INSURANCE CODE

(P.D. No. 1460)

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2.

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4.

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2.
3.
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6.

7.

I. GENERAL CONCEPTS
CONTRACT OF INSURANCE

An
agreement
whereby
one
undertakes for a consideration to
indemnify
another
against
loss,
damage or liability arising from an
unknown or contingent event. (Sec. 2,
par. 2, IC)
DOING AN INSURANCE BUSINESS
OR TRANSACTING AN INSURANCE
BUSINESS (Sec. 2, par. 4)
Making or proposing to make, as
insurer, any insurance contract;
Making or proposing to make, as
surety, any contract of suretyship as a
vocation, not as a mere incident to
any other legitimate business of a
surety;
Doing any insurance business,
including a reinsurance business;
Doing or proposing to do any
business in substance equivalent to
any of the foregoing
II.
CHARACTERISTICS
OF
AN
INSURANCE
CONTRACT
(The
Insurance Code of the Philippines
Annotated, Hector de Leon, 2002 ed.)
Consensual it is perfected by the
meeting of the minds of the parties.
Voluntary the parties may
incorporate such terms and conditions
as they may deem convenient.
Aleatory it depends upon some
contingent event.
Unilateral imposes legal duties only
on the insurer who promises to
indemnify in case of loss.
Conditional It is subject to
conditions the principal one of which
is the happening of the event insured
against.
Contract of indemnity Except life
and accident insurance, a contract of
insurance is a contract of indemnity
whereby the insurer promises to make
good only the loss of the insured.
Personal each party having in view
the character, credit and conduct of
the other.
REQUISITES OF A CONTRACT OF
INSURANCE (The Insurance Code of
the Philippines Annotated, Hector de
Leon, 2002 ed.)
1. A subject matter which the insured
has an insurable interest.
2. Event or peril insured against which
may be any future contingent or
unknown event, past or future and a
duration for the risk thereof.
3. A promise to pay or indemnify in a
fixed or ascertainable amount.
4.
A
consideration
known
as
premium.
5. Meeting of the minds of the parties.
5
CARDINAL
PRINCIPLES
IN
INSURANCE
1. Insurable Interest

a.
b.
c.

1.
2.

2. Principle of Utmost Good Faith

An insurance contract requires
utmost good faith (uberrimae fidei)
between the parties. The applicant is
enjoined to disclose any material fact,
which he knows or ought to know.
Reason: An insurance contract is an
aleatory contract. The insurer relies
on the representation of the applicant,
who is in the best position to know the
state of his health.
3. Contract of Indemnity
It is the basis of all property
insurance. The insured who has
insurable interest over a property is
only entitled to recover the amount of
actual loss sustained and the burden
is upon him to establish the amount of
such loss (Reviewer on Commercial
Law, Professors Sundiang and Aquino)
Rules:
Applies
only
to
property
insurance except when the creditor
insures the life of his debtor.
Life insurance is not a contract
of indemnity.
Insurance contracts are not
wagering contracts. (Sec. 4)
4. Contract of Adhesion (Fine Print
Rule)
Most of the terms of the contract do
not result from mutual negotiations
between the parties as they are
prescribed by the insurer in final
printed form to which the insured may
adhere if he chooses but which he
cannot change. (Rizal Surety and
Insurance Co., vs. CA, 336 SCRA 12)
5. Principle of Subrogation
It is a process of legal substitution
where the insurer steps into the shoes
of the insured and he avails of the
latters rights against the wrongdoer
at the time of loss.
The principle of subrogation is a
normal
incident
of
indemnity
insurance as a legal effect of
payment; it inures to the insurer
without any formal assignment or any
express stipulation to that effect in
the policy. Said right is not dependent
upon nor does it grow out of any
private contract. Payment to the
insured makes the insurer a subrogee
in equity. (Malayan Insurance Co., Inc.
v. CA, 165 SCRA 536; see also Art.
2207, NCC)
Purposes: (The Insurance Code of
the Philippines Annotated, Hector de
Leon, 2002 ed.)
To make the person who caused
the loss legally responsible for it.
To prevent the insured from
receiving a double recovery from the
wrongdoer and the insurer.

3.

a.
b.

c.

d.
e.

1.
2.

3.
4.

5.

To prevent tortfeasors from being

free from liabilities and is thus
founded on considerations of public
policy.
Rules:
1. Applicable only to property
insurance.
2. The insurer can only recover from
the third person what the insured
could have recovered.
3. There can be no subrogation in
cases:
Where the insured by his own act
releases the wrongdoer or third party
liable for the loss or damage;
Where the insurer pays the insured
the value of the loss without notifying
the carrier who has in good faith
settled the insureds claim for loss;
Where the insurer pays the insured
for a loss or risk not covered by the
policy.
(Pan
Malayan
Insurance
Company v. CA, 184 SCRA 54)
In life insurance
For recovery of loss in excess of
insurance coverage
CONSTRUCTION OF INSURANCE
CONTRACT
The ambiguous terms are to be
construed strictly against the insurer,
and liberally in favor of the insured.
However, if the terms are clear, there
is no room for interpretation. (Calanoc
vs. Court of Appeals, 98 Phil. 79)
III. DISTINGUISHING ELEMENTS OF
AN INSURANCE CONTRACT
The insured possesses an insurable
interest susceptible of pecuniary
estimation;
The insured is subject to a risk of loss
through the destruction or impairment
of that interest by the happening of
designated perils;
The insurer assumes that risk of loss;
Such assumption is part of a general
scheme to distribute actual losses
among a large group or substantial
number of persons bearing somewhat
similar risks; and
The insured makes a ratable
contribution (premium) to a general
insurance fund.
A contract possessing only the first 3
elements above is a risk-shifting
device. If all the elements, it is a riskdistributing device. (The Insurance
Code of the Philippines Annotated,
Hector de Leon, 2002 ed.)
IV.
PERFECTION
OF
AN
INSURANCE CONTRACT
An insurance contract is a
consensual contract and is therefore
perfected the moment there is a
meeting of minds with respect to the
object and the cause or consideration.
What is being followed in insurance
contracts is what is known as the
cognition
theory.
Thus,
an
acceptance made by letter shall not
bind the person making the offer

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2.
3.
4.
5.
6.
7.

except from the time it came to his

knowledge. (Enriquez vs. Sun Life
Assurance Co. of Canada, 41 Phil.
269)
Binding Receipt
A mere acknowledgment on behalf
of the company that its branch office
had received from the applicant the
insurance premium and had accepted
the application subject to processing
by the head office.
Cover Note (Ad Interim)
A concise and temporary written
contract issued to the insurer through
its duly authorized agent embodying
the principal terms of an expected
policy of insurance.
Purpose: It is intended to give
temporary
insurance
protection
coverage to the applicant pending the
acceptance or rejection of his
application.
Duration: Not exceeding 60 days
unless a longer period is approved by
Insurance Commissioner (Sec. 52).
Riders
Printed stipulations usually attached
to the policy because they constitute
additional stipulations between the
parties. (Ang Giok Chip vs. Springfield,
56 Phil. 275)
In case of conflict between a rider
and the printed stipulations in the
policy, the rider prevails, as being a
more deliberate expression of the
agreement of the contracting parties.
(C. Alvendia, The Law of Insurance in
the Philippines, 1968 ed.)
Clauses
An agreement between the insurer
and the insured on certain matter
relating to the liability of the insurer in
case of loss. (Prof. De Leon, p.188)
Endorsements
Any provision added to the contract
altering its scope or application. (Prof.
De Leon, p.188)
POLICY OF INSURANCE
The written instrument in which a
contract of insurance is set forth.
(Sec. 49)
Contents: (Sec. 51)
Parties
Amount of insurance, except in
open or running policies;
Rate of premium;
Property or life insured;
Interest of the insured in the
property if he is not the absolute
owner;
Risk insured against; and
Duration of the insurance.
Persons entitled to recover on
the policy (sec. 53): The insurance
proceeds shall be applied exclusively
to the proper interest of the person in
whose name or to whose benefit it is
made, unless otherwise specified in
the policy.

 Kinds:
1.
OPEN POLICY value of thing
insured is not agreed upon, but left to
be ascertained in case of loss. (Sec.
60)
The actual loss, as determined, will
represent the total indemnity due the
insured from the insurer except only
that the total indemnity shall not
exceed the face value of the policy.
(Development Insurance Corp. vs. IAC,
143 SCRA 62)
2. VALUED POLICY definite valuation
of the property insured is agreed by
both parties, and written on the face
of policy. (Sec. 61)
In the absence of fraud or mistake,
the agreed valuation will be paid in
case of total loss of the property,
unless the insurance is for a lower
amount.
3. RUNNING POLICY contemplates
successive insurances and which
provides that the object of the policy
may from time to time be defined
(Sec. 62)
V.
TYPES
OF
INSURANCE
CONTRACTS
1. Life insurance
a. Individual life (Secs. 179183, 227)
b. Group life (Secs. 50, last par., 228)
c. Industrial life (Secs. 229231)
2. Non-life insurance
a.
Marine (Secs. 99166)
b.
Fire (Secs. 167173)
c.
Casualty (Sec. 174)
3. Contracts of bonding or suretyship (Secs.
175178)
Note:
1. Health and accident insurance are
either covered under life (Sec. 180) or
casualty insurance. (Sec. 174).
2. Marine, fire, and the property
aspect of casualty insurance are also
referred to as property insurance.
VI.
PARTIES
TO
INSURANCE
CONTRACT
1. Insurer - Person who undertakes
to indemnify another.
For a person to be called an insurance
agent, it is necessary that he should
perform
the
function
for
compensation. (Aisporna vs. CA, 113
SCRA 459)
2. Insured - The party to be
indemnified upon the occurrence of
the loss. He must have capacity to
contract, must possess an insurable
interest in the subject of the insurance
and must not be a public enemy.
A public enemy- a nation with
whom the Philippines is at war and it
includes every citizen or subject of
such nation.
3.
Beneficiary
- A person
designated to receive proceeds of
policy when risk attaches.
Rules in the designation of the
beneficiary:
a. LIFE

i.

ii.

iii.

iv.

b.

1.
2.
3.
4.
5.

A person who insures his own life can

designate
any
person
as
his
beneficiary, whether or not the
beneficiary has an insurable interest
in the life of the insured subject to the
limitations under Art. 739 and Art.
2012 of the NCC.
Reason: in essence, a life insurance
policy is no different form a civil
donation insofar as the beneficiary is
concerned. Both are founded on the
same consideration of liberality.
(Insular Life vs. Ebrado, 80 SCRA 181)
A person who insures the life of
another person and name himself as
the
beneficiary
must
have
an
insurable interest in such life. (Sec.
10)
As a general rule, the
designation of a beneficiary is
revocable
unless
the
insured
expressly waived the right to revoke
in the policy. (Sec. 11)
The
interest
of
a
beneficiary in a life insurance policy
shall be forfeited when the beneficiary
is the
principal
accomplice
or
accessory in willfully bringing about
the death of the insured in which
event, the nearest relative of the
insured shall receive the proceeds of
said insurance if not otherwise
disqualified. (Sec. 12)
PROPERTY

The
beneficiary
of
property
insurance must have an insurable
interest in such property, which must
exist not only at the time the policy
takes effect but also when the loss
occurs. (Sec. 13 and 18).
Effects of Irrevocable Designation
Of Beneficiary
Insured cannot:
Assign the policy
Take the cash surrender value
of the policy
Allow his creditors to attach or
execute on the policy;
Add new beneficiary; or
Change
the
irrevocable
designation to revocable, even though
the change is just and reasonable.
The insured does not even retain
the power to destroy the contract by
refusing to pay the premiums for the
beneficiary can protect his interest by
paying such premiums for he has an
interest in the fulfillment of the
obligation. (Vance, p. 665, cited in de
Leon, p. 101, 2002 ed.)

a.
b.
c.

d.

1.
2.
3.

VII. INSURABLE INTEREST

A. In General
A person has an insurable interest in
the subject matter if he is so
connected,
so
situated,
so
circumstanced, so related, that by the
preservation of the same he shall
derive pecuniary benefit, and by its
destruction he shall suffer pecuniary
loss, damage or prejudice.
B. Life
Every person has an insurable
interest in the life and health:
of himself, of his spouse and of
his children;
of any person on whom he
depends wholly or in part for
education or support;
of any person under a legal
obligation to him to pay money or
respecting property or services, of
which death or illness might delay or
prevent performance; and
of any person upon whose life
any estate or interest vested in him
depends. (Sec. 10)
When it should exist: When the
insurance takes effect; not thereafter
or when the loss occurs.
Amount:
GENERAL RULE: There is no limit in
the amount the insured can insure his
life.
EXCEPTION: In a creditor-debtor
relationship where the creditor insures
the life of his debtor, the limit of
insurable interest is equal to the
amount of the debt.
Note: If at the time of the death of
the debtor the whole debt has already
been paid, the creditor can no longer
recover on the policy because the
principle of indemnity applies.
C. Property
Every interest in property whether
real or personal, or any relation
thereto, or liability in respect thereof,
of such nature that the contemplated
peril might directly damnify the
insured (Sec. 13), which may consist
in:
an existing interest;
any
inchoate
interest
founded on an existing interest; or
an
expectancy
coupled
with an existing interest in that out of
which the expectancy arises. (Sec. 14)
When it should exist: When the
insurance takes effect and when the
loss occurs, but need not exist in the
meantime.
Amount: The measure of insurable
interest in property is the extent to
which the insured might be damnified
by loss or injury thereof. (Sec. 17)

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

INSURABLE
INTEREST IN
PROPERTY

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

The beneficiary
must
have
insurable
interest
over
the
thing
insured.

SPECIAL CASES
In case of a carrier or depositary
A carrier or depository of any kind
has an insurable interest in a thing
held by him as such, to the extent of
his liability but not to exceed the
value thereof (Sec. 15)
2.
In case of a mortgaged property
The mortgagor and mortgagee each
have an insurable interest in the
property mortgaged and this interest
is separate and distinct from the
other.
a. Mortgagor As owner, has an
insurable interest therein to the
extent of its value, even though the
mortgage debt equals such value. The
reason is that the loss or destruction
of the property insured will not
extinguish the mortgage debt.
1.

b. Mortgagee His interest is only up

to the extent of the debt. Such
interest continues until the mortgage
debt is extinguished.
The lessor cannot be validly a
beneficiary of a fire insurance policy
taken
by
a
lessee
over
his
merchandise, and the provision in the
lease contract providing for such
automatic assignment is void for
being contrary to law and public
policy. (Cha vs. Court of Appeals, 227
SCRA 690)
STANDARD OR
UNION
MORTGAGE
CLAUSE
Subsequent acts
of
the
mortgagor
cannot
affect
the rights of the
assignee

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

Effects of Loss Payable Clause

a. The contract is deemed to be upon
the interest of the mortgagor; hence,
he does not cease to be a party to the
contract.
b. Any act of the mortgagor prior to
the loss, which would otherwise avoid
the insurance affects the mortgagee
even if the property is in the hands of
the mortgagee.
c. Any act, which under the contract
of insurance is to be performed by the
mortgagor, may be performed by the
mortgagee with the same effect.
d. In case of loss, the mortgagee is
entitled to the proceeds to the extent
of his credit.
e. Upon recovery by the mortgagee to
the extent of his credit, the debt is
extinguished.
In case a mortgagee insures his
own interest and a loss occurs, he is
entitled to the proceeds of the
insurance but he is not allowed to
retain his claim against the mortgagor
as the claim is discharged but it
passes by subrogation to the insurer
to the extent of the money paid by
such insurer. (Palileo vs. Cosio)
VIII. RISK
What may be insured against:
1. Future contingent event resulting in
loss or damage Ex. Possible future
fire
2. Past unknown event resulting in loss
or damage Ex. Fact of past sinking of
a vessel unknown to the parties
3. Contingent liability Ex. Reinsurance
IX. PREMIUM PAYMENTS

1.
2.
3.

4.
5.

Consideration paid an insurer for

undertaking to indemnify the insured
against a specified peril.
Basis of the right of the insurer to
collect premiums: Assumption of risk.
GENERAL RULE: No policy issued by
an insurance company is valid and
binding until actual payment of
premium. Any agreement to the
contrary is void. (Sec. 77)
EXCEPTIONS:
In case of life or industrial life
insurance, when the grace periods
applies; (Sec. 77)
When the insurer makes a written
acknowledgment
of
the
receipt
premium; (Sec. 78)
Section 77 may not apply if the
parties have agreed to the payment of
the premium in installments and
partial payment has been made at the
time of the loss. (Makati Tuscany
Condominium Corp. v. CA, 215 SCRA
462)
Where a credit term has been agreed
upon. (UCPB vs. Masagana Telemart,
308 SCRA 259)
Where the parties are barred by
estoppel.
(UCPB
vs.
Maagana
Telemart, 356 SCRA 307)
Section 77 merely precludes the
parties from stipulating that the policy
is valid even if the premiums are not
paid. (Makati Tuscany Condominium
Corp. v. CA, 215 SCRA 462)
Effect of Acknowledgment of
Receipt of Premium in Policy:
Conclusive evidence of its payment,
so far as to make the policy binding,
notwithstanding
any
stipulation
therein that it shall not be binding
until the premium is actually paid.
(Sec. 78)
ENTITLEMENT OF INSURED TO
RETURN OF PREMIUMS PAID

1.
2.
3.

4.

5.

1.

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

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

Collected
to
meet
actual
losses.

Payment is not
enforceable
against
the insured.

Payment
is
enforceable
once
levied
unless
otherwise
agreed upon.

Not a debt.

It becomes a
debt
once
properly levied
unless
otherwise
agreed.

1.
2.
3.
4.
5.

X. TRANSFER OF POLICY
1. Life Insurance
It can be transferred even without
the consent of the insurer except
when there is a stipulation requiring
the consent of the insurer before
transfer. (Sec. 181)
Reason: The policy does not
represent a personal agreement
between the insured and the insurer.
2. Property insurance
It cannot be transferred without the
consent of the insurer.
Reason: The insurer approved the
policy
based
on
the
personal
qualification and the insurable interest
of the insured.
3. Casualty insurance
It cannot be transferred without the
consent of the insurer. (Paterson cited
in de Leon p. 82)
Reason: The moral hazards are as
great as those of property insurance.
CHANE OF INTEREST IN THE
THING INSURED
The mere (absolute) transfer of the
thing insured does not transfer the
policy, but suspends it until the same
person becomes the owner of both
the policy and the thing insured. (Sec.
58)

6.

7.

4.

a.
b.
c.
d.
e.

Reason: Insurance contract is

personal.
GENERAL RULE: A change of interest
in any part of a thing insured
unaccompanied by a corresponding
change of interest in the insurance
suspends the insurance to an
equivalent extent, until the interests
in the thing and the interest in the
insurance are vested in the same
person. (Sec. 20)
EXCEPTIONS:
In life, health and accident
insurance.(Sec. 20);
Change in interest in the thing
insured after occurrence of an injury
which results in a loss. (Sec. 21);
Change in interest in one or more
of several distinct things separately
insured by one policy. (Sec. 22);
Change of interest, by will or
succession, on the death of the
insured. (Sec. 23);
Transfer of interest by one of
several partners, joint owners, or
owners in common, who are jointly
insured, to others. (Sec. 24);
When a policy is so framed that it
will
inure
to
the
benefit
of
whomsoever, during the continuance
of the risk, may become the owner of
the interest insured. (Sec. 57);
When
there
is
an
express
prohibition against alienation in the
policy, in case of alienation, the
contract of insurance is not merely
suspended but avoided. (Art. 1306,
NCC).
XI.
ASCERTAINMENT
AND
CONTROL OF RISK AND LOSS
A. Four Primary Concerns of the
Parties:
1. Correct estimation of the risk;
2. Precise delimitation of the risk;
3. Control of the risk;
Determining whether a loss occurred
and if so, the amount of such loss.
B. Devices used for ascertaining
and controlling risk and loss:
1. Concealment A neglect to
communicate that which a party
knows and ought to communicate
(Sec. 26)
Requisites:
A party knows a fact which he
neglects to communicate or disclose
to the other.
Such party concealing is duty bound
to disclose such fact to the other.
Such party concealing makes no
warranty as to the fact concealed.
The other party has not the means of
ascertaining the fact concealed.
Material
Effects: Entitles insurer to rescind,
even if the death or loss is due to a
cause not related to the concealed
matter (Sec. 27).
Note: Good Faith is not a defense in
concealment. Sec. 27 clearly provides

that, the concealment whether

intentional or unintentional entitles
the injured party to rescind the
contract of insurance.
Test of Materiality: Determined not
by the event, but solely by the
probable and reasonable influence of
the facts upon the party to whom the
communication is due, in forming his
estimate of the advantages of the
proposed contract, or in making his
inquiries (Sec. 31).
Exception to Sec. 31:
a. Incontestability clause
b. Matters under Sec.110 (marine
insurance)
The waiver of medical examination
in a non-medical insurance contract
renders even more material the
information required of the applicant
concerning the previous conditions of
health and diseases suffered. (Sunlife
v. Sps. Bacani, 246 SCRA 268).
The right to information of material
facts may be waived, either by the
terms of the insurance or by neglect
to make inquiries as to such facts
where they are distinctly implied in
other facts of which information is
communicated. (Sec.33)
Where matters of opinion or
judgment are called for, answers
made in good faith and without intent
to deceiver will not avoid the policy
even though they are untrue. Reason:
The insurer cannot rely on those
statements. He must make further
inquiry. (Philamcare Health Systems
vs. CA, G.R. No. 125678, March 18,
2002).
2.
Representations Factual
statements made by the insured at
the time of, or prior to, the issuance of
the policy to give information to the
insurer and induce him to enter into
the insurance contract. They are
considered
an
active
form
of
concealment.
Requisites of a false representation
(misrepresentation):
a. The insured stated a fact which is
untrue.
b. Such fact was stated with knowledge
that it is untrue and with intent to
deceive or which he states positively
as true without knowing it to be true
and which has a tendency to mislead.
c. Such fact in either case is material to
the risk.
Characteristics:
a. It is not a part of the contract but
merely a collateral inducement to it.
b. It may be oral or written.
c. It is made at the same time of
issuing the policy or before but not
after.
d. It may be altered or withdrawn
before the insurance is effected but
not afterwards.

e. It always refers to the date the

contract goes into effect.
Kinds:
a. AFFIRMATIVE affirmation of a fact
when the contract begins; and
b. PROMISSORY promise to be
performed after policy was issued.
Effect of Misrepresentation: the
injured party is entitled to rescind
from
the
time
when
the
representation becomes false.
Test of Materiality: Same as that in
concealment.
Where the insured merely signed
the application form and made the
agent of the insurer fill the same for
him, it was held that by doing so, the
insured made the agent of the insurer
his own agent and he was responsible
for his acts for that purpose. (Insular
Life Assur. Co. vs. Feliciano, 74 Phil.
469)
3.
Warranties Statement or
promise by the insured set forth in the
policy or by reference incorporated
therein, the untruth or non-fulfillment
of which in any respect, and without
reference to whether insurer was in
fact prejudiced by such untruth or
non-fulfillment, renders the policy
voidable by the insurer.
Purpose: To eliminate potentially
increasing hazards which may either
be due to the acts of the insured or to
the change to the condition of the
property.
Kinds:
a.
EXPRESS an agreement
expressed in a policy whereby the
insured stipulates that certain facts
relating to the risk are or shall be true,
or certain acts relating to the same
subject have been or shall be done.
b. IMPLIED - it is deemed included in
the contract although not expressly
mentioned.
Example:
In
marine
insurance, seaworthiness of the
vessel.
Effects of breach of warranty:
a. Material
GENERAL RULE: Violation of material
warranty or of a material provision of
a policy will entitle the other party to
rescind the contract. (Sec. 74)
EXCEPTIONS:
a. Loss occurs before the time of
performance of the warranty.
b. The performances becomes unlawful
at the place of the contract.
c. Performance becomes impossible.
(Sec. 73)
b. Immaterial (ex. Other insurance
clause)
GENERAL RULE: It will not avoid the
policy.
EXCEPTION:
When
the
policy
expressly provides or declares that a
violation thereof will avoid it. (Sec. 75)

WARRANTY

REPRESENTATI
ON
Part of the contract Mere collateral
inducement
Written on the
May be written
policy, actually
in the policy or
or by reference
may be oral.
Presumed
Must be proved
material
to be material
Must be strictly
Requires only
complied with
substantial truth
and compliance
4. Conditions Events signifying in
its
broadest
sense
either
an
occurrence or a non-occurrence that
alters the previously existing legal
relations of the parties to the contract.
They may be conditions precedent or
conditions subsequent.
Effect of breach:
a. Condition precedent prevents the
accrual of cause of action
b. Condition subsequent avoids the
policy or entitles the insurer to rescind
The insurer may also protect
himself against fraudulent claims of
loss and this he attempts to do by
inserting in the policy various
conditions which take the form of
conditions precedent. For instance,
there
are
conditions
requiring
immediate notice of loss or injury and
detailed proofs of loss within a limited
period.
5. Exceptions Provisions that may
specify excepted perils. It makes more
definite the coverage indicated by the
general description of the risk by
excluding certain specified risk that
otherwise would be included under
the general language describing the
risks assumed.
Effect: Limit the coverage of the
contract.
RESCISSION
Grounds:
A. Concealment
B. Misrepresentation
C. Breach of material warranty
D. Breach
of
a
condition
subsequent
Waiver of the right to rescind:
Acceptance of premium payments
despite the knowledge of the ground
for rescission. (Sec. 45)
Limitations on the right of the
insurer to rescind:
1. Non-life such right must be
exercised prior to the commencement
of an action on the contract;
2. Life such right must be availed of
during the first two years from the
date of issue of policy or its last
reinstatement;
prior
to
incontestability. (Sec. 48)
CANCELLATION
OF
NON-LIFE
INSURANCE POLICY
Right of the insurer to abandon the
contract on the occurrence of certain

1.
2.
3.
4.
5.
6.

1.
2.

3.

4.

1.
2.
3.

grounds after the effectivity date of a

non-life policy.
Grounds:
Non-payment of premium;
Conviction of a crime out of acts
increasing the hazard insured against;
Discovery of fraud or material
misrepresentation;
Discovery of willful or reckless acts
of omissions increasing the hazard
insured against;
Physical changes in property
making the property uninsurable; and
Determination by the Insurance
Commissioner that the continuation of
the policy would violate the Insurance
Code. (Sec. 64)
Requirements:
Prior notice of cancellation to
the insured;
Notice must be in writing,
mailed or delivered to the named
insured at the address shown in the
policy;
Notice must state which of the
grounds set forth in Sec. 64 is relied
upon and upon request of the insured,
the insurer must furnish facts on
which the cancellation is based;
Grounds should have existed
after the effectivity date of the policy.
XII. INCONTESTABILITY CLAUSE
Clause in life insurance policy that
stipulates that the policy shall be
incontestable after a stated period.
Requisites:
Life insurance policy
Payable on the death of the
insured
It has been in force during the
lifetime of the insured for a period of
at least two years from the date of its
issue or of its last reinstatement
Note: The period of 2 years may be
shortened but it cannot be extended
by stipulation.
Incontestability only deprives the
insurer of those defenses which arise
in connection with the formation and
operation of the policy prior to loss.
(Prof. De Leon, p. 173 citing Wyatt
and Wyatt, p. 878)
BARRED
DEFENSES
OF THE
INSURER
1. Policy is void
ab initio
2. Policy
is
rescindable by
reason of the
fraudulent
concealment or
misrepresentati
on
of
the
insured or his
agent

DEFENSES
NOT BARRED
1. That
the
person
taking
the
insurance
lacked insurable
interest
as
required by law;
2. That
the
cause of the
death of the
insured is an
excepted risk;
3. That
the

premiums have
not been paid
(Secs.
77,
227[b], 228[b],
230[b]);
4. That
the
conditions of the
policy relating to
military or naval
service
have
been
violated
(Secs.
227[b],
228[b]);
5. That the fraud
is
of
a
particularly
vicious type;
6. That
the
beneficiary
failed to furnish
proof of death or
to comply with
any
condition
imposed by the
policy after the
loss
has
happened; or
7. That
the
action was not
brought
within
the
time
specified.

1.
2.

1.
2.
3.
4.
5.

1.

XIII.
A. OVER-INSURANCE results when
the insured insures the same property
for an amount greater than the value
of the property with the same
insurance company.
Effect in case of loss:
The insurer is bound only to pay to
the extent of the real value of the
property lost;
The insured is entitled to recover
the amount of premium corresponding
to the excess in value of the property;
B. DOUBLE INSURANCE exists
where same person is insured by
several insurers separately in respect
to same subject and interest. (Sec.
93)
Requisites:
Person insured is the same;
Two or more insurers insuring
separately;
Subject matter is the same;
Interest insured is also the same;
Risk or peril insured against is
likewise the same.
Effects: Where double insurance is
allowed, but over insurance results:
(Sec. 94)
The insured, unless the policy
otherwise
provides,
may
claim
payment from the insurers in such
order as he may select, up to the
amount for which the insurers are
severally liable under their respective
contracts;

2. Where the policy under which the

insured claims is a valued policy, the
insured must give credit as against
the valuation for any sum received by
him under any other policy without
regard to the actual value of the
subject matter insured;
3. Where the policy under which the
insured claims is an unvalued policy
he must give credit, as against the full
insurable value, for any sum received
by him under any policy;
4. Where the insured receives any sum
in excess of the valuation in the case
of valued policies, or of the insurable
value in the case of unvalued policies,
he must hold such sum in trust for the
insurers, according to their right of
contribution among themselves;
5. Each insurer is bound, as between
himself and the other insurers, to
contribute ratably to the loss in
proportion to the amount for which he
is liable under his contract.
Additional or Other Insurance
Clause
A condition in the policy requiring
the insured to inform the insurer of
any other insurance coverage of the
property insured. It is lawful and
specifically allowed under Sec. 75
which provides that (a) policy may
declare that a violation of a specified
provision thereof shall avoid it,
otherwise the breach of an immaterial
provision does not avoid it.

A
stipulation
against
double
insurance.
Purposes:
1. To prevent an increase in the moral
hazard
2. To prevent over-insurance and
fraud.
To constitute a violation of the
clause, there should have been double
insurance.
C. REINSURANCE a contract by
which the insurer procures a third
person to insure him against loss or
liability by reason of an original
insurance
(also
known
as
Reinsurance Cession). (Sec. 95)
In every reinsurance, the original
contract of insurance and the contract
of reinsurance are covered by
separate policies.
DOUBLE
INSURANCE
Involves
the
same interest
Insurer remains
in such capacity
Insured is the
party in interest
in
the
2
contracts

REINSURANCE
Involves
different interest
Insurer becomes
the insured in
relation
to
reinsurer
Original insured
has no interest
in
the
reinsurance

contract.
Subject
insurance
property

of
is

Insured has to
give his consent

Subject
of
insurance is the
original insurers
risk
Insureds
consent
not
necessary

TERMS:
1. Reinsurance treaty Merely an
agreement between two insurance
companies whereby one agrees to
cede and the other to accept
reinsurance business pursuant to
provisions specified in the treaty.
(Prof. De Leon, p. 306)
2. Automatic reinsurance The
reinsured is bound to cede and the
reinsurer is obligated to accept a fixed
share of the risk which has to be
reinsured under the contract. (Prof.
De Leon, p. 305)
3. Facultative reinsurance There
is no obligation to cede or accept
participation in the risk each party
having a free choice. But once the
share is accepted, the obligation is
absolute and the liability thereunder
can be discharged only by payment.
(Equitable Ins. & Casualty Co. vs.
Rural Ins. & Surety Co., Inc. 4 SCRA
343)
4. Retrocession A transaction
whereby the reinsurer in turn, passes
to another insurer a portion of the risk
reinsured. It is really the reinsurance
of reinsurance. (Prof. De Leon, p. 305)
XIV.
A. LOSS, IN INSURANCE
Injury or damage sustained by the
insured in consequence of the
happening of one or more of the
accidents or misfortune against which
the insurer, in consideration of the
premium,
has
undertaken
to
indemnify the insured. (Bonifacio Bros.
Inc. vs. Mora, 20 SCRA 261)
Loss for which
insurer is
liable
1. Loss
the
proximate cause
of which is the
peril
insured
against
(Sec.
84);
2. Loss
the
immediate
cause of which
is
the
peril
insured against
except
where
proximate cause
is an excepted

Loss for
which insurer
is not liable
1. Loss
by
insureds willful
act;
2. Loss due to
connivance of
the
insured
(Sec. 87); and
3. Loss where
the
excepted
peril
is
the
proximate
cause.

peril;
3. Loss through
negligence
of
insured except
where there was
gross
negligence
amounting
to
willful acts; and
4. Loss caused
by efforts to
rescue the thing
from
peril
insured against;
5. If during the
course
of
rescue,
the
thing is exposed
to a peril not
insured against,
which
permanently
deprives
the
insured of its
possession,
in
whole or in part
(Sec. 85).
Proximate Cause An event that
sets all other events in motion without
any intervening or independent case,
without which the injury or loss would
not have occurred.
REQUISITES FOR RECOVERY UPON
INSURANCE
1. The insured must have insurable
interest in the subject matter;
2. That interest is covered by the
policy;
3. There must be a loss; and
4. The loss must be proximately
caused by the peril insured against.
NOTICE OF LOSS
In fire
insurance

In other types
of insurance

Required

Not required

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

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

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

LIFE
POLIC
IES
a. Maturing
upon
the
expiration
of
the term The
proceeds
are
immediately
payable to the
insured, unless
they are made
payable
in
installments or
as annuity, in
which case, the
installments or
annuities shall
be paid as they
become due.
b. Maturing
at the death of
the
insured,
occurring prior
to
the
expiration
of
the
term
stipulated

The proceeds
are payable to
the
beneficiaries
within 60 days
after
presentation
and filing of
proof of death.

otherwise it can be used by the

insured as a scheme or device to
waste time until the evidence which
may be used against him is destroyed.
(Sun Insurance Office, Ltd. v. CA, 195
SCRA)
4. In CMVLI, the written notice of claim
must be filed within 6 months from
the date of the accident otherwise the
claim is deemed waived. The suit for
damages either with the proper court
or with the Insurance Commissioner
should be filed within 1 year from the
date of the denial of the claim by the
insurer, otherwise claimants right of
action shall prescribe. (Sec. 384)

NON-LIFE
POLICIES

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

In case of an unreasonable delay in

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

PARTICULAR
KINDS
INSURANCE CONTRACTS

1.

2.
3.

4.

1.

2.
3.

4.

OF

XVI. MARINE INSURANCE

Insurance against risks connected
with navigation, to which a ship,
cargo, freightage, profits or other
insurable
interest
in
movable
property, may be exposed during a
certain voyage or a fixed period of
time. (Sec. 99)
Coverage:
A.
Vessels, goods, freight, cargo,
merchandise, profits, money, valuable
papers, bottomry and respondentia,
and interest in respect to all risks or
perils of navigation;
Persons or property in connection
with marine insurance;
Precious stones, jewels, jewelry
and precious metals whether in the
course of transportation or otherwise;
and
Bridges, tunnels, piers, docks and
other
aids
to
navigation
and
transportation. (Sec. 99)
Cargo can be the subject of marine
insurance, and once it is entered into,
the implied warranty of seaworthiness
immediately attaches to whoever is
insuring the cargo, whether he be the
shipowner or not. (Roque v. IAC, 139
SCRA 596)
B. Marine Protection and Indemnity
Insurance

Classes
of
inland
marine
insurance: (Prof. De Leon, p. 325)
Property in transit provides
protection to property frequently
exposed
to
loss
while
it
is
transportation form one location to
another.
Bailee liability - insurance for
those who have temporary custody of
the goods.
Fixed transportation property
they are so insured because they are
held to be an essential part of the
transportation
system
such
as
bridges, tunnels, etc.
Floater provides insurance to
follow the insured property wherever

1.
a.

b.
c.
2.
3.

it may be located, subject always to

the territorial limits of the contract.
Insurable interest:
A.
Shipowner
Over the vessel to the
extent of its value, except that if
chartered, the insurance is only up to
the amount not recoverable from the
charterer. (Sec. 100).
He also has an insurable
interest on expected freightage. (Sec.
103).
No insurable interest if he
will be compensated by charterer for
the value of the vessel, in case of loss.
Cargo owner
Over the cargo and expected profits
(Sec. 105).
Charterer
Over the amount he is liable to the
shipowner, if the ship is lost or
damaged during the voyage (Sec.
106).

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

Includes
only
those casualties
due to the:
1. unusual
violence; or
2. extraordinar
y action of wind
and wave; or
3. Other
extraordinary
causes
connected with
navigation.

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

Note: It is only perils of the sea which

may be insured against unless perils
of the ship is covered by an all-risk
policy.
SPECIAL MARINE INSURANCE
CONTRACTS AND CLAUSES
A. All Risks Policy insurance
against all causes of conceivable loss
or damage, except: 1) as otherwise
excluded in the policy; or 2) due to
fraud or intentional misconduct on the
part of the insured.
The insured has the initial burden of
proving that the cargo was in good
condition when the policy attached
and that the cargo was damaged
when unloaded from the vessel;
thereafter, the burden then shifts to
the insurer to show the exception to
the coverage. (Filipinas Merchants
Insurance vs. Court of Appeals, 179
SCRA 638)
B. Barratry Clause
A clause which provides that there
can be no recovery on the policy in
case of any willful misconduct on the
part of the master or crew in
pursuance of some unlawful or
fraudulent purpose without consent of
owners, and to the prejudice of the
owners interest. (Roque vs. IAC, 139
SCRA 596)
C. Inchamaree Clause
A clause which makes the insurer
liable for loss or damage to the hull or
machinery arising from the:
1.
Negligence
of
the
captain,
engineers, etc.
2.
Explosions, breakage of shafts;
and
3.
Latent defect of machinery or hull.
(Bar Review Materials in Commercial
Law, Jorge Miravite, 2002 ed.)

D. Sue and Labor Clause

A clause under which the insurer
may become liable to pay the insured,
in addition to the loss actually
suffered, such expenses as he may
have incurred in his efforts to protect
the property against a peril for which
the insurer would have been liable.
(Sec. 163)

1.
2.
3.
4.
5.

MATTERS ALTHOUGH CONCEALED,

WILL NOT VITIATE THE CONTRACT
EXCEPT WHEN THEY CAUSED THE
LOSS (Sec. 110)
National character of the insured;
Liability of the thing insured to
capture or detention;
Liability to seizure from breach of
foreign laws;
Want of necessary documents;
and
Use of false or simulated papers.
Note: This should be related to the
general
rule
regarding
material
concealment.
DISTINCTIONS ON CONCEALMENT
(Commercial Law Reviewer, A.F.
Agbayani, 1988 ed.)
MARINE
INSURANCE
The information of
the
belief
or
expectation of 3rd
persons
is
material and must
be communicated

1.
2.
3.
4.

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

The concealment
of any fact in
relation to any of
the
matters
stated in Sec. 110
does not vitiate
the
entire
contract
but
merely
exonerates
the
insurer from a risk
resulting from the
fact concealed
IMPLIED WARRANTIES
Seaworthiness of the ship at the
inception of the insurance (Sec. 113);
Against improper deviation (Sec.
123, 124, 125);
Against illegal venture;
Warranty of neutrality: the ship will
carry the requisite documents of
nationality or neutrality of the ship or
cargo where such nationality or

neutrality is expressly warranted;

(Sec. 120)
5.
Presence of insurable interest.
While the payment by the insurer
for the insured value of the lost cargo
operates as a waiver of the insurers
right to enforce the term of the
implied warranty against the assured
under the marine insurance policy,
the
same
cannot
be
validly
interpreted as an automatic admission
of the vessels seaworthiness by the
insurer as to foreclose recourse
against the common carrier for any
liability
under
the
contractual
obligation as such common carrier.
(Delsan Transportation Lines vs. CA,
364 SCRA 24)
Seaworthiness
A relative term depending upon the
nature of the ship, voyage, service
and goods, denoting in general a
ships fitness to perform the service
and to encounter the ordinary perils of
the voyage, contemplated by the
parties to the policy (Sec. 114).
GENERAL RULE: The warranty of
seaworthiness is complied with if the
ship be seaworthy at the time of the
commencement of the risk. Prior or
subsequent unseaworthiness is not a
breach of the warranty nor is it
material that the vessel arrives in
safety at the end of her voyage.
EXCEPTIONS:
1.
In the case of a time policy, the
ship must be seaworthy at the
commencement of every voyage she
may undertake
2.
In the case of cargo policy, each
vessel upon which the cargo is
shipped or transshipped, must be
seaworthy at the commencement of
each particular voyage
3.
In the case of a voyage policy
contemplating a voyage in different
stages, the ship must be seaworthy at
the commencement of each portion

Applicability
of
implied
warranty of seaworthiness to
cargo owners:
It becomes the
obligation of a cargo owner to look for
a reliable common carrier, which
keeps its vessels in seaworthy
conditions. The shipper may have no
control over the vessel but he has
control in the choice of the common
carrier that will transport his goods
(Roque v. IAC, 139 SCRA 596).
Deviation
A departure from the course of the
voyage insured, or an unreasonable
delay in pursuing the voyage or the
commencement
of
an
entirely
different voyage. (Sec.123)
Instances:

1. Departure of vessel from the course of

the sailing fixed by mercantile usage
2. Departure of vessel from the most
natural, direct and advantageous
route if not fixed by mercantile usage
3. Unreasonable
delay
in
pursuing
voyage
4.
Commencement of an entirely
different voyage (Secs. 121-123)
Kinds:
1.
Proper a.
When caused by circumstances
outside the control of the ship captain
or ship owner;
b.
When necessary to comply with a
warranty or to avoid a peril;
c.
When made in good faith to avoid a
peril;
d.
When made in good faith to save
human life or to relieve another vessel
in distress (Sec. 124)
Effect: In case of loss, the insurer is
still liable.
2.
Improper - Every deviation not
specified in Sec. 124 (Sec. 125).
Effect: In case of loss or damage, the
insurer is not liable. (Sec. 126)

a.
i.
ii.
iii.
iv.
b.
i.
ii.
iii.

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

PARTICULAR
Has not inured to

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

1.
2.

3.

4.

5.

6.

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

Requisites
for
the right to claim
contribution:
Common
danger to the
vessel or cargo;
Part of the
vessel or cargo
was
sacrificed
deliberately;
Sacrifice
must be for the
common safety
or for the benefit
of all;
Sacrifice
must be made
by the master or
upon
his
authority;
It must be
not be caused by
any fault of the
party asking the
contribution;
It must be
successful,
i.e.
resulted in the
saving of the
vessel or cargo;
and
Necessary.

RIGHT OF INSURED IN CASE OF

GENERAL AVERAGE
GENERAL RULE: The insured may
either hold the insurer directly liable
for the whole of the insured value of
the property sacrificed for the general
benefit, subrogating him to his own
right of contribution or demand
contribution from the other interested
parties as soon as the vessel arrives
at her destination
EXCEPTIONS:
1.
After the separation of interests
liable to contribution
2.
When the insured has neglected or
waived his right to contribution
FPA Clause (Free From Particular
Average)
A clause agreed upon in a policy of
marine insurance in which it is stated
that the insurer shall not be liable for
a particular average, such insurer
shall be free therefrom, but he shall
continue to be liable for his proportion

1.

2.
3.
4.

5.
6.

7.

of all general average losses assessed

upon the thing insured. (Sec. 136)
ABANDONMENT
The act of the insured by which,
after a constructive total loss, he
declared the relinquishment to the
insurer of his interest in the thing
insured. (Sec. 138)
Requisites for validity:
There
must
be
an
actual
relinquishment by the person insured
of his interest in the thing insured
(Sec. 138);
There must be a constructive total
loss (Sec. 139);
The abandonment be neither
partial nor conditional (Sec. 140);
It must be made within a
reasonable time after receipt of
reliable information of the loss (Sec.
141);
It must be factual (Sec. 142);
It must be made by giving notice
thereof to the insurer which may be
done orally or in writing (Sec. 143);
and
The notice of abandonment must
be explicit and must specify the
particular cause of the abandonment
(Sec. 144).

Effects:
It is equivalent to a transfer by the
insured of his interest to the insurer
with all the chances of recovery and
indemnity
(Transfer
of
Interest)
(Sec.146)
2.
Acts done in good faith by those
who were agents of the insured in
respect
to
the
thing
insured,
subsequent to the loss, are at the risk
of the insurer and for his benefit.
(Transfer Of Agency)(Sec.148)
1.

If an insurer refuses to accept a

valid abandonment, he is liable upon
an actual total loss, deducting form
the amount any proceeds of the thing
insured which may have come to the
hands of the insured. (Sec.154)
CO-INSURANCE
A marine insurer is liable upon a
partial loss, only for such proportion of
the amount insured by him as the loss
bears to the value of the whole
interest of the insured in the property
insured. (Sec. 157)
When the property is insured for less
than its value, the insured is
considered a co-insurer of the
difference between the amount of
insurance and the value of the
property.
Requisites:
1. The loss is partial;
2. The amount of insurance is less
than the value of the property
insured.

Rules:
1. Co-insurance applies only to marine
insurance
2. Logically, there cannot be coinsurance in life insurance.
3. Co-insurance applies in fire
insurance when expressly provided for
by the parties.
CO-INSURANCE
A percentage in
the value of the
insured property
which the
insured himself
assumes to act
as insurer to the
extent of the
deficiency in the
insurance of the
insured property.
In case of loss or
damage, the
insurer will be
liable only for
such proportion
of the loss or
damage as the
amount of the
insurance bears
to the
designated
percentage of
the full value of
the property
insured. (Bar
Review Materials
in Commercial
Law, Jorge
Miravite, 2002
ed.)

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

XVII. FIRE INSURANCE

A contract by which the insurer for a
consideration agrees to indemnify the
insured against loss of, or damage to,
property by hostile fire, including loss
by lightning, windstorm, tornado or
earthquake and other allied risks,
when such risks are covered by
extension to fire insurance policies or
under separate policies. (Sec. 167)
Prerequisites to recovery:
1. Notice of loss must be
immediately given, unless delay is
waived expressly or impliedly by the
insurer
2. Proof of loss according to best
evidence obtainable. Delay may also
be waived expressly or impliedly by
the insurer
HOSTILE FIRE

FRIENDLY FIRE

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

One that burns

in a place where
it was intended
to
burn
and
ought to be
Insurer
liable

is

not

Measure of Indemnity
1. Open policy: only the expense
necessary to replace the thing lost or
injured in the condition it was at the
time of the injury
2. Valued policy: the parties are bound
by the valuation, in the absence of
fraud or mistake
Note: It is very crucial to determine
whether a marine vessel is covered by
a marine insurance or fire insurance.
The determination is important for 2
reasons:
1. Rules on constructive total loss and
abandonment applies only to marine
insurance;
2. Rule on co-insurance applies
primarily to marine insurance;
3. Rule on co-insurance applies to fire
insurance only if expressly agreed
upon. (Commercial Law Reviewer,
Aguedo Agbayani, 1988 ed.)

1.
2.
3.
4.
5.
6.

ALTERATION
AS
A
SPECIAL
GROUND FOR RESCISSION BY
INSURER
Requisites:
The use or condition of the thing is
specifically limited or stipulated in the
policy;
Such use or condition as limited by
the policy is altered;
The alteration is made without the
consent of the insurer;
The alteration is made by means
within the control of the insured;
The alteration increases the risk;
(Sec. 168) and
There must be a violation of a
policy provision. (Sec. 170)
Fall-of-building clause
A clause in a fire insurance policy
that if the building or any part thereof
falls, except as a result of fire, all
insurance
by
the
policy
shall
immediately cease.
Option to rebuild clause
A clause giving the insurer the
option to reinstate or replace the
property damaged or destroyed or
any part thereof, instead of paying the
amount of the loss or the damage.
The insurer, after electing to
rebuild, cannot be compelled to
perform this undertaking by specific
performance because this is an
obligation to do, not to give. Remedy:
Art. 1167, NCC.

XVIII. CASUALTY OR ACCIDENT

INSURANCE
Insurance covering loss or liability
arising from accident or mishap,
excluding those falling under other
types of insurance such as fire or
marine. (Sec. 174)
Classifications:
1. Insurance against specified perils
which may affect the person and/or
property of the insured. (accident or
health insurance)

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

one having unrestricted access to the

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

INTENTIONAL vs. ACCIDENTAL

AS USED IN INSURANCE POLICIES
1. Intentional Implies the exercise of
the reasoning faculties, consciousness
and volition. Where a provision of the
policy excludes intentional injury, it is
the intention of the person inflicting
the injury that is controlling. If the
injuries suffered by the insured clearly
resulted from the intentional act of
the third person, the insurer is relieve
from liability as stipulated. (Biagtan v.
the Insular Life Assurance Co. Ltd., 44
SCRA 58, 1972)
2. Accidental That which happens by
chance
or
fortuitously,
without
intention
or
design,
which
is
unexpected, unusual and unforeseen.
NO ACTION CLAUSE
A requirement in a policy of liability
insurance which provides that suit and
final judgment be first obtained
against the insured;
that only
thereafter can the person injured
recover on the policy. (Guingon vs. Del
Monte, 20 SCRA 1043)
XIX.
COMPULSORY
MOTOR
VEHICLE LIABILITY INSURANCE
(CMVLI)
A species of compulsory insurance
that provides for protection coverage
that will answer for legal liability for
losses and damages for bodily injuries
or property damage that may be
sustained by another arising from the
use and operation of motor vehicle by
its owner.
Purpose: To give immediate financial
assistance to victims of motor vehicle

accidents and/or their dependents,

especially if they are poor regardless
of the financial capability of motor
vehicle
owners
or
operators
responsible for the accident sustained
(Shafer v. Judge, RTC, 167 SCRA 386).

Claimants/victims
may
be
a
passenger or a 3rd party
It applies to all vehicles whether
public and private vehicles.
Note: It is the only compulsory
insurance
coverage
under
the
Insurance Code.

Method of coverage
1. Insurance policy
2. Surety bond
3. Cash deposit
Passenger Any fare-paying person
being transported and conveyed in
and
by
a
motor
vehicle
for
transportation of passengers for
compensation,
including
persons
expressly authorized by law or by the
vehicles operator or his agents to ride
without fare. (Sec. 373[b])
Third Party Any person other than
the passenger, excluding a member of
the household or a member of the
family within the second degree of
consanguinity or affinity, of a motor
vehicle owner or land transportation
operator, or his employee in respect
of death or bodily injury arising out of
and in the course of employment.
(Sec. 373[c])
No-Fault Clause
A clause that allows the victim
(injured person or heirs of the
deceased) to an option to file a claim
for death or injury without the
necessity
of
proving
fault
or
negligence of any kind.
Purpose: To guarantee compensation
or indemnity to injured persons in
motor vehicle accidents.
Rules:
1. Total indemnity - maximum of
P5,000
2. Proofs of loss a. Police report of accident;
b.
Death certificate and evidence
sufficient to establish proper payee;
c.
Medical report and evidence of
medical or hospital disbursement.
3. Claim may be made against one
motor
vehicle only
4. Proper insurer from which to claim a. In case of an occupant: Insurer
of the vehicle in which the occupant is
riding, mounting or dismounting from;

b. In any other case: Insurer of

the directly offending vehicle. (Sec.
378)
The claimant is not free to choose
from which insurer he will claim the
no fault indemnity as the law makes
it mandatory that the claim shall lie
against the insurer of the vehicle in
which
the
occupant
is
riding,
mounting or dismounting from. That
said vehicle might not be the one that
caused the accident is of no moment
since the law itself provides that the
party paying may recover against the
owner of the vehicle responsible for
the accident. (Perla Compania de
Seguros, Inc. v. Ancheta, 169 SCRA
144)
This no-fault claim does not apply
to property damage. If the total
indemnity claim exceeds P5,000 and
there is controversy in respect
thereto, the finding of fault may be
availed of by the insurer only as to the
excess. The first P5,000 shall be paid
without regard to fault. (Prof. De Leon,
p. 716)
The essence of the no-fault
indemnity insurance is to provide
victims of vehicular accidents or their
heirs
immediate
compensation
although in limited amount, pending
final
determination
of
who
is
responsible for the accident and liable
for the victims injuries or death. (Ibid.)
SPECIAL CLAUSES
A. Authorized Driver Clause
A clause which aims to indemnify the
insured owner against loss or damage
to the car but limits the use of the
insured vehicle to the insured himself
or any person who drives on his order
or with his permission (Villacorta v.
Insurance Commissioner)
The requirement that the person
driving
the
insured
vehicle
is
permitted in accordance with the
licensing laws or other laws or
regulations to drive the motor vehicle
(licensed driver) is applicable only if
the person driving is other than the
insured.
B. Theft Clause
A clause which includes theft as
among the risks insured against.
Where the car is unlawfully and
wrongfully taken without the owners
consent or knowledge, such taking
constitutes theft, and thus, it is the
theft clause and not the authorized
driver clause that should apply
(Palermo v. Pyramids Ins., 161 SCRA
677).

C. Cooperation Clause
A clause which provides in essence
that the insured shall give all such
information and assistance as the
insurer may require, usually requiring
attendance at trials or hearings.
XX. SURETYSHIP
An agreement whereby a surety
guarantees the performance by the
principal or obligor of an obligation or
undertaking in favor of an obligee.
(Sec. 175)

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

PROPERTY
INSURANCE
Principal
contract
2 parties: insurer
and insured

Accessory
contract
3
parties:
surety, obligor
and oblige
Credit
Contract
of
accommodation indemnity
Surety can
Insurer has no
recover from
such right; only
principal
right of
subrogation
Bond can be
May be cancelled
cancelled only
unilaterally
with consent of either by insured
obligee,
or insurer on
Commissioner
grounds
or court
provided by law
Requires
No need of
acceptance of
acceptance by
obligee to be
any third party
valid
Risk-shifting
Risk-distributing
device;
device; premium
premium paid
paid as a ratable
being in the
contribution to a
nature of a
common fund
service fee
XXI. LIFE INSURANCE
Insurance on human lives and
insurance appertaining thereto or

1.

2.

3.

4.

5.

6.

connected therewith which includes

every contract or pledge for the
payment of endowments or annuities.
(Sec. 179)
Kinds: (Bar Review Materials in
Commercial Law, Jorge Miravite, 2002
ed.)
Ordinary Life, General Life or Old
Line Policy - Insured pays a fixed
premium every year until he dies.
Surrender value after 3 years.
Group Life Essentially a single
insurance contract that provides
coverage
for
many
individuals.
Examples: In favor of employees,
mortgage redemption insurance.
Limited Payment Policy insured
pays premium for a limited period. If
he dies within the period, his
beneficiary is paid; if he outlives the
period, he does not get anything.
Endowment Policy pays premium
for specified period. If he outlives the
period, the face value of the policy is
paid to him; if not, his beneficiaries
receive the benefit.
Term Insurance insurer pays
once only, and he is insured for a
specified period. If he dies within the
period, his beneficiaries benefits. If he
outlives the period, no person benefits
from the insurance.
Industrial Life - life insurance
entitling the insured to pay premiums
weekly, or where premiums are
payable monthly or oftener.
Mortgage Redemption Insurance
A life insurance taken pursuant to a
group mortgage redemption scheme
by the lender of money on the life of a
mortgagor who, to secure the loan,
mortgages the house constructed
from the use of the proceeds of the
loan, to the extent of the mortgage
indebtedness
such
that
if
the
mortgagor dies, the proceeds of his
life insurance will be used to pay for
his indebtedness to the lender
assured and the deceaseds heirs will
thereby be relieved from paying the
unpaid balance of the loan. (Great
Pacific Life Assurance Corp. vs. Court
of Appeals, 316 SCRA 677)

LIABILITY OF INSURER IN CERTAIN

CAUSES OF DEATH OF INSURED
1. Suicide
Insurer is liable in the following
cases:
1. If committed after two years from the
date of the policys issue or its last
reinstatement;
2. If committed in a state of insanity
regardless of the date of the
commission unless suicide is an
excepted peril. (Sec. 180-A)
3. If committed after a shorter period
provided in the policy

Any stipulation extending the 2year period is null and void.

2. At the hands of the law (E.g. by
legal execution)
It is one of the risks assumed by the
insurer under a life insurance policy in
the absence of a valid policy
exception. (Vance,p.572 cited in de
Leon, p. 107)
Note: Justice Vitug believes that
death by suicide (if the insured is
sane) or at the hands of the law
obviates against recovery as being
more in consonance with public policy
and as being implicit under Section
87, ICP. (Pandect of Commercial Law
and Jurisprudence, 1997 ed. P. 191)
3. Killing by the beneficiary
GENERAL RULE: The interest of a
beneficiary in a life insurance policy
shall be forfeited when the beneficiary
is the
principal
accomplice
or
accessory in willfully bringing about
the death of the insured, in which
event, the nearest relative of the
insured shall receive the proceeds of
said insurance if not otherwise
disqualified. (Sec. 12)
EXCEPTIONS:
1. Accidental killing
2. Self-defense
3. Insanity of the beneficiary at the time
he killed the insured
If the premiums paid came from
conjugal funds, the proceeds are
considered conjugal. If the beneficiary
is other than the insureds estate, the
source of premiums would not be
relevant. (Del Val v. Del Val, 29 Phil
534)
The measure of indemnity in life or
health insurance policy is the sum
fixed in the policy except when a
creditor insures the life of his debtor.
(Sec. 183)
IS
THE
CONSENT
OF
THE
BENEFICIARY NECESSARY TO THE
ASSIGNMENT
OF
A
LIFE
INSURANCE POLICY?
It depends. If the designation of the
beneficiary
is
irrevocable,
the
beneficiarys consent is essential
because of his vested right. If the
designation is revocable, the policy
may be assigned without such
consent because the beneficiary only
has a mere expectancy to the
proceeds. (The Insurance Code of the
Philippines Annotated, Hector de
Leon, 2002 ed.)
Cash Surrender Value
As applied to a life insurance policy,
it is the amount the insured in case of
default, after the payment of at least
3 full annual premiums, is entitled to

receive if he surrenders the policy and

releases his claims upon it.
LIFE
INSUR
ANCE
Contract of
investment not
of indemnity
Valued policy
May be
transferred or
assigned to
any person
even if he has
no insurable
interest
Consent of
insurer is not
essential to
validity of
assignment
Contingency
that is
contemplated
is a certain
event, the only
uncertainty
being the time
when it will
take place
A long-term
contract and
cannot be
cancelled by
the insurer
Beneficiary is
under no
obligation to
prove actual
financial loss

FIRE
INSURANCE
Contract of
indemnity
Open or valued
policy
The
insurable
interest of the
transferee
or
assignee
is
essential

b. Concurrent original jurisdiction

(with the RTC) Where the maximum
amount involved in any single claim is
P100,000 (Sec. 416), except in case of
maritime insurance which is within the
exclusive jurisdiction of the RTC. (BP
129;
admiralty
&
maritime
jurisdiction)
Where the amount exceeds
P100,000, the RTC has jurisdiction.

Consent of
insurer must be
secured in the
absence of
waiver
Contingency
insured against
may or may not
occur

May be cancelled
by either party
and is usually for
a term of one
year
Insured is
required to
submit proof of
his actual
pecuniary loss as
a condition
precedent to
collecting the
insurance.

XXII. VARIABLE CONTRACT

Any policy or contract on either a
group or individual basis issued by an
insurance company providing for
benefits
or
other
contractual
payments or values thereunder to
vary so as to reflect investment
results of any segregated portfolio of
investment.
XXIII. INSURANCE COMMISSIONER
Main agency charged with the
enforcement of the Insurance Code
and other related laws.
Functions:
1. ADJUDICATORY/QUASI-JUDICIAL
a. Exclusive original jurisdiction
Any dispute in the enforcement of any
policy issued pursuant to Chapter VI
(CMVLI). (Sec. 385, par. 2)

The Insurance Commissioner has no

jurisdiction to decide the legality of a
contract of agency entered into
between an insurance company and
its agent. The same is not covered by
the term doing or transacting
insurance business under Sec 2, ICP,
neither is it covered by Sec. 416 of
the same Code which grants the
Commissioner adjudicatory powers
(Philippine American Life Insurance
Co. v. Ansaldo, 234 SCRA 509).
2. ADMINISTRATIVE/REGULATORY
a.
Enforcement
of
insurance laws
b. Issuance, suspension or revocation of
certificate of authority
c. Power to examine books and records,
etc.
d. Rule-making authority
e. Punitive