Conditional - It Is Subject To: M A C L

San Beda College of Law
1
MEMORY AID
I. GENERAL CONCEPTS
CONTRACT OF INSURANCE
An agreement whereby one
undertakes for a consideration to
indemnify another against loss, damage
or liability arising from an unknown or
contingent event. (Sec. 2, par. 2, IC)
DOING AN INSURANCE BUSINESS OR
TRANSACTING
AN
INSURANCE
BUSINESS (Sec. 2, par. 4)
1. Making or proposing to make, as
insurer, any insurance contract;
2. Making or proposing to make, as
surety, any contract of suretyship as
a vocation, not as a mere incident
to any other legitimate business of a
surety;
3. Doing any insurance business,
including a reinsurance business;
4. Doing or proposing to do any
business in substance equivalent to
any of the foregoing
II.
CHARACTERISTICS
OF
AN
INSURANCE CONTRACT (The Insurance
Code of the Philippines Annotated,
Hector de Leon, 2002 ed.)
1. Consensual it is perfected by the
meeting of the minds of the parties.
2. Voluntary the parties may
incorporate
such
terms
and
conditions as they may deem
convenient.
3. Aleatory it depends upon some
contingent event.
COMMERCIAL LAW COMMITTEE
IN
COMMERCIAL LAW
4.
Unilateral imposes legal duties

only on the insurer who promises to
indemnify in case of loss.
5. Conditional It is subject to
conditions the principal one of
which is the happening of the event
insured against.
6. Contract of indemnity Except life
and accident insurance, a contract
of insurance is a contract of
indemnity whereby the insurer
promises to make good only the loss
of the insured.
7. Personal each party having in view
the character, credit and conduct of
the other.
REQUISITES OF A CONTRACT OF
INSURANCE (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. A subject matter which the insured
has an insurable interest.
2. Event or peril insured against which
may be any future contingent or
unknown event, past or future and a
duration for the risk thereof.
3. A promise to pay or indemnify in a
fixed or ascertainable amount.
4.
A
consideration
known
as
premium.
5. Meeting of the minds of the parties.
5 CARDINAL PRINCIPLES IN INSURANCE
1. Insurable Interest
2. Principle of Utmost Good Faith
An insurance contract requires
utmost good faith (uberrimae fidei)
CHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:
Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario (Transportation Laws);
Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel Gatdula (Banking Laws); Robespierre CU
(Law on Intellectual Property)
2
MEMORY AID
between the parties. The applicant is

enjoined to disclose any material fact,
which he knows or ought to know.
Reason: An insurance contract is an
aleatory contract. The insurer relies on
the representation of the applicant,
who is in the best position to know the
state of his health.
3. Contract of Indemnity
It is the basis of all property
insurance. The insured who has
insurable interest over a property is
only entitled to recover the amount of
actual loss sustained and the burden is
upon him to establish the amount of
such loss (Reviewer on Commercial
Law, Professors Sundiang and Aquino)
Rules:
a. Applies only to property insurance
except when the creditor insures
the life of his debtor.
b. Life insurance is not a contract of
indemnity.
c. Insurance contracts are not
wagering contracts. (Sec. 4)
4. Contract of Adhesion (Fine Print
Rule)
Most of the terms of the contract do
not result from mutual negotiations
between the parties as they are
prescribed by the insurer in final
printed form to which the insured may
adhere if he chooses but which he
cannot change. (Rizal Surety and
Insurance Co., vs. CA, 336 SCRA 12)
5. Principle of Subrogation
It is a process of legal substitution
where the insurer steps into the shoes
IN
COMMERCIAL LAW
of the insured and he avails of the

latters rights against the wrongdoer at
the time of loss.
The principle of subrogation is a
normal incident of indemnity insurance
as a legal effect of payment; it inures
to the insurer without any formal
assignment or any express stipulation
to that effect in the policy. Said right is
not dependent upon nor does it grow
out of any private contract. Payment to
the insured makes the insurer a
subrogee in equity. (Malayan Insurance
Co., Inc. v. CA, 165 SCRA 536; see also
Art. 2207, NCC)
Purposes: (The Insurance Code of
the Philippines Annotated, Hector de
Leon, 2002 ed.)
1. To make the person who caused the
loss legally responsible for it.
2. To prevent the insured from
receiving a double recovery from the
wrongdoer and the insurer.
3. To prevent tortfeasors from being
free from liabilities and is thus
founded on considerations of public
policy.
Rules:
1. Applicable only to property
insurance.
2. The insurer can only recover from
the third person what the insured could
have recovered.
3. There can be no subrogation in
cases:
3
MEMORY AID
a. Where the insured by his own act

releases the wrongdoer or third party
liable for the loss or damage;
b. Where the insurer pays the insured
the value of the loss without notifying
the carrier who has in good faith
settled the insureds claim for loss;
c. Where the insurer pays the insured for
a loss or risk not covered by the
policy. (Pan
Malayan
Insurance
Company v. CA, 184 SCRA 54)
d. In life insurance
e. For recovery of loss in excess of
insurance coverage
CONSTRUCTION
OF
INSURANCE
CONTRACT
The ambiguous terms are to be
construed strictly against the insurer,
and liberally in favor of the insured.
However, if the terms are clear, there is
no room for interpretation. (Calanoc
vs. Court of Appeals, 98 Phil. 79)
III. DISTINGUISHING ELEMENTS OF AN
INSURANCE CONTRACT
1. The insured possesses an insurable
interest susceptible of pecuniary
estimation;
2. The insured is subject to a risk of
loss through the destruction or
impairment of that interest by the
happening of designated perils;
3. The insurer assumes that risk of loss;
IN
COMMERCIAL LAW
4. Such assumption is part of a general

scheme to distribute actual losses
among a large group or substantial
number of persons bearing somewhat
similar risks; and
5. The insured makes a ratable
contribution (premium) to a general
insurance fund.
A contract possessing only the first 3
elements above is a risk-shifting
device. If all the elements, it is a 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
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.
4
MEMORY AID
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)
IN
COMMERCIAL LAW
Endorsements
Any provision added to the contract
altering its scope or application. (Prof.
De Leon, p.188)
POLICY OF INSURANCE
The written instrument in which a
contract of insurance is set forth. (Sec.
49)
Contents: (Sec. 51)
1. Parties
2. Amount of insurance, except in open
or running policies;
3. Rate of premium;
4. Property or life insured;
5. Interest of the insured in the
property if he is not the absolute
owner;
6. Risk insured against; and
7. Duration of the insurance.
Persons entitled to recover on the
policy (sec. 53): The insurance
proceeds shall be applied exclusively to
the proper interest of the person in
whose name or to whose benefit it is
made, unless otherwise specified in the
policy.
Kinds:
1.
OPEN POLICY value of thing
insured is not agreed upon, but left to
be ascertained in case of loss. (Sec. 60)
The actual loss, as determined,
will represent the total indemnity
due the insured from the insurer
except only that the total indemnity
5
MEMORY AID
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).
IN
COMMERCIAL LAW
2. Marine, fire, and the property aspect

of casualty insurance are also referred
to as property insurance.
VI. PARTIES TO INSURANCE CONTRACT
1. Insurer - Person who undertakes to
indemnify another.
For a person to be called an
insurance agent, it is necessary
that he should perform the
function
for
compensation.
(Aisporna vs. CA, 113 SCRA 459)
2. Insured - The party to be
indemnified upon the occurrence of the
loss. He must have capacity to
contract, must possess an insurable
interest in the subject of the insurance
and must not be a public enemy.
A public enemy- a nation with
whom the Philippines is at war
and it includes every citizen or
subject of such nation.
3. Beneficiary - A person designated
to receive proceeds of policy when risk
attaches.
Rules in the designation of the
beneficiary:
a. LIFE
i. A person who insures his own
life can designate any person
as his beneficiary, whether or
not the beneficiary has an
insurable interest in the life of
the insured subject to the
limitations under Art. 739 and
Art. 2012 of the NCC.
Reason: in essence, a life
insurance policy is no different
6
MEMORY AID
form a civil donation insofar as

the beneficiary is concerned.
Both are founded on the same
consideration of liberality.
(Insular Life vs. Ebrado, 80
SCRA 181)
ii. A person who insures the life
of another person and name
himself as the beneficiary must
have an insurable interest in
such life. (Sec. 10)
iii.As a general rule, the
designation of a beneficiary is
revocable unless the insured
expressly waived the right to
revoke in the policy. (Sec. 11)
iv. The interest of a beneficiary in
a life insurance policy shall be
forfeited when the beneficiary
is the principal accomplice or
accessory in willfully bringing
about the death of the insured
in which event, the nearest
relative of the insured shall
receive the proceeds of said
insurance if not otherwise
disqualified. (Sec. 12)
b. PROPERTY
The beneficiary of property
insurance must have an insurable
interest in such property, which
must exist not only at the time
the policy takes effect but also
when the loss occurs. (Sec. 13
and 18).
Effects of Irrevocable Designation Of
Beneficiary
Insured cannot:
IN
COMMERCIAL LAW
1. Assign the policy

2. Take the cash surrender value of
the policy
3. Allow his creditors to attach or
execute on the policy;
4. Add new beneficiary; or
5. Change
the
irrevocable
designation to revocable, even
though the change is just and
reasonable.
The insured does not even retain the
power to destroy the contract by
refusing to pay the premiums for the
beneficiary can protect his interest by
paying such premiums for he has an
interest in the fulfillment of the
obligation. (Vance, p. 665, cited in de
Leon, p. 101, 2002 ed.)
VII. INSURABLE INTEREST
A. In General
A person has an insurable interest in
the subject matter if he is so
connected,
so
situated,
so
circumstanced, so related, that by the
preservation of the same he shall
derive pecuniary benefit, and by its
destruction he shall suffer pecuniary
loss, damage or prejudice.
B. Life
Every person has an insurable
interest in the life and health:
a. of himself, of his spouse and of
his children;
b. of any person on whom he
depends wholly or in part for
education or support;
7
MEMORY AID
c. of any person under a legal

obligation to him to pay money or
respecting property or services,
of which death or illness might
delay or prevent performance;
and
d. of any person upon whose life any
estate or interest vested in him
depends. (Sec. 10)
When it should exist: When the
insurance takes effect; not thereafter
or when the loss occurs.
Amount:
GENERAL RULE: There is no limit in
the amount the insured can insure his
life.
EXCEPTION: In a creditor-debtor
relationship where the creditor insures
the life of his debtor, the limit of
insurable interest is equal to the
amount of the debt.
Note: If at the time of the death of the
debtor the whole debt has already
been paid, the creditor can no longer
recover on the policy because the
principle of indemnity applies.
C. Property
Every interest in property whether
real or personal, or any relation
thereto, or liability in respect thereof,
of such nature that the contemplated
peril might directly damnify the insured
(Sec. 13), which may consist in:
1. an existing interest;
2. any inchoate interest founded
on an existing interest; or
IN
COMMERCIAL LAW
3. an expectancy coupled with an

existing interest in that out of
which the expectancy arises.
(Sec. 14)
When it should exist: When the
insurance takes effect and when the
loss occurs, but need not exist in the
meantime.
Amount: The measure of insurable
interest in property is the extent to
which the insured might be damnified
by loss or injury thereof. (Sec. 17)
INSURABLE
INTEREST IN
LIFE
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
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
8
MEMORY AID
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.
existence of
the
property
insured
must have a
legal basis.
The
beneficiary
must have
insurable
interest
over
the
thing
insured.
SPECIAL CASES
1. In case of a carrier or depositary
A carrier or depository of any kind
has an insurable interest in a thing held
IN
COMMERCIAL LAW
by him as such, to the extent of his

liability but not to exceed the value
thereof (Sec. 15)
2. In case of a mortgaged property
The mortgagor and mortgagee each
have an insurable interest in the
property mortgaged and this interest is
separate and distinct from the other.
a. Mortgagor As owner, has an
insurable interest therein to the
extent of its value, even though the
mortgage debt equals such value.
The reason is that the loss or
destruction of the property insured
will not extinguish the mortgage
debt.
b. Mortgagee His interest is only up
to the extent of the debt. Such
interest
continues
until
the
mortgage debt is extinguished.
The lessor cannot be validly a
beneficiary of a fire insurance policy
taken by a lessee over his merchandise,
and the provision in the lease contract
providing
for
such
automatic
assignment is void for being contrary to
law and public policy. (Cha vs. Court of
Appeals, 227 SCRA 690)
STANDARD
OR UNION
MORTGAGE
CLAUSE
OPEN OR
LOSS
PAYABLE
MORTGAGE
CLAUSE
9
MEMORY AID
Subsequent
acts of the
mortgagor
cannot
affect
the
rights of the
assignee
Acts of the
mortgagor
affect the
mortgagee.
Reason:
Mortgagor
does
not
cease to be
a party to
the
contract.
(Secs. 8 and
9)
Effects of Loss Payable Clause

a. The contract is deemed to be upon
the interest of the mortgagor; hence,
he does not cease to be a party to the
contract.
b. Any act of the mortgagor prior to the
loss, which would otherwise avoid the
insurance affects the mortgagee even if
the property is in the hands of the
mortgagee.
c. Any act, which under the contract of
insurance is to be performed by the
mortgagor, may be performed by the
mortgagee with the same effect.
d. In case of loss, the mortgagee is
entitled to the proceeds to the extent
of his credit.
e. Upon recovery by the mortgagee to
the extent of his credit, the debt is
extinguished.
In case a mortgagee insures his own
interest and a loss occurs, he is entitled
to the proceeds of the insurance but he
IN
COMMERCIAL LAW
is not allowed to retain his claim

against the mortgagor as the claim is
discharged but it passes by subrogation
to the insurer to the extent of the
money paid by such insurer. (Palileo vs.
Cosio)
VIII. RISK
What may be insured against:
1. Future contingent event resulting in
loss or damage Ex. Possible future
fire
2. Past unknown event resulting in loss
or damage Ex. Fact of past sinking
of a vessel unknown to the parties
3. Contingent liability Ex. Reinsurance
IX. PREMIUM PAYMENTS
Consideration paid an insurer for
undertaking to indemnify the insured
against a specified peril.
Basis of the right of the insurer to
collect premiums: Assumption of risk.
GENERAL RULE: No policy issued by
an insurance company is valid and
binding until actual payment of
premium. Any agreement to the
contrary is void. (Sec. 77)
EXCEPTIONS:
1. In case of life or industrial life
insurance, when the grace periods
applies; (Sec. 77)
10
MEMORY AID
2. When the insurer makes a written

acknowledgment of the receipt
premium; (Sec. 78)
3. Section 77 may not apply if the
parties have agreed to the payment
of the premium in installments and
partial payment has been made at
the time of the loss. (Makati
Tuscany Condominium Corp. v. CA,
215 SCRA 462)
4. Where a credit term has been
agreed upon. (UCPB vs. Masagana
Telemart, 308 SCRA 259)
5. Where the parties are barred by
estoppel. (UCPB vs. Maagana
Telemart, 356 SCRA 307)
Section 77 merely precludes the
parties from stipulating that the policy
is valid even if the premiums are not
paid. (Makati Tuscany Condominium
Corp. v. CA, 215 SCRA 462)
Effect of Acknowledgment of Receipt
of Premium in Policy: Conclusive
evidence of its payment, so far as to
make
the
policy
binding,
notwithstanding any stipulation therein
that it shall not be binding until the
premium is actually paid. (Sec. 78)
IN
COMMERCIAL LAW
ENTITLEMENT OF INSURED TO RETURN

OF PREMIUMS PAID
A. Whole:
1. If the thing insured was never
exposed to the risks insured
against; (Sec. 79)
2. If contract is voidable due to the
fraud or misrepresentation of
insurer or his agents; (Sec. 81)
3. If contract is voidable because of
the existence of facts of which
the insured was ignorant without
his fault; (Sec. 81)
4. When by any default of the
insured other than actual fraud,
the
insurer
never
incurred
liability; (Sec. 81)
5. When rescission is granted due to
the insurers breach of contract.
(Sec. 74)
B. Pro rata:
1. When the insurance is for a
definite period and the insured
surrenders his policy before the
termination thereof;
Exceptions:
a. policy not made for a
definite period of time
b. short period rate is
agreed upon
c. life insurance policy
11
MEMORY AID
2. When there
(Sec. 82);
is
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
ASSESSMEN
T
Levied and Collected to

paid to meet meet actual
anticipated
losses.
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.
IN
COMMERCIAL LAW
over-insurance
X. TRANSFER OF POLICY
1. Life Insurance
It can be transferred even without
the consent of the insurer except when
there is a stipulation requiring the
consent of the insurer before transfer.
(Sec. 181)
Reason: The policy does not
represent
a
personal
agreement
between the insured and the insurer.
2. Property insurance
It cannot be transferred without the
consent of the insurer.
Reason: The insurer approved the
policy
based
on
the
personal
qualification and the insurable interest
of the insured.
3. Casualty insurance
It cannot be transferred without the
consent of the insurer. (Paterson cited
in de Leon p. 82)
Reason: The moral hazards are as
great as those of property insurance.
CHANE OF INTEREST IN THE THING
INSURED
The mere (absolute) transfer of the
thing insured does not transfer the
policy, but suspends it until the same
person becomes the owner of both the
policy and the thing insured. (Sec. 58)
Reason: Insurance contract is
personal.
GENERAL RULE: A change of interest
in any part of a thing insured
unaccompanied by a corresponding
change of interest in the insurance
12
MEMORY AID
suspends the insurance to an equivalent

extent, until the interests in the thing
and the interest in the
insurance are vested in the same
person. (Sec. 20)
EXCEPTIONS:
1. In life, health and accident
insurance.(Sec. 20);
2. Change in interest in the thing
insured after occurrence of an
injury which results in a loss.
(Sec. 21);
3. Change in interest in one or more
of
several
distinct
things
separately insured by one policy.
(Sec. 22);
4. Change of interest, by will or
succession, on the death of the
insured. (Sec. 23);
IN
COMMERCIAL LAW
5. Transfer of interest by one of

several partners, joint owners, or
owners in common, who are
jointly insured, to others. (Sec.
24);
6. When a policy is so framed that it
will inure to the benefit of
whomsoever,
during
the
continuance of the risk, may
become the owner of the interest
insured. (Sec. 57);
7. When there is an express
prohibition against alienation in
the policy, in case of alienation,
the contract of insurance is not
merely suspended but avoided.
(Art. 1306, NCC).

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Unilateral imposes legal duties

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between the parties. The applicant is

of the insured and he avails of the

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a. Where the insured by his own act

4. Such assumption is part of a general

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Cover Note (Ad Interim)

COMMERCIAL LAW COMMITTEE

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shall not exceed the face value of

COMMERCIAL LAW COMMITTEE

2. Marine, fire, and the property aspect

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form a civil donation insofar as

1. Assign the policy

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c. of any person under a legal

3. an expectancy coupled with an

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life need not

by him as such, to the extent of his

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Effects of Loss Payable Clause

is not allowed to retain his claim

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2. When the insurer makes a written

COMMERCIAL LAW COMMITTEE

ENTITLEMENT OF INSURED TO RETURN

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Instances when premiums are not

Levied and Collected to

COMMERCIAL LAW COMMITTEE

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suspends the insurance to an equivalent

COMMERCIAL LAW COMMITTEE

5. Transfer of interest by one of

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