30
INSURANCE CODE
(P.D. No. 1460)
I. GENERAL CONCEPTS
CONTRACT OF INSURANCE
An agreement whereby one
undertakes for a consideration to
indemnify another against loss, damage
or liability arising from an unknown or
contingent event. (Sec. 2, par. 2, IC)
DOING AN INSURANCE BUSINESS OR
TRANSACTING AN INSURANCE
BUSINESS (Sec. 2, par. 4)
1. Making or proposing to make, as
insurer, any insurance contract;
2. Making or proposing to make, as
surety, any contract of suretyship as
a vocation, not as a mere incident to
any other legitimate business of a
surety;
3. Doing any insurance business,
including a reinsurance business;
4. Doing or proposing to do any
business in substance equivalent to
any of the foregoing
II. CHARACTERISTICS OF AN INSURANCE
CONTRACT (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. Consensual it is perfected by the
meeting of the minds of the parties.
2. Voluntary the parties may
incorporate such terms and
conditions as they may deem
convenient.
3. Aleatory it depends upon some
contingent event.
4. Unilateral imposes legal duties only
on the insurer who promises to
indemnify in case of loss.
5. Conditional It is subject to
conditions the principal one of
which is the happening of the event
insured against.
6. Contract of indemnity Except life
and accident insurance, a contract
of insurance is a contract of
indemnity whereby the insurer
promises to make good only the loss
of the insured.
7. Personal each party having in view
the character, credit and conduct of
the other.
REQUISITES OF A CONTRACT OF
INSURANCE (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. A subject matter which the insured
has an insurable interest.
2. Event or peril insured against which
may be any future contingent or
unknown event, past or future and a
duration for the risk thereof.
3. A promise to pay or indemnify in a
fixed or ascertainable amount.
4. A consideration known as premium.
5. Meeting of the minds of the parties.
5 CARDINAL PRINCIPLES IN INSURANCE
1. Insurable Interest
2. Principle of Utmost Good Faith
An insurance contract requires utmost
good faith (uberrimae fidei) between
the parties. The applicant is enjoined to
disclose any material fact, which he
knows or ought to know.
Reason: An insurance contract is an
aleatory contract. The insurer relies on
the representation of the applicant, who
is in the best position to know the state
of his health.
3. Contract of Indemnity
It is the basis of all property
insurance. The insured who has insurable
interest over a property is only entitled
to recover the amount of actual loss
sustained and the burden is upon him to
establish the amount of such loss
(Reviewer on Commercial Law,
Professors Sundiang and Aquino)
Rules:
a. Applies only to property
insurance except when the
creditor insures the life of his
debtor.

b. Life insurance is not a contract
of indemnity.
c. Insurance contracts are not
wagering contracts. (Sec. 4)
4. Contract of Adhesion (Fine Print Rule)
Most of the terms of the contract do
not result from mutual negotiations
between the parties as they are
prescribed by the insurer in final printed
form to which the insured may adhere
if he chooses but which he cannot
change. (Rizal Surety and Insurance Co.,
vs. CA, 336 SCRA 12)
5. Principle of Subrogation
It is a process of legal substitution
where the insurer steps into the shoes of
the insured and he avails of the latters
rights against the wrongdoer at the time
of loss.
The principle of subrogation is a
normal incident of indemnity insurance
as a legal effect of payment; it inures to
the insurer without any formal
assignment or any express stipulation to
that effect in the policy. Said right is not
dependent upon nor does it grow out of
any private contract. Payment to the
insured makes the insurer a subrogee in
equity. (Malayan Insurance Co., Inc. v.
CA, 165 SCRA 536; see also Art. 2207,
NCC)
Purposes: (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. To make the person who caused the
loss legally responsible for it.
2. To prevent the insured from
receiving a double recovery from the
wrongdoer and the insurer.
3. To prevent tortfeasors from being
free from liabilities and is thus
founded on considerations of public
policy.
Rules:
1. Applicable only to property insurance.
2. The insurer can only recover from the
third person what the insured could have
recovered.
3. There can be no subrogation in cases:
a. Where the insured by his own act
releases the wrongdoer or third party
liable for the loss or damage;
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b. Where the insurer pays the insured the
value of the loss without notifying the
carrier who has in good faith settled
the insureds claim for loss;
c. Where the insurer pays the insured for
a loss or risk not covered by the policy.
(Pan Malayan Insurance Company v.
CA, 184 SCRA 54)
d. In life insurance
e. For recovery of loss in excess of
insurance coverage
CONSTRUCTION OF INSURANCE
CONTRACT
The ambiguous terms are to be
construed strictly against the insurer,
and liberally in favor of the insured.
However, if the terms are clear, there is
no room for interpretation. (Calanoc vs.
Court of Appeals, 98 Phil. 79)
III. DISTINGUISHING ELEMENTS OF AN
INSURANCE CONTRACT
1. The insured possesses an insurable
interest susceptible of pecuniary
estimation;
2. The insured is subject to a risk of loss
through the destruction or
impairment of that interest by the
happening of designated perils;
3. The insurer assumes that risk of loss;
4. Such assumption is part of a general
scheme to distribute actual losses
among a large group or substantial
number of persons bearing somewhat
similar risks; and
5. The insured makes a ratable
contribution (premium) to a general
insurance fund.
A contract possessing only the first 3
elements above is a risk-shifting device.
If all the elements, it is a risk-
distributing device. (The Insurance Code
of the Philippines Annotated, Hector de
Leon, 2002 ed.)
IV. PERFECTION OF AN INSURANCE
CONTRACT
An insurance contract is a consensual
contract and is therefore perfected the
moment there is a meeting of minds with
respect to the object and the cause or
consideration.

What is being followed in insurance
contracts is what is known as the
cognition theory. Thus, an
acceptance made by letter shall not bind
the person making the offer except from
the time it came to his knowledge.
(Enriquez vs. Sun Life Assurance Co. of
Canada, 41 Phil. 269)
Binding Receipt
A mere acknowledgment on behalf of
the company that its branch office had
received from the applicant the
insurance premium and had accepted
the application subject to processing by
the head office.
Cover Note (Ad Interim)
A concise and temporary written
contract issued to the insurer through its
duly authorized agent embodying the
principal terms of an expected policy of
insurance.
Purpose: It is intended to give
temporary insurance protection coverage
to the applicant pending the acceptance
or rejection of his application.
Duration: Not exceeding 60 days
unless a longer period is approved by
Insurance Commissioner (Sec. 52).
Riders
Printed stipulations usually attached
to the policy because they constitute
additional stipulations between the
parties. (Ang Giok Chip vs. Springfield,
56 Phil. 275)
In case of conflict between a rider
and the printed stipulations in the
policy, the rider prevails, as being a
more deliberate expression of the
agreement of the contracting parties.
(C. Alvendia, The Law of Insurance in
the Philippines, 1968 ed.)
Clauses
An agreement between the insurer
and the insured on certain matter
relating to the liability of the insurer in
case of loss. (Prof. De Leon, p.188)
Endorsements
Any provision added to the contract
altering its scope or application. (Prof.
De Leon, p.188)
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POLICY OF INSURANCE
The written instrument in which a
contract of insurance is set forth. (Sec.
49)
Contents: (Sec. 51)
1. Parties
2. Amount of insurance, except in open
or running policies;
3. Rate of premium;
4. Property or life insured;
5. Interest of the insured in the
property if he is not the absolute
owner;
6. Risk insured against; and
7. Duration of the insurance.
Persons entitled to recover on the
policy (sec. 53): The insurance proceeds
shall be applied exclusively to the proper
interest of the person in whose name or
to whose benefit it is made, unless
otherwise specified in the policy.
Kinds:
1. OPEN POLICY value of thing insured
is not agreed upon, but left to be
ascertained in case of loss. (Sec. 60)
The actual loss, as determined,
will represent the total indemnity
due the insured from the insurer
except only that the total indemnity
shall not exceed the face value of
the policy. (Development Insurance
Corp. vs. IAC, 143 SCRA 62)
2. VALUED POLICY definite valuation of
the property insured is agreed by both
parties, and written on the face of
policy. (Sec. 61)
In the absence of fraud or
mistake, the agreed valuation will be
paid in case of total loss of the
property, unless the insurance is for
a lower amount.
3. RUNNING POLICY contemplates
successive insurances and which provides
that the object of the policy may from
time to time be defined (Sec. 62)
V. TYPES OF INSURANCE CONTRACTS
1. Life insurance
a. Individual life (Secs. 179183, 227)

b. Group life (Secs. 50, last par., 228)
c. Industrial life (Secs. 229231)
2. Non-life insurance
a. Marine (Secs. 99166)
b. Fire (Secs. 167173)
c. Casualty (Sec. 174)
3. Contracts of bonding or suretyship
(Secs. 175178)
Note:
1. Health and accident insurance are
either covered under life (Sec. 180) or
casualty insurance. (Sec. 174).
2. Marine, fire, and the property aspect
of casualty insurance are also referred to
as property insurance.
VI. PARTIES TO INSURANCE CONTRACT
1. Insurer - Person who undertakes to
indemnify another.
For a person to be called an
insurance agent, it is necessary
that he should perform the
function for compensation.
(Aisporna vs. CA, 113 SCRA 459)
2. Insured - The party to be indemnified
upon the occurrence of the loss. He must
have capacity to contract, must possess
an insurable interest in the subject of
the insurance and must not be a public
enemy.
A public enemy- a nation with
whom the Philippines is at war
and it includes every citizen or
subject of such nation.
3. Beneficiary - A person designated to
receive proceeds of policy when risk
attaches.
Rules in the designation of the
beneficiary:
a. LIFE
i. A person who insures his own
life can designate any person
as his beneficiary, whether
or not the beneficiary has an
insurable interest in the life
of the insured subject to the
limitations under Art. 739
and Art. 2012 of the NCC.
Reason: in essence, a life
insurance policy is no
different form a civil
donation insofar as the
beneficiary is concerned.
Both are founded on the
same consideration of
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liberality. (Insular Life vs.
Ebrado, 80 SCRA 181)
ii. A person who insures the life
of another person and name
himself as the beneficiary
must have an insurable
interest in such life. (Sec.
10)
iii. As a general rule, the
designation of a beneficiary
is revocable unless the
insured expressly waived the
right to revoke in the policy.
(Sec. 11)
iv. The interest of a beneficiary
in a life insurance policy
shall be forfeited when the
beneficiary is the principal
accomplice or accessory in
willfully bringing about the
death of the insured in which
event, the nearest relative
of the insured shall receive
the proceeds of said
insurance if not otherwise
disqualified. (Sec. 12)
b. PROPERTY
The beneficiary of property
insurance must have an insurable
interest in such property, which
must exist not only at the time
the policy takes effect but also
when the loss occurs. (Sec. 13
and 18).
Effects of Irrevocable Designation Of
Beneficiary
Insured cannot:
1. Assign the policy
2. Take the cash surrender value of
the policy
3. Allow his creditors to attach or
execute on the policy;
4. Add new beneficiary; or
5. Change the irrevocable
designation to revocable, even
though the change is just and
reasonable.
The insured does not even retain the
power to destroy the contract by
refusing to pay the premiums for the
beneficiary can protect his interest by
paying such premiums for he has an
interest in the fulfillment of the
obligation. (Vance, p. 665, cited in de
Leon, p. 101, 2002 ed.)
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VII. INSURABLE INTEREST 3. an expectancy coupled with

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

The mortgagor and mortgagee each d. In case of loss, the mortgagee is

have an insurable interest in the
property mortgaged and this interest is
separate and distinct from the other.
a. Mortgagor As owner, has an
insurable interest therein to the
extent of its value, even though the
mortgage debt equals such value.
The reason is that the loss or
destruction of the property insured
will not extinguish the mortgage
debt.
b. Mortgagee His interest is only up
to the extent of the debt. Such
interest continues until the
mortgage debt is extinguished.
The lessor cannot be validly a
beneficiary of a fire insurance policy
taken by a lessee over his merchandise,
and the provision in the lease contract
providing for such automatic assignment
is void for being contrary to law and
public policy. (Cha vs. Court of Appeals,
227 SCRA 690)
entitled to the proceeds to the extent of
his credit.
e. Upon recovery by the mortgagee to
the extent of his credit, the debt is
extinguished.
In case a mortgagee insures his own
interest and a loss occurs, he is entitled
to the proceeds of the insurance but he
is not allowed to retain his claim against
the mortgagor as the claim is discharged
but it passes by subrogation to the
insurer to the extent of the money paid
by such insurer. (Palileo vs. Cosio)
VIII. RISK
What may be insured against:
1. Future contingent event resulting in
loss or damage Ex. Possible future
fire
2. Past unknown event resulting in loss
or damage Ex. Fact of past sinking
of a vessel unknown to the parties
3. Contingent liability Ex. Reinsurance

STANDARD OR OPEN OR LOSS IX. PREMIUM PAYMENTS

UNION PAYABLE Consideration paid an insurer for
MORTGAGE MORTGAGE
undertaking to indemnify the insured
CLAUSE CLAUSE
Subsequent acts Acts of the against a specified peril.
of the mortgagor mortgagor affect Basis of the right of the insurer to
cannot affect the the mortgagee. collect premiums: Assumption of risk.
rights of the Reason:
assignee Mortgagor does GENERAL RULE: No policy issued by an
not cease to be a insurance company is valid and binding
party to the until actual payment of premium. Any
contract. (Secs.
agreement to the contrary is void. (Sec.
8 and 9)
77)
Effects of Loss Payable Clause
a. The contract is deemed to be upon EXCEPTIONS:
the interest of the mortgagor; hence, he 1. In case of life or industrial life
does not cease to be a party to the insurance, when the grace periods
contract.
b. Any act of the mortgagor prior to the applies; (Sec. 77)
loss, which would otherwise avoid the 2. When the insurer makes a written
insurance affects the mortgagee even if acknowledgment of the receipt
the property is in the hands of the premium; (Sec. 78)
mortgagee. 3. Section 77 may not apply if the
c. Any act, which under the contract of
insurance is to be performed by the parties have agreed to the payment
mortgagor, may be performed by the of the premium in installments and
mortgagee with the same effect. partial payment has been made at
the time of the loss. (Makati
 36

Tuscany Condominium Corp. v. CA, surrenders his policy before the

215 SCRA 462)
4. Where a credit term has been
agreed upon. (UCPB vs. Masagana
Telemart, 308 SCRA 259)
5. Where the parties are barred by
estoppel. (UCPB vs. Maagana
Telemart, 356 SCRA 307)
Section 77 merely precludes the
parties from stipulating that the policy is
valid even if the premiums are not paid.
(Makati Tuscany Condominium Corp. v.
CA, 215 SCRA 462)
Effect of Acknowledgment of Receipt
of Premium in Policy: Conclusive
evidence of its payment, so far as to
make the policy binding,
notwithstanding any stipulation therein
that it shall not be binding until the
premium is actually paid. (Sec. 78)
termination thereof;
Exceptions:
a. policy not made for a
definite period of time
b. short period rate is
agreed upon
c. life insurance policy
2. When there is over-insurance
(Sec. 82);
Instances when premiums are not
recoverable:
1. When the risk has already
attached and the risk is entire and
indivisible.
2. In life insurance.
3. When the contract is rescindable
or rendered void ab initio by the
fraud of the insured.
4. When the contract is illegal and
the parties are in pari delicto.

PREMIUM ASSESSMENT

Levied and paid to Collected to meet

ENTITLEMENT OF INSURED TO RETURN
meet anticipated actual losses.
OF PREMIUMS PAID losses.

A. Whole: Payment is not Payment is

1. If the thing insured was never enforceable against enforceable once
exposed to the risks insured the insured. levied unless
otherwise agreed
against; (Sec. 79) upon.
2. If contract is voidable due to the
fraud or misrepresentation of
Not a debt. It becomes a debt
insurer or his agents; (Sec. 81)
once properly
3. If contract is voidable because of levied unless
the existence of facts of which otherwise agreed.
the insured was ignorant without
X. TRANSFER OF POLICY
his fault; (Sec. 81)
1. Life Insurance
4. When by any default of the It can be transferred even without the
insured other than actual fraud, consent of the insurer except when
the insurer never incurred there is a stipulation requiring the
liability; (Sec. 81) consent of the insurer before transfer.
(Sec. 181)
5. When rescission is granted due
Reason: The policy does not represent
to the insurers breach of a personal agreement between the
contract. (Sec. 74) insured and the insurer.
B. Pro rata: 2. Property insurance
1. When the insurance is for a It cannot be transferred without the
consent of the insurer.
definite period and the insured

Reason: The insurer approved the
policy based on the personal
qualification and the insurable interest
of the insured.
3. Casualty insurance
It cannot be transferred without the
consent of the insurer. (Paterson cited in
de Leon p. 82)
Reason: The moral hazards are as
great as those of property insurance.
CHANE OF INTEREST IN THE THING
INSURED
The mere (absolute) transfer of the
thing insured does not transfer the
policy, but suspends it until the same
person becomes the owner of both the
policy and the thing insured. (Sec. 58)
Reason: Insurance contract is
personal.
GENERAL RULE: A change of interest in
any part of a thing insured
unaccompanied by a corresponding
change of interest in the insurance
suspends the insurance to an equivalent
extent, until the interests in the thing
and the interest in the insurance are
vested in the same person. (Sec. 20)
EXCEPTIONS:
1. In life, health and accident
insurance.(Sec. 20);
2. Change in interest in the thing
insured after occurrence of an
injury which results in a loss.
(Sec. 21);
3. Change in interest in one or
more of several distinct things
separately insured by one policy.
(Sec. 22);
4. Change of interest, by will or
succession, on the death of the
insured. (Sec. 23);
5. Transfer of interest by one of
several partners, joint owners,
or owners in common, who are
jointly insured, to others. (Sec.
24);
6. When a policy is so framed that
it will inure to the benefit of
whomsoever, during the
continuance of the risk, may
become the owner of the
interest insured. (Sec. 57);
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7. When there is an express
prohibition against alienation in
the policy, in case of alienation,
the contract of insurance is not
merely suspended but avoided.
(Art. 1306, NCC).
XI. ASCERTAINMENT AND CONTROL OF
RISK AND LOSS
A. Four Primary Concerns of the
Parties:
1. Correct estimation of the risk;
2. Precise delimitation of the risk;
3. Control of the risk;
4. Determining whether a loss occurred
and if so, the amount of such loss.
B. Devices used for ascertaining and
controlling risk and loss:
1. Concealment A neglect to
communicate that which a party knows
and ought to communicate (Sec. 26)
Requisites:
a. A party knows a fact which he
neglects to communicate or
disclose to the other.
b. Such party concealing is duty
bound to disclose such fact to
the other.
c. Such party concealing makes no
warranty as to the fact
concealed.
d. The other party has not the
means of ascertaining the fact
concealed.
e. Material
Effects: Entitles insurer to rescind,
even if the death or loss is due to a
cause not related to the concealed
matter (Sec. 27).
Note: Good Faith is not a defense in
concealment. Sec. 27 clearly provides
that, the concealment whether
intentional or unintentional entitles the
injured party to rescind the contract of
insurance.
Test of Materiality: Determined not by
the event, but solely by the probable
and reasonable influence of the facts
upon the party to whom the
communication is due, in forming his
estimate of the advantages of the
proposed contract, or in making his
inquiries (Sec. 31).

Exception to Sec. 31:
a. Incontestability clause
b. Matters under Sec.110 (marine
insurance)
The waiver of medical examination in
a non-medical insurance contract
renders even more material the
information required of the applicant
concerning the previous conditions of
health and diseases suffered. (Sunlife v.
Sps. Bacani, 246 SCRA 268).
The right to information of material
facts may be waived, either by the terms
of the insurance or by neglect to make
inquiries as to such facts where they are
distinctly implied in other facts of which
information is communicated. (Sec.33)
Where matters of opinion or judgment
are called for, answers made in good
faith and without intent to deceiver will
not avoid the policy even though they
are untrue. Reason: The insurer cannot
rely on those statements. He must make
further inquiry. (Philamcare Health
Systems vs. CA, G.R. No. 125678, March
18, 2002).
2. Representations Factual
statements made by the insured at the
time of, or prior to, the issuance of the
policy to give information to the insurer
and induce him to enter into the
insurance contract. They are considered
an active form of concealment.
Requisites of a false representation
(misrepresentation):
a. The insured stated a fact which
is untrue.
b. Such fact was stated with
knowledge that it is untrue and
with intent to deceive or which
he states positively as true
without knowing it to be true
and which has a tendency to
mislead.
c. Such fact in either case is
material to the risk.
Characteristics:
a. It is not a part of the contract but
merely a collateral inducement to it.
b. It may be oral or written.
c. It is made at the same time of issuing
the policy or before but not after.
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d. It may be altered or withdrawn before
the insurance is effected but not
afterwards.
e. It always refers to the date the
contract goes into effect.
Kinds:
a. AFFIRMATIVE affirmation of a fact
when the contract begins; and
b. PROMISSORY promise to be
performed after policy was issued.
Effect of Misrepresentation: the
injured party is entitled to rescind from
the time when the representation
becomes false.
Test of Materiality: Same as that in
concealment.
Where the insured merely signed the
application form and made the agent of
the insurer fill the same for him, it was
held that by doing so, the insured made
the agent of the insurer his own agent
and he was responsible for his acts for
that purpose. (Insular Life Assur. Co. vs.
Feliciano, 74 Phil. 469)
3. Warranties Statement or promise
by the insured set forth in the policy or
by reference incorporated therein, the
untruth or non-fulfillment of which in
any respect, and without reference to
whether insurer was in fact prejudiced
by such untruth or non-fulfillment,
renders the policy voidable by the
insurer.
Purpose: To eliminate potentially
increasing hazards which may either be
due to the acts of the insured or to the
change to the condition of the property.
Kinds:
a. EXPRESS an agreement expressed in
a policy whereby the insured stipulates
that certain facts relating to the risk are
or shall be true, or certain acts relating
to the same subject have been or shall
be done.
b. IMPLIED - it is deemed included in the
contract although not expressly
mentioned. Example: In marine
insurance, seaworthiness of the vessel.
Effects of breach of warranty:
a. Material
GENERAL RULE: Violation of material
warranty or of a material provision of a
 39

policy will entitle the other party to general description of the risk by
rescind the contract. (Sec. 74) excluding certain specified risk that
EXCEPTIONS: otherwise would be included under the
a. Loss occurs before the time of general language describing the risks
performance of the warranty. assumed.
b. The performances becomes Effect: Limit the coverage of the
unlawful at the place of the contract.
contract.
c. Performance becomes RESCISSION
impossible. (Sec. 73) Grounds:
b. Immaterial (ex. Other insurance A. Concealment
clause) B. Misrepresentation
GENERAL RULE: It will not avoid the C. Breach of material warranty
policy. D. Breach of a condition subsequent
EXCEPTION: When the policy expressly Waiver of the right to rescind:
provides or declares that a violation Acceptance of premium payments
thereof will avoid it. (Sec. 75) despite the knowledge of the ground for
rescission. (Sec. 45)
WARRANTY REPRESENTATION Limitations on the right of the
Part of the contract Mere collateral insurer to rescind:
inducement 1. Non-life such right must be
Written on the May be written in exercised prior to the commencement of
policy, actually or by the policy or may an action on the contract;
reference be oral. 2. Life such right must be availed of
Presumed material Must be proved to during the first two years from the date
be material of issue of policy or its last
Must be strictly Requires only reinstatement; prior to
complied with substantial truth incontestability. (Sec. 48)
and compliance
CANCELLATION OF NON-LIFE
4. Conditions Events signifying in its
INSURANCE POLICY
broadest sense either an occurrence or a
Right of the insurer to abandon the
non-occurrence that alters the
contract on the occurrence of certain
previously existing legal relations of the
grounds after the effectivity date of a
parties to the contract. They may be
non-life policy.
conditions precedent or conditions
Grounds:
subsequent.
1. Non-payment of premium;
Effect of breach:
a. Condition precedent prevents 2. Conviction of a crime out of acts
the accrual of cause of action increasing the hazard insured
b. Condition subsequent avoids against;
the policy or entitles the insurer 3. Discovery of fraud or material
to rescind
misrepresentation;
The insurer may also protect himself
against fraudulent claims of loss and this 4. Discovery of willful or reckless acts
he attempts to do by inserting in the of omissions increasing the hazard
policy various conditions which take the insured against;
form of conditions precedent. For 5. Physical changes in property making
instance, there are conditions requiring
the property uninsurable; and
immediate notice of loss or injury and
detailed proofs of loss within a limited 6. Determination by the Insurance
period. Commissioner that the continuation
of the policy would violate the
5. Exceptions Provisions that may Insurance Code. (Sec. 64)
specify excepted perils. It makes more
Requirements:
definite the coverage indicated by the
 40

1. Prior notice of cancellation to (Secs. 77, 227[b],

the insured; 228[b], 230[b]);
4. That the conditions
2. Notice must be in writing, of the policy
mailed or delivered to the relating to military
named insured at the address or naval service
have been violated
shown in the policy; (Secs. 227[b],
3. Notice must state which of the 228[b]);
grounds set forth in Sec. 64 is 5. That the fraud is of
a particularly
relied upon and upon request of vicious type;
the insured, the insurer must 6. That the beneficiary
furnish facts on which the failed to furnish
proof of death or to
cancellation is based; comply with any
4. Grounds should have existed condition imposed
after the effectivity date of the by the policy after
the loss has
policy. happened; or
7. That the action was
XII. INCONTESTABILITY CLAUSE not brought within
Clause in life insurance policy that the time specified.
stipulates that the policy shall be
incontestable after a stated period. XIII.
Requisites: A. OVER-INSURANCE results when the
1. Life insurance policy insured insures the same property for an
2. Payable on the death of the insured amount greater than the value of the
3. It has been in force during the property with the same insurance
lifetime of the insured for a period company.
of at least two years from the date Effect in case of loss:
of its issue or of its last 1. The insurer is bound only to pay to
reinstatement the extent of the real value of the
Note: The period of 2 years may be property lost;
shortened but it cannot be extended by 2. The insured is entitled to recover
stipulation. the amount of premium
corresponding to the excess in value
of the property;
Incontestability only deprives the
insurer of those defenses which arise in B. DOUBLE INSURANCE exists where
connection with the formation and
same person is insured by several
operation of the policy prior to loss.
(Prof. De Leon, p. 173 citing Wyatt and insurers separately in respect to same
Wyatt, p. 878) subject and interest. (Sec. 93)
Requisites:
BARRED DEFENSES NOT 1. Person insured is the same;
DEFENSES BARRED 2. Two or more insurers insuring
OF THE INSURER
1. Policy is void ab
1. That the person
separately;
initio taking the insurance 3. Subject matter is the same;
2. Policy is lacked insurable 4. Interest insured is also the same;
rescindable by interest as required
reason of the by law;
5. Risk or peril insured against is
fraudulent 2. That the cause of likewise the same.
concealment or the death of the
misrepresentation of insured is an
the insured or his excepted risk;
Effects: Where double insurance is
agent 3. That the premiums allowed, but over insurance results:
have not been paid (Sec. 94)
 41

1. The Purposes:
insured, unless the policy otherwise 1. To prevent an increase in the
provides, may claim payment from moral hazard
2. To prevent over-insurance and
the insurers in such order as he may fraud.
select, up to the amount for which To constitute a violation of the
the insurers are severally liable clause, there should have been double
under their respective contracts; insurance.
2. Where
the policy under which the insured C. REINSURANCE a contract by which
claims is a valued policy, the insured the insurer procures a third person to
must give credit as against the insure him against loss or liability by
valuation for any sum received by reason of an original insurance (also
him under any other policy without known as Reinsurance Cession). (Sec.
regard to the actual value of the 95)
subject matter insured; In every reinsurance, the original
contract of insurance and the contract of
3. Where
reinsurance are covered by separate
the policy under which the insured policies.
claims is an unvalued policy he must
give credit, as against the full DOUBLE REINSURANCE
insurable value, for any sum INSURANCE
Involves the same Involves different
received by him under any policy; interest interest
4. Where Insurer remains in Insurer becomes the
the insured receives any sum in such capacity insured in relation
to reinsurer
excess of the valuation in the case of
Insured is the party Original insured has
valued policies, or of the insurable in interest in the 2 no interest in the
value in the case of unvalued contracts reinsurance
policies, he must hold such sum in contract.
Subject of Subject of insurance
trust for the insurers, according to insurance is is the original
their right of contribution among property insurers risk
themselves; Insured has to give Insureds consent
his consent not necessary
5. Each
insurer is bound, as between himself TERMS:
and the other insurers, to contribute 1. Reinsurance treaty Merely an
ratably to the loss in proportion to agreement between two insurance
the amount for which he is liable companies whereby one agrees to cede
under his contract. and the other to accept reinsurance
business pursuant to provisions specified
in the treaty. (Prof. De Leon, p. 306)
Additional or Other Insurance Clause
A condition in the policy requiring the 2. Automatic reinsurance The
insured to inform the insurer of any
reinsured is bound to cede and the
other insurance coverage of the property
insured. It is lawful and specifically reinsurer is obligated to accept a fixed
allowed under Sec. 75 which provides share of the risk which has to be
that (a) policy may declare that a reinsured under the contract. (Prof. De
violation of a specified provision thereof Leon, p. 305)
shall avoid it, otherwise the breach of an
3. Facultative reinsurance There is no
immaterial provision does not avoid it.
A stipulation against double obligation to cede or accept
insurance. participation in the risk each party
 42

having a free choice. But once the share insured against;

is accepted, the obligation is absolute 5. If during the
and the liability thereunder can be course of rescue,
discharged only by payment. (Equitable the thing is exposed
to a peril not
Ins. & Casualty Co. vs. Rural Ins. &
insured against,
Surety Co., Inc. 4 SCRA 343)
which permanently
deprives the insured
4. Retrocession A transaction whereby of its possession, in
the reinsurer in turn, passes to another whole or in part
insurer a portion of the risk reinsured. It (Sec. 85).
is really the reinsurance of reinsurance.
(Prof. De Leon, p. 305) Proximate Cause An event that sets all
other events in motion without any
XIV. intervening or independent case,
A. LOSS, IN INSURANCE without which the injury or loss would
Injury or damage sustained by the not have occurred.
insured in consequence of the happening
of one or more of the accidents or REQUISITES FOR RECOVERY UPON
misfortune against which the insurer, in INSURANCE
1. The insured must have insurable
consideration of the premium, has interest in the subject matter;
undertaken to indemnify the insured. 2. That interest is covered by the policy;
(Bonifacio Bros. Inc. vs. Mora, 20 SCRA 3. There must be a loss; and
261) 4. The loss must be proximately caused
by the peril insured against.
Loss for which Loss for which
NOTICE OF LOSS
insurer is liable insurer is not
In fire insurance In other types of
liable
1. Loss the
1. Loss by insurance
proximate cause of insureds willful
which is the peril act; Required Not required
insured against
2. Loss due to
Failure to give Failure to give
(Sec. 84); connivance of the
notice will defeat notice will not
2. Loss the insured (Sec. 87);
the right of the exonerate the
immediate cause of and
insured to recover. insurer, unless
which is the peril 3. Loss where the
there is a
insured against excepted peril is
stipulation in the
except where the proximate
policy requiring
proximate cause is cause.
the insured to do
an excepted peril;
so.
3. Loss through
negligence of
insured except
B. CLAIMS SETTLEMENT
where there was
The indemnification of the loss of the
gross negligence insured.
amounting to willful
acts; and TIME FOR PAYMENT OF CLAIMS
4. Loss caused by
efforts to rescue the
thing from peril
 43

NON-LIFE It shall commence from the denial of

LIFE POLICIES POLICIES the claim, not from the resolution of the
motion for reconsideration, otherwise it
a. Maturing The proceeds shall can be used by the insured as a scheme
upon the be paid within 30 or device to waste time until the
expiration of the days after the evidence which may be used against him
term The receipt by the is destroyed. (Sun Insurance Office, Ltd.
proceeds are insurer of proof of
v. CA, 195 SCRA)
immediately loss, and
payable to the ascertainment of 4. In CMVLI, the written notice of claim
insured, unless the loss or damage must be filed within 6 months from the
they are made by agreement of the date of the accident otherwise the claim
payable in parties or by is deemed waived. The suit for damages
installments or as arbitration but not either with the proper court or with the
annuity, in which later than 90 days Insurance Commissioner should be filed
case, the from such receipt of within 1 year from the date of the denial
installments or proof of loss of the claim by the insurer, otherwise
annuities shall be whether or not
claimants right of action shall prescribe.
paid as they ascertainment is
become due. had or made. (Sec. 384)
b. Maturing at
the death of the PARTICULAR KINDS OF INSURANCE
insured, occurring CONTRACTS
prior to the
expiration of the XVI. MARINE INSURANCE
term stipulated
Insurance against risks connected with
The proceeds are
payable to the navigation, to which a ship, cargo,
beneficiaries freightage, profits or other insurable
within 60 days
interest in movable property, may be
after presentation
and filing of proof exposed during a certain voyage or a
of death. fixed period of time. (Sec. 99)
Coverage:
In case of an unreasonable delay in A.
the payment of the insureds claim by 1. Vessels, goods, freight, cargo,
the insurer, the insured can recover: 1) merchandise, profits, money,
attorneys fees; 2) expenses incurred by valuable papers, bottomry and
reason of the unreasonable withholding; respondentia, and interest in respect
3) interest at double the legal interest
rate fixed by the Monetary Board; and 4) to all risks or perils of navigation;
the amount of the claim. (Zenith 2. Persons or property in connection
Insurance Corp. vs. CA, 185 SCRA 398) with marine insurance;
3. Precious stones, jewels, jewelry and
XV. PRESCRIPTIVE PERIOD (Secs. 63 & precious metals whether in the
384)
Rules: course of transportation or
1. In the absence of an express otherwise; and
stipulation in the policy, it being based 4. Bridges, tunnels, piers, docks and
on a written contract, the action other aids to navigation and
prescribes in 10 years. transportation. (Sec. 99)
2. However the parties may validly agree
Cargo can be the subject of
on a shorter period provided it is not less
than one year from the time the cause of marine insurance, and once it is
action accrues. entered into, the implied
3. The cause of action accrues from the warranty of seaworthiness
rejection of the claim of the insured and immediately attaches to
not from the time of loss.
 44

whoever is insuring the cargo, Over the amount he is liable

whether he be the shipowner or to the shipowner, if the ship is
not. (Roque v. IAC, 139 SCRA lost or damaged during the
596) voyage (Sec. 106).
B. Marine Protection and Indemnity
Insurance B.
Classes of inland marine insurance: In loans on bottomry and respondentia
(Prof. De Leon, p. 325) Repayment of the loan is subject to
1. Property in transit provides the condition that the vessel or goods,
protection to property respectively, given as a security, shall
frequently exposed to loss while arrive safely at the port of destination.
it is transportation form one 1. Owner/Debtor
location to another. Difference between the value
2. Bailee liability - insurance for of vessel or goods and the
those who have temporary amount of loan. (Sec. 101)
custody of the goods. 2. Creditor/lender
3. Fixed transportation property Amount of the loan
they are so insured because they
are held to be an essential part Note: If a vessel is hypothecated by
of the transportation system bottomry, only the excess is insurable,
such as bridges, tunnels, etc. since a loan on bottomry partakes of the
4. Floater provides insurance to nature of an insurance coverage to the
follow the insured property extent of the loan accommodation. The
wherever it may be located, same rule would apply to the
subject always to the territorial hypothecation of the cargo by
limits of the contract. respondentia. (Pandect of Commercial
Insurable interest: Law and Jurisprudence, Justice Jose
A. Vitug, 1997 ed.)
1.Shipowner PERILS OF THE PERILS OF THE
a. Over the vessel to the SEA SHIP
extent of its value, except Includes only those A loss which in the
casualties due to ordinary course of
that if chartered, the events, results
the:
insurance is only up to the from the:
1. unusual 1. natural and
amount not recoverable violence; or inevitable action of
from the charterer. (Sec. 2. extraordinary the sea
100). action of wind and 2. ordinary wear and
b. He also has an insurable wave; or tear of the ship or
3. Negligent
interest on expected 3. Other failure of the ships
freightage. (Sec. 103). extraordinary causes owner to provide
c. No insurable interest if he connected with the vessel with
navigation. proper equipment
will be compensated by to convey the
charterer for the value of cargo under
the vessel, in case of loss. ordinary
conditions.
2. Cargo owner
Over the cargo and expected Note: It is only perils of the sea which
profits (Sec. 105). may be insured against unless perils of
3. Charterer the ship is covered by an all-risk policy.
 45

SPECIAL MARINE INSURANCE MATTERS ALTHOUGH CONCEALED, WILL

CONTRACTS AND CLAUSES NOT VITIATE THE CONTRACT EXCEPT
A. All Risks Policy insurance against all WHEN THEY CAUSED THE LOSS (Sec.
causes of conceivable loss or damage, 110)
except: 1) as otherwise excluded in the 1. National character of the insured;
policy; or 2) due to fraud or intentional 2. Liability of the thing insured to
misconduct on the part of the insured. capture or detention;
The insured has the initial burden of 3. Liability to seizure from breach of
proving that the cargo was in good foreign laws;
condition when the policy attached and 4. Want of necessary documents; and
that the cargo was damaged when 5. Use of false or simulated papers.
unloaded from the vessel; thereafter, Note: This should be related to the
the burden then shifts to the insurer to general rule regarding material
show the exception to the coverage. concealment.
(Filipinas Merchants Insurance vs. Court
of Appeals, 179 SCRA 638) DISTINCTIONS ON CONCEALMENT
(Commercial Law Reviewer, A.F.
B. Barratry Clause Agbayani, 1988 ed.)
A clause which provides that there
can be no recovery on the policy in case MARINE INSURANCE OTHER
of any willful misconduct on the part of PROPERTY
the master or crew in pursuance of some INSURANCE
unlawful or fraudulent purpose without The information of The information or
the belief or belief of a 3rd party
consent of owners, and to the prejudice expectation of 3rd is not material and
of the owners interest. (Roque vs. IAC, persons is material need not be
139 SCRA 596) and must be communicated
communicated unless it proceeds
form an agent of
C. Inchamaree Clause the insured whose
A clause which makes the insurer duty it is to give
information
liable for loss or damage to the hull or The concealment of Concealment of
machinery arising from the: any fact in relation to any material fact
1. Negligence of the captain, any of the matters will vitiate the
stated in Sec. 110 entire contract,
engineers, etc. does not vitiate the whether or not the
2. Explosions, breakage of shafts; and entire contract but loss results for the
3. Latent defect of machinery or hull. merely exonerates the risk concealed.
insurer from a risk
(Bar Review Materials in Commercial resulting from the
Law, Jorge Miravite, 2002 ed.) fact concealed
IMPLIED WARRANTIES
D. Sue and Labor Clause 1. Seaworthiness of the ship at the
inception of the insurance (Sec.
A clause under which the insurer may
113);
become liable to pay the insured, in 2. Against improper deviation (Sec.
addition to the loss actually suffered, 123, 124, 125);
such expenses as he may have incurred 3. Against illegal venture;
in his efforts to protect the property 4. Warranty of neutrality: the ship will
carry the requisite documents of
against a peril for which the insurer
nationality or neutrality of the ship
would have been liable. (Sec. 163) or cargo where such nationality or

neutrality is expressly warranted;
(Sec. 120)
5. Presence of insurable interest.
While the payment by the insurer for
the insured value of the lost cargo
operates as a waiver of the insurers
right to enforce the term of the implied
warranty against the assured under the
marine insurance policy, the same
cannot be validly interpreted as an
automatic admission of the vessels
seaworthiness by the insurer as to
foreclose recourse against the common
carrier for any liability under the
contractual obligation as such common
carrier. (Delsan Transportation Lines vs.
CA, 364 SCRA 24)
Seaworthiness
A relative term depending upon the
nature of the ship, voyage, service and
goods, denoting in general a ships
fitness to perform the service and to
encounter the ordinary perils of the
voyage, contemplated by the parties to
the policy (Sec. 114).
GENERAL RULE: The warranty of
seaworthiness is complied with if the
ship be seaworthy at the time of the
commencement of the risk. Prior or
subsequent unseaworthiness is not a
breach of the warranty nor is it material
that the vessel arrives in safety at the
end of her voyage.
EXCEPTIONS:
1. In the case of a time policy, the ship
must be seaworthy at the
commencement of every voyage she
may undertake
2. In the case of cargo policy, each
vessel upon which the cargo is
shipped or transshipped, must be
seaworthy at the commencement of
each particular voyage
3. In the case of a voyage policy
contemplating a voyage in different
46
stages, the ship must be seaworthy
at the commencement of each
portion
Applicability of implied warranty of
seaworthiness to cargo owners: It
becomes the obligation of a cargo owner
to look for a reliable common carrier,
which keeps its vessels in seaworthy
conditions. The shipper may have no
control over the vessel but he has
control in the choice of the common
carrier that will transport his goods
(Roque v. IAC, 139 SCRA 596).
Deviation
A departure from the course of the
voyage insured, or an unreasonable
delay in pursuing the voyage or the
commencement of an entirely different
voyage. (Sec.123)
Instances:
1. Departure of vessel from the
course of the sailing fixed by
mercantile usage
2. Departure of vessel from the
most natural, direct and
advantageous route if not fixed
by mercantile usage
3. Unreasonable delay in pursuing
voyage
4. Commencement of an entirely
different voyage (Secs. 121-123)
Kinds:
1. Proper -
a. When caused by circumstances outside
the control of the ship captain or ship
owner;
b. When necessary to comply with a
warranty or to avoid a peril;
c. When made in good faith to avoid a
peril;
d. When made in good faith to save
human life or to relieve another vessel
in distress (Sec. 124)
Effect: In case of loss, the
insurer is still liable.
 47

2. Improper - Every deviation not GENERAL PARTICULAR

specified in Sec. 124 (Sec. 125). Has inured to the Has not inured to the
common benefit and common benefit and
Effect: In case of loss or
profit of all persons profit of all persons
damage, the insurer is not liable. interested in the interested in the
(Sec. 126) vessel and cargo vessel and her cargo.
To be borne equally To be borne alone by
by all of the interests the owner of the
concerned in the cargo or the vessel,
LOSS venture. as the case may be.
1. Total: Requisites for the
right to claim
a. Actual -
contribution:
i. Total destruction; 1. Common
ii. Irretrievable loss by sinking; danger to the
iii. Damage rendering the thing vessel or
valueless; or cargo;
iv. Total deprivation of owner of 2. Part of the
vessel or cargo
possession of thing insured. was sacrificed
(Sec. 130) deliberately;
b. Constructive - 3. Sacrifice must
i. Actual loss of more than be for the
of the value of the object; common safety
or for the
ii. Damage reducing value by benefit of all;
more than of the value of 4. Sacrifice must
the vessel and of cargo; and be made by
iii. Expense of transshipment the master or
exceed of value of cargo. upon his
authority;
(Sec. 131, in relation to Sec. 5. It must be not
139) be caused by
In case of constructive any fault of
total loss, insured may: the party
1. Abandon goods or asking the
contribution;
vessel to the insurer and 6. It must be
claim for whole insured successful, i.e.
value (Sec. 139), or resulted in the
2. Without abandoning saving of the
vessel, claim for partial vessel or
cargo; and
actual loss. (Sec. 155) Necessary.
2. Partial: That which is not total (Sec.
128). RIGHT OF INSURED IN CASE OF
GENERAL AVERAGE
AVERAGE GENERAL RULE: The insured may
Any extraordinary or accidental either hold the insurer directly liable for
expense incurred during the voyage for the whole of the insured value of the
the preservation of the vessel, cargo, or property sacrificed for the general
both, and all damages to the vessel and benefit, subrogating him to his own right
cargo from the time it is loaded and the of contribution or demand contribution
voyage commenced until it ends and the from the other interested parties as soon
cargo unloaded. as the vessel arrives at her destination
EXCEPTIONS:
 48

1. After the separation of interests If an insurer refuses to accept a valid

liable to contribution abandonment, he is liable upon an
2. When the insured has neglected or actual total loss, deducting form the
waived his right to contribution amount any proceeds of the thing
insured which may have come to the
FPA Clause (Free From Particular hands of the insured. (Sec.154)
Average)
A clause agreed upon in a policy of CO-INSURANCE
marine insurance in which it is stated A marine insurer is liable upon a
that the insurer shall not be liable for a partial loss, only for such proportion of
particular average, such insurer shall be the amount insured by him as the loss
free therefrom, but he shall continue to bears to the value of the whole interest
be liable for his proportion of all general of the insured in the property insured.
average losses assessed upon the thing (Sec. 157)
insured. (Sec. 136) When the property is insured for less
ABANDONMENT than its value, the insured is considered
The act of the insured by which, after a co-insurer of the difference between
a constructive total loss, he declared the the amount of insurance and the value of
relinquishment to the insurer of his the property.
interest in the thing insured. (Sec. 138)
Requisites for validity: Requisites:
1. There must be an actual 1. The loss is partial;
relinquishment by the person insured 2. The amount of insurance is less than
of his interest in the thing insured the value of the property insured.
(Sec. 138);
2. There must be a constructive total Rules:
loss (Sec. 139); 1. Co-insurance applies only to marine
3. The abandonment be neither partial insurance
nor conditional (Sec. 140); 2. Logically, there cannot be co-
4. It must be made within a reasonable insurance in life insurance.
time after receipt of reliable 3. Co-insurance applies in fire insurance
information of the loss (Sec. 141); when expressly provided for by the
5. It must be factual (Sec. 142); parties.
6. It must be made by giving notice
thereof to the insurer which may be CO-INSURANCE REINSURANCE
done orally or in writing (Sec. 143); A percentage in the Situation where the
and value of the insured insurer procures a 3rd
7. The notice of abandonment must be property which the party called the
explicit and must specify the insured himself reinsurer to insure
particular cause of the abandonment assumes to act as him against liability
insurer to the extent by reason of an
(Sec. 144).
of the deficiency in original insurance.
the insurance of the Basically, reinsurance
Effects: insured property. In is an insurance
1. It is equivalent to a transfer by the case of loss or against liability
insured of his interest to the insurer damage, the insurer which the original
with all the chances of recovery and will be liable only for insurer may incur in
indemnity (Transfer of Interest) such proportion of favor of the original
(Sec.146) the loss or damage as insured.
2. Acts done in good faith by those who the amount of the
insurance bears to
were agents of the insured in respect
the designated
to the thing insured, subsequent to percentage of the
the loss, are at the risk of the full value of the
insurer and for his benefit. (Transfer property insured.
Of Agency)(Sec.148) (Bar Review
Materials in
Commercial Law,
 49

Jorge Miravite, 2002 3. Rule on co-insurance applies to

ed.) fire insurance only if expressly
agreed upon. (Commercial Law
XVII. FIRE INSURANCE Reviewer, Aguedo Agbayani,
A contract by which the insurer for a 1988 ed.)
consideration agrees to indemnify the
insured against loss of, or damage to, ALTERATION AS A SPECIAL GROUND FOR
property by hostile fire, including loss by
RESCISSION BY INSURER
lightning, windstorm, tornado or
earthquake and other allied risks, when Requisites:
such risks are covered by extension to 1. The use or condition of the thing
fire insurance policies or under separate is specifically limited or
policies. (Sec. 167) stipulated in the policy;
2. Such use or condition as limited
by the policy is altered;
Prerequisites to recovery:
3. The alteration is made without
1. Notice of loss must be immediately the consent of the insurer;
given, unless delay is waived expressly 4. The alteration is made by means
or impliedly by the insurer within the control of the
2. Proof of loss according to best insured;
evidence obtainable. Delay may also be 5. The alteration increases the risk;
waived expressly or impliedly by the (Sec. 168) and
insurer 6. There must be a violation of a
policy provision. (Sec. 170)
HOSTILE FIRE FRIENDLY FIRE
One that escapes One that burns in a
from the place place where it was Fall-of-building clause
where it was intended to burn A clause in a fire insurance policy that
intended to burn and ought to be if the building or any part thereof falls,
and ought to be.
Insurer is liable Insurer is not liable except as a result of fire, all insurance
by the policy shall immediately cease.
Measure of Indemnity
1. Open policy: only the expense Option to rebuild clause
necessary to replace the thing lost or A clause giving the insurer the option
injured in the condition it was at the to reinstate or replace the property
time of the injury damaged or destroyed or any part
2. Valued policy: the parties are bound thereof, instead of paying the amount of
by the valuation, in the absence of fraud the loss or the damage.
or mistake The insurer, after electing to rebuild,
cannot be compelled to perform this
Note: It is very crucial to determine undertaking by specific performance
whether a marine vessel is covered by a because this is an obligation to do, not
marine insurance or fire insurance. The to give. Remedy: Art. 1167, NCC.
determination is important for 2 reasons:
1. Rules on constructive total loss XVIII. CASUALTY OR ACCIDENT
and abandonment applies only INSURANCE
to marine insurance; Insurance covering loss or liability
2. Rule on co-insurance applies arising from accident or mishap,
primarily to marine insurance; excluding those falling under other types
 50

of insurance such as fire or marine. (Sec. hazard. Persons frequently excluded are
174) those in the insureds service and
employment. The purpose of the
Classifications: exception is to guard against liability
1. Insurance against specified perils should theft be committed by one having
which may affect the person and/or unrestricted access to the property.
property of the insured. (accident or (Fortune Insurance vs. CA, 244 SCRA 208)
health insurance)
Examples: personal accident, Right of a third party injured to sue the
robbery/theft insurance insurer
2. Insurance against specified perils 1. Indemnity against liability A third
which may give rise to liability on the party injured can directly sue the
part of the insured for claims for insurer.
injuries to or damage to property of 2. Indemnity for actual loss or
others. (third party liability insurance) reimbursement after actual payment by
Insurable interest is based on the the insured A third party has no cause
of action against the insurer (Sec. 53,
interest of the insured in the safety of
Bonifacio Bros. v. Mora, 20 SCRA 261).
persons, and their property, who may
maintain an action against him in case of
The insurer is not solidarily liable with
their injury or destruction, respectively.
Examples: workmens compensation, the insured. The insurers liability is
based on contract; that of the insured is
motor vehicle liability
based on torts. Furthermore, the
In a third party liability (TPL)
insurers liability is limited by the
insurance contract, the insurer assumes
amount of the insurance coverage (Pan
the obligation by paying the injured
Malayan Insurance Corporation v. CA, 184
third party to whom the insured is liable.
SCRA 54).
Prior payment by the insured to the third
person is not necessary in order that the
obligation may arise. The moment the
insured becomes liable to third persons,
the insured acquires an interest in the
INTENTIONAL vs. ACCIDENTAL AS
insurance contract which may be
USED IN INSURANCE POLICIES
garnished like any other credit. (Perla
1. Intentional Implies the exercise of
Comapnia de Seguro, Inc vs. Ramolete,
the reasoning faculties, consciousness
205 SCRA 487)
and volition. Where a provision of the
Aside from compulsory motor vehicle
policy excludes intentional injury, it is
liability insurance, the Insurance Code
the intention of the person inflicting the
contains no other provisions applicable
injury that is controlling. If the injuries
to casualty insurance. Therefore, such
suffered by the insured clearly resulted
casualty insurance are governed by the
from the intentional act of the third
general provisions applicable to all types
person, the insurer is relieve from
of insurance, and outside of such
liability as stipulated. (Biagtan v. the
statutory provisions, the rights and
Insular Life Assurance Co. Ltd., 44 SCRA
obligations of the parties must be
58, 1972)
determined by their contract, taking into
2. Accidental That which happens by
consideration its purpose and always in
chance or fortuitously, without intention
accordance with the general principles
or design, which is unexpected, unusual
of insurance law.
and unforeseen.
In burglary, robbery and theft
NO ACTION CLAUSE
insurance, the opportunity to defraud
A requirement in a policy of liability
the insurer the moral hazard is so
insurance which provides that suit and
great that insurer have found it
final judgment be first obtained against
necessary to fill up the policies with
the insured; that only thereafter can the
many restrictions designed to reduce the

person injured recover on the policy.
(Guingon vs. Del Monte, 20 SCRA 1043)
XIX. COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE (CMVLI)
A species of compulsory insurance
that provides for protection coverage
that will answer for legal liability for
losses and damages for bodily injuries or
property damage that may be sustained
by another arising from the use and
operation of motor vehicle by its owner.
Purpose: To give immediate financial
assistance to victims of motor vehicle
accidents and/or their dependents,
especially if they are poor regardless of
the financial capability of motor vehicle
owners or operators responsible for the
accident sustained (Shafer v. Judge, RTC,
167 SCRA 386).
Claimants/victims may be a medical or hospital disbursement.
passenger or a 3rd party 3. Claim may be made against one motor
It applies to all vehicles whether
public and private vehicles.
Note: It is the only compulsory insurance
coverage under the Insurance Code.
Method of coverage
1. Insurance policy
2. Surety bond
3. Cash deposit
Passenger Any fare-paying person
being transported and conveyed in and
by a motor vehicle for transportation of
passengers for compensation, including
persons expressly authorized by law or
by the vehicles operator or his agents to
ride without fare. (Sec. 373[b])
Third Party Any person other than the
passenger, excluding a member of the
household or a member of the family
within the second degree of
consanguinity or affinity, of a motor
vehicle owner or land transportation
operator, or his employee in respect of
death or bodily injury arising out of and
in the course of employment. (Sec.
373[c])
51
No-Fault Clause
A clause that allows the victim
(injured person or heirs of the deceased)
to an option to file a claim for death or
injury without the necessity of proving
fault or negligence of any kind.
Purpose: To guarantee compensation
or indemnity to injured persons in motor
vehicle accidents.
Rules:
1. Total indemnity - maximum of P5,000
2. Proofs of loss -
a. Police report of accident;
b. Death certificate and evidence
sufficient to establish proper payee;
c. Medical report and evidence of
vehicle only
4. Proper insurer from which to claim -
a. In case of an occupant: Insurer
of the vehicle in which the occupant is
riding, mounting or dismounting from;
b. In any other case: Insurer of the
directly offending vehicle. (Sec. 378)
The claimant is not free to choose
from which insurer he will claim the no
fault indemnity as the law makes it
mandatory that the claim shall lie
against the insurer of the vehicle in
which the occupant is riding, mounting
or dismounting from. That said vehicle
might not be the one that caused the
accident is of no moment since the law
itself provides that the party paying may
recover against the owner of the vehicle
responsible for the accident. (Perla
Compania de Seguros, Inc. v. Ancheta,
169 SCRA 144)
This no-fault claim does not apply to
property damage. If the total indemnity
claim exceeds P5,000 and there is
controversy in respect thereto, the
finding of fault may be availed of by the
insurer only as to the excess. The first
P5,000 shall be paid without regard to
fault. (Prof. De Leon, p. 716)
 52

The essence of the no-fault indemnity It is considered an insurance contract

insurance is to provide victims of if it is executed by the surety as a
vehicular accidents or their heirs vocation, and not incidentally. (Sec. 20
immediate compensation although in
limited amount, pending final When the contract is primarily drawn
determination of who is responsible for up by 1 party, the benefit of doubt goes
the accident and liable for the victims to the other party (insured/obligee) in
injuries or death. (Ibid.) case of an ambiguity following the rule
in contracts of adhesion. Suretyship,
SPECIAL CLAUSES
A. Authorized Driver Clause especially in fidelity bonding, is thus
A clause which aims to indemnify the treated like non-life insurance in some
insured owner against loss or damage to respects.
the car but limits the use of the insured
vehicle to the insured himself or any Nature of liability of surety
person who drives on his order or with 1. Solidary;
his permission (Villacorta v. Insurance 2. Limited to the amount of the bond;
Commissioner) 3. It is determined strictly by the terms
The requirement that the person of the contract of suretyship in
driving the insured vehicle is permitted relation to the principal contract
in accordance with the licensing laws or between the obligor and the obligee.
other laws or regulations to drive the (Sec. 176)
motor vehicle (licensed driver) is
applicable only if the person driving is
other than the insured. SURETYSHIP PROPERTY
INSURANCE
Accessory contract Principal contract
B. Theft Clause
3 parties: surety, 2 parties: insurer
A clause which includes theft as
obligor and oblige and insured
among the risks insured against. Credit Contract of
Where the car is unlawfully and accommodation indemnity
wrongfully taken without the owners Surety can recover Insurer has no such
consent or knowledge, such taking from principal right; only right of
constitutes theft, and thus, it is the subrogation
theft clause and not the authorized Bond can be May be cancelled
driver clause that should apply (Palermo cancelled only with unilaterally either by
v. Pyramids Ins., 161 SCRA 677). consent of obligee, insured or insurer on
Commissioner or grounds provided by
court law
C. Cooperation Clause Requires No need of
acceptance of acceptance by any
A clause which provides in essence obligee to be valid third party
that the insured shall give all such Risk-shifting device; Risk-distributing
premium paid being device; premium paid
information and assistance as the insurer
in the nature of a as a ratable
may require, usually requiring service fee contribution to a
attendance at trials or hearings. common fund
XX. SURETYSHIP XXI. LIFE INSURANCE
An agreement whereby a surety Insurance on human lives and
guarantees the performance by the insurance appertaining thereto or
principal or obligor of an obligation or connected therewith which includes
undertaking in favor of an obligee. (Sec. every contract or pledge for the
175) payment of endowments or annuities.
It is essentially a credit (Sec. 179)
accommodation.

Kinds: (Bar Review Materials in
Commercial Law, Jorge Miravite, 2002
ed.)
1. Ordinary Life, General Life or Old
Line Policy - Insured pays a fixed
premium every year until he dies.
Surrender value after 3 years.
2. Group Life Essentially a single
insurance contract that provides
coverage for many individuals.
Examples: In favor of employees,
mortgage redemption insurance.
3. Limited Payment Policy insured
pays premium for a limited period.
If he dies within the period, his
beneficiary is paid; if he outlives the
period, he does not get anything.
4. Endowment Policy pays premium
for specified period. If he outlives
the period, the face value of the
policy is paid to him; if not, his
beneficiaries receive the benefit.
5. Term Insurance insurer pays once
only, and he is insured for a specified
period. If he dies within the period,
his beneficiaries benefits. If he
outlives the period, no person
benefits from the insurance.
6. Industrial Life - life insurance
entitling the insured to pay
premiums weekly, or where
premiums are payable monthly or
oftener.
Mortgage Redemption Insurance
A life insurance taken pursuant to a
group mortgage redemption scheme by
the lender of money on the life of a
mortgagor who, to secure the loan,
mortgages the house constructed from
the use of the proceeds of the loan, to
the extent of the mortgage indebtedness
such that if the mortgagor dies, the
proceeds of his life insurance will be
used to pay for his indebtedness to the
lender assured and the deceaseds heirs
will thereby be relieved from paying the
unpaid balance of the loan. (Great
53
Pacific Life Assurance Corp. vs. Court of
Appeals, 316 SCRA 677)
LIABILITY OF INSURER IN CERTAIN
CAUSES OF DEATH OF INSURED
1. Suicide
Insurer is liable in the following cases:
1. If committed after two years
from the date of the policys
issue or its last reinstatement;
2. If committed in a state of
insanity regardless of the date of
the commission unless suicide is
an excepted peril. (Sec. 180-A)
3. If committed after a shorter
period provided in the policy
Any stipulation extending the 2-year
period is null and void.
2. At the hands of the law (E.g. by legal
execution)
It is one of the risks assumed by the
insurer under a life insurance policy in
the absence of a valid policy exception.
(Vance,p.572 cited in de Leon, p. 107)
Note: Justice Vitug believes that death
by suicide (if the insured is sane) or at
the hands of the law obviates against
recovery as being more in consonance
with public policy and as being implicit
under Section 87, ICP. (Pandect of
Commercial Law and Jurisprudence,
1997 ed. P. 191)
3. Killing by the beneficiary
GENERAL RULE: The interest of a
beneficiary in a life insurance policy
shall be forfeited when the beneficiary is
the principal accomplice or accessory in
willfully bringing about the death of the
insured, in which event, the nearest
relative of the insured shall receive the
proceeds of said insurance if not
otherwise disqualified. (Sec. 12)
EXCEPTIONS:
1. Accidental killing
2. Self-defense
3. Insanity of the beneficiary at the
time he killed the insured
If the premiums paid came from
conjugal funds, the proceeds are
 54

considered conjugal. If the beneficiary is insurer one year

other than the insureds estate, the Beneficiary is under Insured is required to
source of premiums would not be no obligation to submit proof of his
prove actual actual pecuniary loss
relevant. (Del Val v. Del Val, 29 Phil 534) financial loss as a condition
precedent to
The measure of indemnity in life or collecting the
insurance.
health insurance policy is the sum fixed
in the policy except when a creditor
insures the life of his debtor. (Sec. 183) XXII. VARIABLE CONTRACT
IS THE CONSENT OF THE BENEFICIARY Any policy or contract on either a
NECESSARY TO THE ASSIGNMENT OF A group or individual basis issued by an
LIFE INSURANCE POLICY? insurance company providing for benefits
It depends. If the designation of the or other contractual payments or values
beneficiary is irrevocable, the thereunder to vary so as to reflect
investment results of any segregated
beneficiarys consent is essential portfolio of investment.
because of his vested right. If the
designation is revocable, the policy may XXIII. INSURANCE COMMISSIONER
be assigned without such consent Main agency charged with the
because the beneficiary only has a mere enforcement of the Insurance Code and
other related laws.
expectancy to the proceeds. (The
Functions:
Insurance Code of the Philippines 1. ADJUDICATORY/QUASI-JUDICIAL
Annotated, Hector de Leon, 2002 ed.) a. Exclusive original jurisdiction
Any dispute in the enforcement of any
Cash Surrender Value policy issued pursuant to Chapter VI
As applied to a life insurance policy, it (CMVLI). (Sec. 385, par. 2)
is the amount the insured in case of b. Concurrent original jurisdiction
default, after the payment of at least 3 (with the RTC) Where the maximum
full annual premiums, is entitled to amount involved in any single claim is
receive if he surrenders the policy and P100,000 (Sec. 416), except in case of
releases his claims upon it. maritime insurance which is within the
exclusive jurisdiction of the RTC. (BP
LIFE INSURANCE FIRE INSURANCE 129; admiralty & maritime jurisdiction)
Where the amount exceeds
Contract of Contract of indemnity P100,000, the RTC has
investment not of jurisdiction.
indemnity
Valued policy Open or valued policy
May be transferred The insurable
or assigned to any interest of the
person even if he transferee or
has no insurable assignee is essential
interest
Consent of insurer is Consent of insurer
not essential to must be secured in
validity of the absence of waiver
assignment
Contingency that is Contingency insured
contemplated is a against may or may
certain event, the not occur
only uncertainty
being the time when
it will take place
A long-term May be cancelled by
contract and cannot either party and is
be cancelled by the usually for a term of
 55

416 of the same Code which grants the

Commissioner adjudicatory powers
(Philippine American Life Insurance Co.
v. Ansaldo, 234 SCRA 509).

2. ADMINISTRATIVE/REGULATORY
a. Enforcement of insurance laws
b. Issuance, suspension or
revocation of certificate of
authority
The Insurance Commissioner has no c. Power to examine books and
jurisdiction to decide the legality of a records, etc.
contract of agency entered into between d. Rule-making authority
an insurance company and its agent. The e. Punitive
same is not covered by the term doing
or transacting insurance business under
Sec 2, ICP, neither is it covered by Sec.