In Su Highlights

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NOTES IN INSURANCE LAW – 2ND SEMESTER; AY 2017-2018
GOVERNING LAW
On August 15, 2013, RA 10607 was signed into law. It is a restatement of the Insurance Code [PD 612], with amendments.
While RA 10607 restated the whole law, most of the amendments touch only the administrative portion of the Code, and very little
on the substantive portion.
Unless otherwise indicated, the section numbers pertain to RA 10607.
➢ The Insurance Code primarily governs insurance contracts, unless there is a special law which specifically govern (e.g.,
insurance contract under the RA 1161 or Social Security Act), in which case, the Insurance Code governs subsidiarily.
➢ Matters not expressly provided for in the Insurance Code and special laws are regulated by the Civil Code.
CONCEPT & 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
➢ A contract of suretyship shall be deemed to be an insurance contract only if made by a surety who or which, as such, is doing
an insurance business [Section 2(a)].
➢ A contract of insurance involves public interest. Thus, the business is regulated by the state through the requirement of
license or certificate of authority [White Gold Marine Services v. Pioneer (2005)].
DEFINITION
➢ A contract of insurance is: (1) A contract of indemnity; (2) Wherein one undertakes for a consideration; (3) To indemnify
another against loss, damage, or liability; (4) Arising from an unknown or contingent event.
o A contingent event is one that is not certain to take place.
o An unknown event is one which is certain to happen, but the time of its happening is not known.
o A past event may be a designated event only in cases where it has happened already but the parties do not know
about it, e.g., prior loss of a ship at sea (applicable only to marine insurance).
FORM
➢ A policy of insurance is different from the contract of insurance.
➢ The policy is the formal written instrument evidencing the contract of insurance entered into between the insured and the
insurer.
➢ No policy, certificate or contract of insurance shall be issued or delivered within the Philippines unless in the form previously
approved by the Commissioner.
➢ No application form shall be used with, and no rider, clause, warranty or endorsement shall be attached to, printed or
stamped upon such policy, certificate or contract unless the form of such application, rider, clause, warranty or endorsement
has been approved by the Commissioner [Section 232].
INSURANCE AND GAMBLING DISTINGUISHED
➢ A contract of insurance is a contract of indemnity and is not a wagering or gambling contract.
➢ It is based on contingency, but it is not a contract of chance for profit.
➢ Unlike gambling, in insurance contracts, what insured gains is not at the expense of the another insured.
➢ Also, a gambling contract tends to increase inequality of fortune, while an insurance contract tends to equalize fortune.
DOING OR TRANSACTING INSURANCE BUSINESS
➢ The term “doing an insurance business or transacting an insurance business” includes:
1. Making or proposing to make, as insurer, any insurance contract;
2. Making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other
legitimate business or activity of the surety;
3. Doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance
business within the meaning of the Insurance Code;
4. Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the
provisions of the Insurance Code.
➢ The fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or
direct consideration is received therefor, shall not be deemed conclusive to show that the making thereof does not constitute
the doing or transacting of an insurance business (Section 2(b)).
General rule: An insurance business consists in undertaking, for a consideration, to indemnify another against loss, damage or liability
arising from an unknown or contingent event.
Exception: Although the business is not formally designated as one of insurance and no profit is derived or no separate or direct
consideration is received, it is deemed to be doing an insurance business if it undertakes any of the activities included in the term
“doing an insurance business or transacting an insurance business.”
Philippine Health Care Providers Inc. v. CIR (2009) has stated that:
1) Contracts of law firm with clients whereby in consideration of periodical payments, the law firm promises to represent such clients
in all suits for or against them are not insurance contracts; - x Insurance K
2) A contract by which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a physician against
all suits for damages for malpractice is one of insurance, and the corporation will be deemed as engaged in the business of
insurance.- / Insurance K
BANCASSURANCE
➢ RA 10607 introduced provisions governing bancassurance.
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➢ The term bancassurance shall mean the presentation and sale to bank customers by an insurance company of its insurance
products within the premises of the head office of such bank duly licensed by the Bangko Sentral ng Pilipinas (BSP) or any of
its branches under such rules and regulations which the Commissioner and the BSP may promulgate. To engage in
bancassurance arrangement, a bank is not required to have equity ownership of the insurance company. No insurance
company shall enter into a bancassurance arrangement unless it possesses all the requirements as may be prescribed by the
Commissioner and the BSP.
➢ No insurance product, whether life or non-life, shall be issued or delivered pursuant to a Bancassurance arrangement, unless
in the form previously approved by the Commissioner (Section 375).
➢ Personnel tasked to present and sell insurance products within the bank premises shall be duly licensed by the Commissioner
and shall be subject to the rules and regulations of this Act (Section 376).
➢ This is introduced in RA 10607 amending the Insurance Code.
NOTE: While insurance companies, pre-need companies, and HMOs function under a common concept of receiving compensation,
either through premiums or contributions, and in turn, promise certain contractual benefits in the future – they are different!
PRE-NEED PLANS
➢ Pre-need plans are contracts, agreements, deeds or plans for the benefit of the planholders which provide for the
performance of future services, payment of monetary considerations or delivery of other benefits at the time of actual need
or agreed maturity date, as specified therein, in exchange for cash or installment amounts with or without interest or
insurance coverage and includes life, pension, education, interment and other plans, instruments, contracts or deeds [Section
4(b), RA 9829 (Pre-Need Code)].
➢ Pre-need plans are not governed by the Insurance Code but by the Pre-Need Code of the Philippines. They are not considered
as insurance contracts because even pre-need plans can be insured, thereby implying that the two are not the same.
➢ Pre-need plans are considered as securities and used to be governed by the Securities Regulation Code. They are not
considered as insurance contracts because it is not an insurance for an unknown or contingent event but an event certain
happening at a certain time.
➢ Nevertheless, the Insurance Commissioner shall have the primary and exclusive power to adjudicate any and all claims
involving preneed plans. If the amount of benefits does not exceed P100,000 which decision shall be final and executory
[Sec. 58(a), Pre-Need Code].
HEALTH MAINTENANCE ORGANIZATIONS (HMOs)

In accordance with DOH Administrative Order No. 34 (s. 1994), an HMO refers to a juridical entity legally organized to provide or
arrange for the provision of pre-agreed or designated health care services to its enrolled members for a fixed pre-paid fee for a
specified period of time.
➢ EXECUTIVE ORDER NO. 192, Transferring the Regulation and Supervision over Health Maintenance Organizations from the
Department of Health (DOH) to the Insurance Commission (IC) in order to regulate and supervise the establishment,
operations and financial activities of HMOs; Effective November 2015
ELEMENTS OF AN INSURANCE CONTRACT

IN GENERAL
(1) Subject matter in which the insured has an insurable interest;
(2) Consideration which refers to the premium payments based on probability of loss and extent of liability;
(3) Object and Purpose which is the transfer and distribution of risk of loss, damage or liability;
(4) Cause which refers to an event or peril insured against;
(5) A meeting of minds of the parties upon all the foregoing essentials.
SUBJECT MATTER
➢ The insured must have an insurable interest in the subject matter of the insurance contract.
➢ Insurable interest is the interest which the law requires the owner of an insurance policy to have in the person or thing
insured.
➢ General rule: A person is deemed to have an insurable interest in the subject matter insured where he has a relation or
connection with or concern in it that he will derive pecuniary or financial benefit or advantage from its preservation and will
suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against
[Lalican v. Insular Life Ins. Co. (2009)].
➢ Exception: The expectation of benefit from the continued life of the person insured need not be of a pecuniary nature.
CONSIDERATION
➢ An insurance premium is the agreed price for assuming and carrying the risk. It is the consideration paid to the insurer for
undertaking to indemnify the insured against a designated peril. It is based on probability of loss and extent of liability.
➢ Premiums are difference from assessments. An assessment, in insurance law, is a sum specifically levied by mutual insurance
companies or associations, upon a fixed and definite plan, to pay losses and expenses. While premiums are levied and paid
to meet anticipated loss, assessments are collected to meet actual loss.
OBJECT AND PURPOSE
Insurance contracts serve to distribute the risk of economic loss, damage or liability among as many as possible of those who are
subject to the same kind of risk. By paying premiums which inured to a general fund out of which payment will be made for an
economic loss of a defined type, each member contributes to a small degree toward compensation for losses suffered by any member
of the group.
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CAUSE
➢ Cause refers to an event or peril insured against.
➢ Peril is the contingent or unknown event which may cause a loss. Its existence creates a risk and its occurrence results in loss.
➢ The event or peril insured against must be such that its happening will:
o Damnify or cause loss to a person having insurable interest; or
o Create liability against him.
➢ The unknown event may be past or future. Even if the proximate cause of the loss is a fortuitous event, the insurer may still
be liable if it is the event or peril insured against [De Leon, The Insurance Code of the Philippines Annotated (2010)].
MEETING OF THE MINDS
➢ The two parties to a contract of insurance whose minds need to meet regarding the essential elements are:
o The insurer or the party who assumes or accepts the risk of loss and undertakes for consideration to indemnify the
insured or to pay hum a certain sum on the happening of the event or peril insured against, and
o The insured or the person in whose favor the contract is operative and whose loss is the occasion for the payment
of the insurance proceeds by the insurer
➢ The insured is not always the person whom the proceeds are paid. Such person is the beneficiary.
CHARACTERISTICS OF AN INSURANCE CONTRACT

IN GENERAL
An insurance contract is:
(1) Consensual; (2) Voluntary; (3) Aleatory; (4) Executory and unilateral, but synallagmatic; (5) Conditional; (6) Contract of indemnity;
(7) Contract of adhesion; (8) Personal contract; (9) Property; (10) Uberrimae fidei contract (utmost good faith).
CONSENSUAL
It is perfected by the meeting of the minds of the parties. There must be concurrence of offer and acceptance. Unless otherwise
stipulated, the policy is not essential to the existence of the contract. It merely evidences the terms and conditions thereof [Campos,
Insurance (1983)].
VOLUNTARY
General rule: It is voluntary in the sense that it is not compulsory and the parties are free to incorporate such terms and conditions
they may deem convenient provided they are not contrary to law, morals, good customs, public order, or public policy.
Exceptions: Insurance contracts particularly liability insurance, may be required by law in certain instances:
o For motor vehicles [Sections 373-389];
o For employees [Articles 168-184, Labor Code];
o As a condition to granting a license to conduct business or calling affecting the public safety or welfare [De Leon (2010)].
Also, there are insurance which may arise by operation of law.
Social insurance for members of the Government Service Insurance System (GSIS) and for the employees of the private sector covered
by the Social Security System (SSS) is established by law.
ALEATORY
It is aleatory because it depends upon some contingent event. The obligation of the insurer to pay depends on the happening of an
event which is uncertain, or though certain, is to occur at an indeterminate time [Article 2010, Civil Code]. However, it cannot be
considered as gambling, wagering, or a contract of chance because the risk is created by the contract itself.
EXECUTORY AND UNILATERAL BUT SYNALLAGMATIC
Once the insured pays the premium, the contract already takes effect. After the payment of premiums, the insurance imposes a
unilateral obligation on the insurer who promise to indemnify in case of loss.
It is also synallagmatic and reciprocal such that even if the contingent event does not occur, the insurer has still provided protection
against the risk. When the designated peril does not happen, the insured nevertheless gets the protection against such risk for the
period covered by the insurance contract.
CONDITIONAL
It is conditional because it is subject to conditions, the principal of which is the happening of the event insured against. However, many
other conditions are usually required (such as payments of premium or performance of other act) as precedent to the right of the
insured to claim benefit under the insurance.
CONTRACT OF INDEMNITY (FOR NON-LIFE INSURANCE)
The insured who has insurable interest over the property is only entitled to recover the amount of actual loss sustained. The burden
is upon him to establish the amount of such loss.
General rule: This applies only to property insurance. An insurance contingent on the life of a person is not an indemnity contract
because the value of a life is immeasurable.
Exception: However, where the basis of the insurable interest of the policy owner on the life of the insured is a commercial relationship
(e.g., creditor-debtor, mortgagor/guarantor- mortgagee, supporter and supportee), then such contract is an indemnity contract
CONTRACT OF ADHESION (FINE PRINT RULE)
Insurance contracts are already presented to the insured in its printed form on a “take it or leave it” basis. What is needed only is the
adhesion of the insured for the contract to be made. Such contracts of adhesion are valid. However, ambiguity in them shall be
interpreted liberally in favor of the insured and strictly against the insurer who prepared the same
PERSONAL CONTRACT
Each party takes into consideration the character, conduct and/or credit of the other and in making of the contract, each is enjoined
by law to deal with the other in utmost good faith [Campos (1983)].
The insured cannot assign, before the happening of the loss, his rights under a property policy to others without the consent of the
insurer [Sections 20, 58, and 85].
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Property insurance is personal in the sense that it is the damage to the personal interest not the property that is being reimbursed.
PROPERTY (FOR LIFE INSURANCE)
Life insurance policies, unlike property insurance, are generally assignable or transferrable [Section 85] as they are in the nature of
property and do not represent a personal agreement between the insurer and the insured. They are considered property in legal
contemplation.
UBERRIMAE FIDEI CONTRACT
Each party is required to deal with each other in utmost good faith and disclose conditions affecting the risk, of which he is aware, or
any material fact which the applicant knows and those which he ought to know. Violation of this duty gives the aggrieved party the
right to rescind the contract. Where the aggrieved party is the insured, the bad faith of the insurer will preclude it from denying liability
on the policy based on breach of warranty [Campos (1983)].
CLASSES OF INSURANCE CONTRACTS

1. MARINE INSURANCE
DEFINITION
Marine insurance is a type of transportation insurance which is concerned with the perils of property in, or incidental to, transit as
opposed to property perils at a generally fixed location.
Marine insurance includes:
(1) Insurance against loss of or damage to:
i. Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects, disbursements, profits, moneys, securities,
choses in action, instruments of debts, valuable papers, bottomry, and respondentia interests and all other kinds of property
and interests therein, in respect to, appertaining to or in connection with any and all risks or perils of navigation, transit or
transportation, or while being assembled, packed, crated, baled, compressed or similarly prepared for shipment or while
awaiting shipment, or during any delays, storage, transhipment, or reshipment incident thereto, including war risks, marine
builder’s risks, and all personal property floater risks;
ii. Person or property in connection with or appertaining to a marine, inland marine, transit or transportation insurance,
including liability for loss of or damage arising out of or in connection with the construction, repair, operation, maintenance
or use of the subject matter of such insurance (but not including life insurance or surety bonds nor insurance against loss by
reason of bodily injury to any person arising out of ownership, maintenance, or use of automobiles);
iii. Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise; and
iv. Bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their furniture and
furnishings, fixed contents and supplies held in storage); piers, wharves, docks and slips, and other aids to navigation and
transportation, including dry docks and marine railways, dams and appurtenant facilities for the control of waterways.
(2) Marine protection and indemnity insurance, meaning insurance against, or against legal liability of the insured for loss, damage, or
expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any vessel, craft or instrumentality
in use of ocean or inland waterways, including liability of the insured for personal injury, illness or death or for loss of or damage to
the property of another person [Section 101].
DIVISIONS
Marine insurance has two major divisions:
(1) Ocean marine insurance insures against risk connected with navigation, to which a ship, cargo, freightage, profits or other insurable
interest in movable property, may be exposed during a certain voyage or a fixed period of time. Its scope includes:
▪ Ships or hulls; (b) Goods or cargoes; (c) Earnings such as freight, passage money, commissions, or profits; and (d) Liability
(protection and indemnity insurance).
(2) Inland marine insurance covers the land or over the land transportation perils of property shipped by railroads, motor trucks,
airplanes, and other means of transportation. It also covers risks of lake, river or other inland waterway transportation and other
waterborne perils outside those covered by ocean marine insurance.
BOTTOMRY AND RESPONDENTIA DISTINGUISHED

➢ Bottomry loan is a loan that is obtained for the value of the vessel on a voyage and the lender is repaid only if the vessel
subject of the loan arrives safely at its destination. The insurable interest of a ship owner on its bottomed boat is the
difference between the amount of the loan and the value of the boat. Thus, if the amount of the loan does not cover the total
value of the boat, the owner can still insure the boat.
➢ Respondentia loan is a loan that is obtained as security for the value of the cargo to be transported and the lender is repaid
only if the cargo arrives safely at its destination.
RISKS
PERILS OF THE SEA
➢ Ocean marine insurance protects ships at sea and the cargo or freight on such ships from standard “perils of the sea” or
“perils of navigation” which includes casualties arising from the violent action of the elements and does not cover ordinary
wear and tear or other damage usually incident to the voyage. The mere fact that an injury is due to violence of some marine
force does not necessarily bring it within the protection of the policy if such violence was not unusual or unexpected.
➢ Perils of the sea or perils of navigation include only those casualties due to the unusual violence or extraordinary causes
connected with navigation. It has been said to include only such losses as are of extraordinary nature or arise from some
overwhelming power which cannot be guarded against by the ordinary exertion of human skill or prudence, as distinguished
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from the ordinary wear and tear of the voyage and from injuries suffered by the vessel in consequence of her not being
unseaworthy [Sundiang and Aquino, Reviewer on Commercial Law (2013)].
➢ The phrase also extends to barratry which refers to the willful and intentional act on the part of the master or the crew, in
pursuance of some unlawful or fraudulent purpose, without the consent of the owner, and to the prejudice of his interest
(e.g., burning the ship, unlawfully selling the cargo). x No honest error of judgment or mere negligence, unless criminally
gross, can be barratry [Roque v. IAC (1985)].
PERILS OF THE SHIP
Perils of the ship are those which cause a loss which in the ordinary course of events, results:
(1) From the ordinary, natural and inevitable action of the sea;
(2) From ordinary wear and tear of the ship; and
(3) From the negligent failure of the ship’s owner to provide the vessel with the proper equipment to convey the cargo under
ordinary conditions.
In the absence of stipulation, the risks insured against are only perils of the sea [Go Tiaco y Hermanos v. Union Ins. Society of Canton
(1919)].
However, in an all risk policy, all risks are covered unless expressly excepted. The burden rests on the insurer to prove that the loss is
caused by a risk that is excluded [Filipino Merchants Ins. Co. v. CA (1989)].
LOSS
Loss may be total or partial.
Total loss may be actual or constructive.
(1) Actual total loss is the irretrievable loss of the thing or any damage which renders the thing valueless to the owner for the purpose
for which he held it. It can be presumed from the continued absence of the ship without being heard of for a period of time depending
on the circumstances of the case.
(2) Constructive total loss or “technical total loss” is one in which the loss, although not actually total, is of such character that the
insured is entitled, if he thinks fit, to treat it as total by abandonment.
As to when a constructive total loss exists, three rules exist:

1. English rule, which states that there is constructive total loss when the subject matter of the insurance, while still existent in
specie, is so damaged as not to be worth, when repaired, the cost of the repairs;
2. American rule, which states that there is constructive total loss when it is so damaged that the costs of repairs would exceed one-
half of the value of the thing as acquired; also known as the “fifty percent rule;”
3. Philippine rule, which states that the insured may not abandon the thing insured unless the loss or damage is more than three-
fourths of its value.
Thus, under Section 141, a person insured by a contract of marine insurance may abandon the thing insured, or any particular portion
thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the
loss is a peril insured against:
1. If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril;
2. If it is injured to such an extent as to reduce its value more than three-fourths;
3. If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without incurring either an expense to
the insured of more than three-fourths the value of the thing abandoned or a risk which a prudent man would not take under the
circumstances; or
4. If the thing insured, being cargo or freightage, and the voyage cannot be performed, nor another ship procured by the master,
within a reasonable time and with reasonable diligence, to forward the cargo, without incurring either an expense to the insured
of more than three-fourths the value of the thin abandoned or a risk which a prudent man would not take under the
circumstances. But freightage cannot in any case be abandoned unless the ship is also abandoned.
ABANDONMENT
DEFINITION
Abandonment, in marine insurance, is the act of the insured by which, after a constructive total loss, he declares the relinquishment
to the insurer of his interest in the thing insured [Section 140].
CONDITIONS
Aside from the requirement under Section 141 already mentioned:
(1) An abandonment must be neither partial nor conditional [Section 142];
(2) An abandonment must be made within a reasonable time after receipt of reliable information of the loss, but where the information
is of a doubtful character, the insured is entitled to a reasonable time to make inquiry [Section 142];
(3) Abandonment is made by giving notice thereof to the insurer, which may be done orally, or in writing: Provided, that if the notice
be done orally, a written notice of such abandonment shall be submitted within seven days from such oral notice [Section 145];
(4) Abandonment must be absolute and total.
➢ No notice of abandonment is required for recovery of loss in cases of actual total loss.
➢ Where the information upon which an abandonment has been made proves incorrect, or the thing insured was so far restored
when the abandonment was made that there was in fact no total loss, the abandonment becomes ineffectual.
CHARACTERISTICS
Thus, a valid abandonment has the following characteristics:
(1) There must be an actual relinquishment by the person insured of his interest in the thing insured;
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(2) There must be a constructive total loss;

(3) The abandonment be neither partial nor conditional;
(4) It must be made within a reasonable time after receipt of reliable information of the loss;
(5) It must be factual;
(6) It must be made by giving notice thereof to the insurer which may be done orally or in writing; and
(7) The notice of abandonment must be explicit and must specify the particular cause of the abandonment.
EFFECTS
(1) An abandonment is equivalent to a transfer by the insured of his interest to the insurer, with all the chances of recovery and
indemnity [Section 148];
(2) If a marine insurer pays for a loss as if it were an actual total loss, he is entitled to whatever may remain of the thing insured, or its
proceeds or salvage, as if there had been a formal abandonment [Section 149];
(3) Upon an abandonment, 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 [Section 150].
AVERAGE
Average is defined as the extraordinary or accidental expense incurred during the voyage for the preservation of the vessel, cargo or
both and all the damages to the vessel and cargo from the time it is loaded and the voyage commenced until it ends and the cargo is
unloaded.
There are two kinds of averages: (1) Gross or general averages; and (2) Simple or particular averages.
Gross averages
include damages and expenses which are deliberately caused by the master of the vessel or upon his authority, in order to save the
vessel, her cargo, or both at the same time from a real and known risk. This must be borne equally by all of the interests concerned in
the venture.
To claim general average contributions, the requisites are:
(1) There must be a common danger to the vessel or cargo;
(2) Part of the vessel or cargo was sacrificed deliberately;
(3) The sacrifice must be for the common safety or for the benefit of all;
(4) It must be made by the master or upon his authority;
(5) It must not be caused by any fault of the party asking contribution;
(6) It must be successful (i.e., resulted in the saving of the vessel and/or cargo)
(7) It must be necessary.
Particular averages
include damages and expenses caused to the vessel or her cargo, which have not inured to the common benefit and profit of all the
persons interested in the vessel and her cargo. A particular average loss is suffered by and borne alone by the owner of the cargo or
of the vessel, as the case must be.
2. FIRE INSURANCE
DEFINITION
➢ Fire insurance includes insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when
such risks are covered by extension to fire insurance policies or under separate policies [Section 169].
➢ A fire insurance is a contract of indemnity by which the insurer, for a stipulated premium, agrees to indemnify the insured
against loss of, or damage to, a property caused by hostile fire.
➢ Fire or other so-called “allied risks” enumerated above must be the proximate cause of the damage or loss.
➢ Fire is oxidation which is so rapid as to produce either a flame or a glow. Spontaneous combustion is usually rapid oxidation.
Fire is always caused by combustion, but combustion does not always cause fire.
➢ The presence of heat, steam, or even smoke is evidence of fire, but taken by itself will not prove the existence of fire.
➢ Fire cannot be considered a natural disaster or calamity since it almost always arises from some acts of man or by human
means. It cannot be an act of God unless caused by lightning or a natural disaster or casualty not attributable to human
agency [Phil. Home Assurance Corp. v. CA (1996)].
RISKS
➢ Hostile fire is one that escapes from the place where it was intended to burn and ought to be, or one which remains
completely within its proper place but because of the unsuitable materials used to light it, it becomes inherently dangerous
and uncontrollable. This kind of fire will make the insurer liable.
➢ Friendly fire is one that burns in a place where it is intended to burn and ought to be like fire burning in a stove or a lamp.
ALTERATIONS IN USE OR CONDITION
➢ An alteration in the use or condition of a thing insured from that to which it is limited by the policy made without the consent of
the insurer, by means within the control of the insured, and increasing the risks, entitles an insurer to rescind a contract of fire
insurance [Section 170].
➢ An alteration in the use or condition of a thing insured from that to which it is limited by the policy, which does not increase the
risk, does not affect a contract of fire insurance [Section 171]. (3) A contract of fire insurance is not affected by any act of the
insured subsequent to the execution of the policy, which does not violate its provisions, even though it increases the risk and is
the cause of the loss [Section 172].
➢ Thus, in order that the insurer may rescind a contract of fire insurance for any alteration made in the use or condition of the thing
insured, the following requisites must be present:
(1) The use or condition of the thing is specifically limited or stipulated in the policy;
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(2) Such use or condition as limited by the policy is altered;

(3) The alteration is made without the consent of the insurer;
(4) The alteration is made by means within the control of the insured; and
(5) The alteration increased the risk.
➢ Every contract of insurance is made with reference to the conditions surrounding the subject matter of the risk. Thus, there is an
implied promise or undertaking on the part of the insured that he will not change the premises or the character of the business
carried there so as to increase the risk of loss by fire.
MEASURE OF INDEMNITY
(1) In an open policy, only the expense necessary to replace the thing lost or injured in the condition it was at the time of the
injury will be paid;
(2) In a valued policy, the parties are bound by the valuation, in the absence of fraud or mistake, similar to marine insurance.
➢ In the absence of express valuation in a fire insurance policy, the insured is only entitled to recover the amount of actual loss
sustained and the burden of proof is upon him to establish the amount of such loss by preponderance of evidence. x Where
the face value of the policy is less than the agreed valuation, then even in case of total loss, the insured can only recover up
to the policy’s face value, which is always the maximum limit of the insurer’s liability [Tan Chuco v. Yorkshire Fire & Life Ins.
Co. (1909)].
➢ In an open policy, the actual loss, as determined, will represent the total indemnity due the insured except only that the total
indemnity shall not exceed the total value of the policy [Devt. Ins. Corp. v. IAC (1986)].
3. CASUALTY INSURANCE
DEFINITION
➢ Casualty insurance is insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which
by law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine. It
includes, but is not limited to, employer’s liability insurance, motor vehicle liability insurance, plate glass insurance, burglary
and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other
substantially similar kinds of insurance [Section 176].
➢ Casualty insurance includes all forms of insurance against loss or liability arising from accident or mishap excluding certain
types of loss or liability which are not within the scope of other types of insurance such as fire, marine, suretyship and life. It
includes, but is not limited to, employer’s liability insurance, workmen’s compensation insurance, public liability insurance,
motor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance
as written by non-life insurance companies, and other substantially similar kinds of insurance (e.g., robbery and theft
insurance).
➢ It is governed by the general provisions applicable to all types of insurance plus stipulations in the insurance contract
INTENTIONAL AND ACCIDENTAL INJURY DISTINGUISHED
➢ “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 relieved from liability as stipulated.
➢ “Accidental” means that which happens by chance or fortuitously, without intention or design, which is unexpected, unusual
and unforeseen. The terms do not, without qualification, exclude events resulting in damage due to fault, recklessness or
negligence of third parties. The concept is not necessarily synonymous with “no fault.” It may be utilized simply to distinguish
intentional or malicious acts from negligent or careless acts of man.
DIVISIONS
Casualty insurance has two general divisions: liability and indemnity insurance.
LIABILITY INSURANCE
➢ Under policies of this type, the insurer assumes the obligation to pay the third party in whose favor the liability of the insured
arises. The liability of the insurer attaches as soon as the liability of the insured to the third party is established. It covers
liability incurred from quasi-delict or criminal negligence but cannot cover deliberate criminal acts.
INDEMNITY INSURANCE
➢ Under this kind of insurance, no action will lie against the insurer unless brought by the insured for loss actually sustained
and paid by him. Liability of the insurer attaches only after the insured has paid his liability to the third party.
NO ACTION CLAUSE
✓ A no action clause is 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 v. Del Monte (1967)].
✓ But, the no-action clause cannot prevail over the Rules of Court provisions which are aimed at avoiding multiplicity of suits. Parties
(the insured and the insurer) may be joined as defendants in a case commenced by the third party claiming under a liability
insurance, as the right to relief in respect to the same transactions is alleged to exist [see Section 5, Rule 2 and Section 6, Rule 3].
4. SURETYSHIP
➢ A contract of suretyship is an agreement whereby a party called the surety guarantees the performance by another party
called the principal or obligor of an obligation or undertaking in favor of a third party called the oblige [Section 175].
➢ It is an agreement whereby a surety guarantees the performance or undertakes to answer, under specified terms and
conditions, for the debt, default or miscarriage of the principal or obligor, such as failure to perform, or breach of trust,
negligence and the like, in favor of a third party. x It shall be deemed as insurance contract if the surety’s main business is
that of suretyship, and not where the contract is merely incidental to any other legitimate business or activity of the surety.
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➢ The contract of a surety is evidenced by a writing called “surety bond” which is essentially a promise to guarantee the
obligation of the obligor. In turn, the obligor executes an “indemnity agreement” in favor of the insurer.
➢ It is an accessory contract unlike a contract of insurance which is the principal contract itself.
➢ The liability of the surety or sureties under a bond is joint and several, or solidary. This means that upon the default of the
principal obligor, the surety becomes primarily liable. Unlike a guarantor, a surety is not entitled to the benefit of exhaustion
of the principal obligor’s assets and assumes a regular party to the undertaking.
➢ It is limited or fixed to the amount of the bond.
➢ What is unique to a contract of suretyship is that when the obligee accepts the bond, the bond becomes valid and enforceable
whether or not the premium has been paid by the obligor unlike in an insurance contract where payment of premium is
necessary for the contract to be valid. If the obligee has not yet accepted, then payment of premium is still necessary for the
contract of suretyship to be valid.
5. LIFE INSURANCE
DEFINITION
➢ Life insurance is insurance on human lives and insurance appertaining thereto or connected therewith.
➢ Every contract or undertaking for the payment of annuities including contracts for the payment of lump sums under a
retirement program where a life insurance company manages or acts as a trustee for such retirement program shall be
considered a life insurance contract for purposes of the Insurance Code [Section 181].
➢ An insurance upon life may be made payable on the death of the person, or on his surviving a specified period, or otherwise
contingently on the continuance or cessation of life.
➢ Every contract or pledge for the payment of endowments or annuities shall be considered a life insurance contract for
purposes of the Insurance Code [Section 182].
TYPES
➢ INDIVIDUAL LIFE
It is an insurance on human lives and insurance appertaining thereto or connected therewith. It may be made payable on the
death of the person, or on his surviving a specified period, or otherwise contingently on the continuation or cessation of life
➢ GROUP LIFE
It is a blanket policy covering a number of individuals who are usually a cohesive group (e.g., employees of a company) and
subjected to a common risk. No medical examination is usually required of each person insured (in contrast to individual life
insurance). Group insurance covers a number of persons in a single contract.
➢ INDUSTRIAL LIFE
Industrial life insurance is that form of life insurance under which the premiums are payable either monthly or oftener, if the
face amount of insurance provided in any policy is not more than 500 times that of the current statutory minimum daily wage
in the City of Manila, and if the words ‘industrial policy” are printed upon the policy as part of the descriptive matter [Section
235].
EXAMPLES OF LIFE INSURANCE POLICIES
1) Ordinary or whole life policy, where the insurer agrees to pay the face value of the policy upon the death of the insured;
2) Limited payment plan, where the insured agrees to pay premiums only for a specified number of years. If he survives such
period, he stops paying any further premium, and when he dies, the insurer pays the proceeds to his beneficiary;
3) Term plan, where the insurer’s liability arises only upon the death of the insured within the agreed term or period. If the
insured survives, the contract terminates and the insurer is not liable;
4) Pure endowment policy, where the insurer pays the insured if the insured survives a specified period. If the insured dies
within the period, the insurer is released from liability and unless the contract otherwise provides, need not reimburse any
part of the premiums paid;
5) Endowment policy, where the insured is paid the face value of the policy if he outlives the designated period. If he dies within
said period, the insurer pays the proceeds to the beneficiary. This is a combination of term policy and pure endowment policy.
RISKS: DEATH OR SURVIVAL
It may be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the
continuation or cessation of life [Campos (1983)].
Death of the insured must be proven by the beneficiary before the insurer can be made to pay.
SUICIDE
Insurer is liable in the following cases:
1. If committed after two years from the date of the policy’s issue or its last reinstatement. Any stipulation extending the 2-year
period is void;
2. If committed in a state of insanity regardless of the date of the commission unless suicide is an excepted peril;
3. If committed after a shorter period provided in the policy.
Since suicide is contrary to the laws of nature and the ordinary rules of conduct, it is never presumed. The burden of proving lies with
the insurer who seeks to avoid liability under a life policy excepting it from coverage [Campos (1983)].
DEATH AT THE HANDS OF THE LAW
Death at the hands of the law (e.g., legal execution) is one of the risks assumed by the insurer under a life insurance policy in the
absence of a valid policy exception [Vance on Insurance (1951)].
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 such event, the other beneficiaries so named shall
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receive their share and divide among them the forfeited share of the “guilty” beneficiary. In the absence of other beneficiaries,
proceeds shall be paid according to the policy contract, and if silent, it shall be paid to the estate of the insured [Section 12)]
✓ Exceptions:
(1) Accidental killing;
(2) Self-defense;
(3) Insanity of the beneficiary at the time he killed the insured;
(4) Negligence.
Note: Conviction of the beneficiary is necessary before his interest in the insurance policy is forfeited in favor of the others indicated
in Section 12.
INCONTESTABILITY CLAUSE
Under the new Civil Code, a contract is voidable if the consent by one party is vitiated by mistake or fraud. The incontestability clause
in the Insurance Code is an exception to this Civil Code provision. The incontestability clause provides that a life-insurance policy shall
be incontestable after two years from the date of issuance, regardless of any mistake, fraud, concealment or misrepresentation. Under
Philippine laws, it may only be contested on the ground of nonpayment of premiums.
➢ One of the strongest protections for a policyholder or beneficiary, this rule is soundly on the side of the consumer
➢ The ultimate aim of the incontestability clause is “to compel insurers to solicit business from or provide insurance coverage
only to legitimate and bona fide clients, by requiring them to thoroughly investigate those they insure within two years from
effectivity of the policy and while the insured is still alive. If they do not, they will be obligated to honor claims on the policies
they issue, regardless of fraud, concealment or misrepresentation.” (Manila Bankers Life Insurance Corp. v.Aban, GR 175666,
July 29, 2013).
➢ The object of an incontestability clause is “to restrict the insurer to a definite time within which to discover any fraud or
misrepresentation made by the insured in the application for insurance and to take appropriate action to cancel the policy.”
In Sun Life of Canada (Philippine) Inc. v. Sibya et al. (GR 211212, June 8, 2016), Jesus Sibya Jr. was issued a life-insurance policy on
February 5, 2001, by Sun Life with Daisy Sibya, Jesus III and Jaime as the beneficiaries. The policy entitled them to a death benefit of
P1,000,000 should Jesus die on or before February 5, 2021, or a sum of money if Jesus is still living on the endowment date. In his
application, Sibya indicated that he had undergone lithotripsy due to kidney stone at the National Kidney Institute and was discharged
after three days with no recurrence. On May 11, 2001, or less than two years later, Jesus died of a gunshot wound. Sun Life denied
the claim and refunded the premiums paid on the ground that certain details about Jesus’s medical history were not disclosed in his
application. Sun Life alleged that Jesus did not disclose in his application his previous medical treatment at the National Kidney
Transplant Institute on May and August 1994, and that the insured was in “renal failure,” making him a high-risk individual.
The Supreme Court held, citing Manila Bankers Life Insurance Corp. v. Aban, that if the insured dies within the two-year contestability
period, the insurer is bound to make good its obligation under the policy regardless of the presence or lack of concealment or
misrepresentation. The Court ruled that “the death of the insured within the two-year period will render the right of the insurer to
rescind the policy nugatory. As such, the incontestability period will now set in.”
It should be noted that, while the Manila Bankers case did state that the insurer must make good on the policy if the insured dies
within the two-year period, such was a mere obiter dictum.
A review of two previous cases (Tan et al. v. Court of Appeal et al.; Sunlife Assurance Co. of Canada v.Bacani) would show that the
incontestability period does not set in if the insured dies during the contestable period.
6. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

➢ Compulsory motor vehicle liability insurance is a policy of insurance or guaranty in cash or surety bond to indemnify the
death, bodily injury, and/or damage to property of a third party or passenger, as the case may be, arising from the use of a
motor vehicle [Section 387].
➢ It is a requisite for registration or renewal of registration of a motor vehicle by every land transportation operator or owner
[Section 390]. It is the only compulsory insurance under the Insurance Code.
➢ It is 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. It applies to all vehicles whether public or private vehicles.
➢ To the extent that motor vehicle insurance is compulsory, it must be a liability policy, and the provision making it merely an
indemnity insurance contract cannot have any effect [Campos (1983)].
➢ The insurer’s liability is direct and primary so the insurer need not wait for final judgment in the criminal case to be liable. Its
purpose is 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 (1988)].
➢ The claimants/victims may be a passenger or a third party. The insured may be the party at fault as against claims of third
parties (third party liability) or the victim of the contingent event.
➢ The following clauses are relevant to compulsory motor vehicle liability insurance:
o Authorized driver clause is a stipulation in a motor vehicle insurance which provides that the driver, other than the
insured owner, must be duly licensed to drive the motor vehicle, otherwise the insurer is excused from liability;
o Theft clause is a stipulation including theft as one of the risks insured against. If there is such a provision and the
vehicle was unlawfully taken, the insurer is liable under the theft clause and the authorized driver clause does not
apply. The insured can recover even if the thief has no driver’s license.
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MICROINSURANCE
➢ Microinsurance is a financial product or service that meets the risk protection needs of the poor, where:
o The amount of contributions, premiums, fees or charges, computed on a daily basis, does not exceed 7.5% of the
current daily minimum wage rate for nonagricultural workers in Metro Manila; and
o The maximum sum of guaranteed benefits is not more than 1,000 times of the said current daily minimum wage rate
[Section 187].
➢ No insurance company or mutual benefit association shall engage in the business of Microinsurance unless it possesses all
the requirements as may be prescribed by the Commissioner, who shall issue such rules and regulations governing
microinsurance [Section 188].
INSURABLE INTEREST
IN GENERAL
➢ In general, an insurable interest is that interest which a person is deemed to have in the subject matter insured, where he
has a relation or connection with or concern in it, such that the person will derive pecuniary benefit or advantage from the
preservation of the subject matter insured and will suffer pecuniary loss or damage from its destruction, termination, or
injury by the happening of the event insured against. The existence of an insurable interest gives a person the legal right to
insure the subject matter of the policy of insurance [Lalican v. Insular Life Ins. (2009)].
➢ An insurable interest is one of the most basic and essential requirements in an insurance contract. As such, it may NOT be
waived by stipulation. Absence of insurable interest renders the insurance contract void.
➢ The insurable interest need not always be pecuniary in nature.
Ratio:
(1) As a deterrence to the insured. A policy issued to a person without interest is a mere wager policy or contract and is void for
illegality. A wager policy is obviously contrary to public interest. There is a moral hazard in removing insurable interest as a
requirement for the validity of an insurance policy in that:
a) It allows the insured to have an interest in the destruction of the subject matter rather than in its preservation. [Myer v.
Grand Lodge]
b) It affords a temptation or an inducement to the insured, having nothing to lose and everything to gain, to bring to pass the
event upon happening of which the insurance becomes payable. [White v. Equitable Nuptial Benefit Union]
(2) As a measure of limit of recovery. The insurable interest is the measure of the upper limit of his provable loss under the contract.
Sound public policy requires that insurance should not provide the insured means of making a net profit from the happening of the
event insured against.
WHEN INSURABLE INTEREST SHOULD EXIST

POLICY INSURABLE INTEREST REQUIRED
Effectivity of insurance Intervening Period Occurrence of Loss
Life or Health ∕
Property ∕ ∕
Insurable interest over life/health may be lost after the insurance takes effect as long as it exists at the time the insurance takes effect.
On the other hand, insurable interest property need not exist during the intervening period or from the time between it the policy
takes effect and the loss occurs. The alienation of insured property will not defeat a recovery if the insured has subsequently
reacquired the property and possesses an insurable interest at the time of loss [Womble v. Dubuque Fire &Marine Ins. Co.].
CHANGE OF INTEREST
Change of interest means the absolute transfer of the property insured.
✓ General rule: A change of interest in the thing insured does not transfer the policy, but suspends the insurance to an equivalent
extent until the interest in the thing and the interest in the insurance policy are vested in the same person. Thus, the contract is
not rendered void but is merely suspended.
✓ Exceptions:
1. Life, health, and accident insurance;
2. A change of interest in the thing insured after the occurrence of an injury which results in a loss does not affect the policy;
3. A change in the interest in one or more of several things, separately insured by one policy, such as a conveyance of one or
more things, does not affect the policy with respect to the others not so conveyed;
4. A change of interest by will or succession on the death of the insured. The death of the insured does not avoid insurance
policy. It does not affect the policy except his interest passes to his heir or legal representative who may continue the
insurance policy on the property by continuing paying premiums;
5. A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others.
This does not avoid the insurance. It will avoid the policy only as to the selling partners or co-owners but not as to others. The
rule applies even though it has been agreed that the insurance cease upon alienation of the thing.
6. Automatic transfers of interest in cases in which the policy is so framed that it will inure to the benefit of whosoever may
become the owner of the interest insured during the circumstance of the risk. It is an exception to the general rule that upon
maturity, the proceeds of a policy shall be given exclusively to the proper interest if the person in whose name or for whose
benefit it is made.
7. An express prohibition against alienation in the policy [Article 1306, Civil Code], in which case alienation will not merely
suspend the contract but avoid it entirely.
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INSURABLE INTERES IN LIFE/HEALTH INSURANCE

✓ Every person has an insurable interest in the life and health:
o Of himself, of his spouse and of his children;
o Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; (3) Of any
person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness
might delay or prevent the performance; and
o Of any person upon whose life any estate or interest vested in him depends [Section 10].
✓ Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of indemnity under a policy
of insurance upon life or health is the sum fixed in the policy.
✓ Life insurance policies may be divided into two general classes: (1) Insurance upon one’s life; (2) Insurance upon life of another.
INSURABLE INTEREST IN LIFE INSURANCE

INTEREST IN ONE’S OWN LIFE
✓ Cestui que vie is the insured himself.
✓ The insured can designate anyone to be the beneficiary of the policy.
✓ Each has unlimited interest in his own life, whether the insurance is for the benefit of himself or another.
✓ The beneficiary designated need not have any interest in the life of the insured when person takes out policy on his own life. But
if a person obtains a policy on the life of another and names himself as the beneficiary, he must have insurable interest therein.
INTEREST IN LIFE OF ANOTHER
✓ In life insurance, unless based on commercial relationship, the policy owner does not necessarily have “pecuniary interest” on the
life of the cestui que vie. Mere relationship is a sufficient interest to be insured.
✓ The insurable interest must be based on moral and legal grounds. Such interest exists whenever the insured has a responsible
expectation of deriving benefit from the continuation of the life of the other person or of suffering detriment through its
termination. There is no insurable interest in the life of an illegitimate spouse.
✓ A creditor may take out insurance on the life of his debtor but his insurable interest is only up to the amount of the debt.
✓ An assignee of the insurance contract is not required to have insurable interest in the life of the insured, for to require such
interest in him is to diminish the investment value of the contract to the owner. Note, however, that assignment is different from
a change in the designated beneficiary.
✓ When the beneficiary is the principal, accomplice or accessory in willfully bringing about the death of the insured, interest of
beneficiary in life insurance policy is forfeited.
BENEFICIARY
✓ A beneficiary is the person who is named or designated in a contract of life, health, or accident insurance as the one who is to
receive the proceeds or benefits which become payable, according to the terms of the contract, if the insured risk occurs.
✓ General rule: A person may designate a beneficiary, irrespective of the beneficiary’s lack of insurable interest, provided he acts in
good faith and without intent to make the transaction merely a cover for a forbidden wagering contract [De Leon (2010)].
✓ Exceptions:
Any person who is forbidden from receiving any donation under Article 739, Civil Code cannot be named beneficiary of a life
insurance policy by the person who cannot make any donation to him [Article 2012, Civil Code]. Article 739 provides that the
following donations are void:
(1) Those made between persons who were guilty of adultery or concubinage at the time of the donation;
(2) Those made between persons found guilty of the same criminal offense, in consideration thereof;
(3) Those made to a public officer or his wife, descendants and ascendants, by reason of his office.
✓ The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in
said policy.
✓ In general, the policy owner can change the beneficiary without the consent of such beneficiary. However, when this right to
change is expressly waived, the consent of the beneficiary is necessary. This means that despite the waiver, he can still change
the beneficiary provided he obtained the beneficiary’s consent.
INSURABLE INTEREST IN HEALTH INSURANCE

✓ General rule: Interest in the life or health of a person must exist when the insurance takes effect (at inception), but need not exist
thereafter or when the loss occurs.
✓ Exceptions:
(1) In the case of a creditor’s insurance taken on the life of the debtor, insurable interest disappears once the debt has been paid.
At this point, the creditor/insured can no longer recover on the policy;
(2) In the case of a company’s insurance taken on the life of an employee, insurable interest disappears once the employee leaves
the company, in which case, the company can no longer recover on the policy.
TRANSFER OF POLICY
✓ Interest can be transferred even without the notice to the insurer of such transfer or bequest, unless there is a stipulation to the
contrary.
✓ There is no right of subrogation in life insurance, because it is not a contract of indemnity.
INSURABLE INTEREST IN PROPERTY INSURANCE

✓ An insurable interest in property may consist in:
(1) An existing interest;
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(2) An inchoate interest founded on an existing interest; or

(3) An expectancy, coupled with an existing interest in that out of which the expectancy arises [Section 14].
✓ The insurable interest may be in the property itself (e.g., ownership), or any relation thereto (e.g., interest of a trustee or a
commission agent), or liability in respect thereof (e.g., interest of a carrier or depository of goods). The relation of the insured to
the property is such that he will be benefited by its continued existence or will suffer a direct pecuniary loss by its destruction.
✓ An existing interest may be a legal title or equitable title. Examples of those having existing interest are owners as regards their
properties, trustees in the case of the seller of property not yet delivered, mortgagors over the property mortgaged, and lessor,
lessee and sub-lessee over the property leased.
✓ An inchoate interest must be founded on existing interests. It exists but is incomplete or unripe until the happening of an event.
Examples of inchoate interests are the interest of stockholders with respect to dividends in case of profits and shares in the assets,
and the interest of a partner in the properties belonging to the partnership.
✓ An expectancy must be coupled with an existing interest out of which the expectancy arises. For example, a farmer who planted
crops has insurable interest over his harvest which can be expected.
✓ A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for
it, is not insurable.
✓ A mere hope or expectation of benefit which may be frustrated by the happening of some event uncoupled with any present legal
right will not support a contract of insurance. A son has no insurable interest over the property of his father because such is just
a mere expectancy and has no legal basis before he inherits such property.
✓ Insurable interest in property may be based on a perfected contract of sale, vesting an equitable title even before delivery of the
goods [Filipino Merchants Ins. Co. v. CA (1989)].
✓ When the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss is borne by the buyer. Insurable
interest in property does not imply a property interest in, or a lien upon, or possession of the subject matter of the insurance, and
neither ownership nor a beneficial interest is requisite to the existence of such an interest. Anyone has an insurable interest in
property who derives a benefit from its existence or would suffer loss from its destruction [Gaisano Cagayan Ins. v. Ins. Co. of
North America, (2006)].
TIME OF EXISTENCE
✓ General rule: Interest in property insured must exist both at inception and at time of loss, but not in the intervening period.
✓ Exceptions:
(1) A change in interest over the thing insured after the loss contemplated. The insured may sell the remains without prejudice to
his right to recover;
(2) A change of interest in one or more several distinct things, separately insured by one policy. This does not avoid the insurance
as to the others;
(3) A change in interest by will or succession upon the death of the insured;
(4) A transfer of interest by one of several partners, joint owners, or owners in common who are jointly insured. The acquiring co-
owner has the same interest; his interest merely increases upon acquiring other co-owner’s interest.
TRANSFER OF POLICY
✓ Interest cannot be transferred without the insurer’s consent, because the insurer has approved the policy based on the personal
qualifications and insurable interest of the insured.
✓ When there is an express prohibition against alienation in the policy, and there is alienation, the contract of insurance is not
merely suspended but avoided.
MEASURE OF INDEMNITY
✓ Being a contract of indemnity, the measure of insurable interest in property is the extent to which the insured might be damnified
by the loss of injury thereof. The insured cannot recover a greater value than that of his actual loss because it would be a wagering
policy contrary to public policy and void.
✓ Thus, a mortgagor has an insurable interest equal to the value of the mortgaged property and a mortgagee, only to the extent of
the credit secured by the mortgage.
INTEREST IN PROPERTY AND LIFE DISTINGUISHED

PROPERTY LIFE
EXTENT
Limited to actual value of the interest thereon Unlimited (save in life insurance effected by a creditor on the life
of the debtor – amount of debt only)
EXISTENCE
Must exist when the insurance takes effect and when the loss Must exist at the time the insurance takes effect, BUT need not
occurs, BUT need not exist in the meantime exist thereafter
EXPECTATION OF BENEFIT TO BE DERIVED
Must have legal basis Need not have legal basis
INTEREST OF BENEFICIARY
Must have insurable interest over the thing insured Need not have insurable interest over the life of the insured if
the insured himself secured the policy. But if the insurance was
obtained by the beneficiary, the latter must have insurable
interest over the life of the insured. (Sundiang and Aquino)
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DOUBLE AND OVER INSURANCE; REINSURANCE

DOUBLE INSURANCE
✓ Double insurance exists where the same person is insured by several insurers separately in respect to the same subject and
interest [Section 95].
✓ Requisites:
(1) The same person is insured;
(2) Two or more insurers insuring separately;
(3) The same subject matter;
(4) The same interest insured; and
(5) The same risk or peril insured against
✓ Double insurance is not prohibited under the law, unless the policy contains a stipulation to the contrary. Usually, insurance policy
contains “other insurance clause” which requires disclosure of other existing insurance policy. In such case, non-disclosure will
avoid the policy. Such clause is intended to prevent over insurance and thus avert the perpetration of fraud.
✓ If over-insured, then the insurers will pay pro-rata (or whatever is stated in contract) in case of loss.
✓ Nonetheless, under Section 64(f), an insurer may cancel an insurance policy, other than life, based on a “discovery of other
insurance coverage that makes the total insurance in excess of the value of the property insured” subject to the requirement of
prior notice. x Also, under Section 83, “[i]n case of an over insurance by several insurers other than life, the insured is entitled to
a ratable return of the premium, proportioned to the amount by which the aggregate sum insured in all the policies exceeds the
insurable value of the thing at risk.”
RULES FOR PAYMENT

✓ Section 96 enunciates the principle of contribution which requires each insurer to contribute RATABLY to the loss or damage
considering that the several insurances cover the same subject matter and interest against the same peril. If the loss is greater
than the sum total of all the policies issued, each insurer is liable for the amount of his policy.
DOUBLE AND OVER INSURANCE DISTINGUISHED

DOUBLE INSURANCE OVER INSURANCE
Amount of insurance may or may not exceed the value of the Amount of insurance exceeds the value of the insured’s
insured’s insurable interest insurable interest
There are always several insurers There may be one or more insurers
REINSURANCE
✓ A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of
such original insurance [Section 97].
✓ Reinsurance is a contract of indemnity. It has been referred to as “an insurance of an insurance.” There is no relationship between
the reinsurer of the reinsurance contract and the insured under the original insurance contract.
ORIGINAL INSURANCE CONTRACT AND REINSURANCE CONTRACT DISTINGUISHED
✓ The original insurance contract is separate and distinct from the reinsurance contract. Insurance contract is independent from the
reinsurance contract. Insurance contract covers indemnity against damages. Reinsurance covers indemnity against liability.
REINSURANCE TREATY AND POLICY DISTINGUISHED
✓ A reinsurance treaty is 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 [De Leon (2010)].
✓ A reinsurance policy is a contract of indemnity one insurer makes with another to protect the first insurer from a risk it has already
assumed.
✓ Reinsurance treaties and reinsurance policies are not synonymous. Treaties are contracts for insurance; policies are contracts of
insurance [Philamlife v. Auditor General (1958)].
DOUBLE INSURANCE AND REINSURANCE DISTINGUISHED

DOUBLE INSURANCE REINSURANCE
Same interest Different interest
Insurer remains as the insurer Insurer becomes the insured in relation to the reinsurer
Insured is a party in interest in the insurance contracts The original insured is not a party in the reinsurance contract
Property is the subject matter The original insurer's risk is the subject matter
Insured has to give his consent Insured’s consent is not necessary
MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY

✓ The Insurance Code recognizes that both the mortgagor and mortgagee have each separate and distinct insurable interest in the
mortgaged property and that they may take out separate policies with the same or different insurance companies. Consequently,
insurance taken by one on his own name only does not inure to the benefit of the other.
✓ The mortgagor may insure the mortgaged property in its full value but the mortgagee can insure it only in the extent of the debt
secured.
✓ When a mortgagee insures his own interest in the mortgaged property without reference to the right of the mortgagor, mortgagee
is entitled to the proceeds of the policy in case of loss to the extent of his credit.
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(1) If the proceeds are more than the total amount of credit, then mortgagor has no right to the balance. If the proceeds are equal
to the credit, then insurer is subrogated to the mortgagee’s rights and mortgagee can no longer recover the mortgagor’s
indebtedness.
(2) If the proceeds are less than the credit, then the mortgagee may recover from the mortgagor the deficiency. Upon payment,
the insurer is subrogated to the rights of the mortgagee against the mortgagor to the extent of the amount paid.
✓ When a mortgagor takes out an insurance for his own benefit, he can only recover from the insurer but the mortgagee has a lien
on the proceeds by virtue of the mortgage. A mortgagor can make the proceeds payable to or assigned to the mortgagee.
OPEN LOSS PAYABLE MORTGAGE CLAUSE

✓ An open loss payable clause simply states that the proceeds of the insurance contract is payable to the mortgagee as beneficiary.
✓ The contract, however, is procured by the mortgagor for his interest in the property. He is the party to the contract, not the
mortgagee. The acts 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 said mortgagee.
UNION MORTGAGE OR STANDARD MORTGAGE CLAUSE

✓ This clause is similar to an open loss payable clause, except that it is stipulated that the acts of the mortgagor cannot invalidate
the insurance, provided that if the mortgagor fails to pay the premiums due, the mortgagee shall, on demand, pay said premiums.
x When a mortgagee insured his own interest and a loss occurs, he is entitled to recover on the insurance. However, he may no
longer claim against the mortgagor, for his claim is discharged up to the amount the insurer has paid him [Palileo v. Cosio (1955)].
PERFECTION OF THE INSURANCE CONTRACT

OFFER AND ACCEPTANCE/ CONSENSUAL
✓ An insurance contract is consensual. It is therefore perfected by mere consent. Consent is manifested by the meeting of the offer
and the acceptance upon the object or the cause which are to constitute the contract.
✓ There is an offer when the insured submits an application to the insurer. There is acceptance when the insurer approves the
application. The insurance contract becomes effective upon payment of first premium, provided there has been an approval of
the application.
✓ A contract of insurance must be assented to by both parties, either in person or through their agents and so long as an application
for insurance has not been either accepted or rejected, it is merely a proposal or an offer to make a contract [Perez v. CA (2000)].
✓ Also, according to Enriquez v. Sun Life Assurance Co. (1920):
(1) Submission of application, even with premium payment is a mere offer on the part of the applicant, and does not bind the
insurer; (2) An insurance contract is also not perfected where the applicant dies before the approval of his application or it does
not appear that the acceptance of the application ever came to the knowledge of the applicant;
(3) An acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge.
✓ The parties may impose additional conditions precedent to the validity of the policy as a contract as they see fit. Usually, it is
stipulated in the application that contract shall not become binding until the policy is delivered and the first premium is paid [De
Leon (2010)].
DELAY IN ACCEPTANCE
✓ Delay in acting on the application does not constitute acceptance even though the insured has forwarded his first premium with
his application [Perez v. CA (2000)].
✓ When there is delay in acceptance due to the negligence of the insurance company which takes unreasonably long time before
the application is processed and the applicant dies, the contract is not perfected. In this case, the insurer can be liable for damages
in accordance with the “tort theory.” The insurance business is imbued with public interest; thus, it is the duty of the insurer to
act with reasonable promptness in acting on applications submitted to it.
✓ The measure of damage is the face value of the policy. In life insurance, the proceeds will inure to the insured’s estate and not to
the beneficiary.
✓ The insurer is liable under the policy because its delay in formally accepting/denying the application and payment of premium is
taken as an implied acceptance.
DELIVERY OF POLICY
✓ Delivery is the act of putting the insurance policy (the physical document) into the possession of the insured. The delivery can be
a proof of the acceptance of the insurer of the offer of the insured. It is not, however, a prerequisite of a valid contract of
insurance. Actual manual delivery is not necessary for the validity of the contract. Constructive delivery may be sufficient. The
contract may be completed without delivery depending on the intention of the parties.
✓ Actual delivery to the insured is not essential to give the policy binding effect as long as the insured has complied with every
condition required of him [New York Life Ins. Co. v. Babcock (1898)].
✓ There are conflicting views as to whether delivery to the agent of the insurance company can be considered delivery to the
insured.
✓ In Bradley v. New York Life Ins. (1921), the agent of the insurance company is not the agent of the insured. Thus, delivery to the
agent cannot be considered delivery to the insured.
PREMIUM PAYMENT
✓ An insurance premium is the agreed price for assuming and carrying the risk, that is, the consideration paid an insurer for
undertaking to indemnify the insured against the specified peril.
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✓ General rule: No insurance policy issued or renewal is valid and binding until actual payment of the premium [Section 77]. Any
agreement to the contrary is void.
✓ Exceptions:
1. In case of life and industrial life whenever the grace period provision applies (Section 77);
2. Where there is an acknowledgment in the contract or policy of insurance that the premium has already been paid;
3. Where there is an agreement to grant the insured credit extension for the payment of the premium despite full
awareness of grace period provided by law [UCPB v. Masagana Telemart (2001)];
4. Where there is an agreement allowing the insured to pay premium in installment and partial payment has been made at
the time of the loss [Makati Tuscany v. CA (1992)];
5. Where the parties are barred by estoppel [UCPB v. Masagana Telemart (2001)].
AUTHORITY OF AGENT TO RECEIVE PREMIUM

✓ Where an insurer authorizes an insurance agent or broker to deliver a policy to the insured, it is deemed to have authorized said
agent to receive the premium in its behalf.
✓ The insurer is bound by its agent’s acknowledgement of receipt of payment of premium [American Home Assurance Co. v. Chua
(1999)].
PAYMENT BY POST-DATED CHECK

✓ The payment of premium by a postdated check at a stated maturity subsequent to the loss is insufficient to put the insurance into
effect. But, payment by a check bearing a date prior to the loss, assuming availability of funds, would be sufficient, even if it
remains unencashed at the time of the loss. The subsequent effects of encashment would retroact to the date of the instrument
and its acceptance by the creditor [Vitug, Commercial Laws and Jurisprudence (2006)].
NON-PAYMENT OF PREMIUM
1. Non-payment of first premium, unless waived, prevents the contract from becoming binding notwithstanding the acceptance of
the application nor the issuance of the policy.
2. Non-payment of subsequent premiums does not affect the validity of the contracts unless, by express stipulation, it is provided
that the policy shall in that event be suspended or shall lapse. In case of individual life insurance, the policy holder is entitled a
grace period of either 30 days or one month within which payment of any premium after the first may be made. In cases of
industrial life insurance, the grace period is four weeks, and where premiums are paid monthly, either 30 days or one month.
EXCUSES FOR NON-PAYMENT
1. Fortuitous events which render payment by the insured wholly impossible will not prevent forfeiture of the policy when the
premium remains unpaid. In other words, it is not an excuse.
2. Non-payment of premiums occasioned by war causes an insurance to be not merely suspended, but is completely abrogated. It
would be unjust to allow the insurer to retain the reserve value of the policy, which is the excess of the premiums paid over the
actual risk carried during the years when the policy had been in force in time of war [Constantino v. Asia Life Ins. Co. (1950)].
NON-DEFAULT OPTIONS IN LIFE INSURANCE

The law requires that in case of life or endowment insurance, the policy shall contain a provision specifying the options to which the
policy holder is entitled in the event of default in a premium payment after three full annual premiums shall have been paid [Sec
227(f)].
CASH SURRENDER VALUE (CSV)

✓ It is the amount that the insured is entitled to receive if he surrenders the policy and releases his claims upon it. The right to CSV
accrues only after three full annual premium payments. The Insured is given the right to claim the amount less than the reserve,
reduced by surrender charge.
✓ The cash value or cash surrender value is an amount which the insurance company holds in trust for the insured to be delivered
to him upon demand. When the company’s credit for advances is paid out of the cash value or cash surrender value, that value
and the company’s liability is diminished [Manufacturer’s Life Ins. v. Meer (1951)].
✓ Ratio: The premium is uniform throughout a lifetime, but the risk is varied (i.e., higher risk when older, lower when young). Thus,
the cost of protection is more expensive during the early years of the policy.
ALTERNATIVE TO CSV
1. Extended insurance/term insurance, where the insured, after having paid three full annual premiums, is given the right to have
the policy continued in force from date of default for a time either stated or equal to the amount of the CSV, taken as a single
premium. The face value of the policy remains the same but only within the term. It is also called “term insurance” where CSV is
taken as a single premium (no further payments) to extend the policy for a fixed period of time. Reinstatement is allowed if made
within the term purchased; no reinstatement after the lapse of the term purchased
2. Paid-up insurance, where, after the insurance is “paid-up,” the insured who has paid three full annual premiums is given the right,
upon default, to have the policy continued from the date of default for the whole period of insurance without further payment
of premiums. It is also called “reduced paid-up” because in effect the policy, terms and conditions are the same but the face value
is reduced to the “paid-up” value.
3. Automatic premium loan (APL), where, upon default, the insurer lends/advances to the insured without any need of application
on his part, amount necessary to pay overdue premium, but not to exceed the CSV of the policy. It only applies if requested in
writing by the insured either in the application or at any time before expiration of the grace period. In effect, the insurance policy
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continues in force for a period covered by the payment. After the period, if insured still does not resume paying his premiums,
policy lapses, unless CSV still remains. If there is still CSV, APL continues until CSV is exhausted. This is beneficial for the insured
because it continues the contract and all its features with full force and effect.
REINSTATEMENT OF A LAPSED LIFE INSURANCE POLICY

Reinstatement of a lapsed life insurance policy is not a non-default option. It does not create a new contract, but merely revives the
original policy so insurer cannot require a higher premium than the amount stipulated in the contract.
It does not apply to group/industrial life insurance.
Requisites:
1. It must be exercised within three years from date of default;
2. The insured must present evidence of insurability satisfactory to the insurer;
3. He must pay all back premiums and all indebtedness to the insurer
4. The CSV must not have been duly paid to the insured nor the extension period expired;
5. The application must be filed during the insured’s lifetime [Andres v. Crown Life Ins. (1958)].
REFUND OF PREMIUMS
Return of premiums can be made in the following cases:
1. If the thing insured was never exposed to the risks insured against, the whole premium should be refunded;
2. When the contract is voidable due to the fraud or misrepresentation of insurer or his agent, the whole premium should be
refunded;
3. When by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy, the whole
premium should be refunded;
4. When the contract is voidable because of the existence of facts of which the insured was ignorant without his fault, the whole
premium should be refunded;
5. Where the insurance is for a definite period and the insured surrenders his policy, the portion of the premium that corresponds
to the unexpired time at a pro rata rate, unless a short period rate has been agreed upon and appears on the face of the policy
should be return;
6. When there is over-insurance by several insurers, the return premiums should be proportioned to the amount by which the
aggregate sum insured in all the policies exceeds the insurable value of the thing at risk;
7. When rescission is granted due to the insurer’s breach of contract.
RESCISSION OF INSURANCE CONTRACTS

CONCEALMENT
✓ A neglect to communicate that which a party knows and ought to communicate, is called a concealment [Section 26].
✓ A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance [Section 27].
✓ Requisites:
1. A party knows a fact which he neglects to communicate or disclose to the other;
2. Such party concealing is duty bound to disclose such fact to the other;
3. Such party concealing makes no warranty of the fact concealed;
4. The other party has not the means of ascertaining the fact concealed;
5. The fact concealed is material.
✓ Concealment may be committed by either the insurer or the insured [Qua Chee Gan v. Law Union & Rock Ins. Co. (1955); Fieldmen’s
Ins. Co. v. Vda. de Songco (1968)].
PROOF OF FRAUD IN CONCEALMENT
✓ General rule: Fraud need not be proven in order to prove concealment. Good faith is not a defense.
✓ Exception: When the concealment is made by the insured in relation to the falsity of a warranty, the non-disclosure must be
intentional and fraudulent in order that the contract may be rescinded.
TEST OF MATERIALITY
✓ Materiality is determined not by the event, but solely by the probable and reasonable influence of the fact upon the party to
whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries
[Section 31].
✓ The test is in the effect which the knowledge of the fact in question would have on the contract. It need not increase the risk or
contribute to any loss or damage suffered. It is sufficient if the knowledge of it would influence the party in making the contract
(De Leon (2010)).
EFFECTS
✓ General rule: Concealment vitiates the contract and entitles the insurer to rescind, even if the death or loss is due to a cause not
related to the concealed matter.
✓ Exceptions:
1. Incontestability clause, which clause stipulates that the policy shall be incontestable after a stated period. The incontestability
clause is a mandatory provision in life policies. The policy must be payable on the death of the insured and has been in force
during the lifetime of the insured for at least two years from its date of issue or of its last reinstatement;
2. Concealment after the contract has become effective, because concealment must take place at the time the contract is
entered into in order that the policy may be avoided. Information obtained after the perfection of the contract is no longer
necessary to be disclosed by the insured, even if the policy has not been issued.
3. Waiver or estoppel;
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4. Marine insurance, where concealment of the following matters does not vitiate the entire contract, but merely exonerates
the insurer from a loss resulting from the risk concealed:
a. The national character of the insured;
b. The liability of the thing insured to capture and detention;
c. The liability to seizure from breach of foreign laws of trade;
d. The want of necessary documents; and
e. The use of false and simulated papers [Section 112].
CONCEALMENT IN MARINE AND ORDINARY PRIVATE INSURANCE DISTINGUISHED

MARINE INSURANCE ORDINARY INSURANCE
REQUIRED DISCLOSURE
Exact and whole truth Substantial truth
EFFECT OF CONCEALMENT
Concealment of the matters specified in Section 112 will not Any kind of concealment will make the insurer not liable
entirely avoid the contract but will merely exonerate the insurer
from losses resulting from the risk concealed
CONCEALMENT IN NON-MEDICAL INSURANCE

✓ The waiver of medical examination in a nonmedical insurance contract renders even more material the information required of
the applicant concerning the previous conditions of health and diseases suffered. The fact that the matter concealed had no
bearing on the cause of death is not important because it is well settled that the insured need not die of the disease he had failed
to disclose to the insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimates of the risks of the
proposed policy or in making inquiries [Sunlife v. Sps. Bacani (1995)].
✓ Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid the
policy even though they are untrue. Reason: The insurer cannot simply rely on those statements. He must make further inquiry
[Philamcare Health Systems v. CA (2002)].
MATTERS WHICH MUST BE DISCLOSED EVEN IN THE ABSENCE OF INQUIRY

✓ Each party to a contract of insurance must communicate to the other, in good faith, all facts within his knowledge which are
material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining [Sec 28].
✓ Note: If the applicant is aware of the existence of some circumstance which he knows would influence the insurer in acting upon
his application, good faith requires him to disclose that circumstance, though unasked [Vance (1951)].
✓ The fact of being a “mongoloid” is a material fact that needs to be disclosed [Great Pacific Life v. CA (1979)].
✓ Mere possibility of previous hypertension is not enough to establish concealment [Great Pacific Life (1999)].
MATTERS WHICH NEED NOT BE DISCLOSED
1. Matters already known to the insurer [Section 30(a));
2. Matters which each party are bound to know [Section 30(b) and Section 32];
3. Matters of which the insurer waives communication [Section 30(c) and Section 33];
4. Matters which prove or tend to prove the existence of a risk excluded by a warranty and which are not otherwise material [Section
30(d)];
5. Matters which relate to a risk excepted in the policy, and which are not otherwise material [Section 30(e)];
6. Information of the nature or amount of the interest of one insured unless if inquired upon by the insurer, except if required by
Section 51 [Section 34]
7. Matters of opinion [Section 35].
✓ Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of
the other, and which may affect the political or material perils contemplated; and all general usages of trade [Section 32].
MISREPRESENTATION / OMISSIONS
✓ A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations [Section 44]
✓ If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the
contract from the time when the representation becomes false [Section 45].
✓ There is false representation if the matter is true at the time it was made/represented but false at the time the contract takes
effect [Section 44]. Corollarily, there is no false representation if the matter is true at the time the contract takes effect although
false at the time it was made/represented.
✓ A representation must be presumed to refer to the date on which the contract goes into effect [Section 42]. Thus, a representation
may be altered or withdrawn before the insurance is effected but not afterwards [Section 41].
✓ Representations are factual statements made by the insured at the time of, or prior to, the issuance of the policy, which give
information to the insurer and induce him to enter into the insurance contract.
KINDS OF REPRESENTATIONS
1. Affirmative, which refers to any allegation as to the existence or non-existence of a fact when the contract begins.
2. Promissory, which is any promise to be fulfilled after the contract has come into existence; or any statement concerning what is
to happen during the existence of the insurance [Section 39]. A promissory representation is substantially a condition or warranty
[De Leon (2010)].
3. Oral or written [Section 36].
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Requisites:
1. The insured stated a fact which is untrue;
2. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without
knowing it to be true and which has a tendency to mislead;
3. Such fact in either case is material to the risk.
✓ Like in concealment, fraud or intent is not essential to entitle the insurer to rescind on the ground of misrepresentation [Sec 45].
TEST OF MATERIALITY
The materiality of a representation is determined by the same rules as the materiality of a concealment [Section 46].
EFFECTS
✓ General rule: The injured party is entitled to rescind from the time when the representation becomes false [Section 45].
✓ Exceptions:
1. Incontestability clause;
2. Misrepresentation after contract takes effect;
3. Waiver, made by acceptance of insurer of premium payments despite knowledge of the ground for rescission [Section 45];
4. A representation of the expectation, belief, opinion, or judgment of the insured, although false, and even if material to the risk
[Philamcare Health Systems, Inc. v. CA (2002)];
5. Representation by insured based on information obtained from third persons (not his agent), provided the insured:
(a) Has no personal knowledge of the facts;
(b) Believes them to be true; and
(c) Explains to the insurer that he does so on the information of others.
✓ A representation cannot qualify an express provision or an express warranty of insurance [Section 40] because a representation
is not part of the contract but only a collateral inducement to it. However, it may qualify as an implied warranty.
✓ There is fraud and misrepresentation when another person takes the place of the insured in the medical examination [Eguaras v.
Great Eastern (1916)].
✓ The insurer is not entitled to rescission for misrepresentation of age if the birth date on the policy leads to the conclusion that the
insured is beyond the age covered and yet insurer continued to accept payment and had issued the policy. Insurer is deemed
estopped [Edillon v. Manila Bankers Life (1982)].
MARINE INSURANCE ORDINARY INSURANCE

WHO MAY COMMIT
May be committed by either insured or insurer Committed only by insured.
ACT INVOLVED
Passive form Active form
Insured withholds information of material facts from the insurer; Insured makes erroneous statements of facts with the intent of
he maintains silence when he ought to speak inducing the insurer to enter into the insurance contract
MATERIALITY
Determined by the same rules
EFFECT
Same effects on the part of the insured; insurer has right to rescind;
Injured party is entitled to rescind a contract of insurance on ground of concealment or false representation, whether intentional
or not.
BREACH OF WARRANTIES
✓ Warranty is a statement or promise by the insured set forth in the policy itself or incorporated in it by proper reference, the
untruth or nonfulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such
untruth or non-fulfilment, renders the policy voidable by the insurer [Vance (1951)].
✓ A warranty may also be made by the insurer.
✓ A warranty may relate to the past, the present, the future, or to all of these [Section 68].
✓ No particular form of words is necessary to create a warranty [Section 69].
KINDS OF WARRANTIES
1. Express warranty, which is an agreement contained in the policy or clearly incorporated therein as part thereof;
2. Implied warranty, which is deemed included in the contract although not expressly mentioned (e.g., implied warranty of
seaworthiness of the vessel in marine insurance and implied warranty not to alter the circumstances of the thing insured);
3. Affirmative warranty, which asserts the existence of a fact or condition at the time it is made;
4. Promissory warranty or executory warranty, which is one where the insured stipulates that certain facts or conditions pertaining
to the risk shall exist or that certain things with reference thereto shall be done or omitted. It is in the nature of a condition
subsequent [Sections 72 and 73].
EFFECT MATERIAL WARRANTY
✓ General rule: Violation of a material warranty, or other material provision of the policy, on the part of either the insured or insurer,
entitles the other to rescind [Section 74].
✓ Breach of a material warranty may either be:
1. Without fraud, in which case, the insurer will be exonerated from the time it occurs. If made during the inception, it will
prevent the policy from taking effect [Section 76].
2. With fraud, in which case, the policy is avoided ab initio.
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✓ Exceptions:
1. Loss occurs before the time of performance of the warranty [Section 73];
2. The performance becomes unlawful [Section 73];
3. The performance becomes impossible [Section 73];
4. Waiver or estoppel.
IMMATERIAL WARRANTY
✓ General rule: Breach of an immaterial provision does not avoid the policy [Section 75].
✓ Exception: Breach of an immaterial provision avoids the policy when the parties stipulate that violation of a particular provision,
though immaterial, shall avoid the policy. In effect, the parties converted the immaterial provision into a material one [Sundiang
and Aquino (2013)].
✓ A condition in the policy which requires insured to disclose to the insurer of any insurance that, if violated by the insured, would
ipso facto avoid the contract [Pioneer v. Yap (1974)].
✓ Insurer is barred by waiver (or estoppel) to claim violation of the so-called hydrants warranty when, despite knowing fully that
only 2 fire hydrants existed (out of the 11 hydrants required), it still issued the insurance policies and received the premiums [Qua
Chee Gan v. Law Union (1955)].
WARRANTY REPRESENTATION
NATURE
Part of the contract Mere collateral inducement
FORM
Written on the policy, actually or by reference May be written in the policy or may be oral
MATERIALITY
Presumed material Must be proved to be material
COMPLIANCE
Must be strictly complied with Requires only substantial truth and compliance
APPLICABILITY OF INCONTESTABILITY CLAUSE
Does not apply Applies
CLAIMS SETTLEMENT AND SUBROGATION

CONCEPT OF LOSS
Loss in insurance law embraces injury or damage [Bonifacio Bros. v. Mora (1967)].
Requisites: Recovery upon a loss requires that:
1. The insured must have insurable interest in the subject matter;
2. The interest is covered by the policy;
3. There be a loss; and
4. The loss must be one for which the insurer is liable;
5. Notice and proof of loss must be given if policy is fire insurance or when the same is stipulated in the policy.
CAUSES OF LOSS
1. Remote cause is an event preceding another in a causal chain, but separated from it by other events;
2. Proximate cause is “that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces
the injury, and without which the result would not have occurred” [Vda. De Bataclan v. Medina (1957)].
3. Immediate cause is the cause, not the proximate cause, which immediately precedes the loss.
LIABILITY FOR LOSS FOR WHICH THE INSURER IS LIABLE
✓ Loss the proximate cause of which is the peril insured against [Section 86]
✓ Loss the immediate cause of which is the peril insured against except where the proximate cause is an excepted peril
✓ Loss through negligence of insured except where there was gross negligence amounting to willful acts
✓ Loss caused by efforts to rescue the thing from peril insured against if, during the course of the rescue, the thing is exposed to a
peril not insured against, which permanently deprives the insured of its possession in whole or in part [Section 87]
NOTICE AND PROOF OF LOSS

NOTICE OF LOSS
✓ This refers to the formal notice given the insurer by the insured or claimant under a policy of the occurrence of the loss insured
against.
PURPOSE
✓ Its purpose is to apprise the insurance company so that it may make proper investigation and take such action as may be necessary
to protect its interest.
✓ In fire insurance, an insurer is exonerated, if notice thereof be not given to him by an insured, or some person entitled to the
benefit of the insurance, without unnecessary delay [Section 90].
✓ In other types of insurance, failure to give notice will not exonerate the insurer, unless there is a stipulation in the policy requiring
the insured to do so.
✓ However, it has been held that formal notice of loss is not necessary if insurer has actual notice of loss.
FORM
✓ In the absence of any stipulation in the policy, notice may be given orally or in writing.
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✓ The notice of loss may be in the form of an informal or provisional claim containing a minimum of information as distinguished
from a formal claim which contains the full details of the loss, computations of the amounts claimed, and supporting evidence,
together with a demand or request for payment [De Leon (2010)].
PROOF OF LOSS
✓ It is the formal evidence given to the insurance company by the insured or claimant, under a policy, of: the occurrence of the loss,
the particulars thereof, and the data necessary to enable the company to determine its liability and the amount.
PURPOSE
✓ Its purpose is to give the insurer information by which he may determine the extent of his liability but also; to afford him a means
of detecting any fraud that may have been practiced upon him, and to operate as a check upon extravagant claims.
✓ Like a notice of loss, in the absence of any stipulation in the policy, proof may be given orally or in writing.
✓ The insured is not bound to give such proof as would be necessary in a court of justice; but it is sufficient for him to give the best
evidence which he has in his power at the time [Section 91].
RULES FOR RECOVERY
General rule: Timely compliance with the notice and proof of loss is a condition precedent to the right to recover if the policy is fire
insurance, or when the same is stipulated in the policy.
Exceptions:
(1) For both notice and proof of loss, waiver:
a. Defects in a notice or proof of loss may be waived when such defects, which the insured might remedy, are not specified,
without unnecessary delay, to him as ground of objection by the insurer (Section 92);
b. Delay in presentation to an insurer of notice or proof of loss is waived if caused by any act of his, or if he omits to take
objection promptly and specifically upon that ground;
(2) For notice of loss, a formal notice of loss is not necessary if insurer has actual notice of loss.
GUIDELINES ON CLAIMS SETTLEMENT

✓ Claims settlement is the indemnification of the loss suffered by the insured. The claimant may be the insured or reinsured, the
insurer who is entitled to subrogation, or a third party who has a claim against the insured
✓ Where a policy gives the insurer the control of the decision to settle claim or litigate it, the insurer nevertheless is required to
observe a certain measure of consideration for the interest of the insured.
CLAIMS LIFE INSURANCE NON-LIFE INSURANCE

Maturity Either: (1) Upon happening of event insured against; and
(1) Upon death of the person insured; (2) Event must occur within the period specified in
(2) Upon his surviving a specific period; or (3) policy, otherwise insurer has no liability
Otherwise contingently on the continuance or
cessation of life (Section 180)
Delivery of proceeds General rule: The proceeds should be (1) Within 30 days after:
delivered immediately upon maturity of (a) Proof of loss is received by insurer; and
policy. (b) Ascertainment of loss or damage is made either
Exceptions: by agreement between the insured and insurer or
(1) If payable in installments or as an annuity, by arbitration
when such installments or annuities become (2) If ascertainment is not made within 60 days after
due; such receipt by insurer of proof of loss, then loss or
(2) If maturity is upon death, within 60 days damage shall be paid within 90 days after such receipt.
after presentation of claim and filing of proof
of death of insured.
Effect of refusal or (1) This entitles the beneficiary to collect interest on the proceeds of policy for the duration of the delay
failure to pay claim at rate of twice the ceiling prescribed by the monetary board (unless refusal to pay is based on ground
within time prescribe that claim is fraudulent)
(2) In case damages are awarded, this includes attorney’s fees and other expenses incurred due to delay
(plus the interest)
✓ In case of litigation, it is the duty of the Commissioner or the Court to determine whether the claim has been unreasonably denied
or withheld.
✓ Failure to pay any such claim within the time prescribed shall be considered prima facie evidence of unreasonable delay in
payment.
UNFAIR CLAIMS SETTLEMENT; SANCTIONS

✓ No insurance company doing business in the Philippines shall refuse, without just cause, to pay or settle claims arising under
coverages provided by its policies, nor shall any such company engage in unfair claim settlement practices.
✓ Any of the following acts by an insurance company, if committed without just cause and performed with such frequency as to
indicate a general business practice, shall constitute unfair claim settlement practices:
1. Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue;
2. Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its
policies;
3. Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies;
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4. Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has
become reasonably clear; or
5. Compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason
substantially less than the amounts ultimately recovered in suits brought by them.
✓ Evidence as to numbers and types of valid and justifiable complaints to the Commissioner against an insurance company, and the
Commissioner’s complaint experience with other insurance companies writing similar lines of insurance shall be admissible in
evidence in an administrative or judicial proceeding for the purpose of determining whether unfair claim settlement practices
have been committed.
✓ If it is found, after notice and an opportunity to be heard, that an insurance company has violated this section, each instance of
noncompliance may be treated as a separate violation and shall be considered sufficient cause for the suspension or revocation
of the company’s certificate of authority [Section 247].
PRESCRIPTION OF ACTION
✓ In the absence of an express stipulation in the policy, it being based on a written contract, the action prescribes in ten years
[Article 1144, Civil Code].
✓ 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 [Section 63].
✓ In motor vehicle insurance, action prescribes in one year.
✓ The cause of action accrues from the rejection of the claim of the insured and not from the time of loss. A stipulation stating that
the prescriptive period for filing an action is one year from the happening of loss is void. In such cases, since the stipulation is void
and it is upon a written contract, the time limit is ten years from the time the cause of action accrues.
✓ Prescription is essential for the prompt settlement of claims as it demands for suits to be brought while the evidence as to the
origin and cause of the loss or destruction has not yet disappeared.
SUBROGATION
✓ Subrogation is a process of legal substitution. The insurer, after paying the amount covered by the insurance policy, steps into the
shoes of the insured and avails himself of the latter's rights that exist against the wrongdoer at the time of loss.
✓ The insurer becomes entitled to recover from the wrongdoer the amount of the loss it may have paid to the insured.
✓ Note: Subrogation applies only to property insurance and non-life insurance.
RIGHTS TRANSFERRED
✓ The rights to which the subrogee succeeds are the same as, but not greater than, those of the person for whom he is substituted.
✓ The subrogee-insurer cannot acquire any claim, security, or remedy the subrogor did not have. In other words, a subrogee cannot
succeed to a right not possessed by the subrogor. A subrogee can recover only if the insured likewise could have recovered
[Sulpicio Lines, Inc. v. First Lepanto-Taisho Ins. Corp. (2005); Lorenzo Shipping Corp. v. Chubb and Sons, Inc. (2004)].
✓ The insured can no longer recover from the offended party what was paid to him by the insurer but he can recover any deficiency
if the damages suffered are more than what was paid. The deficiency is not covered by the right of subrogation.
✓ The insurer must present the policy as evidence to determine the extent of its coverage [Wallen Phil. Shipping v. Prudential
Guarantee (2003)].
WHEN THERE IS NO RIGHT OF SUBROGATION

1. Where the insured by his own act releases the wrongdoer or third party liable for the loss or damage;
2. Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the insured’s
claim for loss;
3. Where the insurer pays the insured for a loss or risk not covered by the policy [Pan Malayan Ins. Co. v. CA (1997)];
4. In life insurance;
5. For recovery of loss in excess of insurance coverage [De Leon (2010)].
✓ Since the insurer can be subrogated to only such rights as the insured may have, should the insured, after receiving payment from
the insurer, release the wrongdoer who caused the loss, the insurer loses his rights against the latter. But in such a case, the
insurer will be entitled to recover from the insured whatever it has paid to the latter, unless the release was made with the
consent of the insurer [Manila Mahogany v. CA (1987)].
INSURANCE COMMISSIONER
JURISDICTION AND ADJUDICATORY POWERS
✓ The Insurance Commissioner has the power to adjudicate disputes relating to an insurance company’s liability to an insured under
a policy. A complaint or claim filed with such official is considered an “action” or “suit” the filing of which would have the effect
of tolling the suspending the running of the prescriptive period.
(1) Concurrent jurisdiction (with regular civil courts) over cases where any single claim does not exceed P5,000,000 involving liability
arising from:
a) Insurance contract;
b) Contract of suretyship;
c) Reinsurance contract;
d) Membership certificate issued by members of mutual benefit association [Section 439];
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(2) Primary and exclusive jurisdiction over claims for benefits involving pre-need plans where the amount of benefits does not exceed
P100,000 [Sec. 55, Pre-Need Code].
✓ For the purpose of proceeding under its adjudicatory powers under the Insurance Code, the Commissioner or any officer thereof
designated by him, is empowered to administer oaths and affirmation, subpoena witnesses, compel their attendance, take
evidence and require the production of any books, papers, documents or contracts or other records which are relevant or material
to the inquiry [Section 439].
✓ Note: However, the Insurance Commission 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 Section
2, neither is it covered by Section 439, which grants the Commissioner adjudicatory powers [Sundiang and Aquino (2013)].
REVOCATION OF CERTIFICATE OF AUTHORITY

✓ The Certificate of Authority issued to the domestic or foreign company by the Commission may be revoked or suspended by the
Insurance Commissioner for any of the following grounds [Section 254]:
1. The company is in an unsound condition;
2. That it has failed to comply with the provisions of law or regulations obligatory upon it;
3. That its condition or method of business is such as to render its proceedings hazardous to the public or its policyholders;
4. That its paid-up capital stock, in the case of a domestic stock corporation, or its available cash assets, in the case of a domestic
mutual company, or its security deposits, in the case of a foreign company, is impaired or deficient;
5. That the margin of solvency required of such company is deficient.
✓ The Commissioner is authorized to suspend or revoke all certificates of authority granted to such insurance company, its officers
and agents, and no new business shall thereafter be done by such company or for such company by its agents in the Philippines
while such suspension, revocation, or disability continues or until its authority to do business is restored by the Commissioner.
✓ Before restoring such authority, the Commissioner shall require the company concerned to submit to him a business plan showing
the company’s estimated receipts and disbursements, as well as the basis therefor, for the next succeeding three years.
LIQUIDATION OF INSURANCE COMPANY

✓ If the company is determined by the Commissioner to be insolvent or cannot resume business, he shall, if public interest requires,
order its liquidation [Section 256].
✓ This should be distinguished from a situation where a conservator is appointed when the Commissioner finds that a company is
in a state of continuing inability or unwillingness to maintain a condition of solvency or liquidity adequate to protect the
policyholders and creditors. The conservator will take charge of the management of the insurance company [Section 255].
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NOTES IN INSURANCE LAW – 2ND SEMESTER; AY 2017-2018

CONCEPT & CONTRACT OF INSURANCE

HEALTH MAINTENANCE ORGANIZATIONS (HMOs)

ELEMENTS OF AN INSURANCE CONTRACT

CHARACTERISTICS OF AN INSURANCE CONTRACT

CLASSES OF INSURANCE CONTRACTS

BOTTOMRY AND RESPONDENTIA DISTINGUISHED

As to when a constructive total loss exists, three rules exist:

(2) There must be a constructive total loss;

(2) Such use or condition as limited by the policy is altered;

6. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

WHEN INSURABLE INTEREST SHOULD EXIST

INSURABLE INTERES IN LIFE/HEALTH INSURANCE

INSURABLE INTEREST IN LIFE INSURANCE

INSURABLE INTEREST IN HEALTH INSURANCE

INSURABLE INTEREST IN PROPERTY INSURANCE

(2) An inchoate interest founded on an existing interest; or

INTEREST IN PROPERTY AND LIFE DISTINGUISHED

DOUBLE AND OVER INSURANCE; REINSURANCE

RULES FOR PAYMENT

DOUBLE AND OVER INSURANCE DISTINGUISHED

DOUBLE INSURANCE AND REINSURANCE DISTINGUISHED

MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY

OPEN LOSS PAYABLE MORTGAGE CLAUSE

UNION MORTGAGE OR STANDARD MORTGAGE CLAUSE

PERFECTION OF THE INSURANCE CONTRACT

AUTHORITY OF AGENT TO RECEIVE PREMIUM

PAYMENT BY POST-DATED CHECK

NON-DEFAULT OPTIONS IN LIFE INSURANCE

CASH SURRENDER VALUE (CSV)

REINSTATEMENT OF A LAPSED LIFE INSURANCE POLICY

RESCISSION OF INSURANCE CONTRACTS

CONCEALMENT IN MARINE AND ORDINARY PRIVATE INSURANCE DISTINGUISHED

CONCEALMENT IN NON-MEDICAL INSURANCE

MATTERS WHICH MUST BE DISCLOSED EVEN IN THE ABSENCE OF INQUIRY

MARINE INSURANCE ORDINARY INSURANCE

CLAIMS SETTLEMENT AND SUBROGATION

NOTICE AND PROOF OF LOSS

GUIDELINES ON CLAIMS SETTLEMENT

CLAIMS LIFE INSURANCE NON-LIFE INSURANCE

UNFAIR CLAIMS SETTLEMENT; SANCTIONS

WHEN THERE IS NO RIGHT OF SUBROGATION

REVOCATION OF CERTIFICATE OF AUTHORITY

LIQUIDATION OF INSURANCE COMPANY

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