INSURANCE CODE
Q: X and Y are disputing over a property. To
settle the dispute, they entered into a
compromise agreement by which they agreed to
have the property in dispute be sold. X bought
the property and delivered a manager’s check to
Y. Y refused to accept the same, hence it was
consigned with the court. Y later accepted the
check and three years after acceptance, he filed
an action alleging that the check payment did
not amount to legal tender and that he never
even encashed the check. Is the contention of Y
tenable?
A: NO. It is true that a check is not a legal tender and
while delivery of a check produces the effect of
payment only when it is encashed, the rule is
otherwise if the debtor (X) was prejudiced by the
creditor’s (Y) unreasonable delay in presentment.
Acceptance of a check implies an undertaking of due
diligence in presenting it for payment. If no such
presentment was made, the drawer cannot be held
liable irrespective of loss or injury sustained by the
payee. Payment will be deemed effected and the
obligation for which the check was given as
conditional payment will be discharged (Pio
Barretto Realty Development Corp. vs. Court of
Appeals, G.R. No. 132362, June 28, 2001).
Q: To ensure payment and as a business
practice, SMC required Puzon to issue postdated
checks equivalent to the value of the products
purchased on credit before the same were
released to him. Said checks were returned to
Puzon when the transactions covered by these
checks were paid or settled in full. Puzon
purchased products on credit and issued to SMC,
two (2) BPI checks to cover the said transaction.
During on of his visits to the SMC Paranaque
Sales Office, he allegedly requested to see BPI
Check No. 17657. However, when he got hold of
BPI Check No. 27903 which was attached to a
bond paper together with BPI Check No. 17657,
he allegedly immediately left the office with his
accountant, bringing the checks with them. SMC
sent a letter to Puzon, demanding the return of
the said checks. Puzon ignored the demand
hence SMC filed a complaint against him for
theft. The investigating prosecutor
recommended the dismissal of the case for lack
of evidence. On appeal, the CA agreed with the
prosecutor. Were the prosecutor and the DOJ
correct in finding no probable cause for theft?
A: Yes. If the subject check was given by Puzon to
SMC in payment of the obligation, the purpose of
giving effect to the instrument is evident thus title
to or ownership of the check was transferred upon
delivery. However, if the check was not given as
payment, there being no intent to give effect to the
75
instrument, then ownership of the check was not
transferred to SMC.
The evidence of SMC failed to establish that the
check was given in payment of the obligation of
Puzon. There was no provisional receipt or official
receipt issued for the amount of the check. What
was issued was a receipt for the document, a
POSTDATED CHECK SLIP.
Furthermore, SMC’s demand letter sent to Puzon
states: “As per company policies on receivables, all
issuances are to be covered by post-dated checks.
However, you have deviated from this policy by
forcibly taking away the check you have issued to us
to cover the December issuance. Notably, the term
payment was not used instead the terms covered
and cover were used” (San Miguel Corporation v.
Bartolome Puzon, Jr., G.R. No. 167567, September 22,
2011).
INSURANCE CODE
Laws governing contracts of insurance in the
Philippines
1. R.A. 10607
2. New Civil Code
3. Special Laws
CONCEPT OF INSURANCE
Contract of insurance
It is an agreement whereby one undertakes for a
consideration to indemnify another against the loss,
damage or liability arising from an unknown or
contingent event. (IC, Sec. 2[a])
A contract of insurance, to be binding from the date
of application, must have been a completed contract
(Perez vs. CA, GR No. 112329, January 28, 2000).
Thus, it must have all the essential elements of a
valid contract as enumerated in Art. 1318 of the New
Civil Code:
1. Subject matter in which the insured has an
insurable interest;
2. Consideration, which is the premium paid by
the insured, for the insurer’s promise to
indemnify the former upon the happening of
the event or peril insured against;
3. Meeting of minds of the parties.
“Doing an insurance business” or “transacting
an insurance business” (ISRA)
 MERCANTILE LAW
The term “doing an insurance business” or
“transacting an insurance business” means:
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 and not as
merely incidental to any other legitimate
business or activity of the surety;
3. Doing any kind of business, including a
Reinsurance business, specifically recognized
as constituting the doing of an insurance
business.
4. Doing or proposing to do Any business in
substance equivalent to any of the foregoing in
a manner designed to evade the provisions of
the Insurance Code. (Sec. 2[b], ibid)
In the application of the provisions of the Insurance
Code, the fact that no profit is derived from the
making of the insurance contracts, agreements or
transactions or that no separate or direct
consideration is received therefor, shall NOT be
deemed conclusive to show that the making
thereof does not constitute the doing or transacting
of an insurance business.
Q: The parties’ CBA contains the following
provision, “The COMPANY shall obtain group
hospitalization insurance coverage or assume
under a self-insurance basis hospitalization for
the dependents of regular employees”.
Eventually, three members of Mitsubishi Motors
Philippines Salaried Employees Union
(MMPSEU), namely, Ernesto Calida, Hermie Juan
Oabel and Jocelyn Martin, filed claims for
reimbursement of hospitalization expenses of
their dependents. In turn, Mitsubishi Motors
Philippines Corporation (MMPC) paid only a
portion of their hospitalization insurance
claims, not the full amount. However, MMPSEU
insists that MMPC is also liable for the amounts
covered under other insurance policies;
otherwise, MMPC will unjustly profit from the
premiums the employees contribute through
monthly salary deductions. Is MMPSEU’s
contention correct?
A: NO. Since the subject CBA provision is an
insurance contract, the rights and obligations of the
parties must be determined in accordance with the
general principles of insurance law Being in the
nature of a non-life insurance contract and
essentially a contract of indemnity, the CBA
provision obligates MMPC to indemnify the covered
employees’ medical expenses incurred by their
dependents but only up to the extent of the
expenses actually incurred. This is consistent with
the principle of indemnity which proscribes the
76
insured from recovering greater than the loss.
(Mitsubishi Motors Philippines Salaried Employees
Union vs. Mitsubishi Motors Corporation, G.R. No.
175773, June 17, 2013, in Divina 2014)
Insurance as an Uberrimae Fides contract (1993
Bar)
The contract of insurance is one of perfect good
faith (uberrimae fidei) not for the insured alone, but
equally so for the insurer; in fact, it is more so for
the latter, since its dominant bargaining position
carries with it stricter responsibility (Qua Chee Gan
vs. Law Union and Rock Insurance, Co. Ltd., GR No. L-
4611, December 17, 1955). It requires the parties to
the contract to communicate that which a party
knows and ought to communicate, that is, the duty
to disclose in good faith all facts material to the
contract. This doctrine is essential on account of the
fact that the full circumstances of the subject matter
of insurance are, as a rule, known to the insured only
and the insurer, in deciding whether or not to accept
a risk, must rely primarily upon the information
supplied to him by the applicant. (Sundiang Sr. &
Aquino, 2014)
Insurance as contracts of adhesion (Fine Print
Rule)
While generally, stipulations in a contract come
about after deliberate drafting by the parties
thereto, there are certain contracts in which almost
all the provisions of which have been drafted only
by one party, usually a corporation. Such contracts
are called contracts of adhesion, because the only
participation of the other party is the signing of his
signature or his 'adhesion' thereto. Insurance
contracts fall into this category (Sweet Lines, Inc. vs.
Teves, GR No. L-37750, May 19, 1978). An illustration
of a contract of adhesion is when the insurer used
“fine print” letters in conditions stated in a contract
of insurance (Ibid).
Rules in the construction or interpretation of
insurance contracts
By reason of the exclusive control of the insurance
company over the terms and phraseology of the
contract, the ambiguity must be held strictly against
the insurer and liberally in favor of the insured (Qua
Chee Gan v Law Union and Rock Insurance, supra).
However, if the terms, which the parties themselves
have used, are clear and unambiguous, they must be
taken and understood in their plain, ordinary and
popular sense. (Sun Life Office, Ltd. vs. CA, G.R. No.
92383, July 17, 1992)
The phraseology used in medical or hospital service
contracts, such as “standard charges”, must be
 INSURANCE CODE
liberally construed in favor of the subscriber, and if
doubtful or reasonably susceptible of two
interpretations, the construction conferring
coverage is to be adopted, and exclusionary clauses
of doubtful import should be strictly construed
against the provider. (Fortune Medicare Inc. vs.
Amorin, G.R. No. 195872, March 12, 2014)
When the terms of the insurance contract contain
limitations on liability, courts should construe them
in such a way as to preclude the insurer from non-
compliance with his obligation. (Alpha Insurance
and Surety Co. vs. Castor, GR No. 198174, September
2, 2013)
Parties to the contract of insurance
1. Insurer – party who assumes or accepts the risk
of loss and undertakes for a consideration to
indemnify the insured on the happening of a
specified contingency or event.
2. Insured – person in whose favor the contract is
operative and is indemnified.
The insured is not always the person to whom
the proceeds are paid.
3. Assured/Beneficiary- a person designated by
the terms of the policy to receive the proceeds
of the insurance. He may be the insured or a
third party in the contract for whose benefit the
policy is issued and to whom the loss is payable.
Insurer
Every corporation, partnership, or association duly
authorized (by the Insurance Commission) to
transact insurance business may be an insurer. (IC,
as amended by RA 10607, Sec. 6)
The term “insurer” no longer includes “individuals”
under RA 10607. Hence, an individual natural
person is no longer allowed to be an insurer.
However, it includes the following:
1. “Professional reinsurer” as any person,
partnership, association or corporation that
transacts solely and exclusively reinsurance
business in the Philippines.
2. “Mutual Insurance Companies”. The law also
provides for the procedure for mutualization of
domestic stock life insurance companies. A new
provision on RA 10607 is on demutualization or
conversion of mutual insurance companies into
stock corporations. (IC, as amended by RA
10607, Sec. 280)
77
3. Cooperatives are now expressly included in the
term “insurer” or “insurance company.”
However, the cooperative must:
a. Have a sufficient capital and asset required
under the Insurance Code and the pertinent
regulations issued by the Commission. (IC,
as amended, Sec. 192)
b. Have a certificate of authority to operate
issued by the Commission which should be
renewed every year. (IC, as amended, Sec.
193, Sundiang Sr. & Aquino, 2014)
---
Q: Philippine Health Care Providers, Inc. is
engaged in operating a prepaid group practice
health care delivery system or a health
maintenance organization (HMO) to take care of
the sick and disabled persons enrolled in the
health care plan. Individuals enrolled in its
health care programs pay an annual
membership fee and are entitled to various
medical services provided by its duly licensed
physicians, specialists and other professional
technical staff participating in the group
practice health delivery system at a hospital or
clinic operated or accredited by it. Is Philippine
Health Care Providers, Inc. a health
maintenance organization or an insurance
company?
A: HMOs are not insurance business. One test that
they have applied is whether the assumption of risk
and indemnification of loss (which are elements of
an insurance business) are the principal object and
purpose of the organization or whether they are
merely incidental to its business. If these are the
principal objectives, the business is that of
insurance. But if they are merely incidental and
service is the principal purpose, then the business is
not insurance.
Philippine Health Care Providers appears to provide
insurance-type benefits to its members (with
respect to its curative medical services), but these
are incidental to the principal activity of providing
them medical care. The "insurance-like" aspect of
Philippine Health Care Providers’ business is
miniscule compared to its noninsurance activities.
Therefore, since it substantially provides health
care services rather than insurance services, it
cannot be considered as being in the insurance
business. (Philippine Health Care Providers, Inc., v.
Commissioner of Internal Revenue, G.R. No. 167330,
September 18, 2009)
Persons who may be insured (2000 Bar)
 MERCANTILE LAW
Anyone except a public enemy may be insured. (IC,
Sec. 7)
A public enemy is a nation at war with the
Philippines and every citizen or subject of such
nation. It does not include mobs, thieves or robbers.
(Bouvier’s Law Dictionary)
NOTE: If majority of the stockholders of the
respondent corporation Christern, Huenefeld and
Co., Inc. (CHCI) were German subjects who became
an enemy corporation upon the outbreak of the war
between the United States and Germany, it stands to
reason means that an insurance policy ceases to be
allowable as soon as an insured becomes a public
enemy. The respondent CHCI having become an
enemy corporation on December 10, 1941, the
insurance policy issued in its favor on October 1,
1941, by a Philippine corporation had ceased to be
valid and enforceable, and since the insured goods
were burned after December 10, 1941, and during
the war, the respondent CHCI was not entitled to
any indemnity under said policy from Filipinas
Compaña de Seguros (FCS). However, elementary
rules of justice (in the absence of specific provision
in the Insurance Law) require that the premium
paid by the respondent CHCI for the period covered
by its policy from December 11, 1941, should be
returned by FCS. (Filipinas Compaña de Seguros v.
Christern, Huenefeld and Co., Inc., G.R. No. L-
2294 May 25, 1951)
Subject matter of a contract of insurance
Anything having an appreciable pecuniary value,
which is subject to loss or deterioration or of which
one may be deprived so that his pecuniary interest
is or may be prejudiced.
Event or peril insured against
It is any contingent or unknown event, whether past
or future, which may damnify a person having an
insurable interest, or create a liability against him
subject to the provisions of Chapter I of the
Insurance Code. (IC, Sec. 3)
Consent of spouse not necessary
The consent of the spouse is not necessary for the
validity of an insurance policy taken out by a
married person on his or her life or that of his or her
children. (IC, Sec. 3)
Consent of the person insured is not essential to
the validity of the policy.
So long as it could be proved that the insured has an
insurable interest at the inception of the policy, the
78
insurance is valid even without such consent. (IC,
Sec. 10)
Effect of death of policy’s original owner
All rights, title and interest in the policy of insurance
taken out by an original owner on the life or health
of the person insured shall automatically vest in the
latter upon the death of the original owner, unless
otherwise provided for in the policy. (IC, Sec. 3)
NOTE: Prior to the effectivity of the Insurance Code
of 2013, the term used was “minor” instead of “the
person insured.” A minor cannot enter into any
contract of insurance with any insurance company.
Games of chances cannot be insured
An insurance for or against the drawing of any
lottery, or for or against any chance or ticket in a
lottery drawing a prize is not authorized. (IC, Sec. 4)
Void stipulations in an insurance contract
Every stipulation in an insurance contract:
1. For the payment of loss whether the person
insured has or does not have any insurable
interest in the subject-matter of insurance, or
2. That the policy shall be received as proof of
such interest, and
3. Every policy executed by way of gaming or
wagering. (ICC, Sec. 25)
NOTE: The Insurance Code provides that a policy
may declare that a violation of specified provisions
thereof shall avoid it. Thus, in fire insurance policies,
which contain provisions that if the claim be in any
respect fraudulent or if any false declaration be
made or used in support thereof, all the benefits
under the policy, shall be forfeited, a fraudulent
discrepancy between the actual loss and that
claimed in the proof of loss voids the insurance
policy. Mere filing of such a claim will exonerate the
insurer. (United Merchants Corporation vs. Country
Bankers Insurance Corporation, G.R. No. 198588, July
11, 2012)
ELEMENTS OF CONTRACT OF INSURANCE
SPEAR:
1. Scheme to distribute losses – Such assumption of
risk is part of a general scheme to distribute
actual losses among a large group or substantial
number of persons bearing a similar risk.
2. Payment of premium – As consideration for the
insurer’s promise, the insured makes a ratable
contribution called “premium,” to a general
insurance fund.
 INSURANCE CODE
3. Existence of insurable interest – The insured
possesses an interest of some kind susceptible
of pecuniary estimation, known as “insurable
interest.”
4. Assumption of Risk – The insurer assumes that
risk of loss for a consideration.
5. Risk of loss – The insured is subject to a risk of
loss through the destruction or impairment of
that interest by the happening of designated
peril.
NOTE: The inherent uncertainty of events is
normally described in terms of risk. A contract
possessing only the last three elements enumerated
above is a risk-shifting device, but NOT a contract of
insurance which is a risk-distributing device. (De
Leon, 2006)
Consequently, however, the existence of insurance
could have the perverse effect of increasing the
probability of loss. This is when the insured, having
in mind the indemnification for loss or damage
caused by the happening of the event insured
against, would have reduced incentive to take steps
to protect himself or his property, subject of
insurance. This phenomenon is called moral hazard
(ibid).
CHARACTERISTICS AND NATURE OF
AN INSURANCE CONTRACT
Characteristics of an insurance contract
1. Consensual – It is perfected by the meeting of the
minds of the parties as to the object, cause and
consideration of the insurance contract. There
should be acceptance of the application for
insurance.
2. Voluntary – The parties may incorporate such
terms and conditions as they may deem
convenient: Provided they do not contravene
any provision of law and are not opposed to
public policy, law, morals, good customs, or
public order.
GR: The taking out of an insurance contract is
not compulsory.
XPN: Liability insurance may be required by law
in certain instances (E.g. compulsory motor
vehicle liability insurance, or employees under
Labor Code, or as a condition to granting a
license to conduct a business or calling affecting
the public safety or welfare).
3. Aleatory – The liability of the insurer depends
upon some contingent event.
79
An aleatory contract is a contract where one or
both of the parties reciprocally bind themselves
to give or do something upon the happening of
an event which is uncertain, or which is to occur
at an indeterminate time. (NCC, Art. 2010)
4. Unilateral – It imposes legal duties only on the
insurer who promises to indemnify in case of
loss.
It is executed as to the insured after the payment
of the premium, and executory on the part of the
insurer in the sense that it is not executed until
payment for a 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 – Recovery is
commensurate with the amount of the loss
suffered.
GR: The insurer promises to make good only
the loss of the insured.
XPN: The principle is not applicable to life and
accident insurance where the result is death
because life is not capable of pecuniary
estimation. The only situation where the
principle of indemnity is applicable to life
insurance is when the interest of a person
insured is capable of exact pecuniary
measurement. An example would be in a case
where a creditor insures the life of his debtor to
the extent of the latter’s debt to the former.
7. Personal – Each party having in view the
character, credit and conduct of the other. The
law presumes that the insurer considered the
personal qualifications of the insured in
approving the insurance application. (Sundiang
Sr. & Aquino, 2014)
8. Property – Since insurance is a contract, it is
property in legal contemplation.
9. Risk-distributing device – Insurance serves to
distribute the risk of economic loss among as
many as possible of those who are subject to the
same kind of loss. By paying a pre-determined
amount into a general fund out of which
payment will be made for an economic loss of a
defined type, each member contributes to a
small degree toward compensation for losses
suffered by any member of the group. This
broad sharing of economic risk is the principle
of risk-distribution. (Sundiang Sr. & Aquino,
2014)
 MERCANTILE LAW
10. Onerous – There is a valuable consideration Q: Carlo and Bianca met in the La Boracay
called the premium. festivities. Immediately, they fell in love with
each other and got married soon after. They
CLASSES OF INSURANCE have been cohabiting blissfully as husband and
wife, but they did not have any offspring. As the
1. Life insurance years passed by, Carlo decided to take out an
a. Individual life insurance on Bianca’s life for P1 million with
b. Group life him as sole beneficiary, given that he did not
c. Industrial life have a steady source of income and he always
2. Non-Life Insurance depended on Bianca both emotionally and
a. Marine financially. During the term of the insurance,
b. Fire Bianca died of what appeared to be a mysterious
c. Casualty cause so that which led Carlo to immediately
3. Contracts of suretyship or bonding. requested for an autopsy to be conducted. It was
4. Compulsory Motor Vehicle Liability Insurance established that Bianca was transgender all
5. Microinsurance along – a fact unknown to Carlo. Can Carlo claim
the insurance benefit? (2014 Bar)
INSURABLE INTEREST
A: YES, Carlo can claim the insurance benefit. He
An insurable interest is that interest which a person had insurable interest on Bianca’s life under Section
is deemed to have in the subject matter insured, 10(b) of the Insurance Code as the problem states
where he has a relation or connection with or that Carlo “always depended on Bianca both
concern in it, such that the person will derive emotionally and financially.” The insurable interest
pecuniary benefit or advantage from the upon the life of another under the aforesaid
preservation of the subject matter insured and will provision need not be based on kinship or legal
suffer pecuniary loss or damage from its obligation to give support. The fact that their
destruction, termination, or injury by the happening marriage may be void is irrelevant.
of the event insured against. (Violeta R. Lalican vs.
The Insular Life Assurance Company Limited, G.R. No. Insurable interest in life insurance vs. Insurable
183526, August 25, 2009) interest in property insurance (2002 Bar)

NOTE: The existence of insurable interest is a LIFE PROPERTY

matter of public policy and is not susceptible to the GR: Every Limited to the
principle of estoppel. The existence of an insurable person has an actual value of
interest gives a person the legal right to insure the unlimited the property
subject matter of the policy of insurance (ibid). insurable
interest in his
Mere hope or expectancy is not insurable own life

A mere contingent or expectant interest in anything, XPN: Where life

not founded on an actual right to the thing, nor upon As to extent insurance is
any valid contract for it, is not insurable. (ICC, Sec. taken out by a
16) creditor on the
life of the
When does a person have insurable interest? debtor,
insurable
GR: A person is deemed to have an insurable interest is
interest in the subject matter insured when a person limited to the
has a relation or connection with or concern in the amount of debt
subject matter, such that he will derive pecuniary Must exist at the GR: Must exist
benefit or advantage from its preservation and will time the policy both at the time
suffer pecuniary loss from its destruction or injury takes effect and the policy takes
by the happening of the event insured against. When must
need not exist effect and the
insurable
thereafter. (IC, time of loss, but
XPN: To have an insurable interest in the life of a interest
Sec. 19) need not exist in
person, the expectation of benefit from the exist
the period in
continued life of that person need not necessarily be between. (Sec. 19,
of pecuniary nature. (De Leon, 2010) ibid)

80
 INSURANCE CODE
an alienation of
XPN: Secs. 21-24; the thing insured.
25, ibid. (Sec. 24, ibid)

1. A change in 5. Every
interest in a thing stipulation in a
insured, after the policy of
occurrence of an insurance for the
injury which payment of loss
results in a loss, whether the
does not affect person insured
the right of the has or has not
insured to any interest in
indemnity for the the property
loss. (Sec. 21, insured, or that
ibid) the policy shall
be received as
2. A change of proof of such
interest in one or interest, and
more several every policy
distinct things, executed by way
separately of gaming or
insured by one wagering, is void.
policy, does not (Sec. 25, ibid)
avoid the The beneficiary The beneficiary
insurance as to need not have must have
the others. (Sec. insurable insurable
22, ibid) interest over the interest over the
life of the thing insured.
3. A change on insured if the
interest, by will insured himself
or succession, on secured the
the death of the As to the policy.
insured, does not beneficiary’
avoid an s interest However, if the
insurance; and life insurance
his interest in the was obtained by
insurance passes the beneficiary,
to the person the latter must
taking his have insurable
interest in the interest over the
thing insured. life of the
(Sec. 23, ibid) insured.
(De Leon, 2010; Sundiang Sr. & Aquino, 2014)
4. A transfer of
interest by one of Existence of insurable interest in life and
several partners, property insurance
joint owners, or
owners in For both life and property insurance, the insurable
common, who interest is required to exist at the time of perfection
are jointly of the policy. For property insurance, the insurable
insured, to the interest must also exist at the time of loss, however,
others, does not in case of life insurance, the insurable interest need
avoid an to exist only at the time of perfection and not
insurance even thereafter. (IC, Sec. 19)
though it has
been agreed that Change of beneficiary
the insurance
shall cease upon

81
 MERCANTILE LAW
GR: The insured shall have the right to change the
beneficiary he designated in the policy
XPN: If the insured expressly waived this right in
the said policy.
Notwithstanding the foregoing, in the event the
insured does not change the beneficiary during his
lifetime, the designation shall be deemed
irrevocable. (IC, Sec. 11)
NOTE: Under Sec. 64 of the Family Code, the
innocent spouse is allowed to revoke the
designation of the other spouse as irrevocable
beneficiary after legal separation.
Irrevocable designation of the beneficiary to the
assignment of the policy (2005 Bar)
The insured cannot assign the policy if the
designation of the beneficiary is irrevocable. The
irrevocable beneficiary has a vested right.
(Sundiang Sr. & Aquino, 2014)
Effects of Irrevocable Designation of
Beneficiary:
a. The beneficiary designated in a life insurance
contract cannot be changed without the consent
of the beneficiary. (Gercio v. Sun Life Assurance
of Canada, 48 Phil. 53, 28 September 1925)
b. A new beneficiary cannot be added to the
irrevocably designated beneficiary for this
would in effect reduce the latter’s vested rights.
(Go v. Redfern, 72 Phil. 71, 25 April 1941)
c. The irrevocably designated beneficiary may
obtain a policy loan to the extent stated in the
schedule of values attached to the policy.
(Gercio v. Sun Life Assurance of Canada, 48 Phl.
53, 28 September 1925)
d. The insured cannot take the cash surrender
value assign or even borrow on said policy
without the consent of the beneficiary.
IN LIFE/ HEALTH
Two general classes of life policies
1. Insurance upon one’s life – are those taken out
by the insured upon his own life (IC, Section
10[a]) for the benefit of himself, or of his estate,
in case it matures only at his death, for the
benefit of third person who may be designated
as beneficiary.
The question of insurable interest is immaterial
where the policy is procured by the person
whose life is insured. 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 limits under Articles 739 and
2012 of the New Civil Code. (De Leon, 2010)
Q: X is the common-law wife of Y. Y loves X so
much that he took out a life insurance on his own
life and made her the sole beneficiary. Y did this
to ensure that X will be financially comfortable
when he is gone. Upon the death of Y, who should
be entitled to the proceeds? (2012 Bar)
A: X as sole beneficiary under the life insurance
policy on the life of Y will be entitled to the proceeds
of the life insurance.
Q: On July 3, 1993, Delia Sotero (Sotero) took out
a life insurance policy from Ilocos Bankers Life
Insurance Corporation (Ilocos Life) designating
Creencia Aban (Aban) her niece, as her
beneficiary. Ilocos Life issued Policy No. 747,
with a face value of P100,000, in Sotero’s favor
on August 30,1993, after the requisite medical
examination and payment of the premium.
a
On April 10, 1996, Sotero died. Aban filed a
claim for the insurance proceeds on July 9, 1996,
Ilocos Life conducted an investigation into the
claim and came out with the following findings:
1. Sotero did not personally apply for
insurance coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability
to pay the premium on the policy.
4. Sotero did not sign the application for
insurance
5. Alban was the one who filed the insurance
application and designated herself as the
beneficiary.
For the above reasons and claiming fraud, Ilocos
Life denied Aban’s claim on April 16, 1997 but
refunded the premium paid on the policy. May
Sotero validly designate her niece as
beneficiary? (2014 Bar)
A: YES. Sotero may validly designate her niece as
beneficiary. The same is not prohibited under the
Insurance Code or any other laws.
2. Insurance upon life of another – are those taken
out by the insured upon the life of another.
Where a person names himself beneficiary in a
policy he takes on the life of another, he must
have insurable interest in the life of the latter
(De Leon, 2010). This class includes the
following:
a. His spouse and of his children.
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 INSURANCE CODE
b. Any person on whom he depends wholly or
in part for education or support, or in
whom he has a pecuniary interest.
c. Of any person under a legal obligation to
him for the payment of money, or
respecting property or services, of which
death or illness might delay or prevent the
performance.
d. Of any person upon whose life any estate or
interest vested in him depends (IC, Sec. 10).
NOTE: In paragraph (a) of Section 10 of the
Insurance Code, mere relationship is sufficient
while the rest (pars. b, c, and d) requires pecuniary
interest. Thus, the interest of the creditor over the
life of the debtor ceases upon full payment.
(Sundiang Sr. & Aquino, 2009)
Persons prohibited from being designated as
beneficiaries (1998 Bar)
Under the Article 739 of the New Civil Code, the
following are prohibited designation of
beneficiaries:
1. Those made between persons who were guilty
of adultery or concubinage at the time of
donation. Finding of guilt in a civil case is
sufficient.
2. Those made between persons found guilty of
the same criminal offense, in consideration
thereof.
3. Those made to a public officer or his wife,
descendants or ascendants by reason of his
office.
The designation of the above-enumerated persons
is void but the policy is binding. The estate will get
the proceeds. (Sundiang Sr. & Aquino, 2009)
Beneficiary willfully brought about the death of
the insured (2008 Bar)
GR: 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 such a
case, the share forfeited shall pass on to the other
beneficiaries, unless otherwise disqualified. In the
absence of other beneficiaries, the proceeds shall be
paid in accordance with the policy contract. If the
policy contract is silent, the proceeds shall be paid
to the estate of the insured. (Sec. 12, ibid)
XPNs:
1. The beneficiary acted in self-defense;
2. The insured’s death was not intentionally
caused (e.g., thru accident);
83
3. Insanity of the beneficiary at the time he killed
the insured.
Q: Juan de la Cruz was issued Policy No. 8888 of
the Midland Life Insurance Co. on a whole life
plan for P20,000 on August 19, 1989. Juan is
married to Cynthia with whom he has three
legitimate children. He, however, designated
Purita, his common-law wife, as the revocable
beneficiary. Juan referred to Purita in his
application and policy as the legal wife. Three
(3) years later, Juan died. Purita filed her claim
for the proceeds of the policy as the designated
beneficiary therein. The widow, Cynthia, also
filed a claim as the legal wife. To whom should
the proceeds of the insurance policy be
awarded? (1998 Bar)
A: The estate is entitled to claim for the proceeds of
the insurance policy. As a general rule, the insured
may designate anyone he wishes to be his/her
beneficiary. However, Art. 2012 of the Civil Code,
which applies suppletorily to the Insurance Code,
provides that any person who is forbidden from
receiving any donation under Art. 739 cannot be
named beneficiary of a life insurance policy by the
person who cannot make any donation to him,
according to said article. Art. 739 specifically bars
the donations as between persons who were guilty
of adultery or concubinage. Since Purita is a
common-law wife of Juan, she falls squarely in to
this category therefore she is disqualified to receive
insurance proceeds and when this happens, the
estate of the deceased is the one entitled to the
proceeds (Insular Life Assurance Company, Ltd. vs.
Capronia Ebrado, supra).
Q: Loreto designated Eva, his common-law wife,
and illegitimate children as beneficiaries in his
life insurance policies. Loreto was killed and
Eva was the prime suspect in his death. The
legitimate wife and children of Loreto asked for
the insurance proceeds contending that
illegitimate family is disqualified from being
beneficiaries and that the insurance benefits
must redound to the benefit of the estate of
Loreto. Will the claim of the legitimate family
prosper?
A: NO. The insurance proceeds shall be applied
exclusively to the proper interest of the person in
whose name or for whose benefit it is made unless
otherwise specified in the policy.
While the share of Eva must be forfeited, the
designation of the illegitimate children as
beneficiaries remains valid. There is no
proscription in naming illegitimate children as
beneficiaries. It is only in cases where the insured
 MERCANTILE LAW
has not designated beneficiary or when the
designated beneficiary is disqualified by law to
receive the proceeds, that the policy proceeds shall
redound to the benefit of the estate of the insured.
Thus, the proceeds of the policy must be awarded to
the illegitimate children, to the exclusion of the
legitimate family. (Heirs of Loreto Maramag vs.
Maramag, G.R. No. 181132, June 5, 2009)
Because no legal proscription exists in naming as
beneficiaries, children of illicit relationships by the
insured, the shares of the common-law spouse in
the insurance proceeds, whether forfeited by the
Court in view of the prohibition on donation under
Article 739 of the Civil Code or by the insurers
themselves for reasons based on the insurance
contracts, must be awarded to the said illegitimate
children, the designated beneficiaries, to the
exclusion of the legitimate heirs. (Heirs of Loreto
Maramag vs. Maramag, G.R. No. 181132, June 5,
2009)
IN PROPERTY
Every interest in property, whether real or
personal, or any relation thereto, or liability in
respect thereof, of such nature that contemplated
peril might directly damnify the insured, is
insurable interest (IC, Sec. 13).
Insurable interest in property may consist of the
following (1991 Bar):
1. An existing interest – The existing interest in the
property may be legal or equitable title.
Examples of insurable interest arising from
legal title:
a. Trustee, as in the case of the seller of
property not yet delivered;
b. Mortgagor of the property mortgaged;
c. Lessor of the property leased (De Leon,
supra).
Examples of insurable interest arising from
equitable title:
a. Purchaser of property before delivery or
before he has performed the conditions of
the sale;
b. Mortgagee of property mortgaged;
c. Mortgagor, after foreclosure but before the
expiration of the period within which
redemption is allowed (De Leon, 2010).
2. An inchoate interest founded on an existing
interest.
Example: A stockholder has an inchoate interest
in the property of the corporation of which he is
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a stockholder, which is founded on an existing
interest arising from his ownership of shares in
the corporation. (De Leon, 2014)
3. An expectancy coupled with an existing interest
in that out of which the expectancy arises.
NOTE: Existence of insurable interest is a
matter of public policy. Hence, the principle of
estoppel cannot be invoked. (Sundiang Sr. &
Aquino, 2014)
Measure of insurable interest in property (2000
Bar)
The measure of insurable interest in property is the
extent to which the insured might be damnified by
loss or injury thereof (IC, Sec. 17). Insurable interest
in property does not necessarily imply a property
interest in, or lien upon, or possession of, the subject
matter of the insurance, and neither title nor a
beneficial interest is requisite to the existence
thereof. It is sufficient that the insured is so situated
with reference to the property that he would be
liable to loss should it be injured or destroyed by the
peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit
from its existence or would suffer loss from its
destruction. (Gaisano Cagayan, Inc. v. Insurance
Company of North America, G.R. No. 147839, June 8,
2006)
A common carrier or depository’s extent of
insurable interest in a thing held by him
A carrier or depositary 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 (IC, Sec.
15) because the loss of the thing by the carrier or
depository may cause liability against him to the
extent of its value.
Change of interest in any part of a thing insured
“Change of interest” contemplated by law is an
absolute transfer of the insured’s entire interest in
the property insured to one not previously
interested or insured. (Perez, 2006)
GR: A change of interest in any part of a thing
insured unaccompanied by a corresponding change
in interest in the insurance suspends the insurance
to an equivalent extent, until the interest in the thing
and the interest in the insurance are vested in the
same person. (Sec. 20; Sec.58, ibid)
XPNs:
1. When there is a prohibition against alienation
or change of interest without the consent of the
 INSURANCE CODE
insurer in which case the policy is not merely to exceed the amount of the policies issued. (Perez,
suspended but avoided. (Sundiang & Aquino, 2006)
2014., citing Curtis vs. Girard Fire and Marine
Ins., 11 SE 3, 190 Ga. 954) A provision in the policy that prohibits double
2. In life, accident, and health insurance. (IC, Sec. insurance is valid. However, in the absence of such
20) prohibition, double insurance is allowed. (ibid)
3. A change of interest in a thing insured, after the
occurrence of an injury which results in a loss Nature of the liability of the several insurers in
does NOT affect the right of the insured to double insurance (2005 Bar)
indemnity for loss. (IC, Sec. 21)
4. A change of interest in one or more distinct A: In double insurance, the insurers are considered
things, separately insured by one policy does as co-insurers. Each one is bound to contribute
NOT avoid the insurance as to the others. (IC, ratably to the loss in proportion to the amount for
Sec. 22) which he is liable under his contract. This is known
5. A change of interest by will or succession, on the as the “principle of contribution” or “contribution
death of the insured, does NOT avoid an clause”. (IC, Sec. 96 [e])
insurance; and his interest in the insurance
passes to the person taking his interest in the Over insurance
thing insured. (IC, Sec. 23)
6. A transfer of interest by one of several partners, There is over insurance whenever the insured
joint owners, or owners in common, who are obtains a policy in an amount exceeding the value of
jointly insured, to the others does NOT avoid an his insurable interest. (Perez, 2006)
insurance even though it has been agreed that
the insurance shall cease upon an alienation of Double Insurance vs. Over Insurance
the thing insured. (IC, Sec. 24)
7. When the policy is so framed that it will inure to DOUBLE INSURANCE OVER INSURANCE
the benefit of whomsoever, during the There may be no over When the amount of
continuance of the risk, may become the owner insurance as when the the insurance is
of the interest insured. (IC, Sec. 57) sum total of the beyond the value of the
amounts of the policies insured’s insurable
DOUBLE INSURANCE AND OVER INSURANCE issued does not exceed interest.
the insurable interest
Double insurance of the insured.

Double insurance exists where the same person is
insured by several insurers separately, in respect to
the same subject and interest. (Sec. 95, ibid)
Requisites of double insurance (STRIP)
1. Subject matter is the same
2. Two or more insurers insuring separately
3. Risk or peril insured against is the same
4. Interest insured is the same
5. Person insured is the same
There is no double insurance even though two
policies were both issued over the same subject
matter and both covered the same peril insured
against if the two policies were issued to two
different entities. (Malayan Insurance Co. vs.
Philippine First Insurance Co., G.R. No. 184300, July
11, 2012)
Double insurance is not prohibited by law
It is not contrary to law and hence, in case of double
insurance, the insurers may still be made liable up
to the extent of the value of the thing insured but not
There are two or more There may be only one
insurers insuring the insurer, with whom the
same subject matter. insured takes
insurance beyond the
value of his insurable
interest.
Rules when the insured in a policy other than
life is over insured by double insurance
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
which the insurers are severally liable under
their respective contracts;
2. Where the policy under which the insured
claims is a valued policy, any sum received by
him under any other policy shall be deducted
from the value of the 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, any sum received
by him under any policy shall be deducted
against the full insurable value, for any sum
received by him under any policy;

85
 MERCANTILE LAW
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 and the other insurers, to
contribute ratably to the loss in proportion to
the amount for which he is liable under his
contract. (Sec. 96, ibid)
Additional or other insurance clause (2008 Bar)
A clause in the policy that provides that the policy
shall be void if the insured procures additional
insurance without the consent of the insurer.
(Pioneer Insurance and Surety Corp vs. Yap, G.R. No.
L-36232, December 19, 1974)
The insurer may insert an “other insurance clause”
which will prohibit double insurance. The rationale
is to prevent the danger that the insured will over
insure his property and thus avert the possibility of
perpetration of fraud (ibid). It is lawful and
specifically allowed under Sec. 75 of the Insurance
Code which provides that “a policy may declare that
a violation or a specified provision thereof shall
avoid it, otherwise the breach of an immaterial
provision does not avoid it.”
Waiver of violation
When the insurer, with the knowledge of the
existence of other insurances, which the insurer
deemed a violation of the contract, preferred to
continue the policy, its action amounted to a waiver
of annulment of the contract. (Perez, 2006 citing
Gonzales Lao v. Yek Tong Lin Fire & Marine Ins. Co.,
G.R. No. L-33131, December 13, 1930)
Q: Wyeth Philippines, Inc. (Wyeth) procured a
marine policy from Philippines First Insurance
Co., Inc. (Philippines First) to secure its interest
over its own products while the same were
being transported or shipped in the Philippines.
Thereafter, Wyeth executed its annual contract
of carriage with Reputable Forwarder Services,
Inc. (Reputable). Under the contract, Reputable
undertook to answer for all risks with respect to
the goods and shall be liable to Wyeth, for the
loss, destruction, or damage of the
goods/products due to any and all causes
whatsoever, including theft, robbery, flood,
storm, earthquakes, lightning, and other force
majeure while the goods/products are in transit
and until actual delivery to the customers,
salesmen, and dealers. The contract also
required Reputable to secure an insurance
policy on Wyeth’s goods. Thus, Reputable signed
86
a Special Risk Insurance Policy (SR Policy) with
Malayan Insurance Co., Inc., (Malayan) for the
amount of P1,000,000.00. Is there is double
insurance (as prohibited in Section 5 of the SR
policy between Malayan and Reputable) so as to
preclude Philippine First from claiming
indemnity from Malayan?
A: NO. The interest of Wyeth over the property
subject matter of both insurance contracts is
different and distinct from that of Reputable’s. The
policy issued by Philippines First was in
consideration of the legal and/or equitable interest
of Wyeth over its own goods. On the other hand,
what was issued by Malayan to Reputable was over
the latter’s insurable interest over the safety of the
goods, which may become the basis of the latter’s
liability in case of loss or damage to the property
and falls within the contemplation of Section 15 of
the Insurance Code. Therefore, even though the two
concerned insurance policies were issued over the
same goods and cover the same risk, there arises no
double insurance since they were issued to two
different persons/entities having distinct insurable
interests. Necessarily, over insurance by double
insurance cannot likewise exist. (Malayan Insurance
Co., Inc., v. Philippine First Insurance Co., Inc. and
Reputable Forwarder Services, Inc., G.R. No. 184300,
July 11, 2012)
Absence of notice of existence of other insurance
constitutes fraud
When the insurance policy specifically requires that
notice should be given by the insured of the
existence of other insurance policies upon the same
property, the total absence of such notice nullifies
the policy. Such failure to give notice of the
existence of other insurance on the same property
when required to do so constitutes deception and it
could be inferred that had the insurer known that
there were many other insurance policies on the
same property, it could have hesitated or plainly
desisted from entering into such contract. (Perez,
2006)
Cancellation of policy of insurance by reason of
over insurance
Sec. 64 of the Insurance Code of 2013 provides that
upon discovery of other insurance coverage that
makes the total insurance in excess of the value of
the property insured, the insurer may cancel such
policy of insurance; provided there is prior notice
and such circumstance occurred after the effective
date of the policy.
Q: The Peninsula Insurance Company offered to
insure Francis' brand new car against all risks in
 INSURANCE CODE
the sum of P1 Million for 1 year. The policy was
issued with the premium fixed at P60,000.00
payable in 6 months. Francis only paid the first
two months installments. Despite demands, he
failed to pay the subsequent installments. Five
months after the issuance of the policy, the
vehicle was carnapped. Francis filed with the
insurance company a claim for its value.
However, the company denied his claim on the
ground that he failed to pay the premium
resulting in the cancellation of the policy. Can
Francis recover from the Peninsula Insurance
Company? (2006 Bar)
A: YES. As a general rule, no policy is binding unless
the premiums thereof have been paid. However, one
of the exceptions is when there is an agreement
allowing the insured to pay the premium in
installments and partial payment has been made at
the time of loss. In the case at hand Francis already
paid two installments at the time of the loss and as
such may recover on the policy (Makati Tuscany
Condominium Corp. v. CA, G.R. No. 95546, Nov. 6,
1992). Furthermore, the contention of the insurer
that the failure to pay premium resulted in the
cancellation of the policy is not tenable since no
policy of insurance shall be cancelled except upon
notice thereof to the insured. (IC, Sec. 64)
MULTIPLE OR SEVERAL INTERESTS
ON SAME PROPERTY
Instances where more than one insurable
interest may exist in the same property
1. In trust, both trust or and trustee have
insurable interest over the property in trust.
2. In a corporation, both the corporation and its
stockholders have insurable interest over the
assets.
3. In partnership both the firm and partners have
insurable interest over its assets.
4. In assignment both the assignor and assignee
have insurable interest over the property
assigned.
5. In lease, the lessor, lessee and sub-lessees have
insurable interest over the property in lease.
6. In mortgage, both the mortgagor and
mortgagee have insurable interest over the
property mortgaged.
Insurable interest of mortgagor and mortgagee
in case of a mortgaged property are NOT the
same (1999, 2010 Bar)
Each has an insurable interest in the property
mortgaged and this interest is separate and distinct
from the other. Therefore, insurance taken by one in
his name only and in his favor alone does not inure
87
to the benefit of the other. The same is not open to
objection that there is double insurance (RCBC vs.
CA, 289 G.R. Nos. 128833-34, 128866, April 20, 1998;
IC, Sec. 8).
Extent of insurable interest of mortgagor and
mortgagee (1999 Bar)
1. Mortgagor – The mortgagor of property, as
owner, has an insurable interest to the extent of
its value even though the mortgage debt equals
such value.
2. Mortgagee – The mortgagee as such has an
insurable interest in the mortgaged property to
the extent of the debt secured; such interest
continues until the mortgage debt is
extinguished. (Sundiang Sr. & Aquino, 2014)
NOTE: In case of an insurance taken by the
mortgagee alone and for his benefit, the mortgagee,
after recovery from the insurer, is not allowed to
retain his claim against the mortgagor but it passes
by subrogation to the insurer to the extent of the
insurance money paid. (De Leon, 2010)
Q: To secure a loan of P10 million, Mario
mortgaged his building to Armando. In
accordance with the loan arrangements, Mario
had the building insured with First Insurance
Company for P10 million, designating Armando
as the beneficiary. Armando also took an
insurance on the building upon his own interest
with Second Insurance Company for P5 million.
The building was totally destroyed by fire, a
peril insured against under both insurance
policies. It was subsequently determined that
the fire had been intentionally started by Mario
and that in violation of the loan agreement, he
had been storing inflammable materials in the
building.
a. How much, if any, can Armando recover
from either or both insurance companies?
b. What happens to the P10 million debt of
Mario to Armando? Explain. (2010 Bar)
A:
a. Armando can receive P5 million from Second
Insurance Company. As mortgagee, he had an
insurable interest in the building (Panlileo v.
Cosio, 97 Phil. 919 (1955). Armando cannot
collect anything from First Insurance Company.
First Insurance Company since the latter is not
liable for the loss of the building. First, it was
due to a willful act of Mario, who committed
arson (Section 87 of the Insurance Code; East
Furnitures, Inc. v. Globe & Rutgers Fire Insurance
Company, 57 Phil. 576 (1932)). Second, fire
insurance policies contain a warranty that the
 MERCANTILE LAW
insured will not store hazardous materials
within the insured premises. Mario breached
this warranty when he stored inflammable
materials in the building (Young v. Midland
Textile Insurance Company, 30 Phil. 617 (1915).
These two factors exonerate First Insurance
Company from liability to Armando as
mortgagee even though it was Mario who
committed them. (Sec. 8 of the Insurance Code)
b. Since Armando would have collected P5 million
from Second Insurance Company, this amount
should be considered as partial payment of the
loan. Armando can only collect the balance of P5
million. Second Insurance Company can recover
from Mario the amount of P5 million it paid,
because it became subrogated to the rights of
Armando.
Standard or union mortgage clause
It is a clause that states that the acts of the
mortgagor do not affect the mortgagee. The purpose
of the clause is to make a separate and distinct
contract of insurance on the interest of the
mortgagee. (De Leon, 2010)
Open or loss-payable mortgage clause
It is a clause which provides for the payment of loss,
if any, to the mortgagee as his interest may appear
and under it, the acts of the mortgagor affect the
mortgagee (ibid).
In a policy obtained by the mortgagor with loss
payable clause in favor of the mortgagee as his
interest may appear, the mortgagee is only a
beneficiary under the contract, and recognized as
such by the insurer but not made a party to the
contract itself. This kind of policy covers only such
interest as the mortgagee has at the issuance of the
policy. (Sundiang Sr. & Aquino, 2014, Geagonia v. CA,
supra)
The mortgagee may be made a beneficial payee
through any of the following:
1. He may become the assignee of the policy with
the consent of the insurer
2. He may be the mere pledgee without such
consent
3. A rider making the policy payable to the
mortgagee “as his interest may appear” may be
attached
4. A “standard mortgage clause” containing a
collateral independent contract between the
mortgagee and the insurer may be attached
The policy, though, by its terms payable absolutely
to the mortgagor; may have been procured by a
88
mortgagor under a contract duty to insure for the
mortgagee’s benefit, in which the mortgagee
acquires an equitable lien upon the proceeds (ibid.).
The following are the effects if the insurance is
procured by mortgagor for benefit of mortgagee, or
policy assigned to mortgagee:
1. The contract is deemed to be upon the interest
of the mortgagor; hence he does not cease to be
party to the contract;
2. 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;
3. 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;
4. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit at the time
of loss and
5. Upon recovery by the mortgagee to the extent
of his credit, the debt is extinguished. (ibid.,
citing IC, Sec. 8)
NOTE: The rule on subrogation by the insurer to the
right of the mortgagee does not apply in this case.
Assignment of policy to mortgagee is not a
payment
The assignment is merely to afford the mortgagee a
greater security for the settlement of the
mortgagor’s obligation and should not be construed
as payment in just the same way that delivery of
negotiable instruments does not constitute
payment until the proceeds are realized or
collected. (Perez, 2006)
Effects of “mortgage redemption” insurance
procured by the mortgagor
A “mortgage redemption insurance” is simply a kind
of life insurance procured by the mortgagor, with
the mortgagee as beneficiary, up to the extent of the
mortgage indebtedness. Its rationale is to give
protection to both the mortgagee and the
mortgagor. In case the mortgagor-insured dies, the
proceeds of such insurance will be applied to the
payment of the mortgage debt to the mortgagee,
thereby relieving the heirs of the mortgagor of the
burden of paying the debt. (Great Pacific Assur. Corp.
v. Court of Appeals, et. al., G.R. No. 113899, October
13, 1999)
PERFECTION OF THE INSURANCE CONTRACT
Policy of insurance
 INSURANCE CODE
It is the written instrument in which the contract of
insurance is set forth (IC, Sec. 49.). It is the written
document embodying the terms and stipulations of
the contract of insurance between the insured and
insurer.
The policy is not necessary for the perfection of the
contract. (Sundiang Sr. & Aquino, 2014)
Form of an insurance contract
1. The policy shall be in printed form which may
contain blank spaces to be filled in;
2. Any rider, clause, warranty or endorsement
purporting to be part of the contract of
insurance and which is pasted or attached to
said policy is not binding on the insured, unless
the descriptive title or name of the rider, clause,
warranty or endorsement is also mentioned
and written on the blank spaces provided in the
policy.
3. Unless applied for by the insured or owner, any
rider, clause, warranty or endorsement issued
after the original policy shall be countersigned
by the insured or owner.
NOTE: Notwithstanding the foregoing, the policy
may be in electronic form subject to the pertinent
provisions of Republic Act No. 8792, otherwise
known as the ‘Electronic Commerce Act’ and to such
rules and regulations as may be prescribed by the
Commissioner. (IC, Sec. 50)
Types of policy of insurance
1. Open – one in which the value of the thing
insured is not agreed upon, and the amount of
the insurance merely represents the insurer’s
maximum liability. The value of such thing
insured shall be ascertained at the time of the
loss. (IC, Sec. 60)
2. Valued – is one which expresses on its face an
agreement that the thing insured shall be
valued at a specific sum. (IC, Sec. 61)
3. Running – one which contemplates successive
insurances, and which provides that the object
of the policy may be from time to time defined,
especially as to the subjects of insurance, by
additional statements or indorsements. (IC, Sec.
62)
Basic contents of a policy
1. Parties;
2. Amount of insurance, except in open or running
policies;
3. Rate of premium;
4. Property or life insured;
89
5. Interest of the insured in the property if he is
not the absolute owner;
6. Risk insured against; and
7. The period during which the insurance is to
continue. (IC, Sec. 51)
Rider
An attachment to an insurance policy that modifies
the conditions of the policy by expanding or
restricting its benefits or excluding certain
conditions from the coverage. (Black’s Law
Dictionary)
Riders are not binding on the insured unless the
descriptive title or name thereof is mentioned and
written on the blank spaces provided in the policy.
It should be countersigned by the insured or owner
unless he was the one who applied for the same. (IC,
Sec. 50)
Cover notes
Persons who wish to be insured may get protection
before the perfection of the insurance contract by
securing a cover note. The cover note issued by the
insurer shall be deemed an insurance contract as
contemplated under Section 1(1) of the Insurance
Code subject to the following rules:
1. The cover note shall be issued or renewed only
upon prior approval of the Insurance
Commission;
2. The cover note shall be valid and binding for not
more than sixty (60) days from the date of its
issuance;
3. No separate premium (separate from the policy
or main contract) is required for the cover note;
4. The cover note may be canceled by either party
upon prior notice to the other of at least seven
(7) days;
5. The policy should be issued within sixty (60)
days after the issuance of the cover note;
6. The sixty (60)-day period may be extended
upon written approval of the Insurance
Commission; and
7. The written approval of the Insurance
Commission is dispensed with upon the
certification of the president, vice-president or
general manager of the insurer that the risk
involved, the values of such risks and premium
therefor, have not as yet been determined or
established and the extension or renewal is not
contrary to or is not for the purpose of violating
the Insurance Code or any rule
OFFER AND ACCEPTANCE/CONSENSUAL
Perfection of an insurance contract
 MERCANTILE LAW
The contract of insurance is perfected when the
assent or consent is manifested by the meeting of
the offer and the acceptance upon the thing and the
cause which are to constitute the contract. Mere
offer or proposal is not contemplated (De Lim v. Sun
Life Assurance Co., G.R. No. L-15774, November 29,
1920)
Cognition Theory
Mere submission of the application without the
corresponding approval of the policy does not result
in the perfection of the contract of insurance.
Insurance contracts through correspondence follow
the “cognition theory” wherein an acceptance made
by letter shall not bind the person making the offer
except from the time it came to his knowledge.
(Enriquez v. Sun Life Assurance Co. of Canada, GR No.
L-15774, Nov. 29, 1920)
Where the applicant died before he received notice
of the acceptance of his application for the
insurance, there is no perfected contract. (Perez v.
Court of Appeals, G.R. No. 112329, January 28, 2000)
Q: On June 1, 2011, X mailed to Y Insurance Co.
his application for life insurance. On July 21,
2011, the insurance company accepted the
application and mailed, on the same day, its
acceptance plus the cover note. It reached X's
residence on August 11. On August 4, 2011, X
figured in a car accident. He died a day later. May
X's heirs recover on the insurance policy? (2011
Bar)
A: NO, since X had no knowledge of the insurer's
acceptance of his application before he died. What is
being followed in insurance contracts is what is
known as the “cognition theory”.
Offer in property and liability insurance
It is the insured who makes an offer to the insurer,
who accepts the offer, rejects it, or makes a counter-
offer. The offer is usually accepted by an insurance
agent on behalf of the insurer. (De Leon, 2010)
Offer in life and health insurance
It depends upon whether the insured pays the
premium at the time he applies for insurance.
1. If he does not pay the premium, his application
is considered an invitation to the insurer to
make an offer, which he must then accept
before the contract goes into effect.
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2. If he pays the premium with his application, his
application will be considered an offer (De Leon,
2010).
DELAY IN ACCEPTANCE
The acceptance of an insurance policy must be
unconditional, but it need not be by a formal act. (De
Leon, 2010)
Delay in acceptance of the insurance application will
not result in a binding contract. Court cannot
impose upon the parties a contract if they did not
consent. However, in proper cases, the insurer may
be liable for tort. (Sundiang Sr. & Aquino, 2014)
Unreasonable delay in returning the premium
raises the presumption of acceptance of the
insurance application. (Gloria v. Philippine American
Life Ins. Co., CA 73 O.G. [No.37] 8660)
DELIVERY OF POLICY
Delivery is not necessary in the formation of the
contract of insurance since the contract of insurance
is consensual. (Sundiang Sr. & Aquino, 2014).
The mere delivery of an insurance policy to
someone does not give rise to the formation of a
contract in the absence of proof that he had agreed
to be insured.
Two types of delivery
1. Actual – delivery to the person of the insured.
2. Constructive
a. By mail –If policy was mailed already and
premium was paid and nothing is left to be
done by the insured, the policy is
considered constructively delivered if
insured died before receiving the policy.
b. By agent –If delivered to the agent of the
insurer, whose duty is ministerial, or
delivered to the agent of the insured, the
policy is considered constructively
delivered. (De Leon, 2010)
PREMIUM PAYMENT
Premium
It is an agreed price for assuming and carrying the
risk – that is, the consideration paid to an insurer for
undertaking to indemnify the insured against a
specified peril. (De Leon, 2010)
The burden is on an insured to keep a policy in force
by the payment of premiums, rather than on the
insurer to exert every effort to prevent the insured
 INSURANCE CODE
from allowing a policy to elapse through a failure to
make premium payments. The continuance of the
insurer's obligation is conditional upon the
payment of premiums, so that no recovery can be
had upon a lapsed policy, the contractual relation
between the parties having ceased. (Philippine
Phoenix Surety & Insurance Company Vs.
Woodworks, Inc. G.R. No. L-25317 August 6, 1979)
Premium vs. Assessment
PREMIUM ASSESSMENT
Levied and paid to Collected to meet
meet anticipated actual losses
losses
Premium is not a debt Assessment when
properly levied, unless
otherwise expressly
agreed, is a debt
Acceptance of premium
Acceptance of premium within the stipulated period
for payment thereof, including the agreed grace
period, merely assures continued effectivity of the
insurance policy in accordance with its terms.
(Stoke v. Malayan Insurance Co., Inc., G.R. No. L-
34768, February 28, 1984)
Payment of the premium to agent of the insurance
company is binding on it (Malayan Insurance v.
Arnaldo G.R. No. L-67835, October 12, 1987 and
Areola v. CA G.R. No. 95641, September 22, 1994). If
an insurance company delivers a policy to an
insurance broker, it is deemed to have authorized
him to receive the payment of the premium. (Sec.
306, South Sea v. CA G.R. No. 102253, June 2, 1995;
American Home Assurance v. Chua, G.R. No. 130421,
June 28, 1999)
“Cash and carry” rule (2003 Bar)
GR: No policy or contract of insurance issued by an
insurance company is valid and binding unless and
until the premium thereof has been paid. Any
agreement to the contrary is void.
XPN: A policy is valid and binding even when there
is non-payment of premium:
1. In case of life or industrial life policy whenever
the grace period provision applies, or whenever
under the broker and agency agreements with
duly licensed intermediaries, a ninety (90)-day
credit extension is given. No credit extension to
a duly licensed intermediary should exceed
ninety (90) days from date of issuance of the
policy. (IC, Sec. 77)
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2. When there is acknowledgment in a policy of a
receipt of premium, which the law declares to be
conclusive evidence of payment, even if there is
stipulation therein that it shall not be binding
until the premium is actually paid. This is
without prejudice however to right of insurer to
collect corresponding premium. (Sec. 77, ibid)
3. When there is an agreement allowing the
insured to pay the premium in installments and
partial payment has been made at the time of
loss. (Makati Tuscany Condominium Corp. v. CA,
G.R. No. 95546, Nov. 6, 1992)
4. When there is an agreement to grant the
insured credit extension for the payment of the
premium. (Art. 1306, NCC), and loss occurs
before the expiration of the credit term. (UCPB
General Insurance v. Masagana Telemart, G.R.
No. 137172, Apr. 4, 20012006, 2007 Bar)
5. When estoppel bars the insurer to invoke non-
recovery on the policy.
6. When the public interest so requires, as
determined by the Insurance Commissioner
Example: In compulsory motor vehicle
insurance, if the policy was issued without
payment of premium by the vehicle owner, the
insurer will still be held liable. To rule
otherwise would prejudice the 3rd party victim.
Grace Period
In case of individual life or endowment insurance
and group life insurance, the policyholder is entitled
to a grace period of either 30 days or 1 month within
which the payment of any premium after the first
may be made. (IC, Secs. 233[a], 234[a])
In case of industrial life insurance, the grace period
is 4 weeks, where premiums are payable monthly,
either 30 days or 1 month. (IC, Sec. 236 [a])
Acknowledgment of receipt of premium
Acknowledgment of receipt of premium is
conclusive evidence of its payment, in so far as to
make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until
the premium is actually paid. (IC, Sec. 79)
When the policy contains such written
acknowledgment, it is presumed that the insurer
has waived the condition of prepayment. It hereby
creates a legal fiction of payment. The presumption
is however, extended only to the question of the
binding effect of the policy.
As far as the payment of the premium itself is
concerned, the acknowledgment is only a prima
facie evidence of the fact of such payment. The
 MERCANTILE LAW
insurer may still dispute its acknowledgment but
only for the purpose of recovering the premium due
and unpaid. Whether payment was indeed made is
a question of fact.
Credit Extension
Under Sec. 77 as amended by RA 10607, a ninety
(90)-day credit extension may be given whenever
credit extension is given under the broker and
agency agreements with duly licensed
intermediaries. The requisites are as follows:
1. The credit extension must be provided for
under the broker and agency agreements;
2. The credit extension to a duly licensed
intermediary should not exceed ninety (90)
days from date of issuance of the policy.
(Sundiang Sr. & Aquino, 2014)
Q: Stable Insurance Co. (SIC) and St. Peter
Manufacturing Co. (SPMC) have had a long-
standing insurance relationship with each
other; SPMC secures the comprehensive fire
insurance on its plant and facilities from SIC.
The standing business practice between them
has been to allow SPMC a credit period of 90
days from the renewal of the policy within which
to pay the premium.
Soon after the new policy was issued and before
premium payments could be made, a fire gutted
the covered plant and facilities to the ground.
The day after the fire, SPMC issued a manager's
check to SIC for the fire insurance premium, for
which it was issued a receipt; a week later SPMC
issued its notice of loss. SIC responded by
issuing its own manager's check for the amount
of the premiums SPMC had paid, and denied
SPMC's claim on the ground that under the "cash
and carry" principle governing fire insurance,
no coverage existed at the time the fire occurred
because the insurance premium had not been
paid. Is SPMC entitled to recover for the loss
from SIC? (2003, 2013 Bar)
A: YES. St. Peter Manufacturing Company is entitled
to recover for the loss from Stable Insurance
Company. Stable Insurance Company granted a
credit term to pay the premiums. This is not against
the law, because the standing business practice of
allowing St. Peter Manufacturing Company to pay
the premiums after 60 or 90 days, was relied upon
in good faith by SPMC. Stable Insurance Company is
in estoppels. (UCPB General Insurance Company, Inc.
v. Masagana Telemart, Inc., G.R. No. 137172, April 4,
2001)
Payment in installments
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Q: American Home Assurance Co. (AHAC) ,
issued in favor of Makati Tuscany
Condominium Corporation insurance policies
for 2 years. The premiums were paid by Tuscany
on installments. The policy was again renewed,
however, Tuscany thereafter refused to pay the
balance of the premium. AHAC filed an action to
recover the unpaid balance. Tuscany contended
that payment by installment of the premiums
due on an insurance policy invalidates the
contract of insurance and no risk attached to the
policy. The policy was never binding and valid,
and no risk attached to the policy. Is the
contention of Tuscany valid?
A: NO. The subject policies are valid even if the
premiums were paid on installments. The records
clearly show that Tuscany and AHAC intended the
subject insurance policies to be binding and
effective notwithstanding the staggered payment of
the premiums. For 3 years, the insurer accepted all
the installment payments. Such acceptance of
payments speaks loudly of the insurer's intention to
honor the policies it issued to Tuscany.
While the import of Section 77 is that
prepayment of premiums is strictly required as
a condition to the validity of the contract, Section
78 of the Insurance Code in effect allows waiver
by the insurer of the condition prepayment by
making an acknowledgment in the insurance
policy of receipt of premium as conclusive
evidence of payment so far as to make the policy
binding despite the fact that premium is actually
unpaid. (Makati Tuscany Condominium Corp. vs.
Court of Appeals G.R. No. 95546, November 6, 1992)
Q: The Peninsula Insurance Company offered to
insure Francis' brand new car against all risks in
the sum of PI Million for 1 year. The policy was
issued with the premium fixed at 160,000.00
payable in 6 months. Francis only paid the first
two months installments. Despite demands, he
failed to pay the subsequent installments. Five
months after the issuance of the policy, the
vehicle was carnapped. Francis filed with the
insurance company a claim for its value.
However, the company denied his claim on the
ground that he failed to pay the premium
resulting in the cancellation of the policy. Can
Francis recover from the Peninsula Insurance
Company? (2006 Bar)
A: YES, when insured and insurer have agreed to the
payment of premium by installments and partial
payment has been made at the time of loss, then the
insurer becomes liable. When the car loss happened
on the 5th month, the six months agreed period of
payment had not yet elapsed. The owner may
 INSURANCE CODE
recover from Peninsula Insurance Company, but the
latter has the right to deduct the amount of unpaid
premium from the insurance proceeds.
Estoppel
Q: Maxilite and Marques entered into a trust
receipt transaction with FEBTC for the shipment
of various high-technology equipment. FEBIBI,
upon the advice of FEBTC, facilitated the
procurement and processing from Makati
Insurance Company of four separate and
independent fire insurance policies over the
merchandise. Maxilite agreed that FEBTC would
debit Maxilite’s account for the premium
payments. However, said premiums were not
paid. A fire gutted Maxilite’s office and
warehouse. As a result, Maxilite suffered losses
amounting to at least P2.1 million, which
Maxilite claimed against the fire insurance
policy with Makati Insurance Company. Makati
Insurance Company denied the fire loss claim on
the ground of non-payment of premium. FEBTC
and FEBIBI disclaimed any responsibility for the
denial of the claim. Will the claim of Maxilite
prosper?
A: YES. The claim of Maxilite will prosper. FEBTC is
estopped from claiming that the insurance premium
has been unpaid. That FEBTC induced Maxilite to
believe that the insurance premium has in fact been
debited from Maxilite’s account is grounded on the
the following facts: (1) FEBTC represented and
committed to handle Maxilite’s financing and capital
requirements, including the insurance of the trust
receipted merchandise; (2)the premiums of prior
insurance policies had been paid through automatic
debit arrangement; (3) FEBIBI sent FEBTC, not
Maxilite, to debit Maxilite’s account; (4) there was
no written demand from FEBTC or Makati
Insurance Company for Maxilite to pay the
insurance premium; (5) the subject insurance policy
remained uncancelled despite the alleged non-
payment of the premium, making it appear that the
insurance policy remained in force and binding.
Thus, Maxilite can still claim from FEBTC. (Jose
Marques and Maxilite Technologies, Inc. vs Far East
Bank and Trust Company, etc GR No. 171379, January
10, 2011)
Q: If the applicant failed to pay premium and
instead executed a promissory note in favor of
the insurer payable within 30 days which was
accepted by the latter, is the insurer liable in
case of loss?
A: YES, the insurer is liable because there has been
a perfected insurance contract. The insurer
accepted the promise of the applicant to pay the
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insurance premium within thirty 30 days from the
effective date of policy. By so doing, it has implicitly
agreed to modify the tenor of the insurance policy
and in effect, waived any provision therein that it
would only pay for the loss or damage in case the
same occurs after the payment of the premium.
Considering that the insurance policy is silent as to
the mode of payment, insurer is deemed to have
accepted the promissory note in payment of the
premium. This rendered the policy immediately
operative on the date it was delivered. (Capital
Insurance & Surety Co. Inc. v. Plastic Era Co., Inc. G.R.
No. L-22375, July 18, 1975)
Payment through salary deduction
Employees of the Republic of the Philippines,
including its political subdivisions and
instrumentalities, and government-owned or
controlled corporations, may pay their insurance
premiums and loan obligations through salary
deduction: Provided, That the treasurer, cashier,
paymaster or official of the entity employing the
government employee is authorized,
notwithstanding the provisions of any existing law,
rules and regulations to the contrary, to make
deductions from the salary, wage or income of the
latter pursuant to the agreement between the
insurer and the government employee and to remit
such deductions to the insurer concerned, and
collect such reasonable fee for its services (IC, Sec.
78). This is a new provision.
Payment of premium by post-dated check
Delivery of a promissory note or a check will not be
sufficient to make the policy binding until the said
note or check has been converted into cash. This is
consistent with Article 1249 of the New Civil Code.
NOTE: Payment by means of a check or note,
accepted by the insurer, bearing a date prior to the
loss, assuming availability of the funds thereof,
would be sufficient even if it remains unencashed at
the time of the loss. The subsequent effects of
encashment would retroact to the date of the
instrument and its acceptance by the creditor (2007
Bar).
Q: On September 25, 2013, Danny Marcial
(Danny) procured an insurance on his life with a
face value of P5 million from RN Insurance
Company (RN), with his wife Tina Marcial (Tina)
as sole beneficiary. On the same day, Danny
issued an undated check to RN for the full
amount of the premium. On October 1, 2013, RN
issued the policy covering Danny’s life
insurance. On October 5, 2013, Danny met a
 MERCANTILE LAW
tragic accident and died. Tina claimed the
insurance benefit, but RN was quick to deny the
claim because at the time of Danny’s death, the
check was not yet encashed and therefore the
premium remained unpaid.
a. Is RN correct?
b. Will your answer be the same if the check is
dated October 15, 2013? (2014 Bar)
A:
a. NO. RN Insurance is not correct. The facts of the
case show that Danny procured insurance on
his life on September 25, 2013, with his wife
Tina as beneficiary, and on that same day, he
issued an undated check to RN for the full
amount of the premium. Since the undated
check was issued to RN on September 25, 2013,
it will be considered dated as of the same day.
RN Insurance denied the claim of Tina because
at the time of Danny’s death, the check was not
yet encashed, therefore, the premium remained
unpaid. The payment by means of a check or
note, accepted by the insurer, bearing a date
prior to the loss, assuming the availability of the
funds thereof, would be sufficient even if it
remains unencashed at the time of the loss. The
subsequent effects of encashment would
retroact to the date of the mercantile
instrument.
b. The answer would not be the same if the check
were dated October 15, 2013. The payment of
a promissory note or postdated check at a
stated maturity subsequent to the loss, is
insufficient to put the insurance into effect.
(Vitug, Commercial Laws and Jurisprudence,
2006, Vol. I, p. 250)
If it were RN Insurance who dated the check
October 15, 2013, then my answer would be the
same as my answer to the first question.
Q: Alfredo took out a policy to insure this
commercial building from fire. The broker for
the insurance company agreed to give a 15-day
credit within which to pay the insurance
premium. Upon delivery of the policy on May 15,
2006, Alfredo issued a postdated check payable
on May 30, 2006. On May 28, 2006, a fire broke
out and destroyed the building owned by
Alfredo. May Alfredo recover on the insurance
policy? (2007 Bar)
A: YES. Alfredo may recover on the policy. It is valid
to stipulate that the insured will be granted credit
term for payment of premium. Payment by means of
a check which was accepted by the insurer, bearing
a date prior to the loss, would be sufficient. The
94
subsequent effects of encashment retroact to the
date of the check. (UCPB General Insurance Co., Inc.
v. Masagana Telamart, Inc., 356 SCRA 307 [2001])
Non-payment of premiums
Non-payment of the premium will not entitle the
insured to recover the premium from the insurer.
The continuance of the insurer’s obligation is
conditioned upon the payment of the premium, so
that no recovery can be had upon a lapsed policy,
the contractual relation between the parties having
ceased. If the peril insured against had occurred, the
insurer would have had a valid defense against
recovery under the policy.
Non-payment of the first premium prevents the
contract from becoming binding notwithstanding
the acceptance of the application or the issuance of
the policy, unless waived. But nonpayment of the
balance of the premium due does not produce the
cancellation of the contract.
With respect to subsequent premiums, non-payment
does not affect the validity of the contracts unless,
by express stipulation, it is provided that the policy
shall in that event be suspended or shall lapse. (De
Leon, 2010)
Non-payment of premiums by reason of the
circumstances or conduct of the insurer
GR: Non-payment of premiums does not merely
suspend but put an end to an insurance contract
since the time of the payment is peculiarly of the
essence of the contract. (De Leon, 2010)
XPN:
1. The insurer has become insolvent and has
suspended business, or has refused without
justification a valid tender of premiums.
(Gonzales v. Asia Life Ins. Co., G.R. No. L-5188, Oct.
29, 1952)
2. Failure to pay was due to the wrongful conduct
of the insurer.
3. The insurer has waived his right to demand
payment
Instances when payment of premium becomes a
debt or obligation
1. In fire, casualty and marine insurance, the
premium payable becomes a debt as soon as the
risk attaches.
2. In life insurance, the premium becomes a debt
only when, in the case of the first premium, the
contract has become binding, and in the case of
subsequent premiums, when the insurer has
continued the insurance after maturity of the
 INSURANCE CODE
premium, in consideration of the insured’s
express or implied promise to pay. (De Leon,
2010)
Payments in addition to regular premium
An insurer may contract and accept payments, in
addition to regular premium, for the purpose of
paying future premiums on the policy or to increase
the benefits thereof. (IC, Sec. 84)
NON-DEFAULT OPTIONS IN LIFE INSURANCE
Devices used to prevent the forfeiture of a life
insurance after the payment of the first
premium
1. Grace period – After the payment of the first
premium, the insured is entitled to a grace
period of 30 days within which to pay the
succeeding premiums. (Sec. 233 [a], ibid)
2. Cash surrender value – The amount the insurer
agrees to pay to the holder of the policy if he
surrenders it and releases his claim upon it.
(Cyclopedia Law Dictionary, 3rd ed.)
3. Extended insurance – It is where the insured is
given a right, upon default, after payment of at
least three full annual premiums (IC, Sec. 233
[f]) to have the policy continued in force from
the date of default for a time either stated or
equal to the amount as the net value of the
policy taken as a single premium, will purchase.
(De Leon, 2010)
4. Paid up Insurance – The insured is given a right,
upon default, after the payment of at least three
annual premiums to have the policy continued
in force from the date of default for the whole
period of the insurance without further
payment of premiums. It results to a reduction
of the original amount of insurance, but for the
same period originally stipulated. (6 Couch 2d.,
355; 37 C.J.S. 364)
5. Automatic Loan Clause – A stipulation in the
policy providing that upon default in payment
of premium, the same shall be paid from the
loan value of the policy until that value is
consumed. In such a case, the policy is
continued in force as fully and effectively as
though the premiums had been paid by the
insured from funds derived from other sources.
(6 Couch 2d., 383)
6. Reinstatement – Provision that the holder of the
policy shall be entitled to reinstatement of the
contract at any time within 3 years from the
date of default in the payment of premium,
unless the cash surrender value has been paid,
or the extension period expired, upon
production of evidence of insurability
satisfactory to the company and the payment of
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all overdue premiums and any indebtedness to
the company upon said policy. (IC, Sec. 233 [j])
REINSTATEMENT OF A LAPSED POLICY
OF LIFE INSURANCE
Purpose of the reinstatement provision
The purpose of the provision is to clarify the
requirements for restoring a policy to premium-
paying status after it has been permitted to lapse.
The law requires that the policy owner be
permitted to reinstate the policy, subject to the
violations specified, any time within three (3)
years from the date of default of premium
payment. A longer period, being more favorable to
the insured, may be used.
Reinstatement is not an absolute right of the
insured, but discretionary on the part of the
insurer, which has the right to deny reinstatement
if it were not satisfied as to the insurability of the
insured, and if the latter did not pay all overdue
premiums and other indebtedness to the insurer.
(McGuire vs. Manufacturer’s Life Ins. Co., G.R. No. L-
3581, September 21, 1950)
Q: A life insurance policy lapsed. The insured
applied for reinstatement of the policy and paid
only a part of the overdue premiums.
Subsequently, the insured died. Was the insurer
liable?
A: The insurer is not liable as the policy was not
reinstated. The failure to pay the balance of the
overdue premiums prevented reinstatement and
recovery of the face value of the policy. (Andres vs.
Crown Life Ins. Co., 55 O.G. 3483)
Q: Eulogio took out a life insurance policy which
contained a provision which allows for
reinstatement any time within three years after
it lapsed. Eulogio paid the premiums due on the
first two months. However, he failed to pay
subsequent premiums. One month after the
policy lapsed, he filed an application for the
reinstatement of his policy. He deposited the
overdue premiums and signed a reinstatement
policy stating that the payment deposit only
and shall not bind the Company until this
application is finally approved. Hours later,
Eulogio died of electrocution. The insurance
company denied the claim of his beneficiaries
stating that the policy was never approved. Is
the contention of the insurance company valid?
A: YES. The stipulation in a life insurance policy
giving the insured the privilege to reinstate it upon
 MERCANTILE LAW
written application does not give the insured
absolute right to such reinstatement by the mere
filing of an application. The insurer has the right to
deny the reinstatement if it is not satisfied as to the
insurability of the insured and if the latter does not
pay all overdue premium and all other
indebtedness to the insurer. After the death of the
insured, the Insurance Company cannot be
compelled to entertain an application for
reinstatement of the policy because the conditions
precedent to reinstatement can no longer be
determined and satisfied.
Eulogio’s death, just hours after filing his
Application for Reinstatement and depositing his
payment for overdue premiums and interests does
not constitute a special circumstance that can
persuade to consider the policy reinstated. Said
circumstance cannot override the clear and express
provisions of the Policy Contract and Application
for Reinstatement, and operate to remove the
prerogative of Insular Life thereunder to approve
or disapprove the Application for Reinstatement.
(Violeta R. Lalican vs. The Insular Life Assurance
Company Limited, supra)
REFUND OF PREMIUMS
Instances when the insured entitled to recover
premiums already paid or a portion thereof
(2000 Bar)
1. Whole:
a. When no part of the thing insured has been
exposed to any of the perils insured against.
(IC, Sec. 80)
b. When the contract is voidable because of
the fraud or misrepresentations of the
insurer of his agent. (IC, Sec. 82)
c. When the insurance is voidable because of
the existence of facts of which the insured
was ignorant without his fault. (IC, Sec. 82)
d. When the insurer never incurred any
liability under the policy because of the
default of the insured other than actual
fraud. (IC, Sec. 82)
e. When rescission is granted due to insurer’s
breach of contract. (IC, Sec. 74)
NOTE: When the contract is voidable, a person
insured is entitled to a return of the premium
when such contract is subsequently annulled
under the provisions of the New Civil Code.
A person insured is not entitled to a return of
premium if the policy is annulled, rescinded or if a
claim is denied by reason of fraud. (IC, Sec. 82)
96
2. Pro rata:
a. When the insurance is for a definite period
and the insured surrenders his policy
before the termination thereof; (IC, Sec. 80
[b]); except:
i. Policy not made for a definite period
of time;
ii. Short period rate is agreed upon;
iii. Life insurance policy.
b. When there is over-insurance. The
premiums to be returned shall be
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing at
risk. (IC, Sec. 83)
i. In case of over-insurance by double
insurance, the insurer is not liable for
the total amount of the insurance
taken, his liability being limited to
the property insured. Hence, the
insurer is not entitled to that portion
of the premium corresponding to the
excess of the insurance over the
insurable interest of the insured.
(1990 Bar)
ii. In case of over-insurance by several
insurers, the insured is entitled to a
ratable return of the premium,
proportioned to the amount by
which the aggregate sum insured in
all the policies exceeds the insurable
value of the thing insured. (IC, Sec.
83)
Illustration:
Where there is a total over insurance of
P500,000.00 in an aggregate P2,000,000.00
policy (P1,500,000.00 is only the insurable
value), 25% (proportion of P500k to P2M)
of the premiums paid to the several
insurers should be returned.
Insured is not entitled to return of premiums
paid
1. If the peril insured against has existed, and the
insurer has been liable for any period, the peril
being entire and indivisible (IC, Sec. 81);
2. In life insurance policies (IC, Sec. 80 [b]);
3. If the policy is annulled, rescinded or if a claim
is denied by reason of fraud (IC, Sec. 82);
4. If contract is illegal and the parties are in pari
delicto.
Q: Teodoro Cortez, applied for a 20-year
endowment policy with Great Pacific Insurance
Corporation (Great Pacific). His application,
with the requisite medical examination, was
 INSURANCE CODE
accepted and approved by the Great Pacific and
in due course, an endowment policy was issued
in his name. Thereafter, Great Pacific advised
Cortez that the policy was not in force. To make
it enforceable and operative, Cortez was asked
to remit the balance to complete his initial
annual premium and to see Dr. Felipe V. Remollo
for another full medical examination at his own
expense. Because of this, Cortez informed that it
that he was cancelling the policy and he
demanded the return of his premium plus
damages. Great Pacific ignored his demand. Is
Cortez is entitled to a refund of his premium?
A: YES. Great Pacific should have informed Cortez of
the deadline for paying the first premium before or
at least upon delivery of the policy to him, so he
could have complied with what was needful and
would not have been misled into believing that his
life and his family were protected by the policy,
when actually they were not. And, if the premium
paid by Cortez was unacceptable for being late, it
was the company's duty to return it. Since his policy
was in fact inoperative or ineffectual from the
beginning, the company was never at risk, hence, it
is not entitled to keep the premium (Great Pacific
Life Insurance Corporation v. CA, et al., G.R. No. L-
57308, April 23, 1990).
RESCISSION OF INSURANCE CONTRACTS
Instances wherein a contract of insurance may
be rescinded (1991, 1994, 1996 - 1998 Bar)
1. Concealment
2. Misrepresentation/ omission
3. Breach of warranties
Instances wherein a contract of insurance may
be canceled by the insurer
1. Nonpayment of premium;
2. Conviction of a crime arising out of acts
increasing the hazard insured against;
3. Discovery of fraud or material
misrepresentation;
4. Discovery of willful or reckless acts or
omissions increasing the hazard insured
against;
5. Physical changes in the property insured which
result in the property becoming uninsurable;
6. Discovery of other insurance coverage that
makes the total insurance in excess of the value
of the property insured; or
7. A determination by the Commissioner that the
continuation of the policy would violate or
would place the insurer in violation of the
Insurance Code. (IC, Sec. 64)
97
No policy of insurance other than life shall be
canceled by the insurer except upon prior notice
thereof to the insured, and no notice of cancellation
shall be effective unless it is based on the
occurrence, after the effective date of the policy, of
one or more of the abovementioned instances. (Sec.
64, ibid)
Notice of cancellation of the contract
All notices of cancellation shall be in writing, mailed
or delivered to the named insured at the address
shown in the policy, or to his broker provided the
broker is authorized in writing by the policy owner
to receive the notice of cancellation on his behalf,
and shall state:
1. Which of the grounds set forth in Section 64 is
relied upon; and
2. That, upon written request of the named insured,
the insurer will furnish the facts on which the
cancellation is based. (Sec. 65, ibid)
CONCEALMENT
Concealment
Concealment is a neglect to communicate that which
a party knows and ought to communicate. (IC, Sec.
26)
Under Section 27 of the Insurance Code, “a
concealment entitles the injured party to rescind a
contract of insurance.” Moreover, under Section 168
of the Insurance Code, the insurer is entitled to
rescind the insurance contract in case of an
alteration in the use or condition of the thing
insured. (Malayan Insurance Company vs. PAP Co.
(Phil. Branch), G.R. No. 200784, August 7, 2013, in
Divina 2014)
Requisites
1. A party knows a fact which he neglects to
communicate or disclose to the other party
2. Such party concealing is duty bound to disclose
such fact to the other
3. Such party concealing makes no warranty as to
the fact concealed
4. The other party has no means of ascertaining
the fact concealed
5. The fact must be material
Test of materiality (2000 Bar)
It is 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 disadvantages of the
 MERCANTILE LAW
proposed contract, or in making his inquiries. (IC,
Sec. 31)
NOTE: As long as the facts concealed are material,
concealment, whether intentional or not, entitles
the injured party to rescind. (IC, Sec.27)
Concealment in marine insurance
Rules on concealment are stricter in marine
insurance since the insurer would have to depend
almost entirely on the matters communicated by the
insured. Thus, in addition to material facts, each
party must disclose all the information he possesses
which are material or the information of the belief
or expectation of a third person, in reference to a
material fact. But concealment in a marine
insurance in any of the following matters
enumerated under Section 112 Insurance Code does
not vitiate the entire contract, but merely
exonerates the insurer from a loss resulting from
the risk concealed.
Test in ascertaining the existence of
concealment
If the applicant is aware of the existence of some
circumstances which he knows would probably
influence the insurer in acting upon his application,
good faith requires him to disclose that
circumstance, though unasked.
Matters that need not be disclosed
GR: The parties are not bound to communicate
information of the following matters:
1. Those which the other knows
2. Those which, in the exercise of ordinary care,
the other ought to know and of which, the
former has no reason to suppose him ignorant
3. Those of which the other waives
communication
4. Those which prove or tend to prove the
existence of a risk excluded by a warranty, and
which are not otherwise material
5. Those which relate to a risk excepted from the
policy and which are not otherwise material;
6. The nature or amount of the interest of one
insured (except if he is not the owner of the
property insured). (IC, Sec. 34)
XPNs:
1. In answer to inquiries of the other. (IC, Sec. 30)
2. Neither party is bound to communicate, even
upon inquiry, information of his own judgment,
because such would add nothing to the
appraisal of the application. (IC, Sec. 35)
98
3. The parties are bound to know all the general
causes which are open to his inquiry, equally with
the other, and all general usages of trade. (IC, Sec.
32)
Matters that must be disclosed even in the
absence of inquiry
1. Those material to the contract
2. Those which the other has no means of
ascertaining
3. Those as to which the party with the duty to
communicate makes no warranty
NOTE: Matters relating to the health of the insured
are material and relevant to the approval of the
issuance of the life insurance policy as these
definitely affect the insurer’s action to the
application. It is well-settled that the insured need
not die of the disease he had failed to disclose to the
insurer, as it is sufficient that his non-disclosure
misled the insurer in forming his estimates of the
risks of the proposed insurance policy or in making
inquiries. (Sunlife Assurance Company of Canada v.
CA, G.R. No. 105135, June 22, 1995)
Information as to the nature of interest need not be
disclosed except in property insurance, if the
insured is not the owner. If somebody is insuring
properties of which he is not the owner, he must
disclose why he has insurable interest that would
entitle him to ensure it, and the extent thereof. (IC,
Secs. 34 & 51 [e])
Evidence of insurability
Evidence of Insurability is a broader phrase than
“Evidence of Good Health” and includes such other
factors as the insured’s occupation, habits, financial
condition, and other risk selection factors.
Q: Ngo Hing filed an application with the Great
Pacific Life Assurance Company (Pacific Life) for
a twenty-year endownment policy on the life of
his one-year old daughter Helen Go. Ngo Hing
supplied the essential data and filed the
application to Mondragon, the branch manager.
After sometime, Helen Go died of influenza with
complication of bronchopneumonia.
Thereupon, Ngo Hing sought the payment of the
proceeds of the insurance, but having failed in
his effort, he filed the action for the recovery of
the same. Did Ngo Hing concealed the state of
health and physical condition of Helen Go, which
rendered void the binding receipt?
A: YES. Ngo Hing intentionally concealed the state
of health of his daughter Helen Go. He was fully
aware that his child was a typical mongoloid child
 INSURANCE CODE
upon filling out the application form. It is evident
that he withheld a fact material to the risk to be
assumed by the insurance company had the plan be
approved.
The contract of insurance is one of perfect good
faith, uberrima fides, absolute and perfect candor;
the absence of any concealment or demotion.
Concealment is a neglect to communicate that which
needs to be communicated whether intentional or
unintentional. In case of concealment, the insurer is
entitled to rescind the contract of insurance. In the
case at bar, the respondent is guilty of such
concealment. Ultimately, there was no perfected
contract of insurance since the conditions in the
binding receipt were not complied with by the
applicant. (Great Pacific Life Assurance Company v.
CA, G.R. No. L-31845, April 30, 1979)
Q: Benny applied for life insurance for Php 1.5
Million. The insurance company approved his
application and issued an insurance policy
effective Nov. 6, 2008. Benny named his children
as his beneficiaries. On April 6, 2010, Benny died
of hepatoma, a liver ailment.
The insurance company denied the children's
claim for the proceeds of the insurance policy on
the ground that Benny failed to disclose in his
application two previous consultations with his
doctors for diabetes and hypertension, and that
he had been diagnosed to be suffering from
hepatoma. The insurance company also
rescinded the policy and refunded the
premiums paid.
Was the insurance company correct? (2013 Bar)
A: The insurance company correctly rescinded the
policy because of concealment (Section 27 of
Insurance Code). Benny did not disclose that he was
suffering from diabetes, hypertension, and
hepatoma. The concealment is material, because
these are serious ailments. (Florendo v. Philam
Plans, Inc., G.R. No. 186983, February 22, 2012).
Benny died less than two years from the date of the
issuance of the policy. (IC, Sec. 48)
Right to information of material facts may be
waived
1. By the terms of the contract
2. By the failure to make an inquiry as to such
facts, where they are distinctly implied in other
facts from which information is communicated.
(IC, Sec. 33)
Rules on concealment
99
1. If there is concealment under Section 27, the
remedy of the insurer is rescission since
concealment vitiates the contract of insurance.
(1996 Bar)
2. The party claiming the existence of
concealment must prove that there was
knowledge of the fact concealed on the part of
the party charged with concealment.
3. Good faith is not a defense in concealment.
Concealment, whether intentional or
unintentional entitles the injured party to
rescind the contract of insurance. (IC, Sec. 27)
4. The matter concealed need not be the cause of
loss. (IC, Sec. 31)
5. To be guilty of concealment, a party must have
knowledge of the fact concealed at the time of
the effectivity of the policy.
In order for concealment to produce the effect of
avoiding the policy, it should take place at the
time the contract is entered into
Concealment should take place at the time the
contract is entered into and not afterwards in order
that the policy may be avoided. The duty of
disclosure ends with the completion of the contract.
Waiver of medical examination in a non-medical
insurance contract renders even more material the
information required of the applicant concerning
previous condition of health and diseases suffered,
for such information necessarily constitutes an
important factor which the insurer takes into
consideration in deciding whether to issue the
policy or not. Failure to communicate information
acquired after the effectivity of the policy will not be
a ground to rescind the contract.
NOTE: The reason for this is that if concealment
should take place after the contract is entered into,
the information concealed is no longer material as it
will no longer influence the other party to enter into
such contract.
Q: Joanna applied for a non-medical life
insurance. Joanna did not inform the insurer
that one week prior to her application for
insurance, she was examined and confined at St.
Luke’s Hospital where she was diagnosed for
lung cancer. The insured soon thereafter died in
a plane crash. Is the insurer liable considering
that the fact concealed had no bearing with the
cause of death of the insured? Why? (2001 Bar)
A: NO. The concealed fact is material to the approval
and issuance of the insurance policy. It is well
settled that the insured need not die of the disease
she failed to disclose to the insurer. It is sufficient
that his nondisclosure misled the insurer in forming
 MERCANTILE LAW
his estimate of the risks of the proposed insurance
policy or in making inquiries. (Sun Life v. CA, supra)
Instances whereby concealment made by an
agent procuring the insurance binds the
principal
1. Where it was the duty of the agent to acquire
and communicate information of the facts in
question;
2. Where it was possible for the agent, in the
exercise of reasonable diligence to have made
such communication before the making of the
insurance contract.
NOTE: Failure on the part of the insured to disclose
such facts known to his agent, or wholly due to the
fault of the agent, will avoid the policy, despite the
good faith of the insured.
MISREPRESENTATION/OMISSION
Representation
An oral or written statement of a fact or condition
affecting the risk made by the insured to the
insurance company, tending to induce the insurer to
assume the risk.
Representation should be made, altered or
withdrawn at the time of or before the issuance of
the policy. (Sec. 37, Insurance Code). It may be
altered or withdrawn before the insurance is
effected, but not afterwards. (Sec.41, ibid)
Characteristics of representation
1. Not a part of the contract but merely a collateral
inducement to it
2. Oral or written
3. Made at the time of, or before issuing the policy
and not after
4. Altered or withdrawn before the insurance is
effected but not afterwards
5. Must be presumed to refer to the date the
contract goes into effect. (IC, Sec. 42)
Similarities of concealment and representation
1. Both refer to the same subject matter and both
take place before the contract is entered.
2. Concealment or representation prior to loss or
death gives rise to the same remedy; that is
rescission or cancellation.
3. The test of materiality is the same. (IC, Secs. 31,
46)
4. The rules of concealment and representation
are the same with life and non-life insurance.
100
5. Whether intentional or not, the injured party is
entitled to rescind a contract of insurance on
ground of concealment or false representation.
6. Since the contract of insurance is said to be one
of utmost good faith on the part of both parties
to the agreement, the rules on concealment and
representation apply likewise to the insurer.
Kinds of representation
1. Oral or written (Sec. 36, ibid);
2. Affirmative (Sec. 42, ibid); or
3. Promissory (Sec. 39, ibid).
Affirmative representation
Any allegation as to the existence or non-existence
of a fact when the contract begins (e.g. the statement
of the insured that the house to be insured is used
only for residential purposes is an affirmative
representation).
Promissory representation
Any promise to be fulfilled after the contract has
come into existence or any statement concerning
what is to happen during the existence of the
insurance.
Representation as to a future undertaking
A representation as to the future is to be deemed a
promise unless it appears that it was merely a
statement of belief or an expectation that is
susceptible to present, actual knowledge. (IC, Sec.
39)
An erroneous opinion or belief will not avoid the
insurance policy
The statement of an erroneous opinion, belief or
information, or of an unfulfilled intention, per se,
will not avoid the contract of insurance, unless
fraudulent.
Misrepresentation
Misrepresentation is an affirmative defense. To
avoid liability, the insurer has the duty to establish
such a defense by satisfactory and convincing
evidence. (Ng Gan Zee v. Asian Crusader Life Assn.
Corp., G.R. No. L- 30685, May 30, 1983). [See also Sec.
44 (when the facts fail to correspond to the assertions
or stipulations), Insurance Code]
NOTE: In the absence of evidence that the insured
has sufficient medical knowledge to enable him to
distinguish between “peptic ulcer” and “tumor”, the
statement of deceased that said tumor was
 INSURANCE CODE
“associated with ulcer of the stomach” should be
considered an expression in good faith. Fraudulent
intent of insured must be established to entitle
insurer to rescind the insurance contract.
Misrepresentation, as a defense of insurer, is an
affirmative defense which must be proved. (Ng Gan
Zee v. Asian Crusader Life Assn. Corp., G.R. No. L-
30685, May 30, 1983)
Requisites of misrepresentation
1. The insured stated a fact which is untrue;
2. 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;
3. Such fact in either case is material to the risk.
A representation cannot qualify an express
provision in a contract of insurance but it may
qualify an implied warranty. (IC, Sec. 40)
Test of materiality
It is to be determined not by the event, but solely by
the probable and reasonable influence of the facts
upon the party to whom the representation is made,
in forming his estimates of the disadvantages of the
proposed contract or in making his inquiries
(similar with concealment). (IC, Sec. 46)
Effects of misrepresentation
1. It renders the insurance contract voidable at
the option of the insurer, although the policy is
not thereby rendered void ab initio. The injured
party entitled to rescind from the time when the
representation becomes false;
2. When the insurer accepted the payment of
premium with the knowledge of the ground for
rescission, there is waiver of such right;
3. There is no waiver of the right of rescission if
the insurer had no knowledge of the ground
therefor at the time of acceptance of premium
payment.
Effect of collusion between the insurer’s agent
and the insured
It vitiates the policy even though the agent is acting
within the apparent scope of his authority. The
agent ceases to represent his principal. He, thus,
represents himself; so, the insurer is not estopped
from avoiding the policy.
Concealment vs. Misrepresentation
Concealment Misrepresentation
101
The insured withholds The insured makes
the information of erroneous statements
material facts from the of facts with the intent
insurer of inducing the insurer
to enter into the
insurance contract
Application of concealment and
misrepresentation in case of loss or death
GR: If the concealment or misrepresentation is
discovered before loss or death, the insurer can
cancel the policy. If the discovery is after loss or
death, the insurer can refuse to pay.
XPN: The incontestability clause under paragraph 2
of Section 48.
XPN to XPN: (i.e., when the contract may be
rescinded even beyond the incontestability period)
1. Non-payment of premiums.
2. Violation of condition. (IC, Secs. 233 [b], 234 [b])
3. No insurable interest
4. Cause of death was excepted or not covered
5. Fraud of a vicious type
6. Proof of death was not given. (IC, Sec. 248)
7. That the conditions of the policy relating to
military or naval service. (IC, Secs. 233 [b], 234
[b])
8. That the action was not brought within the time
specified. (IC, Sec. 63)
Incontestability clause (1991, 1994, 1996 –
1998 Bar)
After the policy of life insurance made payable on
the death of the insured shall have been in force
during the lifetime of the insured for a period of two
(2) years from the date of its issue or its last
reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindible by reason of
the fraudulent concealment or misrepresentation of
the insured or his agent. (Sundiang Sr. & Aquino,
2014, citing IC, Sec. 48; Florendo v. Philam Plans, G.R.
No. 186983, February 22, 2012)
The “Incontestability Clause” under Section 48 of
the Insurance Code regulates both the actions of the
insurers and prospective takers of life insurance. It
gives insurers enough time to inquire whether the
policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it forewarns
scheming individuals that their attempts at
insurance fraud would be timely uncovered – thus
deterring them from venturing into such nefarious
enterprise. (Manila Bankers Life Insurance
Corporation vs. Cresencia-Aban, G.R. No. 175666, July
29, 2013)
 MERCANTILE LAW
Q: On July 3, 1993, Delia Sotero (Sotero) took out
a life insurance policy from Ilocos Bankers Life
Insurance Corporation (Ilocos Life) designating
Creencia Aban (Aban) her niece, as her
beneficiary. Ilocos Life issued Policy No. 747,
with a face value of P100, 000, in Sotero’s favor
on August 30, 1993, after the requisite medical
examination and payment of the premium.
On April 10, 1996, Sotero died. Aban filed a
claim for the insurance proceeds on July 9, 1996,
Ilocos Life conducted an investigation into the
claim and came out with the following findings:
1. Sotero did not personally apply for
insurance coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability
to pay the premium on the policy.
4. Sotero did not sign the application for
insurance
5. Alban was the one who filed the insurance
application and designated herself as the
beneficiary.
For the above reasons and claiming fraud, Ilocos
Life denied Aban’s claim on April 16, 1997 but
refunded the premium paid on the policy. May
the incontestability period set in even in cases of
fraud as alleged in this case? (2014, Bar)
A: YES. The incontestability period applies even in
cases of fraud. Section 48 regulates both the actions
of the insurers and prospective takers of the life
insurance. It gives insurers enough time to inquire
whether the policy was obtained by fraud,
concealment, or misrepresentation; on the other
hand, it forewarns scheming individuals that their
attempts at insurance fraud would be timely
uncovered. Legitimate policy holders are absolutely
protected from unwarranted denial of their claims
or delay in the collection of insurance proceeds
occasioned by allegations of fraud, concealment, or
misrepresentation by insurers, claims which may
no longer be set up after the two-year period
expires.
Section 48 prevents a situation where the insurer
knowingly continues to accept annual premium
payments, only to later on deny a claim on the policy
on specious claims of fraudulent concealment or
misrepresentation. (Manila Bankers Life Insurance
Corp. v. Aban, G.R. No. 175666, July 29, 2013)
Defenses that are not barred by incontestability
clause
The following defenses are not barred by the
incontestability clause:
102
1. That the person taking the insurance lacked
insurable interest as required by law;
2. That the cause of the death of the insured is an
excepted risk;
3. That the premiums have not been paid (IC, Secs.
77, 233[b], 236[b]);
4. That the conditions of the policy relating to
military or naval service have been violated (IC,
Secs. 233[b], 234[b]);
5. That the fraud is of a particularly vicious type;
6. That the beneficiary failed to furnish proof of
death or to comply with any condition imposed
by the policy after the loss has happened; or
7. That the action was not brought within the time
specified. (Sundiang Sr. & Aquino, 2014)
Remedy of the injured party in case of
misrepresentation
If there is misrepresentation, The injured party is
entitled to rescind from the time when the
representation becomes false.
Exercise of the right to rescind the contract
It must be exercised previous to the commencement
of an action on the contract (the action referred to is
that to collect a claim on the contract). (IC, Sec.48,
par.1)
BREACH OF WARRANTIES
Warranties (1993 Bar)
Statements or promises by the insured set forth in
the policy itself or incorporated in it by proper
reference, the untruth or non-fulfillment of which in
any respect, and without reference to whether the
insurer was in fact prejudiced by such untruth or
non-fulfillment render the policy voidable by the
insurer.
Purpose of warranties
To eliminate potentially increasing moral or
physical hazards which may either be due to the acts
of the insured or to the change of the condition of
the property.
Basis of warranties
The insurer took into consideration the condition of
the property at the time of effectivity of the policy.
Kinds of warranties
1. Affirmative warranty – one which relates to
matters which exist at or before the issuance of
the policy.
 INSURANCE CODE
2. Promissory warranty – one in which the insured to inform the insurer of any other insurance
undertakes that something shall be done or coverage of the property. A violation of the
omitted after the policy takes effect and during clause by the insured will not constitute a
its continuance. breach unless there is an additional provision
3. Express warranty – a statement in a policy, of a stating that the violation thereof will avoid the
matter relating to the person or thing insured, policy. (IC, Sec. 75)
or to the risk, as a fact.
4. Implied warranty – an agreement or stipulation Q: On May 13, 1996 PAM Inc. obtained a P15
not expressed in the policy but the existence of million fire insurance policy from Ilocano
which is admitted or presumed from the fact Insurance covering its machineries and
that the contract of insurance has been equipment effective for one year or until May 14,
executed. 1997. The policy expressly stated that the
insured properties were located at “Sanyo
Warranty vs. Representation Precision Phils. Building Phase III Lots 4 and 6
Block 15 PEZA, Rosario, Cavite.” Before its
WARRANTY REPRESENTATION expiration, the policy was renewed on “as is”
Considered parts of Collateral inducement to the basis for another year or until May 13 1998. The
the contract. contract. subject properties were later transferred to
Always written on Pace Factory also in PEZA. On October 12, 1997
May be written in a totally during the effectivity of the renewed policy, a
the face of the policy,
disconnected paper or may fire broke out at the Pace Factory which totally
actually or by
be oral. burned the insured properties.
reference.
Must be strictly Only substantial proof is
complied with. required. The policy forbade the removal of the insured
Its falsity or non- properties unless sanctioned by Ilocano.
fulfillment operates Its falsity renders the policy Condition 9 (c) of the policy provides that “the
as a breach of void on the ground of fraud. insurance ceases to attach as regards the
contract. property affected unless the insured, before the
Insurer must show its occurrence of any loss or damage, obtains the
Presumed material. materiality in order to sanction of the company signified by
defeat an action on the endorsement upon the policy… (c) if the
policy. property insured is removed to any building or
place other than in which is herein stated to be
Effects of breach of warranty insured.” PAM claims that it has substantially
complied with notifying Ilocano through its
sister company, the RBC which in fact, referred
1. Material
PAM to Ilocano for the insurance coverage. Is
Ilocano liable under the policy? (2014 Bar)
GR: Violation of material warranty or of
material provision of a policy will entitle the
other party to rescind the contract. A: NO. Ilocano Insurance is not liable under the
policy. By the clear and express condition in the
XPN: (with regard to “promissory” warranties) renewal policy, the removal of the insured property
a. Loss occurs before the time of performance to any building or place required the consent of
of the warranty; Ilocano. Any transfer effected by PAM, Inc. without
b. The performance becomes unlawful at the Ilocano’s consent would free the latter from any
place of the contract; and liability. (Malayan Insurance Company, Inc v. PAPCO,
c. Performance becomes impossible (IC, Sec. Ltd., G.R. No. 200784, August 7,2013)
73).
Effect of a breach of warranty without fraud
2. Immaterial
The policy is avoided only from the time of breach
GR: It will not avoid the policy. (IC, Sec. 76) and the insured is entitled:
1. To the return of the premium paid at a pro rata
XPN: When the policy expressly provides, or from the time of breach or if it occurs after the
declares that a violation thereof will avoid it. inception of the contract; or
2. To all premiums if it is broken during the
For instance, an “Other Insurance Clause” which inception of the contract.
is a condition in the policy requiring the insured
Omission

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 MERCANTILE LAW
The failure to communicate information on matters
proving or tending to prove the falsity of warranty.
In case of omission, the aggrieved party may rescind
the contract of insurance.
CLAIMS SETTLEMENT AND SUBROGATION
NOTICE AND PROOF OF LOSS
Loss in insurance
The injury, damage or liability sustained by the
insured in consequence of the happening of one or
more of the perils against which the insurer, in
consideration of the premium, has undertaken to
indemnify the insured. It may be total, partial, or
constructive in marine insurance.
Conditions before the insured may recover on
the policy after the loss
1. The insured or some person entitled to the
benefit of the insurance, without unnecessary
delay, must give written notice to the insurer
(IC, Sec. 90);
2. When required by the policy, insured must
present a preliminary proof loss which is the
best evidence he has in his power at the time
(IC, Sec. 91).
NOTE: For other non-life insurance, the
Commissioner may specify the period for the
submission of the notice of loss. (IC, Sec. 90)
Instances when the defects in the notice or proof
of loss are considered waived (MaJoR-DeW)
When the insurer:
1. Writes to the insured that he considers the
policy null and void as the furnishing of notice
or proof of loss would be useless;
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy
4. Joins in the proceedings for determining the
amount of the loss by arbitration, making no
objections on account of notice and preliminary
proof; or
5. Makes Objection on any ground other than the
formal defect in the preliminary proof.
Instances when delay in the presentation of
notice or proof of loss deemed waived
If caused by:
1. Any act of the insurer; and
2. By failure to take objection promptly and
specifically upon that ground. (IC, Sec. 93)
Proof of loss
It is the more or less formal evidence given the
company by the insured or claimant under a policy
of the occurrence of the loss, the particulars thereof
and the data necessary to enable the company to
determine its liability and the amount thereof.
Time for payment of claims

Notice of loss LIFE POLICIES NON-LIFE POLICIES

1. Maturing upon the The proceeds shall be
It is the more or less formal notice given the insurer expiration of the term– paid within 30 days
by the insured or claimant under a policy of the the proceeds are after the receipt by the
occurrence of the loss insured against. immediately payable to insurer of proof of loss
the insured, except if and ascertainment of
Purposes of notice of loss (IFC) proceeds are payable in the loss or damage by
installments or agreement of the
1. To give insurer Information by which he may annuities which shall be parties or by
determine the extent of his liability; paid as they become arbitration but not
2. To afford the insurer a means of detecting any due. later than 90 days from
Fraud that may have been practiced upon him; such receipt of proof of
and 2. Maturing at the death loss, whether or not
3. To operate as a Check upon extravagant claims. of the insured, occurring ascertainment is had or
prior to the expiration of made (IC, Sec. 249).
Effect of failure to give notice of loss the term stipulated – the
proceeds are payable to
OTHER TYPES OF the beneficiaries within
FIRE INSURANCE
INSURANCE 60 days after
Failure to give notice will not presentation of claim
Failure to give
exonerate the insurer, unless and filing of proof of
notice defeats the
there is a stipulation in the death (IC, Sec. 248).
right of the insured
policy requiring the insured
to recover.
to do so.

104
 INSURANCE CODE
GUIDELINES ON CLAIMS SETTLEMENT
Claim Settlement
Claim settlement is the indemnification of the
suffered by the insured. The claimant may be the
insured or reinsured, the insurer who is entitled to
subrogation, or a third party who has a claim against
the insured.
Purpose of the rule
To eliminate unfair claim settlement practices.
Rules in claim settlement
1. No insurance company doing business in the
Philippines shall refuse, without justifiable
cause, to pay or settle claims arising under
coverage provided by its policies, nor shall any
such company engage in unfair claim
settlement practices.
2. Evidence as to numbers and types of valid and
justifiable complaints to the Commissioner
against an insurance company, and the
Commissioner’s complaint experience with
other insurance companies writing similar lines
of insurance shall be admissible in evidence in
an administrative or judicial proceeding
brought under this section. (IC, Sec. 247 [b])
Claims settlement in life insurance
1. The proceeds shall be paid immediately upon
the maturity of the policy if there is such a
maturity date.
2. If the policy matures by the death of the insured,
within sixty (60) days after presentation of the
claim and filing of the proof of the death of the
insured. (Sundiang Sr. & Aquino, 2014; IC,
Section 248)
Claims settlement in property insurance
1. Proceeds shall be paid within thirty (30) days
after proof of loss is received by the insurer and
ascertainment of the loss or damage is made
either by agreement or by arbitration.
2. If no ascertainment is made within sixty (60)
days after receipt of proof of loss, it shall be paid
within ninety (90) days after such receipt.
(Sundiang Sr. & Aquino, 2014; IC, Sec. 249).
UNFAIR CLAIMS SETTLEMENT; SANCTIONS
Unfair settlement practices (MAI-GL)
105
The following constitutes unfair settlement
practices:
1. Knowingly misrepresenting to claimant’s
pertinent facts or policy provisions relating to
coverage at issue;
2. Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies;
3. Failing to adopt and implement reasonable
standards for the prompt investigation of
claims arising under its policies;
4. Not attempting in good faith to effectuate
prompt, fair and equitable settlement of claims
submitted in which liability has become
reasonably clear; or
5. Compelling policyholders to institute suits to
recover amounts due under its policies by
offering without justifiable reason substantially
less than the amounts ultimately recovered in
suits brought by them.
Sanction for the insurance companies which
engaged to unfair settlement practices
The sanction for insurance companies engaged in
unfair settlement practices can either be [a]
suspension; or [b] revocation of an insurance
company’s certificate of authority. (IC, Sec 247)
Effect of refusal or failure to pay the claim within
the time prescribed
The insurer shall be liable to pay interest twice the
ceiling prescribed by the Monetary Board on the
proceeds of the insurance from the date following
the time prescribed under the Insurance Code, until
the claim is fully satisfied. (Prudential Guarantee
and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc.
G. R. No. 151890, June 20, 2006)
NOTE: Refusal or failure to pay the loss or damage
will entitle the assured to collect interest UNLESS
such refusal or failure to pay is based on the ground
that the claim is fraudulent.
Where the mortgagor and the mortgagee were, both
claiming the proceeds of a fire insurance policy and
the creditors of the mortgagor also attached the
proceeds, the insurance company cannot be held
liable for damages for withholding payment since
the delay was not malevolent. (Rizal Commercial
Bank Corporation v. Court of Appeals, supra)
PRESCRIPTION OF ACTIONS
Rules on the prescriptive period for filing an
insurance claim
 MERCANTILE LAW
1. The parties to a contract of insurance may
validly agree that an action on the policy should
be brought within a limited period of time,
provided such period is not less than 1 year
from the time the cause of action accrues. If the
period agreed upon is less than 1 year from the
time the cause of action accrues, such
agreement is void. (IC, Sec. 63, 1996 Bar)
a. The stipulated prescriptive period shall
begin to run from the date of the insurer’s
rejection of the claim filed by the insured
or beneficiary and not from the time of
loss.
b. In case the claim was denied by the insurer
but the insured filed a petition for
reconsideration, the prescriptive period
should be counted from the date the claim
was denied at the first instance and not
from the denial of the reconsideration.
(Sun Life Office, Ltd. vs. CA, supra)
2. If there is no stipulation or the stipulation is
void, the insured may bring the action within 10
years in case the contract is written.
3. In a comprehensive motor vehicle liability
insurance (CMVLI), the written notice of claim
must be filed within 6 months from the date of
the accident; otherwise, the claim is deemed
waived even if the same is brought within 1
year from its rejection. (Vda. De Gabriel vs. CA,
GR No. 103883, Nov 14, 1996)
4. 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. (IC,
Sec. 397)
NOTE: Notwithstanding the fact that the case was
filed beyond the one-year prescriptive period
provided for under COGSA, the suit will not be
dismissed if the delay was not due to the claimant’s
fault. The insurer therefore should bear the loss
with interest on account of such delay. (New World
International Development Phils. Inc. vs. NYK-
FILJAPAN Shipping Corp., G.R. No. 171468, August 24,
2011, in Divina, 2014)
Q. From what time shall the period of
prescription be computed in case the insured
asked for reconsideration of the denial of claim?
(1996 Bar)
A: In case the claim was denied by the insurer but
the insured file a petition for reconsideration, the
prescriptive period should be counted from the date
the claim was denied at the first instance and not
from the denial of the reconsideration. To rule
otherwise would give the insured a scheme or
devise to waste time until any evidence which may
106
be considered against him is destroyed. (Sun life
Office, Ltd. vs. CA, supra)
Prescriptive period in motor vehicle insurance
It is one (1) year from denial of the claim and not
from the date of the accident.
SUBROGATION
Principle of Subrogation
If the plaintiff’s property has been insured, and he
has received indemnity from the insurance
company for the injury or loss arising out of wrong
or breach of contract complained of, the insurance
company shall be subrogated to the rights of the
insured against the wrongdoer or the person who
has violated the contract. (NCC, Art. 2207)
The insurer, upon happening of the risk insured
against and after payment to the insured is
subrogated to the rights and cause of action of the
latter. As such, the insurer has the right to seek
reimbursement for all the expenses paid. (Eastern
Shipping Lines vs. Prudential Guarantee and
Assurance, Inc., G.R. No. 174116, September 1, 2009)
NOTE: The principle of subrogation 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, G.R. No. L-36413, Sept. 26,
1988)
Incapacity of the insured will not affect the capacity
of the subrogee because capacity is personal to the
holder. (Lorenzo Shipping v. Chub and Sons, Inc., G.R.
No. 147724, June 8, 2004)
Q: ELP Insurance, Inc. issued Marine Policy No.
888 in faor of FCL Corp. to insure the shipment
of 132 bundles of electronic copper cathodes
against all risks. Subsequently, the cargoes
were shipped on board the vessel “M/V Menchu”
from Leyte to Pier 1, North Harbor, Manila.
Upon arrival, FCL Corp. engaged the services of
CGM Inc. for the release and withdrawal of the
cargoes from the pier and the subsequent
delivery to its warehouse or plants in
Valenzuela City. The goods were loaded on
board twelvetrucks owned by CGM, Inc. driven
by its employed drivers and accompanied by its
employed truck helpers. Of the twelve trucks en
route to Valenzuela City, only eleven reached the
destination. One truck loaded with eleven
 INSURANCE CODE
bundles of copper cathodes, failed to deliver its
cargo.
Because of this incident, FCL Corp. filed with ELP
Insurance, Inc. a claim for insurance indemnity
in the amount of P1.5 million. After the requisite
investigation and adjustment, ELP Insurance,
Inc. paid FCL Corp. the amount of P1,350,000 as
insurance indedmnity.
ELP Insurance, Inc. thereafter filed a complaint
for damages against CGM, Inc. before the RTC,
seeking reimbursement of the amount it had
paid to FCL Corp. for the loss of the subject cargo.
CGM, Inc. denied the claim on the basis that it is
not privy to the contract entered into by and
between FCL Corp. and ELP Insurance, Inc., and
hence, it is not liable thereof. If you are the
judge, how will you decide the case? (2014 Bar)
A: I will decide the case in favor of ELP Insurance.
Even if CGM, Inc. is not privy to the contract between
FCL Corp. and ELP Insurance, it is still liable for the
loss of the cargo. If the plaintiff’s property has been
insured and he has received indemnity from the
insurance company for the injury or loss arising out
of the wrong or breach of the contract complained
of, the insurance company shall be subrogated to
the rights of the insured against the wrong-doer.
Since ELP Insurance is subrogated to the rights of
FCL Corp. to the extent of the amount it paid, it has
the right to seek reimbursement from CGM, Inc.
(Loadmaster Customs Serices Inc. Glodel Brokerage
Corporation and R&B Insurance Corporation, G.R. No.
179446, January 10, 2011)
Purposes of subrogation
1. To make the person who caused the loss legally
responsible for it.
2. To prevent the insured from receiving double
recovery from the wrongdoer and the insurer.
3. To prevent the tortfeasors from being free from
liability and is thus founded on consideration of
public policy.
Rules on subrogation
1. Applicable only to property insurance – the value
of human life is regarded as unlimited and
therefore, no recovery from a third party can be
deemed adequate to compensate the insured’s
beneficiary.
2. The right of insurer against a third party is
limited to the amount recoverable from latter
by the insured.
Rules on indemnity
107
1. Applies only to property insurance except when
the creditor insures the life of his debtor.
2. Insurance contracts are not wagering contracts
or gambling contracts.
NOTE: Under the collateral source rule, if an
injured person receives compensation for his
injuries from a source wholly independent of the
tortfeasor, the payment should not be deducted
from the damages which he would otherwise collect
from the tortfeasor. It finds no application to cases
involving no-fault insurances under which the
insured is indemnified for losses by insurance
companies, regardless of who was at fault in the
incident generating the losses. Here, it is clear that
MMPC is a no-fault insurer. Hence, it cannot be
obliged to pay hospitalization expenses of the
dependents of its employees which had already
been paid by separate health insurance providers of
said dependents. (Mitsubishi Motors Philippines
Salaried Employees Union vs. Mitsubishi Motors
Corporation G.R. No. 175773, June 17, 2013, in Divina,
2014)
When amount paid by the insurance company
does not fully cover the injury or loss
The aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or
injury. (NCC, Art. 2207)
Instances where the right of subrogation does
not apply
1. Where the insured by his own act releases the
wrongdoer or third party liable for loss or
damage from liability
2. The insurer loses his rights against the
wrongdoer since the insurer can only be
subrogated to only such rights as the insured
may have
3. Where the insurer pays the insured the value of
the loss without notifying the carrier who has in
good faith settled the insured claim for loss
4. Where the insurer pays the insured for a loss or
risk not covered by the policy
5. Life insurance
6. For recovery of loss in excess of insurance
coverage
NOTE: Since the insurer can be subrogated to only
such rights as the insured may have, should the
insured, after receiving payment from the insurer,
release the wrongdoer who caused the loss, the
insurer loses his rights against the latter. But in such
a case, the insurer will be entitled to recover from
the insured whatever it has paid to the latter, unless
the release was made with the consent of the
insurer. (Manila Mahogany Manufacturing
 MERCANTILE LAW
Corporation v. Court of Appeals, G.R. No. L-52756,
October 12, 1987)
---
Q: Malayan Insurance Company issued a car
insurance policy in favor of First Malayan
Leasing and Finance Corporation (First
Malayan), insuring a Mitsubishi Galant against
third party liability, own damage and theft,
among others. Unfortunately, the Galant
encountered a vehicular accident at the corner
of EDSA and Ayala Avenue, Makati. The accident
involves a Nissan Bus operated by Aladdin
Transit, an Isuzu Tanker, and a Fuzo Cargo
Truck. Because of this, Malayan Insurance was
constrained to pay First Malayan of the damages
sustained by it. Maintaining that it has been
subrogated to the rights and interests of the
assured, Malayan Insurance sent several
demand letters to Rodelio Alberto (Alberto) and
Enrico Alberto Reyes (Reyes), the registered
owner and the driver, respectively, of the Fuzo
Cargo Truck, requiring them to pay the amount
it had paid to the assured. No settlement of
liability was made, thus, Malayan Insurance
filed a complaint for damages for gross
negligence against Alberto, et al. Is Malayan
Insurance entitled to the right of subrogation?
A: YES. The payment by the insurer to the insured
operates as an equitable assignment to the insurer
of all the remedies that the insured may have
against the third party whose negligence or
wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it grow
out of, any privity of contract. It accrues simply upon
payment by the insurance company of the insurance
claim. When it is not disputed that the insurance
company indeed paid, then there is valid
subrogation in its favor. (Malayan Insurance Co., Inc.,
vs. Rodelio Alberto, et al., G.R. No. 194320, February
1, 2012)
MARINE INSURANCE
Traditionally, marine insurance it includes policies
that cover risk 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.
However, under the present laws, it also covers
inland marine insurance. (Sundiang Sr. & Aquino,
2014)
Marine insurance includes:
A. Insurance against loss or damage to:
1. Vessels, craft, aircraft, vehicles, goods,
freights, cargoes, merchandise, effects,
108
disbursements, profits, moneys, securities,
choses in action, instruments of debts,
valuable papers, bottomry, and
respondentia interests and all other kinds of
property and interests therein, in respect
to, appertaining to or in connection with
any and all risks or perils of navigation,
transit or transportation, or while being
assembled, packed, crated, baled,
compressed or similarly prepared for
shipment or while awaiting shipment, or
during any delays, storage, transshipment,
or reshipment incident thereto, including
war risks, marine builder’s risks, and all
personal property floater risks;
2. Person or property in connection with or
appertaining to a marine, inland marine,
transit or transportation insurance,
including liability for loss of or damage
arising out of or in connection with the
construction, repair, operation,
maintenance or use of the subject matter of
such insurance (but not including life
insurance or surety bonds nor insurance
against loss by reason of bodily injury to
any person arising out of ownership,
maintenance, or use of automobiles);
3. Precious stones, jewels, jewelry, precious
metals, whether in course of transportation
or otherwise; and
4. Bridges, tunnels and other
instrumentalities of transportation and
communication (excluding buildings, their
furniture and furnishings, fixed contents
and supplies held in storage); piers,
wharves, docks and slips, and other aids to
navigation and transportation, including
dry docks and marine railways, dams and
appurtenant facilities for the control of
waterways.
B. Marine protection and indemnity insurance.
(IC, Sec. 101)
From the foregoing enumeration, marine insurance
now includes, not only risks connected with marine
navigation, but which are otherwise connected
therewith such as insurance of aircraft, goods while
being packed or assembled, injury to passengers,
precious stones, jewels, jewelry whether in the
course of transportation or not. (Perez, 2010)
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 ship owner or
not. (Roque v. IAC, GR No. L-66935, Nov. 11, 1985)
 INSURANCE CODE
As a general rule, the marine insurance policy needs
to be presented in evidence before the trial court or
even belatedly before the appellate court. However,
as a general rule, there are admitted exceptions. The
policy can still be considered in court as long as it
has been properly identified by testimony duly
recorded and has been incorporated in the records
of the case. (Asian Terminal vs. CIR, G.R. No. 171406,
April 4, 2011, in Divina 2014)
Marine protection and indemnity insurance
It is an insurance against, or against legal liability of
the insured for loss, damage, or expense incident to
ownership, operation, chartering, maintenance, use,
repair, or construction of any vessel, craft or
instrumentality in use of ocean or inland
waterways, including liability of the insured for
personal injury, illness or death or for loss of or
damage to the property of another person. (IC, Sec.
101, [b])
Major divisions of marine insurance
1. Ocean marine insurance –covers primarily sea
perils of ships and cargoes. Scope: (GELS)
a. Goods or cargoes
b. Earnings such as freight, passage money
c. Liability incurred by reason of maritime
perils
d. Ships or hulls
NOTE: The insurer is liable only for such losses or
damages proximately caused by the perils insured
against. (De Leon, supra)
2. Inland marine insurance – Covers primarily the
land or over the land transportation perils of
property shipped by railroads, motor trucks,
airplanes, and other means of transportation. It
also covers risks of lake, river, or the other
inland waterway transportation and other
waterborne perils outside of those risks that fall
definitely within the ocean marine category.
Classes: (Pit-BaFF)
a. Property In Transit – Provides protection
to the property frequently exposed to loss
while it is being transported from one
location to another.
b. Bailee liability – Provides protection to
persons who have temporary custody of
the goods or personal property of others,
such as carriers, laundrymen,
warehousemen, and garage keepers.
c. Fixed transportation property – Covers
bridges, tunnels and other
instrumentalities of transportation and
communication, although as a matter of
fact they are fixed property. They are so
109
insured because they are held to be an
essential part of transportation system.
d. Floater– Provides insurance to follow the
insured property wherever it may be
located subject always to the territorial
limits of the contract (De Leon, 2010).
Risk insured against in marine insurance
GR: In the usual form of a marine policy, the risks
insured against are only “perils of the sea”.
XPN: When the insurance is an “all risk policy” and
thus covers even “perils of the ship”.
XPN to XPN: When the risks are expressly
excepted by the “all risk policy”.
The insured is bound to prove that the cause of the
loss is a peril of the sea. The burden rests on the
insurer to prove that the loss is caused by a risk that
is excluded
“Perils of the sea or perils of navigation” (1998
Bar)
It includes only those casualties due to the (WiN):
1. Unusual violence or extraordinary action of
WInd and wave, or
2. Other extraordinary causes connected with
Navigation. (De Leon, 2010)
“Perils of the ship”
It is a loss which, in the ordinary course of events,
results from the (NON):
1. Natural and inevitable action of the sea;
2. Ordinary wear and tear of the ship;
3. Negligent failure of the ship’s owner to provide
the vessel with proper equipment to convey the
cargo under ordinary conditions.
Q: Remington Industrial Sales Corporation
(Remington) shipped on board a vessel,
seamless steel pipes from Japan to the
Philippines and insured the shipment with
Cathay Insurance Co. (Cathay). Upon receipt of
said shipment, losses and damages were
discovered. Upon demand under the insurance
contract, it was denied by Cathay. Remington
contends that the rust on the seamless steel
pipes is not an inherent vice of the shipment,
thus the same is considered as a peril of the sea.
Cathay, on the other hand claims that the loss
was occasioned by an inherent defect or vice in
the insured article. Is the “rusting” of the
seamless steel pipes considered as a “peril of the
sea”?
 MERCANTILE LAW
A: YES. The rusting of steel pipes in the course of a
voyage is a “peril of the sea” in view of the toll on the
cargo of wind, water, and salt conditions. Moreover,
it is a cardinal rule in the interpretation of contracts
that any ambiguity therein should be construed
against the maker/issuer/drafter thereof, namely,
the insurer. Besides the precise purpose of insuring
cargo during a voyage would be rendered fruitless.
(Cathay Insurance Co., v. CA, et. al., G.R. No. L-76145,
June 30, 1987)
Q: A marine insurance policy on a cargo states
that “the insurer shall be liable for losses
incident to perils of the sea.” During the voyage,
seawater entered the compartment where the
cargo was stored due to the defective drainpipe
of the ship. The insured filed an action on the
policy for recovery of the damages caused to the
cargo. May the insured recover damages? (1998
Bar)
A: NO. The proximate cause of the damage to the
cargo insured was the defective drainpipe of the
ship. This is peril of the ship, and not peril of the sea.
The defect in the drainpipe was the result of the
ordinary use of the ship. To recover under a marine
insurance policy, the proximate cause of the loss or
damage must be peril of the sea.
“All risks” marine insurance policy
GR: It is that which insures against all causes of
conceivable loss or damage.
XPNs:
1. As otherwise excluded in the policy; or
2. Due to fraud or intentional misconduct on the
part of the insured. (Choa Tiek Seng v. CA,
supra)
An “all risks” policy grants greater protection than
that afforded by the “perils clause” (De Leon, supra).
The insured under an "all risks insurance policy"
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.
(Filipino Merchants Insurance Co. vs. CA, supra)
Extent of the insurable interest
1. Ship owner
a. Over the value of the vessel, even when it
has been chartered by one who covenants
to pay him its value in case of loss. In such a
case, the insurer shall be liable for only that
part of the loss which the insured cannot
recover from the charterer. (IC, Sec. 102)
110
b. If hypothecated by a bottomry loan, the
insurable interest is only the excess of the
value of the vessel over the amount secured
by bottomry. (IC, Sec. 103)
c. He also has an insurable interest on
expected freightage. (IC, Sec. 104)
2. Cargo owner – over the cargo and expected
profits. (IC, Sec. 107)
3. Charterer
a. Over the vessel, to the extent of the amount
he is liable to the shipowner, if the ship is
lost or dameged during the voyage. (IC, Sec.
108)
b. Over his expected profits or freightage if
he accepts cargoes from other persons for
a fee. (Sundiang Sr. & Aquino, 2014)
c. Over his own cargo or his client’s cargo.
(Sundiang Sr. & Aquino, 2014)
4. Creditor/lender – over the amount of the loan.
Loan on bottomry or respondentia
A loan in which under any condition whatever, the
repayment of the sum loaned, and of the premium
stipulated, depends upon the safe arrival in port of
the goods on which it is made or of the price they
may receive in case of accident. (Code of Commerce,
Art. 719)
Loan on bottomry vs. Loan on respondentia
They are basically the same. The only distinction is,
a loan on bottomry involves a vessel as a security,
while a respondentia has cargo as its security.
(Perez, 2010)
Freightage
It signifies all the benefits derived by the owner,
either from the chartering of the ship or its
employment for the carriage of his own goods or
those of others. (IC, Sec. 104)
Insurable interest in expected freightage
1. In a charter party - exists from the time the
vessel has broken ground on the chartered
voyage. (IC, Sec. 106)
2. No charter party - If a price is to be paid for the
carriage of goods, insurable interest in expected
freightage exists when they are actually on
board, or there is some contract for putting
them on board, and both ship and goods are
ready for the specified voyage (ibid).
 INSURANCE CODE
Instances when there is no insurable interest in
freight
1. When there is no contract and no part of the
goods expected to be carried are on board,
although there are goods ready for shipment or
the master is provided with funds for the
purpose of purchasing a cargo.
2. Where the vessel is a mere “seeking ship”, the
owner has no insurable interest in freight to be
earned on goods not loaded.
Concealment in marine insurance
It is the failure to disclose any material fact or
circumstance which in fact or law is within, or which
ought to be within the knowledge of one party and
of which the other has no actual or presumptive
knowledge. (De Leon, 2010)
NOTE: Information of the belief or expectation of a
third person, in reference to a material fact, is
material. (IC, Sec. 110)

A “seeking ship” is a vessel looking for cargo to Presumption of knowledge of prior loss in
be transported. (De Leon, 2010) marine insurance

Existence of Insurable interest in expected A person insured by a contract of marine insurance

profits is presumed to have knowledge, at the time of
insuring, of a prior loss, if the information might
Insurable interest in expected profits exists: possibly have reached him in the usual mode of
1. When the interest in the thing involved is based transmission and at the usual rate of
on a legal right. communication (IC, Sec. 111). The presumption,
2. When the interest in thing involved is based on however, is rebuttable.
valuable consideration.
Concealment in respect to any of the following
Special marine insurance contracts and clauses matters does not vitiate the entire contract but
merely exonerates the insurer from a loss
1. All-risks policy resulting from the risk concealed
2. Barratry clause – a clause which provides that
there can be no recovery on the policy in case of 1. National character of the insured;
any willful misconduct on the part of the master 2. The liability of the thing insured to capture and
or crew in pursuance of some unlawful or detention;
fraudulent purpose without the consent of the 3. The liability to seizure from breach of foreign
owner and to the prejudice of owner’s interest. laws of trade;
It requires an intentional and willful act in its 4. The want of necessary documents; and
commission. No honest error or judgment or 5. The use of false and simulated papers. (IC, Sec.
mere negligence, unless criminally gross, can be 112)
barratry. (Roque v. IAC, G.R. No. L- 66935, Nov.
11, 1985) NOTE: Ordinarily, the matters concealed need not
3. Inchmaree clause – a clause which makes the be the cause of the loss. In marine insurance, the
insurer liable for loss or damage to the hull or above-mentioned matters, although concealed, will
machinery arising from the: not vitiate the contract except when they caused the
a. Negligence of the captain, engineers, etc. loss.
b. Explosion, breakage of shafts; and
c. Latent defect of machinery or hull. Concealment in marine insurance vs.
(Thames and Mersey Marine Insurance Co v. Concealment in other property insurance
Hamilton Fraser and Co [1887] 12 AC 484)
4. “Sue and labor” clause – a clause which makes
OTHER PROPERTY
the insurer liable for MARINE INSURANCE
INSURANCE
a. all the expenses attendant upon a loss
The information or
which forces the ship into port to be
The information or the belief of a 3rd party is
repaired; and
belief or expectation of not material and need
b. expenses incurred, where it is stipulated in
3rd persons in reference not be communicated,
the policy that the insured shall labor for
to a material fact is unless it proceeds from
the recovery of the property. (IC, Sec. 165)
material and must be an agent of the insured
Insurer is liable for such expense, in either case, communicated. whose duty is to give
being in addition to a total loss, if that afterwards information.
occurs (ibid). The concealment of any Concealment of any
fact in relation to any of material fact will vitiate

111
 MERCANTILE LAW
the matters stated in Sec. the entire contract,
112 does not vitiate the whether or not the loss
entire contract but results from the risk
merely exonerates the concealed.
insurer from a risk
resulting from the fact
concealed.
Effect of falsity of a representation by the
insured
1. Promissory Representation - If a representation
by the insured is intentionally false in any
material respect or in respect of any fact on
which the character and nature of the risk
depends, the insurer may rescind the entire
contract. (IC, Sec. 113)
2. Representation of Expectation - The eventual
falsity of a representation as to expectation
does not, in the absence of fraud, avoid a
contract of marine insurance. (IC, Sec. 114)
Implied warranties in marine insurance (SINAI)
(2000 Bar)
1. Seaworthiness (IC, Sec. 115 to 121);
2. Non-engagement from Illegal venture;
3. Warranty of Neutrality – The ship will carry the
requisite documents to show the nationality or
neutrality of the ship or its cargo and will not
carry any documents that cast reasonable
suspicion on it if the nationality or neutrality of
the ship or its cargo is expressly warranted (IC,
Sec. 122);
4. Non-deviation from the Agreed voyage (IC, Secs.
125, 126, 127);
5. Presence of Insurable interest.
Seaworthiness
It is when a ship is reasonably fit to perform the
service and to encounter the ordinary perils of the
voyage contemplated by the parties to the policy.
(IC, Sec. 116)
Scope of the seaworthiness of a vessel
A warranty of seaworthiness extends not only to the
condition of the structure of the ship itself, but
requires that it be properly laden, and provided
with a competent master, a sufficient number of
competent officers and seamen, and the requisite
appurtenances and equipment, such as ballasts,
cables and anchors, cordage and sails, food, water,
fuel and lights, and other necessary or proper stores
and implements for the voyage. (IC, Sec. 118)
Compliance with the warranty of seaworthiness
112
GR: It is complied with if the ship is seaworthy at the
time of the commencement of the risk. (IC, Sec. 117)
XPNs:
1. In the case of time policy- the ship must be
seaworthy at the commencement of every
voyage it undertakes during that time. (IC, Sec.
117, [a])
2. In the case of cargo policy- each vessel upon
which cargo is shipped or transshipped must be
seaworthy at the commencement of each
particular voyage. (IC, Sec. 117, [b])
3. In the case of voyage policy contemplating a
voyage in different stages – the ship must be
seaworthy at the commencement of each
portion of the voyage. (IC, Sec. 119)
Admission of seaworthiness by the insurer
Seaworthiness is admitted by the insurer when:
1. The warranty of seaworthiness is to be taken as
fulfilled; or
2. The risk of unseaworthiness is assumed by the
insurer (ibid).
Effect of the admission of seaworthiness by the
insurer
If the policy provides that the seaworthiness of the
vessel as between insured and insurer is admitted,
the issue of seaworthiness cannot be raised by the
insurer without showing concealment or
misrepresentation by the insured. (Phil. American
General Insurance Co. v. CA, G.R. No. 116940, June 11,
1997)
Unseaworthiness is unknown to the owner of
the cargo
It is immaterial in ordinary marine insurance and
may not be used by him as a defense in order to
recover on the marine insurance policy. 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, G.R. No. L- 66935, Nov. 11, 1985)
Payment made by the insurer to the insured for
the latter’s lost cargo in case the ship is
unseaworthy
Payment made by the insurer to the insured for the
latter’s lost cargo It operates as waiver of the
insurer’s right to enforce the implied warranty of
seaworthiness. However, this waiver extends only
in favor of the insured. There is no waiver in favor
of the carrier that transported the cargo. The
 INSURANCE CODE
insurer can still claim payment against the carrier 4. When made in good faith, for the purpose of
for breach of contract based on the insurer’s right of saving human life or relieving another vessel in
subrogation. (Sundiang Sr. & Aquino, 2014 citing distress. (IC, Sec. 126)
Delsan Transport Lines, Inc. v. CA, G.R. No. 127897,
Nov. 15, 2001) Improper deviation

Ship becomes unseaworthy during the voyage
An unreasonable delay in repairing the defect
exonerates the insurer on ship or shipowner's
interest from liability from any loss arising
therefrom. (IC, Sec. 120)
Every deviation not specified under Sec. 126. (IC,
Sec. 127)
In improper deviation, an insurer is not liable for
any loss happening to the thing insured subsequent
to an improper deviation. (IC, Sec. 128, 2005 Bar)

Express warranty as to nationality and Kinds of losses

neutrality
1. Total, which may be (1992 Bar):
1. As to nationality – imports that the vessel a. Actual total loss
belongs to the subject of a particular country. b. Constructive total loss
2. As to neutrality – imports that the property 2. Partial
insured is neutral in fact, that is it belongs to
neutrals and that no act of insured or his agent Actual vs. Constructive loss
shall be done which can legally compromise its
neutrality. CONSTRUCTIVE
ACTUAL TOTAL LOSS
TOTAL LOSS
Rule regarding voyage in marine insurance It is one which the loss,
It exists when the
although not actually
When the voyage contemplated by a marine subject matter of the
total, is of such a
insurance policy is described by the places of insurance is wholly
character that the
beginning and ending, the voyage insured is one destroyed or lost or
insured is entitled, if he
which conforms to the course of sailing fixed by when it is so damaged
thinks fit, to treat it as
mercantile usage between those places. (IC, Sec. as no longer to exist in
total by abandonment.
123) its original character.
(IC, Sec. 133)
Abandonment by the
NOTE: If the course of sailing is not fixed by The insured has the insured is necessary in
mercantile usage, the voyage insured is that way right to claim the whole order to recover for a
between the places specified, which to a master of insurance without total loss (IC, Sec. 141) in
ordinary skill and discretion, would mean the most notice of abandonment. the absence of any
natural, direct and advantageous. (IC, Sec. 124) (IC, Sec. 137) provision to the
contrary in the policy.
Deviation
Actual total loss (1996 Bar)
It is a departure from the course of the voyage
insured, mentioned in Sec. 123 and Sec. 124, or an The following constitutes actual total loss: (DIVE)
unreasonable delay in pursuing the voyage or the 1. A total destruction of the thing insured;
commencement of an entirely different voyage. (IC, 2. The irretrievable loss of the thing by sinking,
Sec. 125) or by being broken up;
3. Any damage to the thing which renders it
Instances when deviation is proper (2000, 2005 valueless to the owner for the purpose for
Bar) which he held it; or
4. Any other event which effectively deprives the
1. When caused by circumstances over which owner of the possession, at the port of
neither the master nor the owner of the ship has destination, of the thing insured. (IC, Sec. 132)
any control;
2. When necessary to comply with a warranty, or NOTE: Complete physical destruction is not
to avoid a peril, whether or not peril is insured essential to constitute actual total loss.
against;
3. When made in good faith, and upon reasonable An insurance confined in terms to an actual loss
grounds of belief in its necessity to avoid a peril; does not cover a constructive total loss, but covers
or

113
 MERCANTILE LAW
any loss, which necessarily results in depriving the
insured of the possession, at the port of destination,
of the entire thing insured. (IC, Sec. 139)
Constructive total loss
There is constructive total loss when:
1. More than ¾ thereof in value is actually lost, or
would have to be expended to recover it from
the peril;
2. The thing insured is injured to such extent as to
reduce its value more than ¾;
3. The thing insured is a ship, and the
contemplated voyage cannot be lawfully
performed without incurring either an expense
to the insured of more than ¾ the value of the
thing abandoned or a risk which a prudent man
would not take under the circumstances; or
4. The thing insured, being cargo or freightage,
and the voyage cannot be performed, nor
another ship procured by the master, within a
reasonable time and with reasonable diligence,
to forward the cargo, without incurring the like
expense or risk mentioned in no. (3). But
freightage cannot in any case be abandoned
(and thus declared constructively lost) unless
the ship is also abandoned. (IC, Sec. 141)
Q: M/V Pearly Shells, passenger and cargo
vessel, was insured for P40,000,000.00 against
“constructive total loss.” Due to a typhoon, it
sank near Palawan. Luckily, there was no
casualties, only injured passengers. The
shipowner sent a notice of abandonment of his
interest over the vessel to the insurance
company which then hired professionals to
afloat the vessel for P900,000.00. When re-
floated, the vessel needed repairs estimated at
P2,000,000.00. The insurance company refused
to pay the claim of the shipowner, stating that
there was “no constructive total loss.”
a. Was there “constructive total loss” to entitle
the shipowner to recover from the
insurance company? Explain.
b. Was it proper for the shipowner to send a
notice of abandonment to the insurance
company? Explain
c. When does double insurance exist?
d. What is the nature of liability of the several
insurers in double insurance? (2005 Bar)
A:
a. NO. A constructive total loss is one which gives
the insured the right to abandon. (Sec 131, IC)
Abandonment of the thing insured may be
availed of if the loss is more than three-fourths
of its value or the expense to recover it from
peril (Sec 139, IC). In this case, the constructive
114
loss claimed by the ship owner pertains to the
vessel. The expenses for refloating and
estimated repairs did not amount to three-
fourths of the value of the vessel, hence, there is
no constructive total loss to speak of.
b. No. The case did not qualify as one for total
constructive loss. Deduced from the facts of the
case, the loss incurred during the peril did not
amount to three-fourths of its value. As
provided in Sec. 139, abandonment may be
availed of if the loss is more than three-fourths
of its value or the expense to recover it from
peril.
c. Sec. 93 of the Insurance Code provides that
double insurance exists where the same person
is insured by several insurers separately, in
respect to the same subject and interest.
d. In double insurance, the insurers are
considered as co-insurers. Each one is bound to
contribute ratably to the loss in proportion to
the amount for which he is liable under his
contract. This is known as the “principle of
contribution” or “contribution clause.” (IC, Sec.
94 [e])
Presumption of actual loss
It may be presumed from the continued absence of
a ship without being heard of. The length of time
which is sufficient to raise his presumption depends
on the circumstances of the case. (IC, Sec. 134)
Liability of the insurer as regards the cargo in
case of reshipment
When a ship is prevented, at an intermediate port,
from completing the voyage, by the perils insured
against, the liability of a marine insurer on the cargo
continues after they are thus reshipped. The insurer
may, however, require additional premium if the
hazard be increased by his extension of liability. (IC,
Sec. 135)
Additional liabilities of the insurer of goods
referred to in the reshipment of cargo
The marine insurer is bound for:
1. Damages;
2. Expenses of discharging;
3. Storage;
4. Reshipment;
5. Extra freightage; and
6. All other expenses incurred in saving cargo
reshipped, up to the amount insured. (IC, Sec.
136)
NOTE: Nothing in Sec. 136 and Sec. 135 shall render
a marine insurer liable for any amount in excess of
 INSURANCE CODE
the insured value or, if there be none, of the
insurable value.
Average
It is 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. (Code of Commerce, Art. 806)
Kinds of average
1. Gross or general averages – damages or
expenses which are deliberately caused by the
master of the vessel or upon his authority, in
order to save the vessel, her cargo or both at the
same time from a real and known risk. (Code of
Commerce, Art. 811)
This kind of average must be borne equally by
all of the interests concerned in the venture. (De
Leon, 2010)
2. Simple or particular averages – they include all
damages and expenses caused to the vessel or
to her cargo which have not inured to the
common benefit and profit of all the persons
interested in the vessel and her cargo. (Code of
Commerce, Art. 809)
This kind of average is suffered by and borne
alone by the owner of the cargo or of the vessel,
as the case may be. (De Leon, 2010)
Requisites to the right to claim general average
contribution (DaP-SaM-SuN)
1. There must be a common danger to the vessel
or cargo;
2. Part of the vessel or cargo was sacrificed
deliberately;
3. The sacrifice must be for the common safety or
for the benefit of all;
4. It must be made by the master or upon his
authority;
5. It must be successful, i.e. Resulted in the saving
of the vessel or cargo; and
6. It must be necessary. (Sundiang Sr. & Aquino,
2014)
Liability of the insurer as to averages
GR: The marine insurer is liable both for general
average and particular average loss.
115
XPN: When there is “Free From Particular Average”
Clause in the policy making the insurer liable only
for general average.
Free From Particular Average Clause (FFPA Clause) -
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.
XPN to XPN: When particular average loss has the
effect of depriving the insured of the possession at
the port of destination of the whole of the thing
insured. (IC, Sec. 138)
Abandonment
It is 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. 140, ibid)
Effect of a valid abandonment
It is equivalent to a transfer by the insured of his
interest, to the insurer, with all the chances of
recovery and indemnity (Sec. 148, ibid).
Requisites of valid abandonment
1. There must be an actual relinquishment by the
person insured of his interest in the thing
insured. (Sec. 140, ibid)
2. There must be a constructive total loss. (Sec.
141, ibid)
3. The abandonment must neither be partial nor
conditional. (Sec. 142, ibid)
4. It must be made within a reasonable time after
receipt of reliable information of the loss. (Sec.
143, ibid)
5. It must be factual. (Sec. 144, ibid)
6. It must be made by giving notice thereof to the
insurer which may be done orally or in writing;
Provided, that if the notice be done orally, a
written notice of such abandonment shall be
submitted within 7 days from such oral notice.
(Sec. 145, ibid)
7. The notice of abandonment must be explicit and
must specify the particular cause of
abandonment. (Sec. 146, ibid)
Such notice must state only enough to show that
there is probable cause for abandonment, but
need not be accompanied with proof of interest
or of loss.
Person who may make notice of abandonment
The abandonment need not necessarily be made by
the insured but may be made by an authorized
 MERCANTILE LAW
agent, and an agent having an authority to insure
has prima facie an authority to abandon. (De Leon,
2010)
Person to whom notice of abandonment may be
made
To the insurer or his authorized agent or the broker
who is the agent for both parties (ibid).
Acceptance of abandonment may either be express
or implied from the conduct of the insurer. Mere
silence of the insurer for unreasonable length of
time after notice shall be construed as an
acceptance. (IC, Sec. 152)
Effects of acceptance of abandonment
1. The insurer becomes at once liable for the
whole amount of the insurance and also
becomes entitled to all rights which insured
possessed in the thing insured. (Sec. 148, ibid)
2. GR: It fixes the rights of the parties; whether
express or implied, it is conclusive upon them,
(Sec. 153, ibid.) and irrevocable. (Sec. 154, ibid)
XPN: Where the ground upon which it was
made proves to be unfounded (Sec. 154, ibid).
Under Sec. 147, abandonment can be sustained
only upon the ground specified in the notice
thereof.
3. It stops the insurer to rely on any insufficiency
in the form, time, or right, of abandonment (Sec.
145, 143, 141, ibid). Whether the insured has a
right to abandon is immaterial where the
abandonment is accepted and there is no fraud.
(New Orleans Ins. Co. vs. Piaggio, 16 Wall. [US]
378)
4. On accepted abandonment of a ship, freightage
earned previous to the loss belongs to the
insurer of said freightage; but freightage
subsequently earned belongs to the insurer of
the ship. (Sec. 155, ibid)
Effect of the insurer’s refusal to accept a valid
abandonment
If the insurer refuses to accept a valid abandonment,
he is liable as upon an actual total loss, deducting
from the amount any proceeds of the thing insured
which may have come to the hands of the insured.
(Sec. 156, ibid)
However, if the abandonment was improper, the
insured may nevertheless recover to the extent of
the damage proved. (De Leon, 2010)
116
Effect of insured’s failure to make abandonment
The insured has an election to abandon or not, and
cannot be compelled to abandon although
abandonment is proper. If the insured fails to
abandon, he may nevertheless recover his actual
loss. (IC, Sec. 157)
Measure of indemnity
1. Valued policy – the parties are bound by the
valuation, if the insured had some interest at
risk and there is no fraud. (Sec. 158, ibid)
Overvaluation of property by the insured may
take place either at the time of making the
contract or at the time of submission of the
proof of loss. In either event, such
overvaluation, if fraudulent, entirely avoids the
insurance. However, such fraudulent intent
must be alleged and clearly proven by the
insurer. (Perez, 2006)
2. Open policy – the following rules shall apply in
estimating a loss:
a. Value of the ship – value at the beginning of
the risk.
b. Value of the cargo – actual cost to the
insured, when laden on board, or where
that cost cannot be ascertained, its market
value at the time and place of lading, adding
the charges incurred in purchasing and
placing it on board, but without reference
to any loss incurred in raising money for its
purchase, or to any drawback on its
exportation, or to the fluctuation of the
market at the port of destination, or to
expenses incurred on the way or on arrival.
c. Value of freightage – gross freightage
exclusive of primage, which is a small
compensation paid by a shipper to the
master of the vessel for his care and trouble
bestowed on the shipper’s goods and which
the master is entitled to retain in the
absence of an agreement to the contrary
with the owners of the vessels.
d. Cost of insurance – the cost of insurance is
always added in calculating the value of the
ship, cargo, or freightage or other subject
matter in an open policy. (De Leon, 2010)
Co-Insurance
Co-insurance is a form of insurance in which the
person who insures his property for less than the
entire value is understood to be his own insurer for
the difference which exists between the true value
of the property and the amount of insurance.
 INSURANCE CODE
In such a case, a marine insurer is liable upon a The subject of insurance The subject is the
partial loss only for such proportion of the amount is the property original insurer’s risk
insured by him as the loss bears to the value of the An insurance of the Insurance of a different
whole interest of the insured in the property same interest interest
insured. (IC, Sec. 159) The insured party is the The original insured
party in interest in all has no interest in the
Requisites for co-insurance contracts contract of reinsurance
which is independent
There is co-insurance when the following requisites of the original contract
concur: of insrurance
1. The loss is partial; and The insured has to give Consent of the original
2. The amount of insurance is less than the value consent insured (who is hardly
of the property insured. (Sundiang Sr. & Aquino, even aware of the
2014) reinsurance
transaction) is not
Co-insurance in marine insurance vs. Co- necessary. (De Leon,
insurance in fire insurance 2014)

CO-INSURANCE IN CO-INSURANCE IN
MARINE INSURANCE FIRE INSURANCE Formula to determine the amount recoverable
There is co-insurance by There has to be an in co-insurance
virtue of Section 159 of express stipulation to
the Insurance Code, as that effect. Illustration
long as the above-
enumerated requisites (Partial) Loss X Amount of = Amount of recovery
are present. Insurance

Co-insurance vs. Reinsurance (1994 Bar) (Insurer’s Liability)

Value of thing Insured
CO-INSURANCE REINSURANCE
If a vessel valued at P1M is insured for only P800,
A plan of indemnity It is a contract through 000 and is damaged to the extent of P400, 000, the
insurance under which which the insurer insurer will be required to pay only 80% of the loss
the reinsurer assumes procures a third suffered, or P320,000; the other 20% or P80,000
the obligation on the person to insure him being borne by the insured himself.
amount reinsured, in against loss or liability
the same fashion as the by reason of such P400,000 or 2/5 X P800,000 = P320, 000
insurer is obligated to original insurance. In P1M
the insured (excluding every reinsurance, the
policy loans). For this original contract of The insured is considered a co-insurer as to the
risk, the insurer the insurance and the uninsured portion of P200,000. (1M – 800,000).
insurer usually pays to contract of reinsurance
the reinsurer the gross are separate and distict If the loss is total, the insurer is liable for the full
premium (less from each other and amount of P800,000. On the other hand, if the
commissions and covered by separate property is insured to its full value, the insured is
expense, allowances) it policies. (Diaz, et. al. entitled to recover the full amount of the partial loss
has collected from the 2014) of P400,000.
insured on the amount
insured (it should be Amount the insured is entitled to recover in case
noted that the insurer of loss if profits to be realized are separately
has no relationship with insured
the insured or
beneficiary).
Where profits are separately insured in a contract of
marine insurance, the insured is entitled to recover,
CO-INSURANCE REINSURANCE in case of loss, a proportion of such profits
The insurer remains as The insurer becomes equivalent to the proportion which the value of the
the insurer of the the insured, insofar as property lost bears to the value of the whole. (IC,
original insured the reinsurer is Sec. 160)
concerned

117
 MERCANTILE LAW
Conclusive presumption of loss of profits
When profits are valued and insured by a contract
of marine insurance, a loss of them is conclusively
presumed from a loss of the property out of which
they were expected to arise, and the valuation fixes
their amount. (IC, Sec. 162)
The following are indirect losses:
1. Physical damage caused to other property.
2. Loss of earnings due to the interruption of
business by damage to the insured’s property.
3. Additional expenses incurred by the insurer
following the damage to the property or
contents by an insured peril. (De Leon, 2010)

Other Terms Friendly fire vs. Hostile fire

Drawback FRIENDLY FIRE HOSTILE FIRE

Fire that burns in a Fire that escapes and
It is an allowance made by the government upon the place where it is burns in a place where
duties due on imported merchandise when the supposed to burn. it is not supposed to be.
importer, instead of selling there, re-exports it; or E.g. Gas stove, fire It may also refer to fire
the refunding of such duties if already paid. (Perez, place that started out as a
2006) friendly fire but
escapes from its
Primage original place or it
becomes too strong as
It is a small allowance or compensation payable to it becomes out of
the master or owner of the vessel for the use of his control. (Sundiang Sr. &
cables and ropes to discharge the goods, and to the Aquino, 2014)
mariners for lading and unlading in any port. (Perez,
2006) Ocean Marine Insurance vs. Fire Insurance

NOTE: Drawback and primage are not included in OCEAN MARINE FIRE
determining the loss in a marine open policy. A policy of insurance Where the hazard is
on a vessel engaged in fire alone and the
“Port of refuge expenses” navigationis a contract subject is an unfinished
of marine insurance vessel, never afloat for
These are the additional expenses incurred in although it insures a voyage, the contract
repairing the damages suffered by a vessel because against fire risks only. to insure is a fire risk,
of the perils insured against as well as those especially in the
incurred for saving the vessel from such perils, such absence of an express
as the expense of launching or raising the vessel or agreement that it shall
of towing or navigating it into port for her safety. have the incidents of
These are items to be borne by the insurer in marine policy, or
addition to a total loss if that afterwards takes place. where it insures
(IC, Sec. 165) materials in a shipyard
for use in constructing
FIRE INSURANCE vessels.

It is a contract of indemnity by which the insurer, for Also where a policy

a consideration, agrees to indemnify the insured insures against fire, a
against loss of or damage by fire, lightning, vessel while moored
windstorm, tornado or earthquake and other allied and in use as a hospital.
risks, when such risks are covered by extension to (De Leon, 2010)
fire insurance policies or under separate policies.
(IC, Sec. 169)
Marine vs. Fire insurance

NOTE: The liability of an insurer is to pay for direct Marine Insurance Fire Insurance
loss only. The insurer may be liable to pay for Rules on constructive Not in a fire insurance
consequential or indirect losses if covered by total loss (IC, Secs. 133,
extension to such fire policies or insured under 141) and abandonment
separate policy. (De Leon, 2010) (IC, Sec. 140) apply

Indirect losses

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 INSURANCE CODE
In case of partial loss of The insured may only
a thing insured for less become a co-insurer if
than its actual value, expressly agreed upon
the insured in a marine by the parties (IC, Sec.
policy is a co-insurer of 174) (De Leon, 2010).
the uninsured portion
(IC, Sec. 159)
Alteration made in the use or condition of the
thing insured
Insurer may rescind a fire insurance policy on the
ground of alteration made in the use or condition of
the thing insured, following the requisites:
1. The use or condition of the thing is specially
limited or stipulated in the policy;
2. Such use or condition 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; and
5. The alteration increases the risk. (IC, Sec. 170)
6. There must be a violation of a material policy
provision. (Sundiang Sr. & Aquino, 2014)
NOTE: A contract of fire insurance is not affected by
any act of the insured subsequent to the execution
of the policy, which does not violate its provisions
even though it increases the risk and is the cause of
the loss. (IC, Sec. 172)
Q: United Merchants Corporation (UMC)’s
General Manager Alfredo Tan insured UMC’s
stocks in trade of Christmas lights against fire
with Country Bankers Insurance Corporation
(CBIC). Unfortunately, a fire gutted the
warehouse rented by UMC. When UMC
demanded for payment under the insurance
policy, CBIC rejected its claim due to breach of
Condition No. 15 of the policy which states that
if the claim be in any respect fraudulent, or if any
false declaration be made or used in support
thereof, all the benefits under the policy shall be
forfeited.CBIC contends that because arson and
fraud attended the claim, UMC is not entitled to
recover under Condition No. 15 of the insurance
policy. Is UMC is entitled to claim from CBIC the
full coverage of its fire insurance policy?
A: NO. The Insurance Code provides that a policy
may declare that a violation of specified provisions
thereof shall avoid it. Thus, in fire insurance policies,
which contain provisions such as Condition No. 15
of the insurance policy, a fraudulent discrepancy
between the actual loss and that claimed in the
proof of loss voids the insurance policy. Mere filing
of such a claim will exonerate the insurer. (United
119
Merchants Corporation v. Country Bankers Insurance
Corporation, G.R. No. 198588, July 11, 2012)
Q: On May 13, 2014, Freedom Insurance
Company (Freedom) issued Fire Insurance
Policy to BCP Corporation for the latter’s
machineries and equipment located at Tower 1
Building located in Concepcion, Tarlac which
was used as a factory for automotive parts. The
insurance, which was for 10 million and
effective for a period of one year, was procured
by BCP Corporation for Rizal Commercial
Banking Corporation (RCBC), the mortgagee of
the insured machineries and equipment. On
October 12, 2014, the insured machineries were
totally lost by fire. BCP Corporation filed a fire
insurance claim with Freedom which denied the
claim upon the ground that at the time of loss,
the insured machineries and equipment were
transferred by BCP Corporation to a location
different from that indicated in the policy. The
insured machineries were transferred from the
Tower 1 Buiding to the Tower 2 Building also
found in Concepcion, Tarlac which was used as a
warehouse for storing old and unused
machineries of the corporation. Was the refusal
of Freedom justified?
A: YES. The policy stipulated that the insured
properties were located at the Tower1 Building but
BCP Corporation transferred the machineries
without the consent of Freedom. The alteration of
the location increased the risk of loss. The transfer
affected Freedom’s ability to control the risk by
guarding against the risk brought about by the
change in condition, specifically the change in the
location of the risk. Tower 2 Building was not the
location stipulated in the policy. There being an
unconsented removal, the transfer was at BCP’s
own risk and it must suffer the consequences of the
fire. (Malayan Insurance Company, Inc. v. PAP Co.,
Ltd. G.R. No. 200784, August 7, 2013)
Effect when the insured has no control or
knowledge of the alteration
GR: The insurer is not relieved from liability if the
acts or circumstances by which the risk is increased
are occasioned by accident, or a cause over which
the insured has no control.
XPNs:
1. Actually known to the insured; or
2. Insured is presumed to know of the alteration
when the acts or circumstances, permanently
and substantially affects the conditions of the
property so as to constitute an increase in risk.
(De Leon, supra, 2010)
 MERCANTILE LAW
Measure of indemnity in open and valued undertaking, even though the cost may exceed the
policies in fire insurance original amount of insurance. (De Leon, 2010)

OPEN POLICIES VALUED POLICIES Insured can pledge, hypothecate or transfer a

The expense it would be The parties are bound fire insurance policy or rights thereunder
to the insured at the time by the valuation, in the
of the commencement of absence of fraud. He may do so after a loss has occurred and even
the fire to replace the (Sundiang Sr. & Aquino without the consent of, or notice to, the insurer. In
thing lost or injured in 2014, citing such a case, it is not the personal contract which is
the condition in which it Development Insurance being assigned, but a claim under or a right of action
was at the time of the Corporation v. IAC, G.R. on the policy against the insurer. (De Leon, 2010)
injury. No. 713610, July 19,
1986). Limitation to the right of the insured in pledging,
In an open policy, the hypothecating or transferring his right under a
actual loss, as fire insurance policy
determined, will
represent the total Section 175 of the Insurance Code prohibits the
indemnity due the exercise of this right in the case where the pledging,
insured except only that hypothecating, or transferring is made to any
the total indemnity shall person, firm or company who acts as agent for or
not exceed the total value otherwise represents the insurer.
of the policy
NOTE: Any such pledge, etc. shall be void and of no
Co-insurance clause in fire policies effect insofar as it may affect other creditors of the
insured (ibid).
The co-insurance clause is a clause requiring the
insured to maintain insurance to an amount equal CASUALTY INSURANCE
to the value or specified percentage of the value of
the insured property under penalty of becoming co- It is an insurance covering loss or liability arising
insurer to the extent of such deficiency. This is to from accident or mishap, excluding certain types of
prevent the property owners from taking out such loss which by law or custom are considered as
small amount of insurance, and thereby reducing falling exclusively within the scope of other types of
the premium payments and thereby increasing the insurance such as fire or marine. (IC, Sec. 176)
rates of premium for all. (De Leon, 2010)
Coverage of casualty insurance
NOTE: A co-insurance cannot exist in fire insurance
if there is no stipulation to that effect. 1. Employer's liability and workmen’s insurance –
the risk insured against is the liability of the
Option to rebuild clause assured to make compensation or pay damages
for an accident, injury, or death, occurring to a
It gives the insurer the option to rebuild the servant or other employee, in the course of his
destroyed property instead of paying the amount of employment under statutes imposing such
the loss or damage, notwithstanding a fixed liability on employers.
valuation in the policy (IC, Sec. 174). This clause 2. Public utility insurance – indemnifies against
serves to protect the insurer against unfairness in liability on account of injuries to the person or
the appraisal and award rendered by a packed property of another. It may extend to
board of arbitrators, or in the proof of loss. automobiles, elevators, fly wheels, libel,
theaters, and vessels.
NOTE: The insurer must exercise his option to 3. Motor vehicle liability insurance – is a contract
rebuild within the time stipulated in the policy, or in of insurance against passenger and third-party
the absence of stipulation, within a reasonable time. liability for death or bodily injuries and damage
The choice by the insurer shall produce no effect to property arising from, motor vehicle
except from the time it has been communicated to accidents.
the insured. (Article 1201, NCC) 4. Plate glass insurance – an insurance against loss
from accidental breaking of plate-glass
Unless the policy has limited the cost of rebuilding windows, doors, showcases, etc.
to the amount of the insurance, the insurer, after 5. Burglary and theft insurance – an insurance
electing to rebuild, can be compelled to perform his against loss of property by the depredations of
burglars and thieves.

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 INSURANCE CODE
6. Personal accident insurance – a form of Co. Ltd, G.R. No. L-
insurance which undertakes to indemnify the 25579, March 29,
assured against the expense, loss of time, and 1972)
suffering resulting from accidents causing him
physical injury, usually by payment at a fixed
rate per week while the consequent disability Rules on Third party liability insurance
lasts, and sometimes including the payment of a
fixed sum to his heirs in case of his death by 1. Insurable interest is based on the interest of the
accident within the term of the policy. insured in the safety of the persons, and their
7. Health insurance – an indemnity to persons for property, who may maintain an action against
expense and loss of time occasioned by disease. him in case of their injury or destruction
8. Other substantially similar kinds of insurance. respectively. (De Leon, 2010)
(Perez, 2006) 2. In a TPL insurance contract, the insurer
assumes the obligation by paying the injured
Two divisions of casualty insurance third party to whom the insured is liable. Prior
payment by the insured to the injured third
1. Accident or health insurance – Insurance against person is not necessary in order that the
specified perils which may affect the person obligation of the insurer may arise. The moment
and/or property of the insured. (E.g. personal the insured becomes liable to third persons, the
accident, robbery/theft insurance) insured acquires an interest in the insurance
2. Third party liability insurance (TPL) – Insurance contract which may be garnished like any other
against specified perils which may give rise to credit. (Perla Compania de Seguros, Inc. vs.
liability on the part of the insured of claims for Ramolete, G.R. No. L-60887, November 13, 1991)
injuries or damage to property of others. (De 3. In burglary, robbery and theft insurance, the
Leon, 2010) opportunity to defraud the insurer (moral
hazard) is so great that insurer have found it
“Accidental” vs. “Intentional” as used in necessary to fill up the policies with many
insurance restrictions designed to reduce the hazard. The
purpose of the exception is to guard against
ACCIDENTAL INTENTIONAL liability should theft be committed by one
The terms “accident” Intentional as used in having unrestricted access to the property.
and “accidental” have an accident policy (Fortune Insurance & Surety Co. vs. CA, G.R. No.
been taken to mean excepting intentional 115278, May 23, 1995)
that which happens injuries inflicted by 4. The right of the person injured to sue the
by chance or the insured or any insurer of the party at fault (insured), depends
fortuitously, without other person, implies on whether the contract of insurance is
intention or design, the exercise of the intended to benefit third persons also or only
which is unexpected, reasoning faculties, the insured (Eulogio vs. Del Monte, GR No. L-
unusual or consciousness, and 22042, August 17, 1967). If the contract provides
unforeseen. The term volition. Where a for:
does not, without provision of the policy a. Indemnity against third party liability – The
qualification, exclude excludes intentional third persons to whom the insured is liable,
events resulting in injury, it is the can sue directly the insurer upon the
damage or loss due to intention of the occurrence of the injury or event upon
fault, recklessness or person inflicting the which the liability depends.The purpose is
negligence of third injury that is to protect the injured person against the
parties. (Sundiang Sr. controlling. If the insolvency of the insured who causes such
& Aquino, 2014 citing injuries suffered by injury and to give him a certain beneficial
Pan Malayan the insured clearly interest in the proceeds of the policy. It is as
Insurance Corp. V. CA, resulted from the if the injured person were especially named
G.R. No. 81026, April 3, intentional act of a in the policy. (Shafer vs. RTC Judge, G.R. No.
1990) third person, the 78848, November 14, 1988, 1996 Bar)
insurer is relieved b. Indemnity against actual loss or payment –
from liability as The third persons cannot proceed against
stipulated. (Sundiang the insurer, the contract being solely to
Sr. & Aquino, 2014 reimburse the insured for liability actually
citing Biagtan v. The discharged by him through payment to
Insular Life Assurance third persons, said third person’s recourse
being thus limited to the insured alone.

121
 MERCANTILE LAW
(Guingon vs. Del Monte, G.R. No. L-22042,
August 17, 1967) Prior payment by the
insured is necessary to give rise to the
obligation of the insurer.
Source of liability of third party liability
insurance (1996, 2000 Bar)
The direct liability of the insurer under indemnity
contract against third party liability does not mean
that the insurer can be held solidarily liable with the
insured. The insurer’s liability is based on contract;
that of the insured is based on tort. (Figuracion vda.
De Maglana, et. al. v. Hon. Francisco Consolacion, G.R.
No. 60506, August 6, 1992)
---
with finality. Is the contention of the insurer
correct? (1996 Bar)
A: NO, the contention of the insurer is not correct.
There is no need to wait for the decision of the court
determining Cesar’s liability with finality before the
third party liability insurer could be sued. The
occurrence of the injury to Roberto immediately
gave rise to the liability of the insurer under its
policy. Where an insurance policy insures directly
against liability, the insurer’s liability accrues
immediately upon the occurrence of the injury or
event upon which the liability depends. (Shafer vs.
RTC Judge, supra)
Liability of insurer if the insured was
committing a felony

Q: Lawrence, a boxer, is a holder of an accident Liabilities arising out of acts of negligence, which
insurance policy. In a boxing match, he died after are also criminal, are also insurable on the ground
being knocked out by the opponent. Can his that such acts are accidental. Thus, a motor
father who is a beneficiary under said insurance insurance policy covering the insured’s liability for
policy successfully claim indemnity from the accidental injury caused by his negligence, even
insurance company? (1990 Bar) though gross and attended by criminal
consequences such as homicide through reckless
A: YES. Clearly, the proximate cause of death was imprudence, will not be void as against public
the boxing contest. Death sustained in a boxing policy. But liability consequences of deliberate
contest is an accident. (De la Cruz v. Capital criminal acts are not insurable. (Sundiang Sr. &
Insurance & Surety Co., G.R. No. L-21574, June 30, Aquino, 2014)
1966)
“No action” clause
Liability of the insurer vs. Liability of the insured
It is a requirement in a policy of liability insurance
INSURER INSURED which provides that suit and final judgment be first
The liability is direct but Liability is direct and obtained against the insured, that only thereafter
the insurer cannot be can be held liable with can the person injured recover on the policy. It
held solidarily liable all the parties at fault. expressly disallows suing the insurer as co-
with the insured and defendant. (Guingon v. Del Monte, supra)
other parties at fault.
Liability is based on Liability is based on A “no action” clause must yield to the provisions of
contract. tort. the Rules of Court regarding multiplicity of suits.
The third-party liability The liability extends to (Shafer v. RTC Judge, supra.)
is only up to the extent the amount of actual
of the insurance policy and other damages. Rules in accident insurance
and that required by (Heirs Poe v. Malayan
law. Insurance, G.R. No. 1. For death or injury to be covered by the policy,
156302, April 7, 2009) such should not be the natural or probable
result of the insured’s voluntary act, or if
something unforeseen occurs in the doing of the
act which produces the injury, which may result
Q: While driving his car along EDSA, Cesar to death. (Dela Cruz vs. Capitol Insurance &
sideswiped Roberto, causing injuries to the Surety Co., supra)
latter, Roberto sued Cesar and the third-party 2. Suicide and willful exposure to needless peril
liability insurer for damages and/or insurance are in pari matere because they both signify a
proceeds. The insurance company moved to disregard for one’s life. Voluntary exposure to a
dismiss the complaint, contending that the known danger is generally held to negate the
liability of Cesar has not yet been determined accidental character of whatever followed from
the known danger. (De Leon, 2010)

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 INSURANCE CODE
3. The insured’s beneficiary has the burden of More of a credit Generally a contract of
proof in demonstrating that the cause of death accommodation with indemnity
is due to the covered peril. Once that fact is the surety assuming
established, the burden shifts to the insurer to primary liability
show any excepted peril that may have been Surety is entitled to No right of recovery for
stipulated by the parties. (Vda. De Gabriel vs. CA, reimbursement from the loss the insurer may
G.R. No. 103883, Novembber 14, 1996) the principal and his sustain except when the
guarantors for the loss it insurer is entitled to
SURETYSHIP may suffer under the subrogation.
contract.
Contract of suretyship A bond may be canceled May be canceled
by or with the consent of unilaterally either by the
It is an agreement whereby a party called the the obligee or by the insured or by the insurer
“surety” guarantees the performance by another commissioner or by the on grounds provided by
party called the “principal or obligor” of an court. law.
obligation or undertaking in favor of a third party Requires acceptance of Does not need
called the “obligee”. It includes official the obligee before it acceptance of any third
recognizances, stipulations bonds or undertakings becomes valid and party.
issued by any company by virtue and under the enforceable.
provisions of Act No. 536, as amended by Act No. A risk-shifting device, A risk-distributing
2206. (IC, Sec. 177) the premium paid being device, the premium
in the nature of a service paid being considered a
The extent of surety’s liability is determined by the fee. ratable contribution to a
language of the suretyship contract or bond itself. It common fund. (De Leon,
cannot be extended by implications beyond the 2010)
terms of the contract. Having accepted the bond, the
creditor is bound by the recital in the surety bond Types of surety bonds
that the terms and conditions of distributorship
contract be reduced in writing or at the very least 1. Contract bonds – These are connected with
communicated in writing to the surety. Such non- construction and supply contracts. They are for
compliance by the creditor impacts not on the the protection of the owner against a possible
validity or legality of the surety-contract but on the default by the contractor or his possible failure
creditor’s right to demand performance. (First to pay materials, men, laborers and sub-
Lepanto–Taisho Insurance Corporation vs. Chevron contractors.The position of surety, therefore, is
Philippines, G.R. No. 177839, January 18, 2012) to answer for a failure of the principal to
perform in accordance with the terms and
Nature of liability of surety specifications of the contract. There may be two
bonds:
The liability of the surety or sureties shall be: a. Performance bond – One covering the
faithful performance of the contract; and
1. Solidary – Joint and several with the obligor and b. Payment bond – One covering the payment
2. Limited or fixed – Limited to the amount of the of laborers and material men.
bond (It cannot be extended by implication).
3. Contractual – It is determined strictly by the 2. Fidelity bonds –They pay an employer for loss
terms of the contract of suretyship in relation to growing out of a dishonest act of his employee.
the principal contract between the obligor and For the purposes of underwriting, they are
the obligee. (IC, Sec. 178) classified as:
a. Industrial bond – One required by private
Suretyship vs. Property Insurance employers to cover loss through dishonesty
of employees; and
SURETYSHIP PROPERTY b. Public official bond – One required of public
INSURANCE officers for the faithful performances of
It is an accessory The principal contract their duties and as a condition of entering
contract. itself. upon the duties of their offices.
There are three parties: There are only two
the surety, parties: insurer and 3. Judicial bonds – They are those which are
obligor/debtor, and the insured required in connection with judicial
obligee/creditor. proceedings (ibid).

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 MERCANTILE LAW
Rules of payment of premiums in suretyship
1. The premium becomes a debt as soon as the
contract of suretyship or bond is perfected and
delivered to the obligor (IC, Sec. 77);
2. The contract of suretyship or bonding shall not
be valid and binding unless and until the
premium therefor has been paid;
3. Where the obligee has accepted the bond, it
shall be valid and enforceable notwithstanding
that the premium has not been paid (Philippine
Pryce Assurance Corp. v. CA, G.R.No. 107062,
February 21, 1994);
4. If the contract of suretyship or bond is not
accepted by, or filed with the obligee, the surety
shall collect only a reasonable amount;
5. If the non-acceptance of the bond be due to the
fault or negligence of the surety, no service fee,
stamps, or taxes imposed shall be collected by
the surety; and
6. In the case of continuing bond (for a term longer
than one year or with no fixed expiration date),
the obligor shall pay the subsequent annual
premium as it falls due until the contract is
canceled (IC, Sec. 179) (De Leon, 2010).
By law and by the specific contract involved in this
case, the effectivity of the bond required for the
obtention of a license to engage in the business of
receiving rice for storage is determined not alone by
the payment of premiums but principally by the
Administrator of the NFA. A continuing bond, as in
this case where, there is no fixed expiration date,
may be cancelled only by the obligee, which is the
NFA, by the Insurance Commissioner, and by the
court. (Country Bankers Insurance Corporation vs.
Lagman, G.R. No. 165487, July 13, 2011, in Divina,
2014)
Q: Fumitechniks Corporation, represented by
Ma. Lourdes Apostol, had applied for and was
issued a surety bond by First Lepanto-Taisho
Insurance Corporation (First Lepanto-Taisho)
for the amount of P15,700,000.00. As stated in
the attached rider, the bond was in compliance
with the requirement for the grant of a credit
line with the Chevron Philippines, Inc.
(Chevron) to guarantee payment of the cost of
fuel products withdrawn within the stipulated
time in accordance with the terms and
conditions of agreement between Chevron and
Fumitechniks. When Fumitechniks defaulted on
its obligation, Chevron notified First Lepanto-
Taisho of Fumitechniks’ unpaid purchases. First
Lepanto-Taisho thereafter demanded to
Fumitechniks the submission of a copy of the
agreement secured by the bond, together with
copies of documents such as delivery receipts.
Fumitechniks, however, denied that it executed
124
such an agreement with Chevron, thus no copy
of such agreement could be submitted. Because
of this, Chevron Philippines, Inc. sued First
Lepanto-Taisho for the payment of unpaid oil
and petroleum purchases made by
Fumitechniks. Is the surety liable to the creditor
in absence of a written contract with the
principal?
A: NO. Section 176 of the Insurance Code is clear
that a surety contract should be read and
interpreted together with the contract entered into
between the creditor and the principal. A surety
contract is merely a collateral one, its basis is the
principal contract or undertaking which it secures.
Necessarily, the stipulations in such principal
agreement must at least be communicated or made
known to the surety. Having accepted the bond,
Chevron as creditor must be held bound by the
recital in the surety bond that the terms and
conditions of its distributorship contract be reduced
in writing or at the very least communicated in
writing to the surety. Such non-compliance by the
Chevron impacts not on the validity or legality of the
surety contract but on the creditor’s right to
demand performance. (First Lepanto-Taisho
Insurance v. Chevron Philippines, Inc., G.R. No.
177839, January 18, 2012)
LIFE INSURANCE
It is insurance on human lives and insurance
appertaining thereto or connected therewith (Sec.
181, Insurance Code). It is made payable on the
death of the person, or on his surviving a specified
period, or otherwise contingently on the
continuance or cessation of life. (IC, Sec. 182)
NOTE: Every contract or undertaking for the
payment of annuities including contracts for the
payment of lump sums under a retirement program
where a life insurance company manages or acts as
a trustee for such retirement program shall be
considered a life insurance contract for purposes of
the Insurance Code. (IC, Sec. 181)
Every contract or pledge for the payment of
endowments or annuities shall also be considered a
life insurance contract under the Insurance Code.
(IC, Sec. 182)
Who may exercise any right under the policy
In the absence of a judicial guardian, the father, or in
the latter’s absence or incapacity, the mother, of any
minor, who is an insured or a beneficiary under a
contract of life, health, or accident insurance, may
exercise, in behalf of said minor, any right under the
policy, without necessity of court authority or the
 INSURANCE CODE
giving of a bond, where the interest of the minor in
the particular act involved does not exceed Five
hundred thousand pesos (P500,000.00) or in
such reasonable amount as may be determined
by the Commissioner. Such right may include, but
shall not be limited to, obtaining a policy loan,
surrendering the policy, receiving the proceeds of
the Policy, and giving the minor’s consent to any
transaction on the minor’s consent to any
transaction on the policy.
In the absence or in case of the incapacity of the
father or mother, the grandparent, the eldest
brother or sister at least eighteen (18) years of
age, or any relative who has actual custody of the
minor insured or beneficiary, shall act as a
guardian without need of a court order or
judicial appointment as such guardian, as long
as such person is not otherwise disqualified or
incapacitated. Payment made by the insurer
pursuant to this section shall relieve such
insurer of any liability under the contract. (IC,
Sec. 182)
Reasons why a Life insurance is also a contract
of indemnity
This is because of the following reasons:
1. The liability in life insurance is absolutely
certain
2. Amount of life insurance generally is without
limit
3. The policy is a valued policy
4. There is no direct pecuniary loss required. (De
Leon, 2010)
Kinds of life insurance policies
1. Ordinary life, general life or old line policy –
Insured pays a premium every year until he
dies. Cash surrender value after 3 years.
2. Limited payment – 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.
3. Endowment – insured 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.
4. Term insurance – insured pays premium only
once, and he is insured for a specified period. If
he dies within the period, his beneficiaries
benefit. If he outlives the period, no person
benefits from the insurance.
5. Industrial life – entitles the insured to pay
premiums weekly, or where premiums are
payable monthly or oftener. (Sundiang Sr. &
Aquino, 2014)
125
Contract of life annuity
It is a contract to pay the insured, or a named person
or persons, a sum or sums periodically during life or
certain period. (Perez, 2006)
Measure of indemnity under a policy of
insurance upon life or health
GR: The measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the
policy.
XPN: The interest of a person insured is susceptible
of exact pecuniary measurement. (IC, Sec. 186)
Liability of the insurer in case of suicide
The insurer shall be liable in case of suicide by the
insured if:
1. The suicide is committed after the policy has
been in force for a period of 2 years from the
date of its issue or of its last reinstatement.
2. The suicide is committed within a shorter
period as provided in the policy.
3. The suicide is committed in the state of insanity
regardless of the date of commission. (IC, Sec.
183)
Q: Sun Insurance Co. issued to Tan a life policy
having this provision: “the company shall not be
liable in respect of ‘bodily injury’ consequent
upon the insured person who willfully exposes
himself to needless peril except in an attempt to
save human life". Tan designated his wife,
Beverly as beneficiary.
One evening, Tan, while playing with his hand
gun, suddenly stood in front of his secretary and
pointed the gun at her. Startled, she pushed the
gun aside and said that it may be loaded. Thus,
Tan, to assure her that it was not loaded, pointed
it at his temple. The next moment, there was an
explosion and Tan slumped to the floor lifeless.
Beverly, then claimed the proceeds from Sun
Insurance, but the latter rejected her claim on
the ground that the death of Tan was not
accidental. Beverly sued the insurer. Will
Beverly’s claim prosper? (1993, 1994 Bar)
A: Beverly can recover the proceeds of the policy
from the insurer. The death of the insured was not
due to suicide or willful exposure to needless peril
which are excepted risks. The insured’s act was
purely an act of negligence which is covered by the
policy and for which the insured got the insurance
for his protection. In fact, he removed the magazine
from the gun and when he pointed the gun to his

temple he did so because he thought that it was safe
for him to do so. He did so to assure his sister that
the gun was harmless. There is none in the policy
that would relieve the insurer of liability for the
death of the insured since the death was an accident.
(Sun Insurance v CA, G.R. Nos. 79937-38, February 13,
1989)
Life insurance vs. Fire/Marine insurance
LIFE INSURANCE
It is a contract of
investment not contract
of indemnity.
Always regarded as
valued policy.
May be transferred or
assigned to any person
even if he has no
insurable interest.
The consent of the
insurer is not essential to
the validity of the
assignment of a life
policy unless expressly
required.
Insurable interest in the
life or health of the
person insured need not
exist after the insurance
takes effect or when loss
occurs.
Insurable interest need
not have any legal basis.
Contingency that is
contemplated is a certain
event, the only
uncertainty being the
time when it will take
place.
The liability of the
insurer to make payment
is certain, the only
uncertain element being
when such payment
must be made.
May be terminated by the
insured but cannot be
cancelled by the insurer
and is usually a long term
contract.
The “loss” to the
beneficiary caused by the
death of the insured can
seldom be measured
MERCANTILE LAW
FIRE/MARINE
INSURANCE
It is a contract of
indemnity.
May be open or valued.
The transferee or
assignee must have an
insurable interest in
the thing insured.
Consent, in the
absence of waiver by
the insurer, is essential
in the assignment of
the policy.
Insurable interest in
the property insured
must exist not only
when the insurance
takes effect but also
when the loss occurs.
Insurable interest
must have a legal
basis.
The contingency
insured against may or
may not occur.
Liability is uncertain
because the happening
of the peril insured
against is uncertain.
May be cancelled by
either party and is
usually for a term of
one year
The reverse is
generally true of the
loss of property, i.e., it
is capable of pecuniary
estimation.
126
accurately in terms of
cash value.
The insured is
The beneficiary is under
required to submit
no obligation to prove
proof of his actual
actual financial loss as a
pecuniary loss as a
result of the death of the
condition precedent to
insured in order to
collecting the
collect the insurance.
insurance.
COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE
Motor vehicle liability insurance
It is a 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 a motor
vehicle by its owner. (Compulsory Motor Vehicle
Liability Insurance, prepared and distributed by the
Insurance Commission)
The Insurance Code makes it unlawful for any land
transportation operator or owner of a motor vehicle
to operate the same in public highways unless there
is an insurance or guaranty to indemnify the death
or bodily injury of a third party or passenger arising
from the use thereof (IC, Sec. 387). Registration of
any vehicle will not be made or renewed without
complying with the requirement. (IC, Sec. 389)
Purpose of motor vehicle liability insurance
To give immediate financial assistance to victims of
motor vehicle accidents and/or their dependents,
especially if they are poor regardless of financial
capability of motor vehicle owners or operators
responsible for the accident sustained. (First
Integrated Bonding Insurance Co., Inc. v. Hernando,
G.R. No. L-51221, July 31, 1991)
NOTE: The insurer’s liability accrues immediately
upon the occurrence of the injury or event upon
which the liability depends, and does not depend on
the recovery of judgment by the injured party
against the insured. (Shafer v. Judge, RTC, supra)
Definitions
1. Motor vehicle
Any vehicle propelled by any power other than
muscular power using the public highways, but
excepting road rollers, trolleys cars, street
sweepers, sprinklers, lawn mowers, bulldozers,
graders, forklifts, amphibian trucks, and cranes if
not used in public highways, vehicles which run
 INSURANCE CODE
only on rails or tracks, and tractors, trailers and
traction engines of all kinds used exclusively for
agricultural purposes. (Sec. 3[a] of RA 4136)
NOTE: Trailers having any number of wheels, when
propelled or intended to be propelled by
attachment to a motor vehicle shall be classified as
separate motor vehicle with no power rating (ibid).
2. 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. (IC, Sec. 386, [b])
3. Third-party
Any person other than a passenger as defined in this
section (ibid.) and shall also exclude 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, as likewise defined herein, or his
employee in respect of death, bodily injury, or
damage to property arising out of and in the course
of employment. (Sec. 386, [c], ibid)
4. Owner or Motor vehicle owner (MVO)
Actual legal owner of a motor vehicle, whose name
such vehicle is duly registered with the Land
Transportation Office. (Sec. 386, [d], ibid)
5. Land transportation operator (LTO)
The owner or owners of motor vehicles for
transportation of passengers for compensation,
including school buses. (Sec. 386, [e], ibid)
Persons required to maintain a compulsory
motor vehicle liability insurance (CMVLI) policy
to operate motor vehicle/s in public highways
1. Motor vehicle owner (MVO)
2. Land transportation operator (LTO) (Sec. 387,
ibid).
Scope of coverage required for compulsory
motor vehicle liability insurance
1. For MVOs, the coverage must be comprehensive
against third party liability for death or bodily
injuries. If the private motor vehicle is being
used to transport passengers for compensation,
the coverage shall include passenger liability.
127
2. For LTOs, coverage must be comprehensive
against both passenger and third-party
liabilities for death or bodily injuries. (Ins.
Memo. Cir. No. 3-81)
Substitutes for a compulsory motor vehicle
liability insurance policy
Instead of a CMVLI policy, MVOs or LTOs may either:
1. Post a surety bond with the Insurance
Commissioner who shall be made the obligee or
creditor in the bond in such amount or amounts
required as limits of indemnity to answer for
the same losses sought to be covered by a
CMLVI policy; or
2. Make a cash deposit with the Insurance
Commission in such amount or amounts
required as limits of indemnity for the same
purpose. (Sec. 390, ibid)
After the cash deposit or surety bond has been
proceeded against by the Insurance Commissioner,
such cash deposit shall be replenished or such
surety bond shall be restored by the MVO or LTO in
the right amount/s required as limit of liability
within 60 days after impairment or expiry,
otherwise, he shall secure a CMLVI required (ibid).
Duties of motor vehicle owner or land
transportation operator in contemplation of the
cancellation of the policy
Contemplating the cancellation of the policy, the
MVO or LTO shall:
1. Give to the insurance or surety company
concerned a written notice of his intention to
cancel;
2. Secure, before the insurance policy or surety
bond ceases to be effective, another similar
policy or bond to replace that one canceled;
3. Without making any replacement, make a cash
deposit in sufficient amount with the Insurance
Commissioner and secure a certification from
the Insurance Commissioner regarding the
deposit made for presentation to and filing with
the Land Transportation Office (CMVLI, supra)
(IC, Sec. 393-394).
Effects of the cancellation of the policy
GR: Upon receipt of the notice of such cancellation,
the Land Transportation Office shall order the
immediate confiscation of the plates of the motor
vehicle concerned.
XPNs: No confiscation will be ordered if said Office
receives any of the following:
 MERCANTILE LAW
1. An evidence or proof of a new and valid CMVLI
cover which may be either an insurance policy
or guaranty in cash or surety bond;
2. A signed duplicate of an endorsement or
addendum issued by the insurance company
concerned showing revival or continuance of
the CMVLI cover; or
3. A certification issued by the Insurance
Commissioner to the effect that a cash deposit
in the amount required as limit of indemnity
has been made with him by the MVO or LTO
(CMVLI, supra, IC, Sec. 393).
“Own damage” coverage
It simply meant that the insurer had assumed to
reimburse the costs for repairing the damage to the
insured vehicle, as opposed to damage to third party
vehicle/property. The phrase “own damage” does
not mean damage to the insured car caused by the
assured itself, instead, of third parties. (Pan
Malayan Insurance Corporation v. Court of Appeals,
supra)
No fault indemnity clause (1994 Bar)
It is a clause where the insurer is required to pay a
third party injured or killed in an accident without
the necessity of proving fault or negligence on the
part of the insured. There is a stipulated maximum
amount to be recovered.
Rules under the “no fault indemnity clause”
1. The total indemnity in respect of any one
person shall not exceed P15,000 for all motor
vehicles. (Ins. Memo. Circ. No. 4-2006)
2. Proof 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 (IC, Sec. 391 [3]).
3. Claim may be made against one motor vehicle
only (Sec. 391 [c], ibid).
4. In case injury of an occupant of a vehicle, the
claim shall lie against the insurer of the vehicle
in which the occupant is riding, mounting or
dismounting from (ibid).
5. In any other case (not an occupant), claim shall
lie against the insurer of the directly offending
vehicle (ibid).
6. In all cases, the right of the party paying the
claim to recover against the owner of the
vehicle responsible for the accident shall be
maintained (ibid).
128
The claimant is not free to choose from which
insurer he will claim the "no fault indemnity," as the
law, by using the word "shall”, makes it mandatory
that the claim be made 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, G.R. No. L-49599, August 8,
1988)
This no-fault claim does NOT apply to property
damage. If the total indemnity claim exceeds P15,
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 P15, 000 shall be paid
without regard to the fault. (CMVLI, supra)
---
Q: X is a passenger of a jeepney for hire being
driven by Y. The jeepney collided with another
passenger jeepney being driven by Z who was
driving recklessly. As a result of the collision, X
suffered injuries. Both passenger jeepneys are
covered by Comprehensive Motor Vehicular
Insurance Coverage. If X wants to claim under
the "no fault indemnity clause", his claim will lie
(2012 Bar)
A: Against the insurer of the passenger jeepney
driven by Y because X was his passenger. The
Insurance Code states that in the case of an occupant
of a vehicle, the claim shall lie against the insurer of
the vehicle in which the occupant is riding,
mounting or dismounting from.
Authorized driver clause
It indemnifies the insured owner against loss or
damage to the car but limits the use of the insured
vehicle to:
1. The insured himself; or
The insured need not prove that he has a
driver’s license at the time of the accident if he
was the driver. (Sundiang Sr. & Aquino, 2014)
2. Any person who drives on his order or with his
permission; provided, that the person driving is
permitted to drive the motor vehicle in
accordance with the law, and is not disqualified.
(Villacorta v. Insurance Commissioner, G.R. No.
54171, October 28, 1980)
 INSURANCE CODE
The main purpose of this clause is to require a
person other than the insured, who drives the
car on the insured’s order or with his
permission, to be duly licensed drivers and
have no disqualification to drive a motor
vehicle.
An Irish citizen whose 90-day tourist visa had
expired, cannot recover on his car insurance policy,
not being authorized to drive a motor vehicle
without a Philippine driver’s license. (Stokes v.
Malayan Insurance Co., Inc. G.R. No. L-34768,
February 24, 1984)
A driver with an expired Traffic Violation Receipt or
expired Temporary Operator’s permit is not
considered an authorized driver within the meaning
of the insurance policy. The Traffic Violation Receipt
is coterminous with a confiscated license under the
Motor Vehicle Law. (Gutierrez v. Capital Insurance &
Surety Co., Inc., G.R. No. L-26287, June 29, 1984)
Theft clause
It is that which includes theft as among the risks
insured against. Where a car is unlawfully and
wrongfully taken without the knowledge and
consent of the owner, such taking constitutes “theft”
and it is the theft clause, not the authorized driver
clause which should apply. (Perla Compania de
Seguros, Inc. v. CA, supra)
The “Theft Clause” of a comprehensive motor
vehicle insurance policy has been interpreted by the
Court in several cases to cover situations like (1)
when one takes the motor vehicle of another
without the latter’s consent even if the motor
vehicle is later returned, there is theft- there being
intent to gain as the use of the thing unlawfully
taken constitutes gain or (2) when there is taking of
a vehicle by another person without the permission
or authority from the owner thereof. (Paramount
Insurance vs. Spouses Remondeulaz, G.R. No. 173773,
November 28, 2012)
Theft
There is theft if the vehicle is taken with intent to
gain without the consent of the insured-owner.
Thus, there is theft even if:
1. The vehicle is returned;
2. The vehicle was stolen by the driver of the
insured (Alpha Insurance and Surety Company v.
Castor, G.R. 198174, September 2, 2013);
3. The vehicle was taken to the owner of a repair
shop for the purpose of repair and in order to
attach accessories. (Paramount Insurance v.
Spouses Remondeulaz, G.R. No. 173773,
129
November 28, 2012) (Sundiang Sr. & Aquino,
2014)
---
Q: On May 26, 2014, Jess insured with Jack
Insurance (Jack) his 2014 Toyota Corolla sedan
under a comprehensive motor vehicle insurance
policy for one year. On July 1, 2014, Jess’ car was
unlawfully taken. Hence, he immediately
reported the theft to the traffic Management
Command (TMC) of the Philippine National
Police (PNP), which made Jess accomplish a
complaint sheet as part of its procedure. In the
complaint sheet, Jess alleged that a certain Ric
Silat (Silat) took possession of the subject
vehicle to add accessories and improvements
thereon. However, Silat failed to return the
subject vehicle within the agreed three- day
period. As a result, Jess notified Jack of his claim
for reimbursement of the value of the lost
vehicle under the insurance policy. Jack refused
to pay claiming that there is no theft as Jess gave
Silat lawful possession of the car. Is Jack
correct? (2014 Bar)
A: NO, Jack Insurance is not correct. Ric Silat was
merely given physical possession of the car. He did
not have juridical possession over the same. It is
also apparent that the taking by Silat of the car of
Jess is without the consent or authority of the latter.
Thus, the act of Silat in depriving Jess of his car, soon
after the transfer of physical possession of the same
to him, constitutes theft under the insurance policy
that is compensable. (Paramount Insurance v.
Spouses Remonduelaz, G.R. No. 173773, November 8,
2012)
Q: On February 21, 2013, Barrack entered into a
contract of insurance with Matino Insurance
Company (Matino) involving a motor vehicle.
The policy obligates Matino to pay Barrack the
amount of P600,000 in case of loss or damage to
said vehicle during the period covered, which is
from February 26,2013 to February 26,2014.
On April 16,2013, at about 9:00 am, Barrack
instructed his driver, JJ, to bring the motor
vehicle to a nearby auto shopfor tune-up.
However, JJ no longer despite and diligent
efforts to locate the said vehicle, the efforts
proved futile. Resultantly, Barrack promptly
notified Matino of the said loss and demanded
payment of the insurance proceeds of P600,000.
In a letter dated July 5,2013, Matino denied the
claim, reasoning as stated in the contract that
“the company shall not be liable for any
malicious damage caused by the insured, any
member of his family or by a person in the
 MERCANTILE LAW
insured’s service. Is Matino correct in denying
the claim? (2014 Bar)
A: Matino Insurance is not correct in denying the
claim. The loss of the motor vehicle is not excluded
under the insurance policy as the loss was due to
theft, not malicious damage. The “malicious
damage” clause under the policy is not applicable
but rather the “theft” clause. Thus, the provision
under the policy that ”the company shall not be
liable for any malicious damage caused by the
insured, any member of his family or by a person in
the insured’s service” is not applicable. (Alpha
Insurance and Surety Co. v. Castor, G.R. No. 198174,
September 2,2003).
Limitations with respect to compulsory motor
vehicle liability insurance over solicitation
1. No government office or agency having the duty
of implementing the provisions of the Insurance
Code on CMVLI shall act as agent in procuring
the insurance policy or surety bond required;
2. No official or employee of such office or agency
shall similarly act as such agent; and
3. The commission of an agent procuring the
corresponding insurance policy or surety bond
shall in no case exceed 10% of the amount of
premiums therefore. (IC, Sec. 400)
Q: When a passenger jeepney, insured but with
an authorized driver’s clause and was driven by
a driver who only holds a Traffic Violation
Report (TVR) because his license was
confiscated, met an accident, may the owner of
the jeepney claim from the insurance company?
(2003 Bar)
A: YES. The fact that the driver was merely holding
a TVR does not violate the condition that the driver
should have a valid and existing driver’s license.
Besides, such a condition should be disregarded
because what is involved is a passenger jeepney, and
what is involved here is not own damage insurance
but third party liability where the injured party is a
third party not privy to the contract of insurance.
MICROINSURANCE
It is a financial product or service that meets the risk
protection needs of the poor where:
The amount of contributions, premiums, fees or
charges, computed on a daily basis, does not exceed
seven and a half percent (7.5%) of the current daily
minimum wage rate for nonagricultural workers in
Metro Manila; and
130
The maximum sum of guaranteed benefits is not
more than one thousand (1000) times of current
daily minimum wage rate for nonagricultural
workers in Metro Manila. (IC, Sec. 187)
NOTE: No insurance company or mutual benefit
association shall engage in the business of
microinsurance unless it possesses all the
requirements as may be prescribed by the
Commissioner. The Commissioner shall issue such
rules and regulations governing microinsurance.
(IC, Sec. 188)
TRANSPORTATION LAW
Laws that govern contracts of transportation
Contracts of transportation, whether by land, sea, or
air, [i] if within the Philippines; or [ii] if the
transportation of goods be from a foreign country to
the Philippines, shall be governed by the following
laws, arranged by order of application:
1. Provisions of the New Civil Code on Common
Carriers;
2. Code of Commerce; and
3. Special laws such as Carriage of Goods by the
Sea (COGSA); Salvage Law; Public Service Act;
Land Transportation and Traffic Code; Tariff
and Customs Code; and Civil Aeronautics Act
(Art. 1735 and 1766, NCC; American President
Lines, Ltd. v. Klepper, G.R. No. L-15671, November
29, 1960).
NOTE: In case of international carriage in air
transportation, (i) the Montreal Convention as
ratified by the Philippines in 2015; and (ii) the
Warsaw Convention (R.A. 9497 may be applicable.
If the goods are to be transported from the
Philippines to a foreign country, the law of the latter
country shall govern the transportation contract
(Art. 1753, CC; National Development Co. v. CA, G.R.
No. L-49407, August 19, 1988).
COMMON CARRIER
Requisites for an entity to be classified as a
common carrier (1996, 1997, 2000, 2002 Bar)
(PBL-FP)
1. Must be a Person, corporation, firm or
association
2. Engaged in the Business of carrying or
transporting passengers or goods or both;
3. The carriage or transport must either be by
Land, water or air;
4. The service is for a Fee;
5. The service is offered to the Public (Art. 1732,
NCC).