TABLE OF CONTENTS
INSURANCE
A. Concept of Insurance ........................................ 1
Doing an Insurance Business ................. 1
Requisites ....................................... 1
B. Elements of an Insurance Contract ................... 1
Distinguishing Elements of an Insurance
Contract ......................................... 1
Form ............................................. 1
C. Characteristics/Nature of Insurance Contracts . 2
Cardinal Principles in Insurance............. 2
Insurable Interest ............................... 2
Principle of Utmost Good Faith................ 2
Contract of indemnity .......................... 2
Contract of Adhesion ........................... 2
Construction of the Insurance Contract ... 3
D. Classes ............................................................. 3
1. Marine ........................................ 3
Perils of the Sea ................................. 3
Perils of the Ship ................................ 3
2. Fire ........................................... 3
3. Casualty ...................................... 4
4. Suretyship ................................... 4
5. Life ........................................... 4
Individual Life.................................... 4
Group Life ........................................ 4
Industrial Life .................................... 4
6. Compulsory Motor Vehicle Liability
Insurance........................................ 4
E. Insurable Interest .............................................. 4
1. In life/Health ............................... 5
2. In Property .................................. 5
Interest in Life and Property Distinguished .. 5
Other Cases ...................................... 6
Insurance by mortgagor of his own interest . 6
Effects of Loss Payable Clause................. 6
3. Double Insurance and Over Insurance .. 6
Double Insurance ................................ 6
Additional or “Other Insurance” Clause ...... 7
Over Insurance ................................... 7
Double Insurance and Over Insurance
Distinguished ..................................... 7
4. Multiple or Several Interests On Same
property ......................................... 7
Nature of contract of reinsurance ............ 7
Original Insurance Contract and Reinsurance
Contract Distinguished .......................... 8
Double Insurance and Reinsurance
Distinguished ..................................... 8
Rights of original insured in contract of
reinsurance....................................... 8
LA SALLIAN COMMISION ON BAR OPERATIONS
i COMMERCIAL LAW
Liability of reinsurer to reinsured............. 8
Liability of reinsurer to original insured ..... 8
F. Perfection of the Contract of Insurance ............. 8
1. Offer and acceptance/Consensual ..... 8
a. Delay in Acceptance ......................... 8
b. Delay of Policy ............................... 9
2. Premium Payment ........................11
Effect of Non-Payment ........................ 11
Entitlement of Insured to Return of Premiums
Paid .............................................. 12
Premiums are not Recoverable in the
Following Instances ............................ 12
3. Non-default options in life insurance .12
4. Reinstatment of a lapsed policy of Life
insurance ......................................12
5. Refund of Premiums ......................12
G. Rescission of Insurance Contracts ................. 12
1. Concealment ...............................12
Requisites: ...................................... 12
Effects: .......................................... 13
2. Misrepresentations/Omissions ..........13
Requisites of misrepresentation ............. 13
Characteristics.................................. 13
Kinds ............................................. 13
Effect of misrepresentation .................. 13
3. Breach of Warranties .....................14
Purpose .......................................... 14
Kinds ............................................. 14
Effects of breach of warranty: ............... 14
Conditions ....................................... 14
Rescission ....................................... 14
Cancellation of Non-Life Insurance Policy .. 15
H. Claims Settlement and Subrogation................ 15
1. Notice and Proof of Loss .................15
2. Guidelines on Claims Settlement .......15
a. Unfair Claims Settlement; Sanctions ..... 16
Transfer of Policy................................................. 16
Change of Interest in the Thing Insured ..17
Risk ..................................................................... 17
What may be insured against: ..............17
Kinds of Insurable Risks .....................18
Personal risks ................................... 18
Property risks ................................... 18
Liability risks.................................... 18
Requirements for Risks to be Insurable ...18
Particular Kinds of Contracts of Insurance .......... 18
1. Marine Insurance ..........................18
Marine Protection and Indemnity Insurance 18
Major divisions of marine insurance: ........ 19
Insurable Interest .............................. 19
 TABLE OF CONTENTS ii COMMERCIAL LAW

Special Marine Insurance Contracts and Nature of powers of the Insurance

Clauses .......................................... 20 Commission ....................................29
Matters Although Concealed, Will Not Vitiate 1. Regulatory or non-quasi judicial- generally
the Contract Except When They Caused the provided in Sec. 414. .......................... 29
Loss .............................................. 20 2. Adjudicatory or quasi-judicial- generally
Distinctions on Concealment................. 20 described in Sec. 416. ......................... 29
Representation ................................ 20
Implied warranties ............................ 21
Deviation ....................................... 21
Loss .............................................. 21
Average ......................................... 22
Free From Particular Average (FPA) Clause 22
Abandonment .................................. 22
Co-Insurance ................................... 23
2. Fire Insurance ............................. 23
Prerequisites to recovery:.................... 23
Measure of Indemnity ......................... 23
Distinctions of ocean marine and fire policies
................................................... 23
Alteration as a Special Ground for Rescission
by Insurer ....................................... 23
Fall-of-building clause ........................ 24
3. Casualty or Accident Insurance ........ 24
Classifications: ................................. 24
Right of a third party injured to sue the
insurer .......................................... 24
No Action Clause .............................. 25
4. Compulsory Motor Vehicle Liability
INSURANCE (CMVLI) ......................... 25
Method of coverage ........................... 25
Claimants: ...................................... 25
No-Fault Clause ................................ 25
Special Clauses ................................ 26
5. Suretyship ................................. 26
Nature of liability of surety .................. 26
Types of surety bonds ........................ 26
6. Life Insurance ............................. 27
Parties in a Life Insurance ................... 27
Kinds: ........................................... 27
Mortgage Redemption Insurance ............ 27
Liability of Insurer in Certain Causes of Death
of Insured....................................... 27
Is the Consent of the Beneficiary Necessary
to the Assignment of a Life Insurance Policy?
................................................... 28
Cash Surrender Value ......................... 28
Variable Contract................................................. 28
Insurance Commissioner ............................. 29
Functions: .................................... 29
1. Adjudicatory/Quasi-Judicial .............. 29
2. Administrative/Regulatory ................ 29
Insurance Commission ................................. 29

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE
A. Concept of
Insurance
Agreement by which one party (insurer) for a
consideration (premium) paid by the other party
(insured), promises to pay money or its equivalent,
or to do some act valuable to the latter, upon the
happening of a loss, damage, liability, or disability
arising from an unknown or contingent event.
The term assurance is also used, although seldom
employed. But modern writers use assurance to
describe the life insurance business. Thus, assurance
is used to refer to an event like death, which must
happen; while insurance, to a contingent event,
which may or may not happen.
The definition of law is subject to criticism for it
does not include life insurance (contract upon a
condition rather than to indemnify, since a loss of
life is beyond pecuniary estimation.
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(1), Insurance Code]
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 Insurance, G.R. No. 154514, 2005]
DOING AN INSURANCE BUSINESS
(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.
In the application of the provisions of the Insurance
Code, the fact that no profits is derived from the
making of insurance contracts, agreements or
transactions or that no separate or direct
consideration is received thereof, shall not be
deemed conclusive to show that the making thereof
does not constitute the doing or transacting of an
insurance business. [Sec.2(b), Insurance Code]
LA SALLIAN COMMISION ON BAR OPERATIONS
1 COMMERCIAL LAW
REQUISITES
• Subject matter which the insured has an
insurable interest.
• Consideration known as premium.
• Event or peril insured against which may be any
future contingent or unknown event, past or
future and a duration for the risk thereof.
• Promise to pay or indemnify in a fixed or
ascertainable amount.
• Meeting of the minds of the parties
B. Elements of an
Insurance Contract
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.
All the elements must be present; otherwise, it is
not an insurance contract. Further, even if all the
elements are present, it is not an insurance contract
if the same is entered into for the purpose of
rendering service and not indemnification for a loss.
Insurance serves to distribute the risk of economic
loss among as many as possible of those who are
subject to the same kind of risk (each member
contributes).
A member does not need to bear all the loss by
himself.
FORM
An Insurance Policy is different from the contract of
insurance. Unless otherwise stipulated, the policy is
not essential to the existence of the contract. The
policy is merely the formal written instrument
evidencing the contract of insurance entered into
between the insured and the insurer. On the other
hand, there is no particular form required for a
contract of insurance.
 INSURANCE
C.
Characteristics/Nat
ure of Insurance
Contracts
CONSENSUAL
It is perfected by the meeting of the minds of the
parties. There must be a concurrence of offer and
acceptance.
VOLUNTARY
The parties may incorporate such terms and
conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs,
public order, or public policy.
Exception: Insurance contracts are required by law
for motor vehicles [Compulsory Motor Vehicle
Liability Insurance, Secs. 386-402, Insurance Code]
ALEATORY
Depends upon some contingent event.
UNILATERAL
Imposes legal duties only on the insurer who
promises to indemnify in case of loss.
Executed as to insured after payment of premium.
Executory as to insurer, not executed until payment
for a loss.
CONDITIONAL
It is subject to conditions the principal one of which
is the happening of the event insured against.
CONTRACT OF INDEMNITY
Whereby the insurer promises to make good only the
loss of the insured (except life and accident
insurance)
PERSONAL
Each party having in view the character, credit and
conduct of the other.
RISK DISTRIBUTION DEVICE
Insurer’s assumption is a part of a general scheme to
distribute the loss among a large numebr of persons
exposed to similar risks.
CONTRACT OF ADHESION
One party only adheres to the printed form the other
party presents.
LA SALLIAN COMMISION ON BAR OPERATIONS
2 COMMERCIAL LAW
CARDINAL PRINCIPLES IN INSURANCE
INSURABLE INTEREST
The insured must have an insurable interest ing the
subject matter of the insurance contract or else, it
shall be void [Sec. 25, Insurance Code]
PRINCIPLE OF UTMOST GOOD FAITH
Uberrimae fidei
An insurance contract requires utmost good faith
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.
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.1
Rules:
✓ Applies only to property insurance except
when the creditor insures the life of his
debtor.
✓ Life insurance is not a contract of indemnity.
✓ Insurance contracts are not wagering
contracts. [Sec. 4]
CONTRACT OF ADHESION
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.2
A process of legal substitution where the insurer
steps into the shoes of the insured and he avails of
the latter’s 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.3
Purposes:
(1) To make the person who caused the loss legally
responsible for it.
1
Sundiang and Aquino, Reviewer on Commercial Law
2
Rizal Surety and Insurance Co., vs. CA, 336 SCRA 12
3
Malayan Insurance Co., Inc. v. CA, 165 SCRA 536
 INSURANCE
(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:
✓ Where the insured by his own act releases
the wrongdoer or third party liable for the
loss or damage;
✓ Where the insurer pays the insured the
value of the loss without notifying the
carrier who has in good faith settled the
insured’s claim for loss;
✓ Where the insurer pays the insured for a
loss or risk not covered by the policy.4
✓ Life insurance.
✓ Recovery of loss in excess of insurance
coverage.
CONSTRUCTION OF THE 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.5
• Where there is ambiguity or doubt, strictly
against the insurer and liberally in favor of the
insured/beneficiary.6
• Where terms are clear, although the contract
may be rather onerous, it cannot be enlarged or
diminished by judicial construction since courts
cannot make a new contract for the parties
where they themselves have employed express
and unambiguous words.
D. Classes
1. MARINE
(see Secs. 99–166)
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.
Ocean marine insurance insures against risk
connected with navigation, to which a ship, cargo,
freightage, profits, or other insurable interest
4 policies or under separate policies. These must be
Pan Malayan Insurance Company v. CA, 184 SCRA 54
5
Calanoc vs. Court of Appeals, 98 Phil. 79
6
Serrano v. CA, 130 SCRA 327
LA SALLIAN COMMISION ON BAR OPERATIONS
3 COMMERCIAL LAW
immovable property, may be exposed during a
certain voyage or a fixed period of time. It protects
ships at sea and the cargo or freight on such ships
from standard “perils of the sea”.
In the absence of stipulation, the risks insured
against are only perils of the sea. 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.
PERILS OF THE SEA
General Rule: The term perils of the sea extend only
to losses caused by sea damage, or by the violence
of the elements, and does not embrace all losses
happening at sea. They insure against losses from
extraordinary occurrences only which cannot be
guarded against by the ordinary exertion of human
skill or prudence, as distinguished from the ordinary
wear and tear of the voyage and from injuries
suffered by the vessel in consequences of her not
being unseaworthy. [Roque v. IAC, G.R. No. L-66935,
(1985)]
It also includes 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 consent of the owner, and to the
prejudice of his interest.
Exception: An “all-risk policy”. [Malayan Insurance
Corp. v. CA, G.R. No. 119599 (1997)]
PERILS OF THE SHIP
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 the ordinary conditions.
[De Leon (2014)]
2. FIRE
(see Secs. 167–173)
An insurance against loss of, or damage to, property
by hostile fire.
It includes loss by fire, lightning, windstorm,
tornado, or earthquake and other allied risks when
such risks are covered by extension to fire insurance
the proximate cause of the damage or loss.
 INSURANCE
Hostile Fire
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 to light it, becomes
inherently dangerous and uncontrollable.
Friendly Fire
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.
The risk assumed by the insurer is the loss and
damages caused by hostile fire and not friendly fire.
3. CASUALTY
(see Sec. 174)
Insurance covering loss or liability arising from
accident or mishap, excluding fire or marine.
It may be liability insurance or indemnity insurance.
A liability insurance is when the insurer assumes the
obligation to pay the third party in whose favour 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.
An indemnity insurance is when no action will lie
against the insurer unless brought by the insured for
loss actually sustained and paid by him. Liability of
the insurer attached only after the insured has paid
his liability.
4. SURETYSHIP
(see Secs. 175–178)
An agreement whereby a surety, guarantees the
performance by the principal obligor of an obligation
in favor of the obligee.
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.
5. LIFE
Life insurance is insurance on human lives and
insurance appertaining thereto or connected
therewith. [Sec. 181, Insurance Code]
Every contract or pledge for the payment of
endowments or annuities shall be considered a life
insurance contract for purposes of the Insurance
Code. [Sec. 182, Insurance Code]
LA SALLIAN COMMISION ON BAR OPERATIONS
4 COMMERCIAL LAW
INDIVIDUAL LIFE
(see Secs. 179–183, 227)
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
GROUP LIFE
(see Secs. 50, last par., 228)
It is a blanket policy covering a number of
individuals who are usually a cohesive group and
subjected to a common risk.
INDUSTRIAL LIFE
(see Secs. 229–231)
It provides insurance coverage to industrial workers
or people who are unable to afford insurance for
bigger amounts.
6. COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE
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.
Motor Vehicle Liability Insurance is a requisite for
registration or renewal of registration of a motor
vehicle by every land transportation operator or
owner.
The insurer’s liability is direct and primary so the
insurer need not wait for the final judgment in the
criminal case to be liable. The purpose is to give
immediate financial assistance to victims of motor
vehicles accidents and/or their dependents,
especially if they are poor, regardless of the
financial capability of motor vehicles owners or
operators responsible for the accident sustained.
[Shafer v. Judge, RTC Olangapo, G.R. No. 78848
(1988)]
E. Insurable
Interest
Insurable interest in general
A person is deemed to have an insurable interest in
 INSURANCE 5 COMMERCIAL LAW

the subject matter 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.7
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.

• The existence of insurable interest gives the 2. IN PROPERTY

person the legal right to insure the subject of
the policy of insurance.
• In its absence, the person insuring would in
effect be merely gambling since it allows the
insured to have an interest in destruction of the
subject matter rather than in its preservation.
• However, it is held not to apply to industrial life
insurance.
1. IN LIFE/HEALTH
Every person has an insurable interest in the life and
health of:
(1) himself, his spouse and his children;
(2) any person on whom he depends wholly or in
part for education or support;
(3) any person under a legal obligation to him to
pay money or respecting property or services, of
which death or illness might delay or prevent
performance; and
Every interest in property whether real or personal,
or any relation thereto, or liability in respect
thereof, of such nature that the contemplated peril
might directly damnify the insured. [Sec. 13,
Insurance Code]
It consists of:
• an existing interest;
• any inchoate interest founded on an existing
interest; or
• an expectancy coupled with an existing interest
in that out of which the expectancy arises. [Sec.
14, Insurance Code]
When it should exist: When the insurance takes effect
and when the loss occurs, but need not exist in the
meantime. [Sec. 19, Insurance Code]
Amount: The measure of insurable interest in
property is the extent to which the insured might be
damnified by loss or injury thereof. [Sec. 17,
Insurance Code]

(4) any person upon whose life any estate or INTEREST IN LIFE AND PROPERTY
interest vested in him depends. [Sec. 10, DISTINGUISHED
Insurance Code]
Life Property
Existence
Only at the time the policy takes effect At the time the
When it should exist: When the insurance takes effect;
and need not exist at the time of loss policy takes
not thereafter or when the loss occurs. effect and
when the loss
Amount: There is no limit in the amount the insured occurs
can insure his life. Value
Unlimited except in life insurance Limited to
(Except in a creditor-debtor relationship where the effected by creditor on life of debtor. actual value of
creditor insures the life of his debtor, the limit of interest in
insurable interest is equal to the amount of the property
debt.) insured.
Expectation of benefit derived
• If at the time of the death of the debtor the from the continued existence
whole debt has already been paid, the creditor Need not have any legal basis whatever. Must have a
A reasonable probability is sufficient legal basis.
can no longer recover on the policy because the
without more.
principle of indemnity applies.
Interest of Beneficiary
Need not have an insurable interest over
Each person has unlimited interest in his own life, Must have
the life of the insured if the insured
whether the insurance is for the benefit of himself insurable
himself secured the policy. However, if
or another. interest over
the life insurance was obtained by the
the thing
beneficiary, the latter must have
insured.
The beneficiary designated need not have any insurable interest over the life of the
insured.
7
Lalican v. Insular Life, 597 SCRA 159

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE
OTHER CASES
Carrier or depositary
A carrier or depository of any kind has an insurable
interest in a thing held by him as such, to the extent
of his liability but not to exceed the value thereof.
Mortgaged property
The mortgagor and mortgagee have each an
insurable interest in the property mortgaged and this
interest is separate and distinct from the other.
Thus, insurance taken by one in his own name only
and in his favour alone, does not inure to the benefit
of the other.
In case both of them take out separate insurance
policies on the same property, or one policy covering
their respective interest, the same is not open to the
objection that there is double insurance.
Mortgagor Has an insurable interest therein to the
extent of its value, even if the mortgage debt equals
such value since he is the owner.
Reason: Loss or destruction of the property insured
will not extinguish the mortgage debt.
Mortgagee- Interest is only up to the extent of the
debt and the 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.8
INSURANCE BY MORTGAGOR OF HIS OWN
INTEREST
• Own benefit
In case of loss, the insurance proceeds do not
inure to the benefit of the mortgagee who has
no greater right than unsecured creditors
• Benefit of mortgagee
Loss payable to mortgagee made through the
following ways:
✓ Assignee of the policy (with insurer’s
consent)
✓ Mere pledge (without insurer’s consent)
✓ Rider
✓ Standard mortgage clause
8
Cha vs. Court of Appeals, 227 SCRA 690
LA SALLIAN COMMISION ON BAR OPERATIONS
6 COMMERCIAL LAW
✓ Equitable lien- the policy procured by a
mortgagor under a contract duty to insure
for the mortgagee’s benefit
EFFECTS OF LOSS PAYABLE CLAUSE
The contract is deemed to be upon the interest of
the mortgagor; hence, he does not cease to be a
party to the contract.
Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance affects the
mortgagee even if the property is in the hands of the
mortgagee.
Any act, which under the contract of insurance is to
be performed by the mortgagor, may be performed
by the mortgagee with the same effect.
In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit.
Upon recovery by the mortgagee to the extent of his
credit, the debt is extinguished.
Standard Or Union Open Or Loss Payable Mortgage
Mortgage Clause Clause
Subsequent acts of the Acts of the mortgagor affect
mortgagor cannot affect the mortgagee because the
the rights of the former does not cease to be a
assignee party to the contract.
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.
3. DOUBLE INSURANCE AND OVER INSURANCE
DOUBLE INSURANCE
Exists where same person is insured by several
insurers separately in respect to same subject and
interest. [Sec. 95, Insurance Code]
REQUISITES:
1. Person insured is the same;
2. Two or more insurers insuring separately;
3. Subject matter is the same;
4. Interest insured is also the same;
5. Risk or peril insured against is likewise the
same.
EFFECTS:
Where double insurance is allowed, but over
insurance results:
• The insured, unless the policy otherwise
provides, may claim payment from the insurers
 INSURANCE
in such order as he may select, up to the
amount for which the insurers are severally
liable under their respective contracts;
• Where the policy under which the insured claims
is a valued policy, the insured must give credit
as against the valuation for any sum received by
him under any other policy without regard to
the actual value of the subject matter insured;
• Where the policy under which the insured claims
is an unvalued policy he must give credit, as
against the full insurable value, for any sum
received by him under any policy;
• Where the insured receives any sum in excess of
the valuation in the case of valued policies, or
of the insurable value in the case of unvalued
policies, he must hold such sum in trust for the
insurers, according to their right of contribution
among themselves;
• Each insurer is bound, as between himself and
the other insurers, to contribute ratably to the
loss in proportion to the amount for which he is
liable under his contract.
ADDITIONAL OR “OTHER INSURANCE” CLAUSE
Double insurance is not prohibited under the law,
unless the policy contained a stipulation to the
contrary. Such clause is intended to prevent over
insurance and thus avert the perpetuation of fraud.
Usually, insurance policies contain “other insurance
clause” which is condition in the policy requiring the
insured to inform the insurer of any other insurance
coverage of the property insured.
• It is lawful and specifically allowed under Sec.
75 which provides that “(a) policy may declare
that a violation of a specified provision thereof
shall avoid it, otherwise the breach of an
immaterial provision does not avoid it.”
• To constitute a violation of the clause, there
should have been double insurance.
OVER INSURANCE
Results when the insured insures the same property
for an amount greater than the value of the property
with the same insurance company.
EFFECT IN CASE OF LOSS:
• The insurer is bound only to pay to the extent of
the real value of the property lost;
• The insured is entitled to recover the amount of
premium corresponding to the excess in value of
the property;
LA SALLIAN COMMISION ON BAR OPERATIONS
7 COMMERCIAL LAW
Over-insurance is not per se void but recovery is
allowed only to the extent of the loss or damage
incurred by the insured.
DOUBLE INSURANCE AND OVER INSURANCE
DISTINGUISHED
Over Insurance Double Insurance
Amount of the There may be no over-insurance
insurance is beyond when the sum total of the
the value of the amounts of the policies issued
insured’s insurable does NOT exceed the insurable
interest. interest of the insured.
There may be only ALWAYS several insurers.
one insurer involved.
4. MULTIPLE OR SEVERAL INTERESTS ON SAME
PROPERTY
REINSURANCE
Referred to as an “insurance of an insurance”.
It is one by which an insurer procures a third person
to insure him against loss or liability by reason of
such original insurance. [Sec. 97, Insurance Code]
A reassurance is presumed to be a contract of
indemnity against liability, and not merely against
damage. [Sec. 99, Insurance Code]
The original insured has no interest in a contract of
reinsurance. [Sec. 100, Insurance Code]
In every reinsurance, the original contract of
insurance and the contract of reinsurance are
covered by separate policies.
NATURE OF CONTRACT OF REINSURANCE
• Contract of Indemnity against liability -
reinsurer agrees to indemnify the insurer against
liabilities incurred. Not a condition precedent
that the insurer first paid a loss before
demanding payment from the reinsurer.
• Contract separate from original insurance
policy.
• Contract based on original policy - The reinsured
risk must be the same as that covered by the
original insurance policy.
• Insurable interest requirement applicable- The
primary insurer is not entitled to contract for
reinsurance exceeding the limits of the policy
ceded to the reinsurer. The reinsurer also
 INSURANCE 8 COMMERCIAL LAW

cannot provide coverage beyond the risks RIGHTS OF ORIGINAL INSURED IN CONTRACT
covered by the primary insurer. OF REINSURANCE
• Rule on subrogation is applicable. The insured has no concern with the contract of
reinsurance, and the reinsurer is not liable to the
insured either as surety or otherwise. Unless the
ORIGINAL INSURANCE CONTRACT AND
contract so provides.
REINSURANCE CONTRACT DISTINGUISHED
The original insurance contract is separate and • No privity of contract between the original
distinct from the insurance contract. An original reinsured and the reinsurer.
insurance contract covers indemnity against
damages, while reinsurance covers indemnity against
liability. LIABILITY OF REINSURER TO REINSURED
• The reinsurer is entitled to avail itself of every
DOUBLE INSURANCE AND REINSURANCE defense which the reinsured might urge in an
action by the person originally insured.
DISTINGUISHED
Reinsurance • Reinsurer is not liable to the reinsured for a loss
Double Insurance
if the latter is not liable to the original insured,
Involves the same Involves different interest or for an amount more than the sum actually
interest paid to the insured.
Insurer remains in such Insurer becomes the insured in
capacity relation to reinsurer
Insured is the party in Original insured has no interest
interest in the 2 in the reinsurance contract. LIABILITY OF REINSURER TO ORIGINAL INSURED
contracts • Contract of reinsurance solely between the
Subject of insurance is Subject of insurance is the insurer and the reinsurer- the original insured
property original insurer’s risk absolutely has no interest in the contract. Thus,
Insured has to give his Insured’s consent not
remedy of the original insured is only against
consent necessary
the insurer.

Reinsurance treaty • Contract of reinsurance with stipulation in favor

Merely an agreement between two insurance
companies whereby one agrees to cede and the
other to accept reinsurance business pursuant to
provisions specified in the treaty.
of original insured- the reinsurer may bind
himself to pay to the policy holder for any loss
for which the insurer may become liable. Thus,
remedy of the original insured is both against
the reinsurer and the insurer.

Automatic reinsurance • Contract of reinsurance amounting to novation

The reinsured is bound to cede and the reinsurer is
obligated to accept a fixed share of the risk which
has to be reinsured under the contract.
Facultative reinsurance
There is no obligation to cede or accept
participation in the risk each party having a free
choice. But once the share is accepted, the
obligation is absolute and the liability thereunder
can be discharged only by payment.9
Retrocession
A transaction whereby the reinsurer in turn, passes
to another insurer a portion of the risk reinsured. It
is really the reinsurance of reinsurance.
9
Equitable Ins. & Casualty Co. vs. Rural Ins. & Surety Co., Inc. 4
SCRA 343
of original contract- circumstances attending
the making of the contract of reinsurance
amount to a novation of the original contract,
thus discharging the original insurer from all
obligations thereunder.
Technically not one of reinsurance since the
reinsurer is substituted for the original insurer
F. Perfection of
the Contract of
Insurance
1. OFFER AND ACCEPTANCE/CONSENSUAL
A. DELAY IN ACCEPTANCE
Mere delay by insurer, although unreasonable, in
acting upon the application raises no implication of
acceptance nor does it estop the insurer to deny the

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE
existence of the contract
B. DELAY OF POLICY
An acceptance made by letter shall not bind the
person making the offer except from the time it
came to his knowledge.
• Since it is a consensual contract, it is 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.10
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
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.
Period: Not exceeding 60 days unless a longer
period is approved by Insurance Commissioner.
Clauses
Agreement between the insurer and the insured on
certain matter relating to the liability of the insurer
in case of loss.
Riders
Printed stipulations usually attached to the policy
because they constitute additional stipulations
between the parties.11
• 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.
10
Enriquez vs. Sun Life Assurance Co. of Canada, 41 Phil. 269
11
Ang Giok Chip vs. Springfield, 56 Phil. 275
LA SALLIAN COMMISION ON BAR OPERATIONS
9 COMMERCIAL LAW
Endorsements
Provisions added to the contract altering its scope or
application.
Policy of Insurance
The written instrument in which a contract of
insurance is set forth.
CONTENTS:
• Parties
• Amount of insurance (except in open or running
policies)
• Premium or rate/basis of final premium (if exact
premium is determinable upon termination)
• Property or life insured
• Interest of the insured in the property if he is
not the absolute owner
• Risk insured against; and
• Duration of the insurance.
KINDS:
1. Open
Value of thing insured is not agreed upon, but
left to be ascertained in case of loss.
The actual loss 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.12
2. Valued
Definite valuation of the property insured is
agreed by both parties, and written on the face
of policy.
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
Contemplates successive insurances and which
provides that the object of the policy may from
time to time be defined.
Persons entitled to recover on the policy:
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).
12
Development Insurance Corp. vs. IAC, 143 SCRA 62
 INSURANCE 10 COMMERCIAL LAW

for compensation.13
INCONTESTABILITY CLAUSE
Clause in life insurance policy that stipulates that
the policy shall be incontestable after a stated • Insured
period. The person whose loss is the occasion for the
payment of the insurance proceeds by the
REQUISITES: insurer.
• Life insurance policy;
Requisites:
• Payable on the death of the insured;
• Capacity to contract;
• Possess an insurable interest in the subject
• It has been in force during the lifetime of the
of the insurance;
insured for a period of at least two years from
the date of its issue or of its last • Must not be a public enemy
reinstatement.
Public Enemy nation with which the
Philippines is at war (includes every citizen
• The period of 2 years may be shortened but it
or subject of such nation).
cannot be extended by stipulation.
The terms insured and assured are generally
• Incontestability only deprives the insurer of
used interchangeably; but technically, insured
those defenses which arise in connection with
refers to the owner or property insured or the
the formation and operation of the policy prior
person whose life is the subject of the contract
to loss.
of insurance; while assured refers to the person
for whose benefit the insurance is granted.
Barred Defenses
Defenses Not Barred
of the Insurer
Policy is void ab initio Person taking the insurance • Beneficiary
lacked insurable interest as A person designated to receive proceeds of
Policy is rescindable required by law policy when risk attaches.
by reason of the
fraudulent Cause of the death of the insured
concealment or is an excepted risk
misrepresentation of RULES:
the insured or his Premiums have not been paid a. Life Insurance
agent • A person who insures his own life can
Conditions of the policy relating designate any person as his beneficiary,
to military or naval service have whether or not the beneficiary has an
been violated insurable interest in the life of the insured
Fraud is of a particularly vicious subject to the limitations under the NCC
type provisions on void donations.

Beneficiary failed to furnish • Exception: Any person who is forbidden

proof of death or to comply with
any condition imposed by the
policy after the loss has
happened
Action was not brought within
the time specified.
PARTIES TO CONTRACT OF INSURANCE
• Insurer
Person who undertakes to indemnify another.
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.
• Reason: A life insurance policy is no
different form a civil donation insofar
as the beneficiary is concerned. Both
are founded on the same consideration
of liberality.14

The business of insurance may be carried on by • A person who insures the life of another person
individuals just as much as by corporations and and name himself as the beneficiary must have
associations. an insurable interest in such life.

For a person to be called an insurance agent, it

is necessary that he should perform the function 13
Aisporna vs. CA, 113 SCRA 459
14
Insular Life vs. Ebrado, 80 SCRA 181

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE 11 COMMERCIAL LAW

• The insured shall have the right to change the Premium Assessment
beneficiary he designated in the policy (unless All payments are but contributions from all members of the
he has expressly waived this right in the policy). insuring organization to make good the losses of individual
members
Purpose
• The interest of a beneficiary in a life insurance Levied and paid to meet Collected to meet actual
policy shall be forfeited when the beneficiary is anticipated losses losses
the principal accomplice or accessory in willfully Enforceability
bringing about the death of the insured in which Payment of premium after the Enforceable against the
event, the nearest relative of the insured shall first is not enforceable against insured, unless otherwise
receive the proceeds of said insurance if not the insured agreed
otherwise disqualified
Expectation of benefit derived
from the continued existence
Not a debt Debt if properly levied,
b. Property Insurance unless otherwise
• Unlike in life insurance, the beneficiary of expressly agreed
property insurance must have an insurable
interest in such property, which must exist
not only at the time the policy takes effect No policy issued by an insurance company is valid
but also when the loss occurs. and binding until actual payment of premium. Any
agreement to the contrary is void.

Kinds of Beneficiaries
Insured himself 3rd person who paid a 3rd person through Exceptions:
consideration mere bounty of the • Life or industrial life insurance, when the
insured grace periods applies.
Also called Ex. Insured taking out May be the (1) • Insurer makes a written acknowledgment of
the a policy on his life for estate of the the receipt premium.
“assured”. the benefit of the insured; or a (2)
• Parties have agreed to the payment of the
creditor. third party.
premium in installments and partial
Immediate NOT a party to the NOT a party to
party to the contract. the contract. payment has been made at the time of the
contract. loss.15
Proceeds of the insurance become the exclusive property of
the beneficiary upon the death of the insured. • Where a credit term has been agreed
upon.16

EFFECTS OF IRREVOCABLE DESIGNATION OF • Where the parties are barred by estoppel.17

BENEFICIARY
• Insured cannot:
- Assign the policy;
- Take the cash surrender value of the policy;
- Allow his creditors to attach or execute on
the policy;
- Add new beneficiary; or
- Change the irrevocable designation to
revocable, even though the change is just
and reasonable.
The insured does not even retain the power to
destroy the contract by refusing to pay the
premiums for the beneficiary can protect his interest
by paying such premiums for he has an interest in
the fulfillment of the obligation.
2. PREMIUM PAYMENT
It is the agreed price for assuming and carrying the
risk. The consideration paid to an insurer for
undertaking to indemnify the insured against a
specified peril.
• Section 77 merely precludes the parties from
stipulating that the policy is valid even if the
premiums are not paid. 18
• Acknowledgment of receipt of premium in
policy is 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.
EFFECT OF NON-PAYMENT
• First premium
Prevents the contract from becoming binding
notwithstanding the acceptance of the
application nor the issuance of the policy unless
waived
15
Makati Tuscany Condominium v. CA, 215 SCRA 462
16
UCPB vs. Masagana Telemart, 308 SCRA 259
17
UCPB vs. Maagana Telemart, 356 SCRA 307
18
Id note 14

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE
• Subsequent premiums
Does not affect the validity of the contract
unless by express stipulation, it is provided that
the policy shall be suspended or lapse
ENTITLEMENT OF INSURED TO RETURN OF
PREMIUMS PAID
• Whole
• Thing insured was never exposed to the
risks insured against.
• Voidable contract due to the fraud or
misrepresentation of insurer or his agent.
• Voidable contract because of the existence
of facts of which the insured was ignorant
without his fault.
• Insurer never incurred liability when by any
default of the insured other than actual
fraud.
• Rescission due to the insurer’s breach of
contract.
• Pro rata
• Insurance is for a definite period and the
insured surrenders his policy before the
termination thereof.
Exceptions:
• Policy not made for a definite period of
time;
• Short period rate is agreed upon;
• Life insurance policy.
• When there is over-insurance
PREMIUMS ARE NOT RECOVERABLE IN THE
FOLLOWING INSTANCES
• Risk has already attached and the risk is entire
and indivisible.
• Life insurance.
• Contract is rescindable or rendered void ab
initio by the fraud of the insured.
• Parties are in pari delicto and the contract is
illegal.
3. NON-DEFAULT OPTIONS IN LIFE INSURANCE
(Cash surrender value) The amount that the insured, in
case of default, after the payment of at least three
LA SALLIAN COMMISION ON BAR OPERATIONS
12 COMMERCIAL LAW
full annual premiums, in entitled to receive if he
surrenders the policy and release his claim upon it.
4. REINSTATMENT OF A LAPSED POLICY OF
LIFE INSURANCE
The policy holder shall be entitled to have the policy
reinstated at any time within three years rom the
date of default of premium of payment unless the
cash surrender value has been paid, extension have
expired
5. REFUND OF PREMIUMS
A person insured is entitled to a return of premium;
to the whole premium if no part of his interest in the
thing insured be exposed to any of the perils insured
against; where the insurance is made for a definite
period of time and the insured surrenders his policy
to such portion of the premium as corresponds with
the unexpired time.
G. Rescission of
Insurance Contracts
Ascertainment and Control of Risk and Loss
FOUR PRIMARY CONCERNS OF THE PARTIES
• Correct estimation of the risk;
• Precise delimitation of the risk;
• Control of the risk;
• Determining whether a loss occurred and if so,
the amount of such loss.
Devices used for ascertaining and controlling risk and
loss
1. CONCEALMENT
A neglect to communicate that which a party knows
and ought to communicate.
REQUISITES:
• A party knows a fact which he neglects to
communicate or disclose to the other.
• Such party concealing is duty bound to disclose
such fact to the other.
 INSURANCE
• Such party concealing makes no warranty as to
the fact concealed.
• The other party has not the means
ascertaining the fact concealed.
• Material
EFFECTS:
Entitles insurer to rescind, even if the death or loss
is due to a cause not related to the concealed
matter.
• 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 is determined not by the event,
but solely by the probable and reasonable influence
of the facts upon the party to whom the
communication is due, in forming his estimate of the
advantages of the proposed contract, or in making
his inquiries
Exception:
• Incontestability clause
• 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 suffered19
• 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.
• 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.20
2. MISREPRESENTATIONS/OMISSIONS
Factual statements made by the insured at the time
of, or prior to, the issuance of the policy to give
19
Sunlife v. Sps. Bacani, 246 SCRA 268
20
Philamcare Health Systems vs. CA, G.R. No. 125678, March 18,
2002
LA SALLIAN COMMISION ON BAR OPERATIONS
13 COMMERCIAL LAW
information to the insurer and induce him to enter
into the insurance contract. They are considered an
active form of concealment.
of
REQUISITES OF MISREPRESENTATION
• The insured stated a fact which is untrue.
• 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.
• Such fact in either case is material to the risk.
CHARACTERISTICS
• It is not a part of the contract but merely a
collateral inducement to it.
• It may be oral or written.
• It is made at the same time of issuing the policy
or before but not after.
• It may be altered or withdrawn before the
insurance is effected but not afterwards.
• It always refers to the date the contract goes
into effect.
KINDS
• Affirmative
Affirmation of a fact when the contract begins.
• 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.21
21
Insular Life Assur. Co. vs. Feliciano, 74 Phil. 469
 INSURANCE
3. BREACH OF 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
• 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.
• 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:
Material - violation of material warranty or of a
material provision of a policy will entitle the other
party to rescind the contract.
Exceptions:
• Loss occurs before the time of performance of
the warranty.
• The performance becomes unlawful at the place
of the contract.
• Performance becomes impossible.
Immaterial - It will not avoid the policy.
Exceptions: When the policy expressly provides or
declares that a violation thereof will avoid it
Warranty Representation
Part of the contract Mere collateral inducement
Written on the policy, May be written in the policy
actually or by reference or may be oral.
Presumed material Must be proved to
material
Must be strictly complied Requires only substantial
with truth and compliance
LA SALLIAN COMMISION ON BAR OPERATIONS
14 COMMERCIAL LAW
CONDITIONS
Events signifying in its broadest sense either an
occurrence or a non-occurrence that alters the
previously existing legal relations of the parties to
the contract. They may be conditions precedent or
conditions subsequent.
EFFECT OF BREACH:
• Condition precedent - prevents the accrual of cause
of action
• Condition subsequent - avoids the policy or entitles
the insurer to rescind
• The insurer may also protect himself against
fraudulent claims of loss and this he
attempts to do by inserting in the policy
various conditions which take the form of
conditions precedent. For instance, there
are conditions requiring immediate notice
of loss or injury and detailed proofs of loss
within a limited period.
Exceptions: Provisions that may specify excepted
perils. It makes more definite the coverage indicated
by the general description of the risk by excluding
certain specified risk that otherwise would be
included under the general language describing the
risks assumed.
EFFECT
Limit the coverage of the contract.
RESCISSION
GROUNDS:
• Concealment
• Misrepresentation
• Breach of material warranty
• Breach of a condition subsequent
WAIVER OF THE RIGHT TO RESCIND:
Acceptance of premium payments despite the
knowledge of the ground for rescission.
LIMITATIONS ON THE RIGHT OF THE INSURER
TO RESCIND:
• Non-life- such right must be exercised prior to
the commencement of an action on the
contract;
be • Life- such right must be availed of during the
first two years from the date of issue of policy
or its last reinstatement; prior to
“incontestability.”
 INSURANCE 15 COMMERCIAL LAW

insurer is not liable

• Loss the proximate cause of • Loss by
CANCELLATION OF NON-LIFE INSURANCE which is the peril insured against insured’s
• Loss the immediate cause of willful act
POLICY which is the peril insured against • Loss due to
Right of the insurer to abandon the contract on the except where proximate cause is connivance of
occurrence of certain grounds after the effectivity an excepted peril the insured
• Loss through negligence of • Loss where
date of a non-life policy.
insured except where there was the excepted
gross negligence amounting to peril is the
willful acts proximate
GROUNDS: • Loss caused by efforts to rescue cause.
• Non-payment of premium; the thing from peril insured •
agains
• Conviction of a crime out of acts increasing the • If during the course of rescue,
hazard insured against; the thing is exposed to a peril
not insured against, which
permanently deprives the
• Discovery of fraud or material insured of its possession, in
misrepresentation; whole or in part

• Discovery of willful or reckless acts of omissions

increasing the hazard insured against; Proximate Cause
An event that sets all other events in motion without
• Physical changes in property making the any intervening or independent case, without which
property uninsurable; and the injury or loss would not have occurred.

• Determination by the Insurance Commissioner

that the continuation of the policy would violate REQUISITES FOR RECOVERY UPON INSURANCE
the Insurance Code. • Insured must have insurable interest in the
subject matter;

REQUIREMENTS: • Interest is covered by the policy;

• Prior notice of cancellation to the insured;
• Notice must be in writing, mailed or delivered
to the named insured at the address shown in
the policy;
• Notice must state which of the grounds set forth
in Sec. 64 is relied upon and upon request of the
insured, the insurer must furnish facts on which
the cancellation is based;
• Grounds should have existed after
effectivity date of the policy.
• Loss;
• Loss must be proximately caused by the peril
insured against.
1. NOTICE AND PROOF OF LOSS
More or less formal notice given to the insurer by the
insurer/claimant in the policy if the loss insured
against occurred.
the
• Purpose: Apprise the insurer for it to gather
information while the evidence is still fresh

• Actual notice is sufficient. Formal notice is not

H. Claims necessary in case there’s actual notice.

Settlement and
Subrogation
Fire insurance Other types of insurance
Required Not required
Failure to give notice Failure to give notice will not
Injury or damage sustained by the insured in will defeat the right exonerate the insurer, unless there
consequence of the happening of one or more of the of the insured to is a stipulation in the policy
accidents or misfortune against which the insurer, in recover. requiring the insured to do so.
consideration of the premium, has undertaken to
indemnify the insured.22
2. GUIDELINES ON CLAIMS SETTLEMENT
Loss for which insurer is liable Loss for which The indemnification of the loss of the insured.

22
Bonifacio Bros. Inc. vs. Mora, 20 SCRA 261

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE 16 COMMERCIAL LAW

TIME FOR PAYMENT OF CLAIMS

Life Non-life
Maturing upon the The proceeds shall be paid
expiration of the term – within 30 days after the b. PRESCRIPTION OF ACTION
The proceeds are receipt by the insurer of proof Rules:
immediately payable to of loss, and ascertainment of • In the absence of an express stipulation in the
the insured, unless they the loss or damage by policy, it being based on a written contract, the
are made payable in agreement of the parties or action prescribes in 10 years.
installments or as by arbitration but not later
annuity, in which case, than 90 days from such • However the parties may validly agree on a
the installments or receipt of proof of loss
annuities shall be paid as whether or not ascertainment
shorter period provided it is not less than one
they become due. is had or made. year from the time the cause of action accrues.

Maturing at the death of • The cause of action accrues from the rejection
the insured, occurring of the claim of the insured and not from the
prior to the expiration of time of loss.
the term stipulated – The
proceeds are payable to
the beneficiaries within • It shall commence from the denial of the claim,
60 days after presentation not from the resolution of the motion for
and filing of proof of reconsideration, otherwise it can be used by the
death. insured as a scheme or device to waste time
until the evidence which may be used against
him is destroyed.24

• In case of an unreasonable delay in the payment
of the insured’s claim by the insurer, the
insured can recover: 1) attorney’s fees; 2)
expenses incurred by reason of the unreasonable
withholding; 3) interest at double the legal
interest rate fixed by the Monetary Board; and
4) the amount of the claim.23
• In CMVLI, the written notice of claim must be
filed within 6 months from the date of the
accident otherwise the claim is deemed waived.
The suit for damages either with the proper
court or with the Insurance Commissioner should
be filed within 1 year from the date of the
denial of the claim by the insurer, otherwise
claimant’s right of action shall prescribe.

A. UNFAIR CLAIMS SETTLEMENT; SANCTIONS

Any of the following acts by the 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; or
c. SUBROGATION
Subrogation is a process of legal substitution. The
insurer, after paying the amount covered by the
insurance policy, steps in to 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.
The Right of Subrogation stems from Art. 2207 of the
Civil Code.
Subrogation applies only to property insurance and
non-life insurance.

(4) Compelling policy holders to institute suits to

recover amounts due under its policies by
offering without justifiable reason
Transfer of Policy
substantially less than the amounts Life Insurance
ultimately recovered in suits brought by Can be transferred even without the consent of the
them. insurer (except when there is a stipulation requiring
the consent of the insurer before transfer).

23 24
Zenith Insurance Corp. vs. CA, 185 SCRA 398 Sun Insurance Office, Ltd. v. CA, 195 SCRA

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE
• Reason: The policy does not represent a personal
agreement between the insured and the insurer.
Property insurance
It cannot be transferred without the consent of the
insurer.
• Reason: The insurer approved the policy based on
the personal qualification and the insurable
interest of the insured.
Casualty insurance
It cannot be transferred without the consent of the
insurer.
• Reason: The moral hazards are as great as those
of property insurance.
Fire insurance
Not subject to assignment, being strictly a personal
contract.
• Reason: Insurer is concerned with the moral
character of the insured.
Marine insurance
Not assignable without the consent of the insurer
CHANGE OF INTEREST IN THE THING INSURED
• The mere 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.
Reason: Insurance contract is personal.
Purpose: To provide against changes which might give
a motive to destroy the property or might lessen the
interest of the insured in protecting or guarding it.
• Therefore, the purchaser of the insured policy
should obtain a transfer of the policy of
insurance, if NOT then nobody can recover on
the insurance policy in case the thing insured
was purchased because the purchaser is not a
party to the policy and the seller had no more
insurable interest.
• Here, the insurance policy is not rendered void,
it is merely SUSPENDED by a change of interest
Exceptions:
• Life, health and accident insurance;
• Change in interest in the thing insured after
occurrence of an injury which results in a loss;
LA SALLIAN COMMISION ON BAR OPERATIONS
17 COMMERCIAL LAW
• Change in interest in one or more of several
distinct things separately insured by one policy;
• Change of interest, by will or succession, on the
death of the insured;
• Transfer of interest by one of several partners,
joint owners, or owners in common, who are
jointly insured, to others;
• 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;
• 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.
Risk
WHAT MAY BE INSURED AGAINST:
• Future contingent event resulting in loss or
damage (e.g., possible destruction of cargo)
• Past unknown event resulting in loss or damage
(e.g., fact of past sinking of a vessel unknown to
the parties)
• Contingent liability (e.g., reinsurance)
Risk
The chance of loss. If loss is certain to happen, no
risk is involved.
Peril
A contingent or unknown event which may cause a
loss. Its existence creates the risk. It can be covered
or excluded by a policy. Ex. fires, floods, accident,
etc.
Hazard
The condition or factor, tangible or intangible,
which may create or increase the chance of loss
from a given peril.
Physical hazards
Everything relating to location, structure,
occupancy, exposure, etc (e.g., pile of
papers, stored gasoline in the premises,
unsafe brakes in the car).
Moral hazards
Factors that involve mental attitudes in
which appraisal of this hazard requires the
study of the character of the person under
 INSURANCE
consideration in the light of his reputation
(e.g., hazards created by dishonesty,
insanity, carelessness)
• In practice, the terms are used interchangeably
or may be given more than one meaning.
KINDS OF INSURABLE RISKS
PERSONAL RISKS
Involves a person, it is often divided into life and
health risks and mainly concerned with the time of
death or disability.
PROPERTY RISKS
Involves loss or damage to property
• Direct losses
By fire, lightning, etc. offer a constant threat of
loss on the property itself.
• Indirect losses
Involves loss of profits, rents, or favourable
leases.
LIABILITY RISKS
Involves liability for the injury to the person or
property of others
• occasioned by the law on liability (torts).
• also called third party risks because insurance is
used to pay a “third party”, as agreed by the
insurer and the insured.
• includes bodily injury and property damage risks
REQUIREMENTS FOR RISKS TO BE INSURABLE
1. Importance
The loss should be important enough. An attempt to
cover every small loss would increase the cost of
protection.
2. Calculability
Risk must be calculable, if not, it is impossible to
determine the premiums.
3. Definiteness of Loss
As to cause, time, place, amount.
4. No catastrophic loss
When a large number of people are subject to the
same kind of losses, it is an obvious deviation of the
principle that losses of a few are borne by the
contributions of many. Thus, war and political risks
are often excluded. They may sometimes be
shouldered by the State.
LA SALLIAN COMMISION ON BAR OPERATIONS
18 COMMERCIAL LAW
5. Accidental Nature
Insurance is intended to cover fortuitous events.
Intentional losses are uninsurable because they are
against public policy. Other losses are commonly
expected: wear and tear
• The above requirements are not absolute.
Insurability is relative. What is insurable varies
among insurers and may change over time.
Particular Kinds of
Contracts of
Insurance
1. MARINE INSURANCE
Insurance against risks connected with navigation, to
which a ship, cargo, freightage, profits or other
insurable interest in movable property, may be
exposed during a certain voyage or a fixed period of
time.
Coverage:
Insurance against loss or damage to
• Vessels, goods, freight, cargo, merchandise,
profits, money, valuable papers, bottomry
and respondentia, and interest in respect to
all risks or perils of navigation;
• Persons or property in connection with
marine insurance;
• Precious stones, jewels, jewelry and
precious metals whether in the course of
transportation or otherwise; and
• Bridges, tunnels, piers, docks and other aids
to navigation and transportation.
• Cargo can be the subject of marine insurance,
and once it is entered into, the implied
warranty of seaworthiness immediately attaches
to whoever is insuring the cargo, whether he be
the shipowner or not.25
MARINE PROTECTION AND INDEMNITY
INSURANCE
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,
25
Roque v. IAC, 139 SCRA 596
 INSURANCE
illness or death or for loss of or damage to the
property of another person.
MAJOR DIVISIONS OF MARINE INSURANCE:
1. OCEAN MARINE INSURANCE
Provides protection to property frequently exposed
to loss while it is transportation form one location to
another.
Scope:
• Ships or hulls;
• Goods or cargoes;
• Earnings such as freight, passage money,
commissions, or profits;
• Liability incurred by the owner or any party
interested in or responsible for the insured
property by reason of maritime perils.
2. INLAND MARINE INSURANCE
Covers primarily the land or over the land
transportation perils of property shipped by
railroads, motor trucks, airplanes, and other means
of transportation.
CLASSES OF INLAND MARINE INSURANCE:
a. Property in transit
Provides protection to property frequently exposed
to loss while it is transportation form one location to
another.
b. Bailee liability
Insurance for those who have temporary custody of
the goods.
c. Fixed transportation property
They are so insured because they are held to be an
essential part of the transportation system such as
bridges, tunnels, and other instrumentalities of
transportation and communication
d. Floater
Provides insurance to follow the insured property
wherever it may be located, subject always to the
territorial limits of the contract.
INSURABLE INTEREST
A. PARTIES IN THE CONTRACT OF INSURANCE
Shipowner
Over the vessel to the extent of its value, except
that if chartered, the insurance is only up to the
amount not recoverable from the charterer.
Expected freightage
No insurable interest if he will be compensated by
LA SALLIAN COMMISION ON BAR OPERATIONS
19 COMMERCIAL LAW
charterer for the value of the vessel, in case of loss.
Cargo owner
Over the cargo and expected profits
Charterer
Over the amount he is liable to the shipowner, if the
ship is lost or damaged during the voyage
Charter Party
A contract by which an entire ship or some principal
part thereof is lent by the owner to another person
for a specified time or use.
TYPES:
1. Bare boat or demise charter
The ship-owner turns over full possession and control
of his vessel to the charterer, who then undertakes
to provide a crew and victuals and supplies and fuel
for her during the term of the charter.
• The charterer is treated as owner pro hac vice
of the vessel, the charterer assuming in large
measure the customary rights and liabilities of
the ship-owner in relation to third persons who
have dealt with him or with the vessel.
• “Under the charterer’s direction”- master and
crew then become agents and servants or
employees of the charterer, and the charterer
through the agency of the master, has
possession and control of the vessel during the
charter period.
2. Contract of affreightment
The owner of the vessel leases part or all of its space
to haul goods for others. It is a contract of special
service to be rendered by the owner of the vessel
who retains the possession, command and navigation
of the ship, the character or freighter merely having
use of the space in the vessel in return for the
payment of the charter hire or freight.
• Voyage charter or trip charter
A contract for the carriage of goods, from one or
more ports of loading to one or more ports of
unloading, on one or on a series of voyages.
• Time charter
A contract for the use of a vessel for a specified
period or for the duration of one or more
specified voyages. What time charterer acquires
is the right to utilize the carrying capacity and
facilities of the vessel and to designate her
destinations during the term of the charter.
• The charterer is free from liability to third
persons in respect to the ship.
 INSURANCE 20 COMMERCIAL LAW

B. IN LOANS ON BOTTOMRY AND RESPONDENTIA
The insurable interest of the owner of the ship
hypothecated by bottomry is only the excess of its
value over the amount secured by bottomry since a
loan on bottomry partakes of the nature of an
insurance coverage to the extent of the loan
accommodation
• Owner/Debtor- difference between the value of
vessel or goods and the amount of loan.
• Creditor/lender- amount of the loan
to protect the property against a peril for which
the insurer would have been liable.
MATTERS ALTHOUGH CONCEALED, WILL NOT
VITIATE THE CONTRACT EXCEPT WHEN THEY
CAUSED THE LOSS
• National character of the insured;
• Liability of the thing insured to capture or
detention;

Loan on Bottomry • Liability to seizure from breach of foreign laws;

One which is payable only if the vessel given as
security for the loan completes in safety the • Want of necessary documents; and
contemplated voyage.
• Use of false or simulated papers.
• The same rule would apply to the hypothecation
of the cargo by respondentia.
DISTINCTIONS ON CONCEALMENT
SPECIAL MARINE INSURANCE CONTRACTS AND
CLAUSES Marine Insurance Other Property Insurance

• All Risks Policy – insurance against all causes of The information of the belief The information or belief
conceivable loss or damage or expectation of 3rd persons of a 3rd party is not
is material and must be material and need not be
Except: communicated communicated unless it
proceeds form an agent of
• Otherwise excluded in the policy the insured whose duty it
• Due to fraud or intentional misconduct on the is to give information
part of the insured The concealment of any fact Concealment of any
in relation to any of the material fact will vitiate
The insured has the initial burden of proving that the matters stated in Sec. 110 the entire contract,
cargo was in good condition when the policy does not vitiate the entire whether or not the loss
attached and that the cargo was damaged when contract but merely results for the risk
exonerates the insurer from concealed.
unloaded from the vessel; thereafter, the burden
a risk resulting from the fact
then shifts to the insurer to show the exception to concealed
the coverage.26

• Barratry Clause- provides that there can be no

REPRESENTATION
recovery on the policy in case of any willful
misconduct on the part of the master or crew in An intentionally false representation by a person
pursuance of some unlawful or fraudulent insured by a contract of marine insurance in:
purpose without consent of owners, and to the • Any material respect;
prejudice of the owner’s interest. (Roque vs.
IAC, 139 SCRA 596) • In respect of any fact on which the
character and nature of the risk depends
• Inchamaree Clause- makes the insurer liable for
loss or damage to the hull or machinery arising • The general rules on representation are
from the: applicable.
• Negligence of the captain, engineers, crew
• Explosions, breakage of shafts
• Latent defect of machinery or hull. EFFECT OF FALSE REPRESENTATION BY THE
INSURED
• Sue and Labor Clause- clause under which the • Intentional – avoids the policy.
insurer may become liable to pay the insured, in
addition to the loss actually suffered, such • Not intentional but the fact misrepresented is
expenses as he may have incurred in his efforts material to the risk – the insurer may rescind
the contract from the time the representation
becomes false.
26
Filipinas Merchants Insurance vs. Court of Appeals, 179 SCRA
638

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE
IMPLIED WARRANTIES
• Seaworthiness of the ship at the inception
of the insurance;
• Against improper deviation;
• Against illegal venture;
• Warranty of neutrality: the ship will carry
the requisite documents of nationality or
neutrality of the ship or cargo where such
nationality or neutrality is expressly
warranted.
• Presence of insurable interest
• While the payment by the insurer for the
insured value of the lost cargo operates as a
waiver of the insurer’s 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 vessel’s seaworthiness by the
insurer as to foreclose recourse against the
common carrier for any liability under the
contractual obligation as such common carrier.27
Seaworthiness
A relative term depending upon the nature of the
ship, voyage, service and goods, denoting in general
a ship’s fitness to perform the service and to
encounter the ordinary perils of the voyage,
contemplated by the parties to the policy.
• 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:
• In the case of a time policy, the ship must
be seaworthy at the commencement of
every voyage she may undertake.
• 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.
• In the case of a voyage policy
contemplating a voyage in different stages,
the ship must be seaworthy at the
commencement of each portion.
27
Delsan Transportation Lines vs. CA, 364 SCRA 24
LA SALLIAN COMMISION ON BAR OPERATIONS
21 COMMERCIAL LAW
• 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.28
DEVIATION
Departure from the course of the voyage insured, or
an unreasonable delay in pursuing the voyage or the
commencement of an entirely different voyage.
Instances:
• Departure of vessel from the course of the
sailing fixed by mercantile usage.
• Departure of vessel from the most natural,
direct and advantageous route if not fixed by
mercantile usage.
• Unreasonable delay in pursuing voyage.
• Commencement of an entirely different voyage.
KINDS:
1. Proper
In case of loss, the insurer is still liable –
• When caused by circumstances outside the
control of the ship captain or ship owner;
• When necessary to comply with a warranty
or to avoid a peril;
• When made in good faith to avoid a peril;
• When made in good faith to save human life
or to relieve another vessel in distress.
2. Improper
Every deviation not specified. And in case of loss
or damage, the insurer is not liable.
LOSS
1. TOTAL
Actual -
• Total destruction;
• Irretrievable loss by sinking;
• Damage rendering the thing valueless; or
• Total deprivation of owner of possession of
thing insured. [Sec. 130]
Constructive -
28
Roque v. IAC, 139 SCRA 596
 INSURANCE 22 COMMERCIAL LAW

• Actual loss of more than ¾ of the value of the destination.

object;
Exceptions:
• Damage reducing value by more than ¾ of the • After the separation of interests liable to
value of the vessel and of cargo; and contribution
• When the insured has neglected or waived his
• Expense of transshipment exceed ¾ of value right to contribution
of cargo. [Sec. 131, in relation to Sec. 139]

• In case of constructive total loss, insured may: FREE FROM PARTICULAR AVERAGE (FPA)
• Abandon goods or vessel to the insurer CLAUSE
and claim for whole insured value OR
A clause agreed upon in a policy of marine insurance
• Without abandoning vessel, claim for
in which it is stated that the insurer shall not be
partial actual loss.
liable for a particular average, such insurer shall be
free therefrom, but he shall continue to be liable for
2. PARTIAL
his proportion of all general average losses assessed
That which is not total.
upon the thing insured.
AVERAGE
Any extraordinary or accidental expense incurred ABANDONMENT
during the voyage for the preservation of the vessel,
The act of the insured by which, after a constructive
cargo, or both, and all damages to the vessel and
total loss, he declared the relinquishment to the
cargo from the time it is loaded and the voyage
insurer of his interest in the thing insured.
commenced until it ends and the cargo unloaded.
REQUISITES FOR VALIDITY:
General Particular
• Actual relinquishment by the person insured of
Has inured to the common Has not inured to the his interest in the thing insured;
benefit and profit of all common benefit and profit
persons interested in the of all persons interested in • Constructive total loss;
vessel and cargo the vessel and her cargo.
To be borne equally by all To be borne alone by the • Abandonment be neither partial nor conditional;
of the interests concerned owner of the cargo or the
in the venture. vessel, as the case may be.
• Must be made within a reasonable time after
Requisites for the right to
claim contribution: receipt of reliable information of the loss;
Common danger to the
vessel or cargo; • Factual;
Part of the vessel or cargo
was sacrificed deliberately; • Give notice thereof to the insurer which may be
Sacrifice must be for the done orally or in writing;
common safety or for the
benefit of all;
Sacrifice must be made by • Notice of abandonment must be explicit and
the master or upon his must specify the particular cause of the
authority; abandonment.
It must be not be caused by
any fault of the party asking
the contribution; EFFECTS:
It must be successful, i.e.
• Transfer of Interest
resulted in the saving of the
vessel or cargo; and Equivalent to a transfer by the insured of his
necessary. interest to the insurer with all the chances of
recovery and indemnity.

RIGHTS OF INSURED IN CASE OF GENERAL • Transfer of Agency

AVERAGE
The insured may either hold the insurer directly
liable for the whole of the insured value of the
property sacrificed for the general benefit,
subrogating him to his own right of contribution or
demand contribution from the other interested
parties as soon as the vessel arrives at her
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.
If an insurer refuses to accept a valid abandonment,
he is liable upon an actual total loss, deducting form
the amount any proceeds of the thing insured which

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE 23 COMMERCIAL LAW

may have come to the hands of the insured. may also be waived expressly or impliedly by
the insurer

CO-INSURANCE
• A marine insurer is liable upon a partial loss,
MEASURE OF INDEMNITY
only for such proportion of the amount insured
by him as the loss bears to the value of the
whole interest of the insured in the property
insured.
• When the property is insured for less than its
value, the insured is considered a co-insurer of
the difference between the amount of insurance
and the value of the property.
• It is very crucial to determine whether a marine
REQUISITES:
• Loss is partial.
• The amount of insurance is less than the value
of the property insured.
RULES:
• Co-insurance applies only to marine insurance.
• There cannot be co-insurance in life insurance.
• Open policy- only the expense necessary to
replace the thing lost or injured in the
condition it was at the time of the injury.
• Valued policy- the parties are bound by the
valuation, in the absence of fraud or
mistake.
vessel is covered by a marine insurance or fire
insurance. The determination is important for 2
reasons:
• Rules on constructive total loss and
abandonment and co-insurance apply only
to marine insurance.
• Rule on co-insurance applies to fire
insurance only if expressly agreed upon.

• Co-insurance applies in fire insurance when

expressly provided for by the parties. DISTINCTIONS OF OCEAN MARINE AND FIRE
POLICIES
Co-Insurance Reinsurance • When considered as OCEAN marine insurance -
A percentage in the value of Situation where the Policy on a vessel engaged in navigation,
the insured property which the insurer procures a 3rd although it insures against fire risks only.
insured himself assumes to act party called the
as insurer to the extent of the reinsurer to insure him • When considered as FIRE insurance :
deficiency in the insurance of against liability by
• When the hazard is fire alone and the
the insured property. In case of reason of an original
loss or damage, the insurer will insurance. Basically, subject is an unfinished vessel, which is not
be liable only for such reinsurance is an afloat for voyage. - In the absence of
proportion of the loss or insurance against express agreement that it shall be a marine
damage as the amount of the liability which the insurance policy.
insurance bears to the original insurer may
designated percentage of the incur in favor of the • When the policy insured materials in a
full value of the property original insured. shipyard for use in constructing vessel.
insured.

• When it is a fire insurance policy, while a

vessel is moored and in use as a hospital.
2. FIRE INSURANCE
A contract by which the insurer for a consideration
agrees to indemnify the insured against loss of, or ALTERATION AS A SPECIAL GROUND FOR
damage to, property by hostile fire (including allied RESCISSION BY INSURER
lines- loss by lightning, windstorm, tornado or
earthquake and other allied risks, when such risks REQUISITES:
are covered by extension to fire insurance policies or • Use or condition of the thing is specifically
under separate policies). limited or stipulated in the policy.

PREREQUISITES TO RECOVERY: • Such use or condition as limited by the policy is

altered.
1. Notice of loss
Must be immediately given, unless delay is • Made without the consent of the insurer.
waived expressly or impliedly by the insurer
• Made by means within the control of the
2. Proof of loss insured.
According to best evidence obtainable. Delay

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE
• Increases the risk.
• Violation of a policy provision.
FALL-OF-BUILDING CLAUSE
A clause in a fire insurance policy that if the building
or any part thereof falls, except as a result of fire,
all insurance by the policy shall immediately cease.
OPTION TO REBUILD CLAUSE
A clause giving the insurer the option to reinstate or
replace the property damaged or destroyed or any
part thereof, instead of paying the amount of the
loss or the damage.
• The insurer, after electing to rebuild, cannot be
compelled to perform this undertaking by
specific performance because this is an
obligation to do, not to give.
• The remedy is Art. 1167. [NCC]
• Insured not a co-insurer in fire insurance- in a
usual contract of fire insurance, the insurer is
required to give full indemnity for a partial loss
up to the amount written in the policy, even
though the property be very inadequately
insured. (Unlike in marine insurance where the
insured becomes a co-insurer as to the value of
the thing not insure.
3. CASUALTY OR ACCIDENT INSURANCE
Insurance covering loss or liability arising from
accident or mishap, excluding those falling under
other types of insurance such as fire or marine.
CLASSIFICATIONS:
• Accident or health insurance- insurance
against specified perils which may affect
the person and/or property of the insured
(examples: personal accident,
robbery/theft insurance).
• Third party liability insurance- insurance
against specified perils which may give rise
to liability on the part of the insured for
claims for injuries to or damage to property
of others (examples: workmen’s
compensation, motor vehicle liability).
• Insurable interest is based on the interest of the
insured in the safety of persons, and their
property, who may maintain an action against
him in case of their injury or destruction,
respectively.
LA SALLIAN COMMISION ON BAR OPERATIONS
24 COMMERCIAL LAW
• In a third party liability (TPL) insurance
contract, the insurer assumes the obligation by
paying the injured third party to whom the
insured is liable. Prior payment by the insured
to the third person is not necessary in order that
the obligation may arise. The moment the
insured becomes liable to third persons, the
insured acquires an interest in the insurance
contract which may be garnished like any other
credit.29
• Aside from compulsory motor vehicle liability
insurance, the Insurance Code contains no other
provisions applicable to casualty insurance.
Therefore, such casualty insurance are governed
by the general provisions applicable to all types
of insurance, and outside of such statutory
provisions, the rights and obligations of the
parties must be determined by their contract,
taking into consideration its purpose and always
in accordance with the general principles of
insurance law.
• In burglary, robbery and theft insurance, the
opportunity to defraud the insurer – the moral
hazard – is so great that insurer have found it
necessary to fill up the policies with many
restrictions designed to reduce the hazard.
Persons frequently excluded are those in the
insured’s service and employment. The purpose
of the exception is to guard against liability
should theft be committed by one having
unrestricted access to the property.30
RIGHT OF A THIRD PARTY INJURED TO SUE THE
INSURER
1. Indemnity against liability
A third party injured can directly sue the
insurer.
2. Indemnity for actual loss or reimbursement after
actual payment by the insured
A third party has no cause of action against the
insurer31
• The insurer is not solidarily liable with the
insured. The insurer’s liability is based on
contract; that of the insured is based on torts.
Furthermore, the insurer’s liability is limited by
the amount of the insurance coverage.32
Intentional
Implies the exercise of the reasoning faculties,
consciousness and volition. Where a provision of the
29
Perla Comapnia de Seguro, Inc vs. Ramolete, 205 SCRA 487
30
Fortune Insurance vs. CA, 244 SCRA 208
31
Bonifacio Bros. v. Mora, 20 SCRA 261
32
Supra note 4
 INSURANCE
policy excludes intentional injury, it is the intention
of the person inflicting the injury that is controlling.
If the injuries suffered by the insured clearly
resulted from the intentional act of the third person,
the insurer is relieve from liability as stipulated.33
Accidental
That which happens by chance or fortuitously,
without intention or design, which is unexpected,
unusual and unforeseen.
NO ACTION CLAUSE
A requirement in a policy of liability insurance which
provides that suit and final judgment be first
obtained against the insured; that only thereafter
can the person injured recover on the policy.34
4. COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE (CMVLI)
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 sustained35
• It is the only compulsory insurance coverage
under the Insurance Code.
• It applies to all vehicles whether public and
private vehicles.
METHOD OF COVERAGE
• Insurance policy
• Surety bond
• Cash deposit
CLAIMANTS:
• Passenger
• 3rd party
Passenger
Any fare-paying person being transported and
33
Biagtan v. the Insular Life Assurance Co. Ltd., 44 SCRA 58,
1972
34
Guingona vs. Del Monte, 20 SCRA 1043
35
Shafer v. Judge, RTC, 167 SCRA 386
LA SALLIAN COMMISION ON BAR OPERATIONS
25 COMMERCIAL LAW
conveyed in and by a motor vehicle for
transportation of passengers for compensation
(including: persons expressly authorized by law or by
the vehicle’s operator or his agents to ride without
fare).
Third Party
Any person other than the passenger (excluding:
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.
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
Guarantee compensation or indemnity to injured
persons in motor vehicle accidents.
ESSENCE
Provide victims of vehicular accidents or their heirs
immediate compensation although in limited
amount, pending final determination of who is
responsible for the accident and liable for the
victims injuries or death.
RULES:
• Total indemnity - maximum of P5,000.
• Proofs of loss -
• Police report of accident;
• Death certificate and evidence sufficient to
establish proper payee;
• Medical report and evidence of medical or
hospital disbursement.
• Claim may be made against one motor vehicle
only.
• Proper insurer from which to claim -
• Occupant: Insurer of the vehicle in which
the occupant is riding, mounting or
dismounting from;
• Other case: Insurer of the directly offending
vehicle.
• 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
 INSURANCE 26 COMMERCIAL LAW

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.36
if it is executed by the surety as a vocation, and
not incidentally.
• Suretyship, especially in fidelity bonding, is thus
treated like non-life insurance in some respects.

• 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.
SPECIAL CLAUSES
A. AUTHORIZED DRIVER CLAUSE
• A clause which aims to indemnify the insured
owner against loss or damage to the car but
limits the use of the insured vehicle to the
insured himself or any person who drives on his
order or with his permission [Villacorta v.
Insurance Commissioner].
• The requirement that the person driving the
insured vehicle is permitted in accordance with
the licensing laws or other laws or regulations to
drive the motor vehicle (licensed driver) is
applicable only if the person driving is other
than the insured.
NATURE OF LIABILITY OF SURETY
• Solidary
• Limited to the amount of the bond
• It is determined strictly by the terms of the
contract of suretyship in relation to the
principal contract between the obligor and the
obligee.
TYPES OF SURETY BONDS
1. Contract Bonds
Bonds connected with construction and supply
contracts. They are for the protection of the
owner against a possible default by the
contractor to comply with his contract or his
possible failure to pay material men, laborers
and subcontractors.
• Performance bond- covering the faithful
performance of the contract
• Payment bond- covering the payment of
laborers and material men

2. Fidelity bonds
B. THEFT CLAUSE Surety pays an employer for loss growing out of
• A clause which includes theft as among the risks a dishonest act of his employee.
insured against.
• Industrial bond- required by private
• Where the car is unlawfully and wrongfully employers to cover loss through dishonesty
taken without the owner’s consent or of employees.
knowledge, such taking constitutes theft, and
thus, it is the “theft clause” and not the • Public official bond- required of public
“authorized driver clause that should apply.37 officers for the faithful performance of
their duties and as a condition of entering
upon the duties of their offices.
C. COOPERATION CLAUSE
• A clause which provides in essence that the 3. Judicial bonds
insured shall give all such information and Those which are required in connection with
assistance as the insurer may require, usually judicial proceedings. The purpose of requiring a
requiring attendance at trials or hearings. litigant to furnish a judicial bond is to indemnify
the adverse party against damages resulting
from the proceeding.
5. SURETYSHIP
Suretyship Property insurance
An agreement whereby a surety guarantees the
performance by the principal or obligor of an Accessory contract Principal contract
obligation or undertaking in favor of an obligee. 3 parties: surety, obligor 2 parties: insurer and
and oblige insured
• It is essentially a credit accommodation. Credit accommodation Contract of indemnity
However, it is considered an insurance contract Surety can recover from Insurer has no such right;
principal only right of subrogation
Bond can be cancelled only May be cancelled
36
Supra note 29 with consent of obligee, unilaterally either by
37
Palermo v. Pyramids Ins., 161 SCRA 677

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE 27 COMMERCIAL LAW

Commissioner or court insured or insurer on

grounds provided by law • One person might occupy all 3 positions by
Requires acceptance of No need of acceptance by naming his estate as beneficiary.
obligee to be valid any third party
Risk-shifting device; Risk-distributing device;
premium paid being in the premium paid as a ratable
nature of a service fee contribution to a common KINDS:
fund • Ordinary Life, General Life or Old Line Policy
Insured pays a fixed premium every year until
Surety Guaranty he dies. Surrender value after 3 years.
Assumes liability as Liability of the guarantor depends
• Group Life
a regular party to upon an independent agreement to
the undertaking pay if the primary debtor fails to do Essentially a single insurance contract that
so provides coverage for many individuals.
Primarily liable Secondarily liable
Not entitled to the Has this right to have all the • Limited Payment Policy
benefit of property of the debtor and legal insured pays premium for a limited period. If he
exhaustion of the remedies against the debtor first dies within the period, his beneficiary is paid; if
debtor’s assets exhausted before he can be he outlives the period, he does not get anything.
compelled to pay the creditor
Undertakes to pay if Undertakes to pay if the principal
• Endowment Policy
the principal does cannot pay
not pay
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.
6. LIFE INSURANCE
Insurance on human lives and insurance appertaining • Term Insurance
thereto or connected therewith which includes every Insurer pays once only, and he is insured for a
contract or pledge for the payment of endowments specified period. If he dies within the period,
or annuities. his beneficiaries benefits. If he outlives the
period, no person benefits from the insurance.
PARTIES IN A LIFE INSURANCE
• Industrial Life
• Owner of the policy- one who has the power to Life insurance entitling the insured to pay
name or change the beneficiary, to assign the premiums weekly, or where premiums are
policy (under certain conditions) cash it in for payable monthly or oftener.
its surrender value, or use it as a collateral in
obtaining a loan, and the obligation to pay the
premiums.
MORTGAGE REDEMPTION INSURANCE
• Cestui que vie – person whose life is the subject A life insurance taken pursuant to a group mortgage
of the policy. redemption scheme by the lender of money on the
life of a mortgagor who, to secure the loan,
• Beneficiary – one to whom the proceeds are mortgages the house constructed from the use of the
paid. proceeds of the loan, to the extent of the mortgage
indebtedness such that if the mortgagor dies, the
• Minor as beneficiary in a contract of life, health proceeds of his life insurance will be used to pay for
or accident insurance – the judicial guardian, his indebtedness to the lender assured and the
father, or mother may exercise, in behalf of said deceased’s heirs will thereby be relieved from
minor, any right under the policy, where the paying the unpaid balance of the loan.38
interest of the minor in the particular act
involved does not exceed twenty thousand
pesos. LIABILITY OF INSURER IN CERTAIN CAUSES OF
DEATH OF INSURED
• Such right may include, but shall not be
1. Suicide
limited to, obtaining a policy loan, Insurer is liable in the following cases:
surrendering the policy, receiving the
• If committed after two years from the date
proceeds of the policy, and giving the
of the policy’s issue or its last
minor's consent to any transaction on the
reinstatement;
policy.

• No need for court appointment or filing of a 38

Great Pacific Life Assurance Corp. vs. Court of Appeals, 316
bond. SCRA 677

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE 28 COMMERCIAL LAW

• If committed in a state of insanity

regardless of the date of the commission
unless suicide is an excepted peril. CASH SURRENDER VALUE
As applied to a life insurance policy, it is the amount
• If committed after a shorter period
the insured in case of default, after the payment of
provided in the policy
at least 3 full annual premiums, is entitled to
receive if he surrenders the policy and releases his
Any stipulation extending the 2-year period is
claims upon it.
null and void.

• Justice Vitug believes that death by suicide (if Fire and Marine
the insured is sane) or at the hands of the law Life Insurance
Insurance
obviates against recovery as being more in Contract of investment Contract of
consonance with public policy. indemnity
Always a valued policy May be open or
2. At the hands of the law (legal execution) valued
It is one of the risks assumed by the insurer May be transferred or assigned to Transferee or
under a life insurance policy in the absence of a any person even if he has no assignee must have
insurable interest an insurable interest
valid policy exception.
in the thing insured
Consent of the insurer is not Such consent is
3. Killing by the beneficiary required to the validity of the essential in the
The interest of a beneficiary in a life insurance assignment assignment
policy shall be forfeited when the beneficiary is Insurable interest in the life or Insurable interest in
the principal accomplice or accessory in willfully health of the person insured need the property insured
bringing about the death of the insured, in not exist after the insurance takes must exist not only
which event, the nearest relative of the insured effect or when the loss occurs when the insurance
shall receive the proceeds of said insurance if (must exist only when the takes effect but also
insurance takes effect, EXCEPT: if when the loss occurs
not otherwise disqualified.
the insurance was taken by the
creditor on the life of the debtor)
Exceptions: Insurable interest need not have Insurable interest
• Accidental killing; any legal basis must have a legal
• Self-defense; basis
• Insanity of the beneficiary at the time he The contingency that is The contingency
killed the insured. contemplated (death) is a certain insured may or may
event, the only uncertainty being not occur
the time when it will take place
• If the premiums paid came from conjugal
The liability of the insurer to make Liability is uncertain
funds, the proceeds are considered payment is certain, the only because the
conjugal. If the beneficiary is other than uncertain element being when happening of the
the insured’s estate, the source of such payment must be made peril insured against
premiums would not be relevant.39 is uncertain
Although it may be terminated by May be cancelled by
• The measure of indemnity in life or health the insured, it cannot be cancelled either party. Usually
insurance policy is the sum fixed in the by the insurer. Usually a long term for a term of 1 year
contract
policy except when a creditor insures the
The loss to the beneficiary caused Such loss can
life of his debtor. by the death of the insured can generally be
seldom be measured accurately in measured accurately
terms of cash value
IS THE CONSENT OF THE BENEFICIARY The beneficiary is under no The insured is
obligation to prove actual financial required to submit
NECESSARY TO THE ASSIGNMENT OF A LIFE loss as a result of the death of the proof of his actual
INSURANCE POLICY? insured in order to collect the pecuniary loss as a
insurance condition precedent
• If the designation of the beneficiary is
to collecting the
irrevocable, the beneficiary’s consent is insurance
essential because of his vested right.

• If the designation is revocable, the policy may

be assigned without such consent because the Variable Contract
beneficiary only has a mere expectancy to the
proceeds. Any policy or contract on either a group or individual
basis issued by an insurance company providing for
benefits or other contractual payments or values
39
Del Val v. Del Val, 29 Phil 534

LA SALLIAN COMMISION ON BAR OPERATIONS

 INSURANCE
thereunder to vary so as to reflect investment
results of any segregated portfolio of investment.
Insurance Commissioner
FUNCTIONS:
1. ADJUDICATORY/QUASI-JUDICIAL
• Exclusive original jurisdiction – Any
dispute in the enforcement of any policy
issued pursuant to Chapter VI (CMVLI).
• Concurrent original jurisdiction (with the
RTC) – Where the maximum amount
involved in any single claim is P100,000
(Sec. 416), except in case of maritime
insurance which is within the exclusive
jurisdiction of the RTC. (BP 129; admiralty
& maritime jurisdiction) OR Where the
amount exceeds P100,000, the RTC has
jurisdiction.
• The Insurance Commissioner has no jurisdiction
to decide the legality of a contract of agency
entered into between an insurance company and
its agent. The same is not covered by the term
“doing or transacting insurance business” under
Sec 2, ICP, neither is it covered by Sec. 416 of
the same Code which grants the Commissioner
adjudicatory powers.40
2. ADMINISTRATIVE/REGULATORY
• Enforcement of insurance laws
• Issuance, suspension or revocation of
certificate of authority
• Power to examine books and records, etc.
• Rule-making authority
• Punitive
Insurance Commission
Main agency charged with the enforcement of the
Insurance Code and other related.
NATURE OF POWERS OF THE INSURANCE
COMMISSION
1. REGULATORY OR NON-QUASI JUDICIAL-
GENERALLY PROVIDED IN SEC. 414.
• The authority to issue, or refuse issuance of, a
certificate of authority to a person or entity
40
Philippine American Life Insurance Co. v. Ansaldo, 234 SCRA
509
LA SALLIAN COMMISION ON BAR OPERATIONS
29 COMMERCIAL LAW
desiring to engage in insurance business in the
Philippines;
• To revoke or suspend such certificate of
authority upon a finding of the existence of
statutory grounds for such revocation or
suspension.
2. ADJUDICATORY OR QUASI-JUDICIAL-
GENERALLY DESCRIBED IN SEC. 416.
DUTIES AND FUNCTIONS OF THE INSURANCE
COMMISSION
1. To insure the solvency of insurance companies;
• Issue certificates of authority;
• Suspend or revoke the certificates of
authority;
• Require insurance companies to keep books,
records, accounts and vouchers;
• Require the setting up of reserves;
• Require the filing of annual statements;
• Require adequate rates;
• Pass upon and approve certain classes of
investments;
• Cause an examination, into the financial
conditions of insurance companies;
• Act as depository of securities;
• See that no non-life insurance company
shall retain any risk on any one subject of
insurance in an amount exceeding 20% of its
net worth;
• Rehabilitate or liquidate insolvent insurance
companies; and
• Maintain and administer the P10million
Security Fund as well as the Guaranty Fund.
2. To assure fair trade practices of insurance
companies and their agents;
• Approve policy forms;
• Require that rates be equitable and
reasonable;
• Adjudicate claims and complaints where the
amount involved does not exceed P100,000
•
in any single claim;
Prohibit unfair claims settlement practices;
and
• Accept legal processes for foreign insurance
companies without an agent.
3. To assure reasonable insurance service;
• License agents, brokers, adjusters, resident
agents, non-life company underwriters,
actuaries and rating organizations.
4. To promote national interest;
• Pass upon and approve investments of
insurance companies’ funds to insure that
technical reserves are invested locally;
• Require insurance companies to increase
their retention of local risks and/or reinsure
locally before ceding to unauthorized
INSURANCE 30 COMMERCIAL LAW

foreign companies whenever technically

feasible;
• Pass upon and approve reinsurance treaties;
and
• Pass upon remittances of reinsurance
premium on risks ceded abroad and of
claims for loss payable abroad.

LA SALLIAN COMMISION ON BAR OPERATIONS