diseases suffered. (Sunlife v.
Sps. Bacani, 246 SCRA 268).
 The right to information of material
facts may be waived, either by the terms
of the insurance or by neglect to make
inquiries as to such facts where they are
distinctly implied in other facts of which
information is communicated. (Sec.33)
 Where matters of opinion or judgment
are called for, answers made in good
faith and without intent to deceiver will
not avoid the policy even though they
are untrue. Reason: The insurer cannot
rely on those statements. He must make
further inquiry. (Philamcare Health
Systems vs. CA, G.R. No. 125678, March
18, 2002).
 38

2. Representations – Factual untruth or non-fulfillment of which in

statements made by the insured at the any respect, and without reference to
time of, or prior to, the issuance of the whether insurer was in fact prejudiced
policy to give information to the insurer by such untruth or non-fulfillment,
and induce him to enter into the renders the policy voidable by the
insurance contract. They are considered insurer.
an active form of concealment.  Purpose: To eliminate potentially
 Requisites of a false representation increasing hazards which may either be
(misrepresentation): due to the acts of the insured or to the
a. The insured stated a fact which change to the condition of the property.
is untrue.  Kinds:
b. Such fact was stated with a. EXPRESS – an agreement expressed in
knowledge that it is untrue and a policy whereby the insured stipulates
with intent to deceive or which that certain facts relating to the risk are
he states positively as true or shall be true, or certain acts relating
without knowing it to be true to the same subject have been or shall
and which has a tendency to be done.
mislead. b. IMPLIED - it is deemed included in the
c. Such fact in either case is contract although not expressly
material to the risk. mentioned. Example: In marine
 Characteristics: insurance, seaworthiness of the vessel.
a. It is not a part of the contract but  Effects of breach of warranty:
merely a collateral inducement to it. a. Material
b. It may be oral or written. GENERAL RULE: Violation of material
c. It is made at the same time of issuing warranty or of a material provision of a
the policy or before but not after. policy will entitle the other party to
d. It may be altered or withdrawn before rescind the contract. (Sec. 74)
the insurance is effected but not EXCEPTIONS:
afterwards. a. Loss occurs before the time of
e. It always refers to the date the performance of the warranty.
contract goes into effect. b. The performances becomes
 Kinds: unlawful at the place of the
a. AFFIRMATIVE – affirmation of a fact contract.
when the contract begins; and c. Performance becomes
b. PROMISSORY – promise to be impossible. (Sec. 73)
performed after policy was issued. b. Immaterial (ex. Other insurance
 Effect of Misrepresentation: the clause)
injured party is entitled to rescind from GENERAL RULE: It will not avoid the
the time when the representation policy.
becomes false. EXCEPTION: When the policy expressly
provides or declares that a violation
Test of Materiality: Same as that in thereof will avoid it. (Sec. 75)
concealment.
WARRANTY REPRESENTATION
 Where the insured merely signed the Part of the contract Mere collateral
application form and made the agent of inducement
the insurer fill the same for him, it was Written on the May be written in
held that by doing so, the insured made policy, actually or by the policy or may
the agent of the insurer his own agent reference be oral.
and he was responsible for his acts for Presumed material Must be proved to
that purpose. (Insular Life Assur. Co. vs. be material
Feliciano, 74 Phil. 469) Must be strictly Requires only
complied with substantial truth
3. Warranties – Statement or promise and compliance
by the insured set forth in the policy or
by reference incorporated therein, the

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)
39
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.
 40

 Incontestability only deprives the corresponding to the excess in value

insurer of those defenses which arise in of the property;
connection with the formation and
operation of the policy prior to loss. B. DOUBLE INSURANCE – exists where
(Prof. De Leon, p. 173 citing Wyatt and same person is insured by several
Wyatt, p. 878) insurers separately in respect to same
subject and interest. (Sec. 93)
BARRED DEFENSES NOT  Requisites:
DEFENSES BARRED 1. Person insured is the same;
OF THE INSURER 2. Two or more insurers insuring
1. Policy is void ab 1. That the person separately;
initio taking the insurance 3. Subject matter is the same;
2. Policy is lacked insurable 4. Interest insured is also the same;
rescindable by interest as required 5. Risk or peril insured against is
reason of the by law; likewise the same.
fraudulent 2. That the cause of
concealment or the death of the
misrepresentation of insured is an  Effects: Where double insurance is
the insured or his excepted risk; allowed, but over insurance results:
agent 3. That the (Sec. 94)
premiums have not 1. The
been paid (Secs. 77, insured, unless the policy otherwise
227[b], 228[b], provides, may claim payment from
230[b]); the insurers in such order as he may
4. That the select, up to the amount for which
conditions of the
the insurers are severally liable
policy relating to
military or naval under their respective contracts;
service have been 2. Where
violated (Secs. the policy under which the insured
227[b], 228[b]); claims is a valued policy, the insured
5. That the fraud is must give credit as against the
of a particularly valuation for any sum received by
vicious type; him under any other policy without
6. That the regard to the actual value of the
beneficiary failed to
subject matter insured;
furnish proof of
death or to comply 3. Where
with any condition the policy under which the insured
imposed by the claims is an unvalued policy he must
policy after the loss give credit, as against the full
has happened; or insurable value, for any sum
7. That the action received by him under any policy;
was not brought 4. Where
within the time the insured receives any sum in
specified.
excess of the valuation in the case of
valued policies, or of the insurable
XIII. value in the case of unvalued
A. OVER-INSURANCE – results when the policies, he must hold such sum in
insured insures the same property for an trust for the insurers, according to
amount greater than the value of the their right of contribution among
property with the same insurance themselves;
company. 5. Each
 Effect in case of loss: insurer is bound, as between himself
1. The insurer is bound only to pay to and the other insurers, to contribute
the extent of the real value of the ratably to the loss in proportion to
property lost; the amount for which he is liable
2. The insured is entitled to recover under his contract.
the amount of premium
 41

Additional or “Other Insurance” Clause 2. Automatic reinsurance – The

 A condition in the policy requiring the reinsured is bound to cede and the
insured to inform the insurer of any reinsurer is obligated to accept a fixed
other insurance coverage of the property share of the risk which has to be
insured. It is lawful and specifically reinsured under the contract. (Prof. De
allowed under Sec. 75 which provides Leon, p. 305)
that “(a) policy may declare that a 3. Facultative reinsurance – There is no
violation of a specified provision thereof obligation to cede or accept
shall avoid it, otherwise the breach of an participation in the risk each party
immaterial provision does not avoid it.” having a free choice. But once the share
 A stipulation against double is accepted, the obligation is absolute
insurance. and the liability thereunder can be
 Purposes: discharged only by payment. (Equitable
1. To prevent an increase in the Ins. & Casualty Co. vs. Rural Ins. &
moral hazard Surety Co., Inc. 4 SCRA 343)
2. To prevent over-insurance and
fraud. 4. Retrocession – A transaction whereby
 To constitute a violation of the the reinsurer in turn, passes to another
clause, there should have been double insurer a portion of the risk reinsured. It
insurance. is really the reinsurance of reinsurance.
(Prof. De Leon, p. 305)
C. REINSURANCE – a contract by which
the insurer procures a third person to XIV.
insure him against loss or liability by A. LOSS, IN INSURANCE
reason of an original insurance (also  Injury or damage sustained by the
known as “Reinsurance Cession”). (Sec. insured in consequence of the happening
95) of one or more of the accidents or
 In every reinsurance, the original misfortune against which the insurer, in
contract of insurance and the contract of consideration of the premium, has
reinsurance are covered by separate undertaken to indemnify the insured.
policies. (Bonifacio Bros. Inc. vs. Mora, 20 SCRA
261)
DOUBLE REINSURANCE
INSURANCE Loss for which Loss for which
Involves the same Involves different insurer is liable insurer is not
interest interest liable
Insurer remains in Insurer becomes the 1. Loss the 1. Loss by
such capacity insured in relation proximate cause of insured’s willful
to reinsurer which is the peril act;
Insured is the party Original insured has insured against 2. Loss due to
in interest in the 2 no interest in the (Sec. 84); connivance of the
contracts reinsurance 2. Loss the insured (Sec. 87);
contract. immediate cause of and
Subject of Subject of insurance which is the peril 3. Loss where the
insurance is is the original insured against excepted peril is
property insurer’s risk except where the proximate
Insured has to give Insured’s consent proximate cause is cause.
his consent not necessary an excepted peril;
3. Loss through
TERMS: negligence of
insured except
1. Reinsurance treaty – Merely an
where there was
agreement between two insurance gross negligence
companies whereby one agrees to cede amounting to willful
and the other to accept reinsurance acts; and
business pursuant to provisions specified 4. Loss caused by
in the treaty. (Prof. De Leon, p. 306) efforts to rescue the
thing from peril
 42

insured against; insured, unless the loss or damage

5. If during the they are made by agreement of the
course of rescue, payable in parties or by
the thing is exposed installments or as arbitration but not
to a peril not annuity, in which later than 90 days
insured against, case, the from such receipt of
which permanently installments or proof of loss
deprives the insured annuities shall be whether or not
of its possession, in paid as they ascertainment is
whole or in part become due. had or made.
(Sec. 85). b. Maturing at
the death of the
Proximate Cause – An event that sets all insured, occurring
other events in motion without any prior to the
expiration of the
intervening or independent case,
term stipulated –
without which the injury or loss would The proceeds are
not have occurred. payable to the
beneficiaries
REQUISITES FOR RECOVERY UPON within 60 days
INSURANCE after presentation
1. The insured must have insurable and filing of proof
interest in the subject matter; of death.
2. That interest is covered by the policy;
3. There must be a loss; and
4. The loss must be proximately caused  In case of an unreasonable delay in
by the peril insured against. the payment of the insured’s claim by
the insurer, the insured can recover: 1)
NOTICE OF LOSS attorney’s fees; 2) expenses incurred by
In fire insurance In other types of reason of the unreasonable withholding;
insurance 3) interest at double the legal interest
rate fixed by the Monetary Board; and 4)
Required Not required the amount of the claim. (Zenith
Insurance Corp. vs. CA, 185 SCRA 398)
Failure to give Failure to give
notice will defeat notice will not XV. PRESCRIPTIVE PERIOD (Secs. 63 &
the right of the exonerate the 384)
insured to recover. insurer, unless  Rules:
there is a 1. In the absence of an express
stipulation in the stipulation in the policy, it being based
policy requiring the on a written contract, the action
insured to do so.
prescribes in 10 years.
2. However the parties may validly agree
on a shorter period provided it is not less
B. CLAIMS SETTLEMENT
than one year from the time the cause of
 The indemnification of the loss of the
action accrues.
insured.
3. The cause of action accrues from the
rejection of the claim of the insured and
TIME FOR PAYMENT OF CLAIMS
not from the time of loss.
NON-LIFE
It shall commence from the denial of
LIFE POLICIES POLICIES
the claim, not from the resolution of the
a. Maturing The proceeds shall
motion for reconsideration, otherwise it
upon the be paid within 30 can be used by the insured as a scheme
expiration of the days after the or device to waste time until the
term – The receipt by the evidence which may be used against him
proceeds are insurer of proof of is destroyed. (Sun Insurance Office, Ltd.
immediately loss, and v. CA, 195 SCRA)
payable to the ascertainment of

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
claimant’s 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.
43
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
 44

extent of the loan accommodation. The

same rule would apply to the C. Inchamaree Clause
hypothecation of the cargo by  A clause which makes the insurer
respondentia. (Pandect of Commercial liable for loss or damage to the hull or
Law and Jurisprudence, Justice Jose machinery arising from the:
Vitug, 1997 ed.) 1. Negligence of the captain,
PERILS OF THE PERILS OF THE engineers, etc.
SEA SHIP 2. Explosions, breakage of shafts; and
Includes only those A loss which in the 3. Latent defect of machinery or hull.
casualties due to ordinary course of (Bar Review Materials in Commercial
the: events, results Law, Jorge Miravite, 2002 ed.)
1. unusual from the:
violence; or 1. natural and D. Sue and Labor Clause
2. extraordinary inevitable action of
 A clause under which the insurer may
action of wind and the sea
wave; or 2. ordinary wear become liable to pay the insured, in
3. Other and tear of the addition to the loss actually suffered,
extraordinary causes ship or such expenses as he may have incurred
connected with 3. Negligent in his efforts to protect the property
navigation. failure of the against a peril for which the insurer
ship’s owner to would have been liable. (Sec. 163)
provide the vessel
with proper
equipment to MATTERS ALTHOUGH CONCEALED,
convey the cargo WILL NOT VITIATE THE CONTRACT
under ordinary EXCEPT WHEN THEY CAUSED THE LOSS
conditions. (Sec. 110)
1. National character of the insured;
Note: It is only perils of the sea which 2. Liability of the thing insured to
may be insured against unless perils of capture or detention;
the ship is covered by an all-risk policy. 3. Liability to seizure from breach of
foreign laws;
SPECIAL MARINE INSURANCE 4. Want of necessary documents; and
CONTRACTS AND CLAUSES 5. Use of false or simulated papers.
A. All Risks Policy – insurance against all Note: This should be related to the
causes of conceivable loss or damage, general rule regarding material
except: 1) as otherwise excluded in the concealment.
policy; or 2) due to fraud or intentional
misconduct on the part of the insured. DISTINCTIONS ON CONCEALMENT
 The insured has the initial burden of (Commercial Law Reviewer, A.F.
proving that the cargo was in good Agbayani, 1988 ed.)
condition when the policy attached and
that the cargo was damaged when MARINE INSURANCE OTHER
unloaded from the vessel; thereafter, PROPERTY
the burden then shifts to the insurer to INSURANCE
show the exception to the coverage. The information of the The information or
(Filipinas Merchants Insurance vs. Court belief or expectation belief of a 3rd party
of Appeals, 179 SCRA 638) of 3rd persons is is not material and
material and must be need not be
communicated communicated
B. Barratry Clause
unless it proceeds
 A clause which provides that there form an agent of
can be no recovery on the policy in case the insured whose
of any willful misconduct on the part of duty it is to give
the master or crew in pursuance of some information
unlawful or fraudulent purpose without The concealment of Concealment of any
consent of owners, and to the prejudice any fact in relation to material fact will
of the owner’s interest. (Roque vs. IAC, any of the matters vitiate the entire
139 SCRA 596) stated in Sec. 110 contract, whether
 45

does not vitiate the or not the loss commencement of every voyage she
entire contract but results for the risk may undertake
merely exonerates the concealed. 2. In the case of cargo policy, each
insurer from a risk vessel upon which the cargo is
resulting from the fact
shipped or transshipped, must be
concealed
seaworthy at the commencement of
IMPLIED WARRANTIES
each particular voyage
1. Seaworthiness of the ship at the
3. In the case of a voyage policy
inception of the insurance (Sec.
contemplating a voyage in different
113);
stages, the ship must be seaworthy
2. Against improper deviation (Sec.
at the commencement of each
123, 124, 125);
portion
3. Against illegal venture;
4. Warranty of neutrality: the ship will
 Applicability of implied warranty of
carry the requisite documents of
seaworthiness to cargo owners: It
nationality or neutrality of the ship
becomes the obligation of a cargo owner
or cargo where such nationality or
to look for a reliable common carrier,
neutrality is expressly warranted;
which keeps its vessels in seaworthy
(Sec. 120)
conditions. The shipper may have no
5. Presence of insurable interest.
control over the vessel but he has
control in the choice of the common
 While the payment by the insurer for
carrier that will transport his goods
the insured value of the lost cargo
(Roque v. IAC, 139 SCRA 596).
operates as a waiver of the insurer’s
right to enforce the term of the implied
Deviation
warranty against the assured under the
 A departure from the course of the
marine insurance policy, the same
voyage insured, or an unreasonable
cannot be validly interpreted as an
delay in pursuing the voyage or the
automatic admission of the vessel’s
commencement of an entirely different
seaworthiness by the insurer as to
voyage. (Sec.123)
foreclose recourse against the common
 Instances:
carrier for any liability under the
1. Departure of vessel from the
contractual obligation as such common
course of the sailing fixed by
carrier. (Delsan Transportation Lines vs.
mercantile usage
CA, 364 SCRA 24)
2. Departure of vessel from the
most natural, direct and
Seaworthiness
advantageous route if not fixed
 A relative term depending upon the
by mercantile usage
nature of the ship, voyage, service and
3. Unreasonable delay in pursuing
goods, denoting in general a ship’s
voyage
fitness to perform the service and to
4. Commencement of an entirely
encounter the ordinary perils of the
different voyage (Secs. 121-123)
voyage, contemplated by the parties to
 Kinds:
the policy (Sec. 114).
1. Proper -
GENERAL RULE: The warranty of
a. When caused by circumstances outside
seaworthiness is complied with if the
the control of the ship captain or ship
ship be seaworthy at the time of the
owner;
commencement of the risk. Prior or
b. When necessary to comply with a
subsequent unseaworthiness is not a
warranty or to avoid a peril;
breach of the warranty nor is it material
c. When made in good faith to avoid a
that the vessel arrives in safety at the
peril;
end of her voyage.
d. When made in good faith to save
EXCEPTIONS:
human life or to relieve another vessel
1. In the case of a time policy, the ship
in distress (Sec. 124)
must be seaworthy at the
 Effect: In case of loss, the
insurer is still liable.
 46

2. Improper - Every deviation not concerned in the cargo or the vessel,

specified in Sec. 124 (Sec. 125). venture. as the case may be.
 Effect: In case of loss or Requisites for the
damage, the insurer is not liable. right to claim
(Sec. 126) contribution:
1. Common
danger to the
LOSS vessel or
1. Total: cargo;
a. Actual - 2. Part of the
i. Total destruction; vessel or cargo
ii. Irretrievable loss by sinking; was sacrificed
iii. Damage rendering the thing deliberately;
valueless; or 3. Sacrifice must
iv. Total deprivation of owner of be for the
possession of thing insured. common safety
(Sec. 130) or for the
b. Constructive - benefit of all;
i. Actual loss of more than ¾ 4. Sacrifice must
of the value of the object; be made by
ii. Damage reducing value by the master or
more than ¾ of the value of upon his
the vessel and of cargo; and authority;
iii. Expense of transshipment 5. It must be not
exceed ¾ of value of cargo. be caused by
(Sec. 131, in relation to Sec. any fault of
139) the party
 In case of constructive asking the
total loss, insured may: contribution;
1. Abandon goods or 6. It must be
vessel to the insurer and successful, i.e.
claim for whole insured resulted in the
value (Sec. 139), or saving of the
2. Without abandoning vessel or
vessel, claim for partial cargo; and
actual loss. (Sec. 155) Necessary.
2. Partial: That which is not total (Sec.
128). RIGHT OF INSURED IN CASE OF
GENERAL AVERAGE
AVERAGE GENERAL RULE: The insured may
 Any extraordinary or accidental either hold the insurer directly liable for
expense incurred during the voyage for the whole of the insured value of the
the preservation of the vessel, cargo, or property sacrificed for the general
both, and all damages to the vessel and benefit, subrogating him to his own right
cargo from the time it is loaded and the of contribution or demand contribution
voyage commenced until it ends and the from the other interested parties as soon
cargo unloaded. as the vessel arrives at her destination
EXCEPTIONS:
GENERAL PARTICULAR 1. After the separation of interests
Has inured to the Has not inured to the liable to contribution
common benefit and common benefit and 2. When the insured has neglected or
profit of all persons profit of all persons waived his right to contribution
interested in the interested in the
vessel and cargo vessel and her cargo. FPA Clause (Free From Particular
To be borne equally To be borne alone by Average)
by all of the interests the owner of the
 47

A clause agreed upon in a policy of  A marine insurer is liable upon a

marine insurance in which it is stated partial loss, only for such proportion of
that the insurer shall not be liable for a the amount insured by him as the loss
particular average, such insurer shall be bears to the value of the whole interest
free therefrom, but he shall continue to of the insured in the property insured.
be liable for his proportion of all general (Sec. 157)
average losses assessed upon the thing  When the property is insured for less
insured. (Sec. 136) than its value, the insured is considered
ABANDONMENT a co-insurer of the difference between
 The act of the insured by which, after the amount of insurance and the value of
a constructive total loss, he declared the the property.
relinquishment to the insurer of his
interest in the thing insured. (Sec. 138)  Requisites:
 Requisites for validity: 1. The loss is partial;
1. There must be an actual 2. The amount of insurance is less than
relinquishment by the person insured the value of the property insured.
of his interest in the thing insured
(Sec. 138);  Rules:
2. There must be a constructive total 1. Co-insurance applies only to marine
loss (Sec. 139); insurance
3. The abandonment be neither partial 2. Logically, there cannot be co-
nor conditional (Sec. 140); insurance in life insurance.
4. It must be made within a reasonable 3. Co-insurance applies in fire insurance
time after receipt of reliable when expressly provided for by the
information of the loss (Sec. 141); parties.
5. It must be factual (Sec. 142);
6. It must be made by giving notice CO-INSURANCE REINSURANCE
thereof to the insurer which may be A percentage in the Situation where the
done orally or in writing (Sec. 143); value of the insured insurer procures a 3rd
and property which the party called the
7. The notice of abandonment must be insured himself reinsurer to insure
explicit and must specify the assumes to act as him against liability
insurer to the extent by reason of an
particular cause of the abandonment
of the deficiency in original insurance.
(Sec. 144). the insurance of the Basically,
insured property. In reinsurance is an
 Effects: case of loss or insurance against
1. It is equivalent to a transfer by the damage, the insurer liability which the
insured of his interest to the insurer will be liable only for original insurer may
with all the chances of recovery and such proportion of incur in favor of the
indemnity (Transfer of Interest) the loss or damage as original insured.
(Sec.146) the amount of the
insurance bears to
2. Acts done in good faith by those who
the designated
were agents of the insured in respect percentage of the
to the thing insured, subsequent to full value of the
the loss, are at the risk of the property insured.
insurer and for his benefit. (Bar Review
(Transfer Of Agency)(Sec.148) Materials in
Commercial Law,
 If an insurer refuses to accept a valid Jorge Miravite, 2002
abandonment, he is liable upon an ed.)
actual total loss, deducting form the
amount any proceeds of the thing
insured which may have come to the XVII. FIRE INSURANCE
hands of the insured. (Sec.154)  A contract by which the insurer for a
consideration agrees to indemnify the
CO-INSURANCE insured against loss of, or damage to,
 48

property by hostile fire, including loss by 2. Such use or condition as limited

lightning, windstorm, tornado or by the policy is altered;
earthquake and other allied risks, when 3. The alteration is made without
such risks are covered by extension to the consent of the insurer;
fire insurance policies or under separate 4. The alteration is made by means
policies. (Sec. 167) within the control of the
insured;
5. The alteration increases the risk;
 Prerequisites to recovery: (Sec. 168) and
1. Notice of loss – must be immediately 6. There must be a violation of a
given, unless delay is waived expressly or policy provision. (Sec. 170)
impliedly by the insurer
2. Proof of loss – according to best Fall-of-building clause
evidence obtainable. Delay may also be  A clause in a fire insurance policy that
waived expressly or impliedly by the if the building or any part thereof falls,
insurer except as a result of fire, all insurance
by the policy shall immediately cease.
HOSTILE FIRE FRIENDLY FIRE
One that escapes One that burns in a Option to rebuild clause
from the place place where it was  A clause giving the insurer the option
where it was intended to burn to reinstate or replace the property
intended to burn and ought to be damaged or destroyed or any part
and ought to be. thereof, instead of paying the amount of
Insurer is liable Insurer is not liable the loss or the damage.
 The insurer, after electing to rebuild,
Measure of Indemnity cannot be compelled to perform this
1. Open policy: only the expense undertaking by specific performance
necessary to replace the thing lost or because this is an obligation to do, not
injured in the condition it was at the to give. Remedy: Art. 1167, NCC.
time of the injury
2. Valued policy: the parties are bound XVIII. CASUALTY OR ACCIDENT
by the valuation, in the absence of fraud INSURANCE
or mistake  Insurance covering loss or liability
arising from accident or mishap,
Note: It is very crucial to determine excluding those falling under other types
whether a marine vessel is covered by a of insurance such as fire or marine. (Sec.
marine insurance or fire insurance. The 174)
determination is important for 2 reasons:
1. Rules on constructive total loss  Classifications:
and abandonment – applies only 1. Insurance against specified perils
to marine insurance; which may affect the person and/or
2. Rule on co-insurance – applies property of the insured. (accident or
primarily to marine insurance; health insurance)
3. Rule on co-insurance applies to  Examples: personal accident,
fire insurance only if expressly robbery/theft insurance
agreed upon. (Commercial Law 2. Insurance against specified perils
Reviewer, Aguedo Agbayani, which may give rise to liability on the
1988 ed.) part of the insured for claims for
injuries to or damage to property of
ALTERATION AS A SPECIAL GROUND others. (third party liability insurance)
FOR RESCISSION BY INSURER  Insurable interest is based on the
 Requisites: interest of the insured in the safety of
1. The use or condition of the thing persons, and their property, who may
is specifically limited or maintain an action against him in case of
stipulated in the policy; their injury or destruction, respectively.

 Examples: workmen’s 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 insured’s 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 insurer’s liability is
49
based on contract; that of the insured is
based on torts. Furthermore, the
insurer’s 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 “3rd party”

 It applies to all vehicles whether
public and private vehicles.
Note: It is the only compulsory insurance
coverage under the Insurance Code.
Method of coverage
1. Insurance policy
2. Surety bond
3. Cash deposit
Passenger – Any fare-paying person
being transported and conveyed in and
by a motor vehicle for transportation of
passengers for compensation, including
persons expressly authorized by law or
by the vehicle’s 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 -
50
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.
 51

B. Theft Clause subrogation

 A clause which includes theft as Bond can be May be cancelled
among the risks insured against. cancelled only with unilaterally either by
 Where the car is unlawfully and consent of obligee, insured or insurer on
wrongfully taken without the owner’s Commissioner or grounds provided by
court law
consent or knowledge, such taking
Requires No need of
constitutes theft, and thus, it is the acceptance of acceptance by any
“theft clause” and not the “authorized obligee to be valid third party
driver clause that should apply (Palermo Risk-shifting device; Risk-distributing
v. Pyramids Ins., 161 SCRA 677). premium paid being device; premium paid
in the nature of a as a ratable
service fee contribution to a
C. Cooperation Clause common fund
 A clause which provides in essence XXI. LIFE INSURANCE
that the insured shall give all such  Insurance on human lives and
information and assistance as the insurer insurance appertaining thereto or
may require, usually requiring connected therewith which includes
attendance at trials or hearings. every contract or pledge for the
XX. SURETYSHIP payment of endowments or annuities.
 An agreement whereby a surety (Sec. 179)
guarantees the performance by the  Kinds: (Bar Review Materials in
principal or obligor of an obligation or Commercial Law, Jorge Miravite, 2002
undertaking in favor of an obligee. (Sec. ed.)
175) 1. Ordinary Life, General Life or Old
 It is essentially a credit Line Policy - Insured pays a fixed
accommodation. premium every year until he dies.
 It is considered an insurance contract Surrender value after 3 years.
if it is executed by the surety as a 2. Group Life – Essentially a single
vocation, and not incidentally. (Sec. 20 insurance contract that provides
 When the contract is primarily drawn coverage for many individuals.
up by 1 party, the benefit of doubt goes Examples: In favor of employees,
to the other party (insured/obligee) in “mortgage redemption insurance”.
case of an ambiguity following the rule 3. Limited Payment Policy – insured
in contracts of adhesion. Suretyship, pays premium for a limited period.
especially in fidelity bonding, is thus If he dies within the period, his
treated like non-life insurance in some beneficiary is paid; if he outlives the
respects. period, he does not get anything.
4. Endowment Policy – pays premium
Nature of liability of surety for specified period. If he outlives
1. Solidary; the period, the face value of the
2. Limited to the amount of the bond; policy is paid to him; if not, his
3. It is determined strictly by the terms beneficiaries receive the benefit.
of the contract of suretyship in 5. Term Insurance – insurer pays once
relation to the principal contract only, and he is insured for a
between the obligor and the obligee. specified period. If he dies within
(Sec. 176) the period, his beneficiaries
benefits. If he outlives the period,
SURETYSHIP PROPERTY no person benefits from the
INSURANCE insurance.
Accessory contract Principal contract 6. Industrial Life - life insurance
3 parties: surety, 2 parties: insurer entitling the insured to pay
obligor and oblige and insured premiums weekly, or where
Credit Contract of premiums are payable monthly or
accommodation indemnity oftener.
Surety can recover Insurer has no such
from principal right; only right of Mortgage Redemption Insurance
 52

 A life insurance taken pursuant to a 1. Accidental killing

group mortgage redemption scheme by 2. Self-defense
the lender of money on the life of a 3. Insanity of the beneficiary at the
mortgagor who, to secure the loan, time he killed the insured
mortgages the house constructed from
the use of the proceeds of the loan, to  If the premiums paid came from
the extent of the mortgage indebtedness conjugal funds, the proceeds are
such that if the mortgagor dies, the considered conjugal. If the beneficiary is
proceeds of his life insurance will be other than the insured’s estate, the
used to pay for his indebtedness to the source of premiums would not be
lender assured and the deceased’s heirs relevant. (Del Val v. Del Val, 29 Phil 534)
will thereby be relieved from paying the
unpaid balance of the loan. (Great  The measure of indemnity in life or
Pacific Life Assurance Corp. vs. Court of health insurance policy is the sum fixed
Appeals, 316 SCRA 677) in the policy except when a creditor
insures the life of his debtor. (Sec. 183)
LIABILITY OF INSURER IN CERTAIN IS THE CONSENT OF THE BENEFICIARY
CAUSES OF DEATH OF INSURED NECESSARY TO THE ASSIGNMENT OF A
1. Suicide LIFE INSURANCE POLICY?
 Insurer is liable in the following cases:  It depends. If the designation of the
1. If committed after two years beneficiary is irrevocable, the
from the date of the policy’s beneficiary’s consent is essential
issue or its last reinstatement; because of his vested right. If the
2. If committed in a state of designation is revocable, the policy may
insanity regardless of the date of be assigned without such consent
the commission unless suicide is because the beneficiary only has a mere
an excepted peril. (Sec. 180-A) expectancy to the proceeds. (The
3. If committed after a shorter Insurance Code of the Philippines
period provided in the policy Annotated, Hector de Leon, 2002 ed.)
 Any stipulation extending the 2-year
period is null and void. Cash Surrender Value
2. At the hands of the law (E.g. by legal  As applied to a life insurance policy,
execution) it is the amount the insured in case of
 It is one of the risks assumed by the default, after the payment of at least 3
insurer under a life insurance policy in full annual premiums, is entitled to
the absence of a valid policy exception. receive if he surrenders the policy and
(Vance,p.572 cited in de Leon, p. 107) releases his claims upon it.
Note: Justice Vitug believes that death
by suicide (if the insured is sane) or at LIFE INSURANCE FIRE INSURANCE
the hands of the law obviates against
recovery as being more in consonance Contract of Contract of indemnity
with public policy and as being implicit investment not of
indemnity
under Section 87, ICP. (Pandect of Valued policy Open or valued policy
Commercial Law and Jurisprudence, May be transferred The insurable
1997 ed. P. 191) or assigned to any interest of the
3. Killing by the beneficiary person even if he transferee or
GENERAL RULE: The interest of a has no insurable assignee is essential
beneficiary in a life insurance policy interest
shall be forfeited when the beneficiary is Consent of insurer is Consent of insurer
not essential to must be secured in
the principal accomplice or accessory in validity of the absence of waiver
willfully bringing about the death of the assignment
insured, in which event, the nearest Contingency that is Contingency insured
relative of the insured shall receive the contemplated is a against may or may
proceeds of said insurance if not certain event, the not occur
otherwise disqualified. (Sec. 12) only uncertainty
being the time when
EXCEPTIONS:
 53

it will take place

A long-term May be cancelled by
contract and cannot either party and is
be cancelled by the usually for a term of
insurer one year
Beneficiary is under Insured is required to
no obligation to submit proof of his
prove actual actual pecuniary loss
financial loss as a condition
precedent to
collecting the
insurance.

XXII. VARIABLE CONTRACT

 The Insurance Commissioner has no
 Any policy or contract on either a
jurisdiction to decide the legality of a
group or individual basis issued by an
contract of agency entered into between
insurance company providing for benefits
an insurance company and its agent. The
or other contractual payments or values
same is not covered by the term “doing
thereunder to vary so as to reflect
or transacting insurance business” under
investment results of any segregated
Sec 2, ICP, neither is it covered by Sec.
portfolio of investment.
416 of the same Code which grants the
Commissioner adjudicatory powers
XXIII. INSURANCE COMMISSIONER
(Philippine American Life Insurance Co.
 Main agency charged with the
v. Ansaldo, 234 SCRA 509).
enforcement of the Insurance Code and
other related laws.
2. ADMINISTRATIVE/REGULATORY
 Functions:
a. Enforcement of insurance laws
1. ADJUDICATORY/QUASI-JUDICIAL
b. Issuance, suspension or
a. Exclusive original jurisdiction –
revocation of certificate of
Any dispute in the enforcement of any
authority
policy issued pursuant to Chapter VI
c. Power to examine books and
(CMVLI). (Sec. 385, par. 2)
records, etc.
b. Concurrent original jurisdiction
d. Rule-making authority
(with the RTC) – Where the maximum
e. Punitive
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.