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INSURANCE CODE
(P.D. No. 1460)
I. GENERAL CONCEPTS
CONTRACT OF INSURANCE
 An agreement whereby one
undertakes for a consideration to
indemnify another against loss, damage
or liability arising from an unknown or
contingent event. (Sec. 2, par. 2, IC)
“DOING AN INSURANCE BUSINESS OR
TRANSACTING AN INSURANCE
BUSINESS” (Sec. 2, par. 4)
1. Making or proposing to make, as
insurer, any insurance contract;
2. Making or proposing to make, as
surety, any contract of suretyship as
a vocation, not as a mere incident to
any other legitimate business of a
surety;
3. Doing any insurance business,
including a reinsurance business;
4. Doing or proposing to do any
business in substance equivalent to
any of the foregoing
II. CHARACTERISTICS OF AN INSURANCE
CONTRACT (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. Consensual – it is perfected by the
meeting of the minds of the parties.
2. Voluntary – the parties may
incorporate such terms and
conditions as they may deem
convenient.
3. Aleatory – it depends upon some
contingent event.
4. Unilateral – imposes legal duties only
on the insurer who promises to
indemnify in case of loss.
5. Conditional – It is subject to
conditions the principal one of
which is the happening of the event
insured against.
6. Contract of indemnity – Except life
and accident insurance, a contract
of insurance is a contract of
indemnity whereby the insurer
promises to make good only the loss
of the insured.
7. Personal – each party having in view
the character, credit and conduct of
the other.
REQUISITES OF A CONTRACT OF
INSURANCE (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. A subject matter which the insured
has an insurable interest.
2. Event or peril insured against which
may be any future contingent or
unknown event, past or future and a
duration for the risk thereof.
3. A promise to pay or indemnify in a
fixed or ascertainable amount.
4. A consideration known as “premium”.
5. Meeting of the minds of the parties.
5 CARDINAL PRINCIPLES IN INSURANCE
1. Insurable Interest
2. Principle of Utmost Good Faith
 An insurance contract requires utmost
good faith (uberrimae fidei) between
the parties. The applicant is enjoined to
disclose any material fact, which he
knows or ought to know.
 Reason: An insurance contract is an
aleatory contract. The insurer relies on
the representation of the applicant, who
is in the best position to know the state
of his health.
3. Contract of Indemnity
 It is the basis of all property
insurance. The insured who has insurable
interest over a property is only entitled
to recover the amount of actual loss
sustained and the burden is upon him to
establish the amount of such loss
(Reviewer on Commercial Law,
Professors Sundiang and Aquino)
Rules:
a. Applies only to property
insurance except when the
creditor insures the life of his
debtor.

b. Life insurance is not a contract
of indemnity.
c. Insurance contracts are not
wagering contracts. (Sec. 4)
4. Contract of Adhesion (Fine Print Rule)
 Most of the terms of the contract do
not result from mutual negotiations
between the parties as they are
prescribed by the insurer in final printed
form to which the insured may “adhere”
if he chooses but which he cannot
change. (Rizal Surety and Insurance Co.,
vs. CA, 336 SCRA 12)
5. Principle of Subrogation
 It is a process of legal substitution
where the insurer steps into the shoes of
the insured and he avails of the 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. (Malayan Insurance Co., Inc. v.
CA, 165 SCRA 536; see also Art. 2207,
NCC)
 Purposes: (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. To make the person who caused the
loss legally responsible for it.
2. To prevent the insured from
receiving a double recovery from the
wrongdoer and the insurer.
3. To prevent tortfeasors from being
free from liabilities and is thus
founded on considerations of public
policy.
 Rules:
1. Applicable only to property insurance.
2. The insurer can only recover from the
third person what the insured could have
recovered.
3. There can be no subrogation in cases:
a. Where the insured by his own act
releases the wrongdoer or third party
liable for the loss or damage;
b. 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;
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c. Where the insurer pays the insured for
a loss or risk not covered by the policy.
(Pan Malayan Insurance Company v.
CA, 184 SCRA 54)
d. In life insurance
e. For recovery of loss in excess of
insurance coverage
CONSTRUCTION OF INSURANCE
CONTRACT
 The ambiguous terms are to be
construed strictly against the insurer,
and liberally in favor of the insured.
However, if the terms are clear, there is
no room for interpretation. (Calanoc vs.
Court of Appeals, 98 Phil. 79)
III. DISTINGUISHING ELEMENTS OF AN
INSURANCE CONTRACT
1. The insured possesses an insurable
interest susceptible of pecuniary
estimation;
2. The insured is subject to a risk of loss
through the destruction or
impairment of that interest by the
happening of designated perils;
3. The insurer assumes that risk of loss;
4. Such assumption is part of a general
scheme to distribute actual losses
among a large group or substantial
number of persons bearing somewhat
similar risks; and
5. The insured makes a ratable
contribution (premium) to a general
insurance fund.
 A contract possessing only the first 3
elements above is a risk-shifting device.
If all the elements, it is a risk-
distributing device. (The Insurance Code
of the Philippines Annotated, Hector de
Leon, 2002 ed.)
IV. PERFECTION OF AN INSURANCE
CONTRACT
 An insurance contract is a consensual
contract and is therefore perfected the
moment there is a meeting of minds with
respect to the object and the cause or
consideration.
 What is being followed in insurance
contracts is what is known as the
“cognition theory”. Thus, “an
acceptance made by letter shall not bind
the person making the offer except from
the time it came to his knowledge”.

(Enriquez vs. Sun Life Assurance Co. of
Canada, 41 Phil. 269)
Binding Receipt
 A mere acknowledgment on behalf of
the company that its branch office had
received from the applicant the
insurance premium and had accepted
the application subject to processing by
the head office.
Cover Note (Ad Interim)
 A concise and temporary written
contract issued to the insurer through its
duly authorized agent embodying the
principal terms of an expected policy of
insurance.
Purpose: It is intended to give
temporary insurance protection coverage
to the applicant pending the acceptance
or rejection of his application.
 Duration: Not exceeding 60 days
unless a longer period is approved by
Insurance Commissioner (Sec. 52).
Riders
 Printed stipulations usually attached
to the policy because they constitute
additional stipulations between the
parties. (Ang Giok Chip vs. Springfield,
56 Phil. 275)
 In case of conflict between a rider
and the printed stipulations in the
policy, the rider prevails, as being a
more deliberate expression of the
agreement of the contracting parties.
(C. Alvendia, The Law of Insurance in
the Philippines, 1968 ed.)
Clauses
 An agreement between the insurer
and the insured on certain matter
relating to the liability of the insurer in
case of loss. (Prof. De Leon, p.188)
Endorsements
 Any provision added to the contract
altering its scope or application. (Prof.
De Leon, p.188)
POLICY OF INSURANCE
 The written instrument in which a
contract of insurance is set forth. (Sec.
49)
 Contents: (Sec. 51)
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1. Parties
2. Amount of insurance, except in open
or running policies;
3. Rate of premium;
4. Property or life insured;
5. Interest of the insured in the
property if he is not the absolute
owner;
6. Risk insured against; and
7. Duration of the insurance.
 Persons entitled to recover on the
policy (sec. 53): The insurance proceeds
shall be applied exclusively to the proper
interest of the person in whose name or
to whose benefit it is made, unless
otherwise specified in the policy.
 Kinds:
1. OPEN POLICY – value of thing insured
is not agreed upon, but left to be
ascertained in case of loss. (Sec. 60)
 The actual loss, as determined,
will represent the total indemnity
due the insured from the insurer
except only that the total indemnity
shall not exceed the face value of
the policy. (Development Insurance
Corp. vs. IAC, 143 SCRA 62)
2. VALUED POLICY – definite valuation
of the property insured is agreed by both
parties, and written on the face of
policy. (Sec. 61)
 In the absence of fraud or
mistake, the agreed valuation will be
paid in case of total loss of the
property, unless the insurance is for
a lower amount.
3. RUNNING POLICY – contemplates
successive insurances and which provides
that the object of the policy may from
time to time be defined (Sec. 62)
V. TYPES OF INSURANCE CONTRACTS
1. Life insurance
a. Individual life (Secs. 179–183, 227)
b. Group life (Secs. 50, last par., 228)
c. Industrial life (Secs. 229–231)
2. Non-life insurance
a. Marine (Secs. 99–166)
b. Fire (Secs. 167–173)
c. Casualty (Sec. 174)
3. Contracts of bonding or suretyship
(Secs. 175–178)
Note:

1. Health and accident insurance are
either covered under life (Sec. 180) or
casualty insurance. (Sec. 174).
2. Marine, fire, and the property aspect
of casualty insurance are also referred to
as property insurance.
VI. PARTIES TO INSURANCE CONTRACT
1. Insurer - Person who undertakes to
indemnify another.
 For a person to be called an
insurance agent, it is necessary
that he should perform the
function for compensation.
(Aisporna vs. CA, 113 SCRA 459)
2. Insured - The party to be indemnified
upon the occurrence of the loss. He must
have capacity to contract, must possess
an insurable interest in the subject of
the insurance and must not be a public
enemy.
 A public enemy- a nation with
whom the Philippines is at war
and it includes every citizen or
subject of such nation.
3. Beneficiary - A person designated to
receive proceeds of policy when risk
attaches.
 Rules in the designation of the
beneficiary:
a. LIFE
i. A person who insures his
own life can designate any
person as his beneficiary,
whether or not the
beneficiary has an insurable
interest in the life of the
insured subject to the
limitations under Art. 739
and Art. 2012 of the NCC.
 Reason: in essence, a life
insurance policy is no
different form a civil
donation insofar as the
beneficiary is concerned.
Both are founded on the
same consideration of
liberality. (Insular Life vs.
Ebrado, 80 SCRA 181)
ii. A person who insures the life
of another person and name
himself as the beneficiary
must have an insurable
interest in such life. (Sec.
10)
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iii. As a general rule, the
designation of a beneficiary
is revocable unless the
insured expressly waived the
right to revoke in the policy.
(Sec. 11)
iv. The interest of a beneficiary
in a life insurance policy
shall be forfeited when the
beneficiary is the principal
accomplice or accessory in
willfully bringing about the
death of the insured in which
event, the nearest relative
of the insured shall receive
the proceeds of said
insurance if not otherwise
disqualified. (Sec. 12)
b. PROPERTY
 The beneficiary of property
insurance must have an insurable
interest in such property, which
must exist not only at the time
the policy takes effect but also
when the loss occurs. (Sec. 13
and 18).
Effects of Irrevocable Designation Of
Beneficiary
 Insured cannot:
1. Assign the policy
2. Take the cash surrender value of
the policy
3. Allow his creditors to attach or
execute on the policy;
4. Add new beneficiary; or
5. Change the irrevocable
designation to revocable, even
though the change is just and
reasonable.
 The insured does not even retain the
power to destroy the contract by
refusing to pay the premiums for the
beneficiary can protect his interest by
paying such premiums for he has an
interest in the fulfillment of the
obligation. (Vance, p. 665, cited in de
Leon, p. 101, 2002 ed.)
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VII. INSURABLE INTEREST out of which the expectancy

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

separate and distinct from the other. the extent of his credit, the debt is
a. Mortgagor – As owner, has an extinguished.
insurable interest therein to the
extent of its value, even though the  In case a mortgagee insures his own
mortgage debt equals such value. interest and a loss occurs, he is entitled
The reason is that the loss or to the proceeds of the insurance but he
destruction of the property insured is not allowed to retain his claim against
will not extinguish the mortgage the mortgagor as the claim is discharged
debt. but it passes by subrogation to the
b. Mortgagee – His interest is only up insurer to the extent of the money paid
to the extent of the debt. Such by such insurer. (Palileo vs. Cosio)
interest continues until the
mortgage debt is extinguished. VIII. RISK
 What may be insured against:
 The lessor cannot be validly a 1. Future contingent event resulting in
beneficiary of a fire insurance policy loss or damage – Ex. Possible future
taken by a lessee over his merchandise, fire
and the provision in the lease contract 2. Past unknown event resulting in loss
providing for such automatic assignment or damage – Ex. Fact of past sinking
is void for being contrary to law and of a vessel unknown to the parties
public policy. (Cha vs. Court of Appeals, 3. Contingent liability – Ex. Reinsurance
227 SCRA 690)
IX. PREMIUM PAYMENTS
STANDARD OR OPEN OR LOSS  Consideration paid an insurer for
UNION PAYABLE undertaking to indemnify the insured
MORTGAGE MORTGAGE against a specified peril.
CLAUSE CLAUSE  Basis of the right of the insurer to
Subsequent acts Acts of the collect premiums: Assumption of risk.
of the mortgagor mortgagor affect
cannot affect the the mortgagee. GENERAL RULE: No policy issued by an
rights of the Reason: insurance company is valid and binding
assignee Mortgagor does until actual payment of premium. Any
not cease to be a agreement to the contrary is void. (Sec.
party to the 77)
contract. (Secs.
8 and 9) EXCEPTIONS:
1. In case of life or industrial life
Effects of Loss Payable Clause insurance, when the grace periods
a. The contract is deemed to be upon applies; (Sec. 77)
the interest of the mortgagor; hence, he 2. When the insurer makes a written
does not cease to be a party to the acknowledgment of the receipt
contract. premium; (Sec. 78)
b. Any act of the mortgagor prior to the 3. Section 77 may not apply if the
loss, which would otherwise avoid the parties have agreed to the payment
insurance affects the mortgagee even if of the premium in installments and
the property is in the hands of the partial payment has been made at
mortgagee. the time of the loss. (Makati
c. Any act, which under the contract of Tuscany Condominium Corp. v. CA,
insurance is to be performed by the 215 SCRA 462)
mortgagor, may be performed by the 4. Where a credit term has been
mortgagee with the same effect. agreed upon. (UCPB vs. Masagana
d. In case of loss, the mortgagee is Telemart, 308 SCRA 259)
entitled to the proceeds to the extent of 5. Where the parties are barred by
his credit. estoppel. (UCPB vs. Maagana
Telemart, 356 SCRA 307)
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1. When the risk has already

 Section 77 merely precludes the attached and the risk is entire and
parties from stipulating that the policy is indivisible.
valid even if the premiums are not paid. 2. In life insurance.
(Makati Tuscany Condominium Corp. v. 3. When the contract is rescindable
CA, 215 SCRA 462) or rendered void ab initio by the
fraud of the insured.
Effect of Acknowledgment of Receipt 4. When the contract is illegal and
of Premium in Policy: Conclusive the parties are in pari delicto.
evidence of its payment, so far as to
make the policy binding, PREMIUM ASSESSMENT
notwithstanding any stipulation therein
that it shall not be binding until the Levied and paid to Collected to meet
premium is actually paid. (Sec. 78) meet anticipated actual losses.
losses.

Payment is not Payment is

enforceable against enforceable once
ENTITLEMENT OF INSURED TO RETURN the insured. levied unless
OF PREMIUMS PAID otherwise agreed
upon.
A. Whole:
1. If the thing insured was never
exposed to the risks insured Not a debt. It becomes a debt
against; (Sec. 79) once properly
levied unless
2. If contract is voidable due to the
otherwise agreed.
fraud or misrepresentation of
insurer or his agents; (Sec. 81)
X. TRANSFER OF POLICY
3. If contract is voidable because of
1. Life Insurance
the existence of facts of which
 It can be transferred even without the
the insured was ignorant without
consent of the insurer except when
his fault; (Sec. 81)
there is a stipulation requiring the
4. When by any default of the
consent of the insurer before transfer.
insured other than actual fraud,
(Sec. 181)
the insurer never incurred
 Reason: The policy does not represent
liability; (Sec. 81)
a personal agreement between the
5. When rescission is granted due
insured and the insurer.
to the insurer’s breach of
2. Property insurance
contract. (Sec. 74)
 It cannot be transferred without the
B. Pro rata:
consent of the insurer.
1. When the insurance is for a
 Reason: The insurer approved the
definite period and the insured
policy based on the personal
surrenders his policy before the
qualification and the insurable interest
termination thereof;
of the insured.
 Exceptions:
3. Casualty insurance
a. policy not made for a
 It cannot be transferred without the
definite period of time
consent of the insurer. (Paterson cited
b. short period rate is
in de Leon p. 82)
agreed upon
 Reason: The moral hazards are as
c. life insurance policy
great as those of property insurance.
2. When there is over-insurance
(Sec. 82);
CHANE OF INTEREST IN THE THING
INSURED
Instances when premiums are not
 The mere (absolute) transfer of the
recoverable:
thing insured does not transfer the
policy, but suspends it until the same

person becomes the owner of both the
policy and the thing insured. (Sec. 58)
 Reason: Insurance contract is
personal.
GENERAL RULE: A change of interest in
any part of a thing insured
unaccompanied by a corresponding
change of interest in the insurance
suspends the insurance to an equivalent
extent, until the interests in the thing
and the interest in the insurance are
vested in the same person. (Sec. 20)
EXCEPTIONS:
1. In life, health and accident
insurance.(Sec. 20);
2. Change in interest in the thing
insured after occurrence of an
injury which results in a loss.
(Sec. 21);
3. Change in interest in one or
more of several distinct things
separately insured by one policy.
(Sec. 22);
4. Change of interest, by will or
succession, on the death of the
insured. (Sec. 23);
5. Transfer of interest by one of
several partners, joint owners,
or owners in common, who are
jointly insured, to others. (Sec.
24);
6. When a policy is so framed that
it will inure to the benefit of
whomsoever, during the
continuance of the risk, may
become the owner of the
interest insured. (Sec. 57);
7. When there is an express
prohibition against alienation in
the policy, in case of alienation,
the contract of insurance is not
merely suspended but avoided.
(Art. 1306, NCC).
XI. ASCERTAINMENT AND CONTROL OF
RISK AND LOSS
A. Four Primary Concerns of the
Parties:
1. Correct estimation of the risk;
2. Precise delimitation of the risk;
3. Control of the risk;
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4. Determining whether a loss occurred
and if so, the amount of such loss.
B. Devices used for ascertaining and
controlling risk and loss:
1. Concealment – A neglect to
communicate that which a party knows
and ought to communicate (Sec. 26)
 Requisites:
a. A party knows a fact which he
neglects to communicate or
disclose to the other.
b. Such party concealing is duty
bound to disclose such fact to
the other.
c. Such party concealing makes no
warranty as to the fact
concealed.
d. The other party has not the
means of ascertaining the fact
concealed.
e. Material
 Effects: Entitles insurer to rescind,
even if the death or loss is due to a
cause not related to the concealed
matter (Sec. 27).
Note: Good Faith is not a defense in
concealment. Sec. 27 clearly provides
that, “the concealment whether
intentional or unintentional entitles the
injured party to rescind the contract of
insurance.”
Test of Materiality: Determined not by
the event, but solely by the probable
and reasonable influence of the facts
upon the party to whom the
communication is due, in forming his
estimate of the advantages of the
proposed contract, or in making his
inquiries (Sec. 31).
 Exception to Sec. 31:
a. Incontestability clause
b. Matters under Sec.110 (marine
insurance)
 The waiver of medical examination in
a non-medical insurance contract
renders even more material the
information required of the applicant
concerning the previous conditions of
health and diseases suffered. (Sunlife v.
Sps. Bacani, 246 SCRA 268).
 The right to information of material
facts may be waived, either by the terms

of the insurance or by neglect to make
inquiries as to such facts where they are
distinctly implied in other facts of which
information is communicated. (Sec.33)
 Where matters of opinion or judgment
are called for, answers made in good
faith and without intent to deceiver will
not avoid the policy even though they
are untrue. Reason: The insurer cannot
rely on those statements. He must make
further inquiry. (Philamcare Health
Systems vs. CA, G.R. No. 125678, March
18, 2002).
2. Representations – Factual
statements made by the insured at the
time of, or prior to, the issuance of the
policy to give information to the insurer
and induce him to enter into the
insurance contract. They are considered
an active form of concealment.
 Requisites of a false representation
(misrepresentation):
a. The insured stated a fact which
is untrue.
b. Such fact was stated with
knowledge that it is untrue and
with intent to deceive or which
he states positively as true
without knowing it to be true
and which has a tendency to
mislead.
c. Such fact in either case is
material to the risk.
 Characteristics:
a. It is not a part of the contract but
merely a collateral inducement to it.
b. It may be oral or written.
c. It is made at the same time of issuing
the policy or before but not after.
d. It may be altered or withdrawn before
the insurance is effected but not
afterwards.
e. It always refers to the date the
contract goes into effect.
 Kinds:
a. AFFIRMATIVE – affirmation of a fact
when the contract begins; and
b. PROMISSORY – promise to be
performed after policy was issued.
 Effect of Misrepresentation: the
injured party is entitled to rescind from
the time when the representation
becomes false.
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Test of Materiality: Same as that in
concealment.
 Where the insured merely signed the
application form and made the agent of
the insurer fill the same for him, it was
held that by doing so, the insured made
the agent of the insurer his own agent
and he was responsible for his acts for
that purpose. (Insular Life Assur. Co. vs.
Feliciano, 74 Phil. 469)
3. Warranties – Statement or promise
by the insured set forth in the policy or
by reference incorporated therein, the
untruth or non-fulfillment of which in
any respect, and without reference to
whether insurer was in fact prejudiced
by such untruth or non-fulfillment,
renders the policy voidable by the
insurer.
 Purpose: To eliminate potentially
increasing hazards which may either be
due to the acts of the insured or to the
change to the condition of the property.
 Kinds:
a. EXPRESS – an agreement expressed in
a policy whereby the insured stipulates
that certain facts relating to the risk are
or shall be true, or certain acts relating
to the same subject have been or shall
be done.
b. IMPLIED - it is deemed included in the
contract although not expressly
mentioned. Example: In marine
insurance, seaworthiness of the vessel.
 Effects of breach of warranty:
a. Material
GENERAL RULE: Violation of material
warranty or of a material provision of a
policy will entitle the other party to
rescind the contract. (Sec. 74)
EXCEPTIONS:
a. Loss occurs before the time of
performance of the warranty.
b. The performances becomes
unlawful at the place of the
contract.
c. Performance becomes
impossible. (Sec. 73)
b. Immaterial (ex. Other insurance
clause)
GENERAL RULE: It will not avoid the
policy.
 39

EXCEPTION: When the policy expressly D. Breach of a condition subsequent

provides or declares that a violation  Waiver of the right to rescind:
thereof will avoid it. (Sec. 75) Acceptance of premium payments
despite the knowledge of the ground for
WARRANTY REPRESENTATIO rescission. (Sec. 45)
N  Limitations on the right of the
Part of the contract Mere collateral insurer to rescind:
inducement 1. Non-life – such right must be
Written on the May be written in exercised prior to the commencement of
policy, actually or by the policy or may an action on the contract;
reference be oral. 2. Life – such right must be availed of
Presumed material Must be proved to during the first two years from the date
be material of issue of policy or its last
Must be strictly Requires only reinstatement; prior to
complied with substantial truth “incontestability.” (Sec. 48)
and compliance
CANCELLATION OF NON-LIFE
4. Conditions – Events signifying in its
INSURANCE POLICY
broadest sense either an occurrence or a
 Right of the insurer to abandon the
non-occurrence that alters the
contract on the occurrence of certain
previously existing legal relations of the
grounds after the effectivity date of a
parties to the contract. They may be
non-life policy.
conditions precedent or conditions
 Grounds:
subsequent.
1. Non-payment of premium;
 Effect of breach:
2. Conviction of a crime out of acts
a. Condition precedent – prevents
increasing the hazard insured
the accrual of cause of action
against;
b. Condition subsequent – avoids
3. Discovery of fraud or material
the policy or entitles the insurer
misrepresentation;
to rescind
4. Discovery of willful or reckless acts
 The insurer may also protect himself
of omissions increasing the hazard
against fraudulent claims of loss and this
insured against;
he attempts to do by inserting in the
5. Physical changes in property making
policy various conditions which take the
the property uninsurable; and
form of conditions precedent. For
6. Determination by the Insurance
instance, there are conditions requiring
Commissioner that the continuation
immediate notice of loss or injury and
of the policy would violate the
detailed proofs of loss within a limited
Insurance Code. (Sec. 64)
period.
 Requirements:
1. Prior notice of cancellation to
5. Exceptions – Provisions that may
the insured;
specify excepted perils. It makes more
2. Notice must be in writing,
definite the coverage indicated by the
mailed or delivered to the
general description of the risk by
named insured at the address
excluding certain specified risk that
shown in the policy;
otherwise would be included under the
3. Notice must state which of the
general language describing the risks
grounds set forth in Sec. 64 is
assumed.
relied upon and upon request of
 Effect: Limit the coverage of the
the insured, the insurer must
contract.
furnish facts on which the
cancellation is based;
RESCISSION
4. Grounds should have existed
 Grounds:
after the effectivity date of the
A. Concealment
policy.
B. Misrepresentation
C. Breach of material warranty
XII. INCONTESTABILITY CLAUSE
 40

 Clause in life insurance policy that was not brought

stipulates that the policy shall be within the time
incontestable after a stated period. specified.
 Requisites:
1. Life insurance policy XIII.
2. Payable on the death of the insured A. OVER-INSURANCE – results when the
3. It has been in force during the insured insures the same property for an
lifetime of the insured for a period amount greater than the value of the
of at least two years from the date property with the same insurance
of its issue or of its last company.
reinstatement  Effect in case of loss:
Note: The period of 2 years may be 1. The insurer is bound only to pay to
shortened but it cannot be extended by the extent of the real value of the
stipulation. property lost;
2. The insured is entitled to recover
the amount of premium
 Incontestability only deprives the corresponding to the excess in value
insurer of those defenses which arise in of the property;
connection with the formation and
operation of the policy prior to loss. B. DOUBLE INSURANCE – exists where
(Prof. De Leon, p. 173 citing Wyatt and same person is insured by several
Wyatt, p. 878) insurers separately in respect to same
subject and interest. (Sec. 93)
BARRED DEFENSES NOT  Requisites:
DEFENSES BARRED 1. Person insured is the same;
OF THE INSURER 2. Two or more insurers insuring
1. Policy is void ab 1. That the person separately;
initio taking the insurance 3. Subject matter is the same;
2. Policy is lacked insurable 4. Interest insured is also the same;
rescindable by interest as required 5. Risk or peril insured against is
reason of the by law; likewise the same.
fraudulent 2. That the cause
concealment or of the death of the  Effects: Where double insurance is
misrepresentation of insured is an
the insured or his excepted risk;
allowed, but over insurance results:
agent 3. That the (Sec. 94)
premiums have not 1. The
been paid (Secs. 77, insured, unless the policy otherwise
227[b], 228[b], provides, may claim payment from
230[b]); the insurers in such order as he may
4. That the select, up to the amount for which
conditions of the the insurers are severally liable
policy relating to under their respective contracts;
military or naval
2. Where
service have been
violated (Secs. the policy under which the insured
227[b], 228[b]); claims is a valued policy, the insured
5. That the fraud is must give credit as against the
of a particularly valuation for any sum received by
vicious type; him under any other policy without
6. That the regard to the actual value of the
beneficiary failed to subject matter insured;
furnish proof of 3. Where
death or to comply
the policy under which the insured
with any condition
imposed by the claims is an unvalued policy he must
policy after the loss give credit, as against the full
has happened; or insurable value, for any sum
7. That the action received by him under any policy;
 41

4. Where in interest in the 2 no interest in the

the insured receives any sum in contracts reinsurance
excess of the valuation in the case of contract.
valued policies, or of the insurable Subject of Subject of insurance
value in the case of unvalued insurance is is the original
property insurer’s risk
policies, he must hold such sum in
Insured has to give Insured’s consent
trust for the insurers, according to his consent not necessary
their right of contribution among
themselves;
TERMS:
5. Each
1. Reinsurance treaty – Merely an
insurer is bound, as between himself
agreement between two insurance
and the other insurers, to contribute
companies whereby one agrees to cede
ratably to the loss in proportion to
and the other to accept reinsurance
the amount for which he is liable
business pursuant to provisions specified
under his contract.
in the treaty. (Prof. De Leon, p. 306)
Additional or “Other Insurance” Clause
2. Automatic reinsurance – The
 A condition in the policy requiring the
reinsured is bound to cede and the
insured to inform the insurer of any
reinsurer is obligated to accept a fixed
other insurance coverage of the property
share of the risk which has to be
insured. It is lawful and specifically
reinsured under the contract. (Prof. De
allowed under Sec. 75 which provides
Leon, p. 305)
that “(a) policy may declare that a
3. Facultative reinsurance – There is no
violation of a specified provision thereof
obligation to cede or accept
shall avoid it, otherwise the breach of an
participation in the risk each party
immaterial provision does not avoid it.”
having a free choice. But once the share
 A stipulation against double
is accepted, the obligation is absolute
insurance.
and the liability thereunder can be
 Purposes:
discharged only by payment. (Equitable
1. To prevent an increase in the
Ins. & Casualty Co. vs. Rural Ins. &
moral hazard
Surety Co., Inc. 4 SCRA 343)
2. To prevent over-insurance and
fraud.
4. Retrocession – A transaction whereby
 To constitute a violation of the
the reinsurer in turn, passes to another
clause, there should have been double
insurer a portion of the risk reinsured. It
insurance.
is really the reinsurance of reinsurance.
(Prof. De Leon, p. 305)
C. REINSURANCE – a contract by which
the insurer procures a third person to
XIV.
insure him against loss or liability by
A. LOSS, IN INSURANCE
reason of an original insurance (also
 Injury or damage sustained by the
known as “Reinsurance Cession”). (Sec.
insured in consequence of the happening
95)
of one or more of the accidents or
 In every reinsurance, the original
misfortune against which the insurer, in
contract of insurance and the contract of
consideration of the premium, has
reinsurance are covered by separate
undertaken to indemnify the insured.
policies.
(Bonifacio Bros. Inc. vs. Mora, 20 SCRA
261)
DOUBLE REINSURANCE
INSURANCE
Loss for which Loss for which
Involves the same Involves different
interest interest
insurer is liable insurer is not
Insurer remains in Insurer becomes the liable
such capacity insured in relation 1. Loss the 1. Loss by
to reinsurer proximate cause of insured’s willful
Insured is the party Original insured has which is the peril act;
insured against 2. Loss due to
 42

(Sec. 84); connivance of the

2. Loss the insured (Sec. 87);
immediate cause of and B. CLAIMS SETTLEMENT
which is the peril 3. Loss where the  The indemnification of the loss of the
insured against excepted peril is
insured.
except where the proximate
proximate cause is cause.
an excepted peril; TIME FOR PAYMENT OF CLAIMS
3. Loss through NON-LIFE
negligence of LIFE POLICIES POLICIES
insured except
where there was a. Maturing The proceeds shall
gross negligence upon the be paid within 30
amounting to willful expiration of the days after the
acts; and term – The receipt by the
4. Loss caused by proceeds are insurer of proof of
efforts to rescue the immediately loss, and
thing from peril payable to the ascertainment of
insured against; insured, unless the loss or damage
5. If during the they are made by agreement of the
course of rescue, payable in parties or by
the thing is exposed installments or as arbitration but not
to a peril not annuity, in which later than 90 days
insured against, case, the from such receipt of
which permanently installments or proof of loss
deprives the insured annuities shall be whether or not
of its possession, in paid as they ascertainment is
whole or in part become due. had or made.
(Sec. 85). b. Maturing at
the death of the
Proximate Cause – An event that sets all insured, occurring
other events in motion without any prior to the
expiration of the
intervening or independent case,
term stipulated –
without which the injury or loss would The proceeds are
not have occurred. payable to the
beneficiaries
REQUISITES FOR RECOVERY UPON within 60 days
INSURANCE after presentation
1. The insured must have insurable and filing of proof
interest in the subject matter; of death.
2. That interest is covered by the policy;
3. There must be a loss; and
4. The loss must be proximately caused  In case of an unreasonable delay in
by the peril insured against. the payment of the insured’s claim by
the insurer, the insured can recover: 1)
NOTICE OF LOSS attorney’s fees; 2) expenses incurred by
In fire insurance In other types of reason of the unreasonable withholding;
insurance 3) interest at double the legal interest
rate fixed by the Monetary Board; and 4)
Required Not required the amount of the claim. (Zenith
Insurance Corp. vs. CA, 185 SCRA 398)
Failure to give Failure to give
notice will defeat notice will not XV. PRESCRIPTIVE PERIOD (Secs. 63 &
the right of the exonerate the 384)
insured to recover. insurer, unless  Rules:
there is a 1. In the absence of an express
stipulation in the stipulation in the policy, it being based
policy requiring
on a written contract, the action
the insured to do
so. prescribes in 10 years.

2. However the parties may validly agree
on a shorter period provided it is not less
than one year from the time the cause of
action accrues.
3. The cause of action accrues from the
rejection of the claim of the insured and
not from the time of loss.
It shall commence from the denial of
the claim, not from the resolution of the
motion for reconsideration, otherwise it
can be used by the insured as a scheme
or device to waste time until the
evidence which may be used against him
is destroyed. (Sun Insurance Office, Ltd.
v. CA, 195 SCRA)
4. In CMVLI, the written notice of claim
must be filed within 6 months from the
date of the accident otherwise the claim
is deemed waived. The suit for damages
either with the proper court or with the
Insurance Commissioner should be filed
within 1 year from the date of the denial
of the claim by the insurer, otherwise
claimant’s right of action shall prescribe.
(Sec. 384)
PARTICULAR KINDS OF INSURANCE
CONTRACTS
XVI. MARINE INSURANCE
 Insurance against risks connected with
navigation, to which a ship, cargo,
freightage, profits or other insurable
interest in movable property, may be
exposed during a certain voyage or a
fixed period of time. (Sec. 99)
 Coverage:
A.
1. Vessels, goods, freight, cargo,
merchandise, profits, money,
valuable papers, bottomry and
respondentia, and interest in respect
to all risks or perils of navigation;
2. Persons or property in connection
with marine insurance;
3. Precious stones, jewels, jewelry and
precious metals whether in the
course of transportation or
otherwise; and
4. Bridges, tunnels, piers, docks and
other aids to navigation and
transportation. (Sec. 99)
 Cargo can be the subject of
marine insurance, and once it is
entered into, the implied
warranty of seaworthiness
43
immediately attaches to
whoever is insuring the cargo,
whether he be the shipowner or
not. (Roque v. IAC, 139 SCRA
596)
B. Marine Protection and Indemnity
Insurance
 Classes of inland marine insurance:
(Prof. De Leon, p. 325)
1. Property in transit – provides
protection to property
frequently exposed to loss while
it is transportation form one
location to another.
2. Bailee liability - insurance for
those who have temporary
custody of the goods.
3. Fixed transportation property –
they are so insured because they
are held to be an essential part
of the transportation system
such as bridges, tunnels, etc.
4. 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.
1.Shipowner
a. Over the vessel to the
extent of its value, except
that if chartered, the
insurance is only up to the
amount not recoverable
from the charterer. (Sec.
100).
b. He also has an insurable
interest on expected
freightage. (Sec. 103).
c. No insurable interest if he
will be compensated by
charterer for the value of
the vessel, in case of loss.
2. Cargo owner
 Over the cargo and expected
profits (Sec. 105).
3. Charterer
 Over the amount he is liable
to the shipowner, if the ship is
lost or damaged during the
voyage (Sec. 106).
B.
In loans on bottomry and respondentia
 44

 Repayment of the loan is subject to unloaded from the vessel; thereafter,

the condition that the vessel or goods, the burden then shifts to the insurer to
respectively, given as a security, shall show the exception to the coverage.
arrive safely at the port of destination. (Filipinas Merchants Insurance vs. Court
1. Owner/Debtor of Appeals, 179 SCRA 638)
 Difference between the value
of vessel or goods and the B. Barratry Clause
amount of loan. (Sec. 101)  A clause which provides that there
2. Creditor/lender can be no recovery on the policy in case
 Amount of the loan of any willful misconduct on the part of
the master or crew in pursuance of some
Note: If a vessel is hypothecated by unlawful or fraudulent purpose without
bottomry, only the excess is insurable, consent of owners, and to the prejudice
since a loan on bottomry partakes of the of the owner’s interest. (Roque vs. IAC,
nature of an insurance coverage to the 139 SCRA 596)
extent of the loan accommodation. The
same rule would apply to the C. Inchamaree Clause
hypothecation of the cargo by  A clause which makes the insurer
respondentia. (Pandect of Commercial liable for loss or damage to the hull or
Law and Jurisprudence, Justice Jose machinery arising from the:
Vitug, 1997 ed.) 1. Negligence of the captain,
PERILS OF THE PERILS OF THE engineers, etc.
SEA SHIP 2. Explosions, breakage of shafts; and
Includes only those A loss which in the 3. Latent defect of machinery or hull.
casualties due to ordinary course of (Bar Review Materials in Commercial
the: events, results Law, Jorge Miravite, 2002 ed.)
1. unusual from the:
violence; or 1. natural and D. Sue and Labor Clause
2. extraordinary inevitable action of
 A clause under which the insurer may
action of wind and the sea
wave; or 2. ordinary wear become liable to pay the insured, in
3. Other and tear of the addition to the loss actually suffered,
extraordinary causes ship or such expenses as he may have incurred
connected with 3. Negligent in his efforts to protect the property
navigation. failure of the against a peril for which the insurer
ship’s owner to would have been liable. (Sec. 163)
provide the vessel
with proper
equipment to MATTERS ALTHOUGH CONCEALED,
convey the cargo WILL NOT VITIATE THE CONTRACT
under ordinary EXCEPT WHEN THEY CAUSED THE LOSS
conditions. (Sec. 110)
1. National character of the insured;
Note: It is only perils of the sea which 2. Liability of the thing insured to
may be insured against unless perils of capture or detention;
the ship is covered by an all-risk policy. 3. Liability to seizure from breach of
foreign laws;
SPECIAL MARINE INSURANCE 4. Want of necessary documents; and
CONTRACTS AND CLAUSES 5. Use of false or simulated papers.
A. All Risks Policy – insurance against all Note: This should be related to the
causes of conceivable loss or damage, general rule regarding material
except: 1) as otherwise excluded in the concealment.
policy; or 2) due to fraud or intentional
misconduct on the part of the insured. DISTINCTIONS ON CONCEALMENT
 The insured has the initial burden of (Commercial Law Reviewer, A.F.
proving that the cargo was in good Agbayani, 1988 ed.)
condition when the policy attached and
that the cargo was damaged when
 45

MARINE INSURANCE OTHER encounter the ordinary perils of the

PROPERTY voyage, contemplated by the parties to
INSURANCE the policy (Sec. 114).
The information of The information or GENERAL RULE: The warranty of
the belief or belief of a 3rd party seaworthiness is complied with if the
expectation of 3rd is not material and ship be seaworthy at the time of the
persons is material need not be commencement of the risk. Prior or
and must be communicated subsequent unseaworthiness is not a
communicated unless it proceeds
breach of the warranty nor is it material
form an agent of
the insured whose that the vessel arrives in safety at the
duty it is to give end of her voyage.
information EXCEPTIONS:
The concealment of Concealment of 1. In the case of a time policy, the ship
any fact in relation to any material fact must be seaworthy at the
any of the matters will vitiate the commencement of every voyage she
stated in Sec. 110 entire contract, may undertake
does not vitiate the whether or not the 2. In the case of cargo policy, each
entire contract but loss results for the vessel upon which the cargo is
merely exonerates the risk concealed.
shipped or transshipped, must be
insurer from a risk
resulting from the seaworthy at the commencement of
fact concealed each particular voyage
IMPLIED WARRANTIES 3. In the case of a voyage policy
1. Seaworthiness of the ship at the contemplating a voyage in different
inception of the insurance (Sec. stages, the ship must be seaworthy
113); at the commencement of each
2. Against improper deviation (Sec. portion
123, 124, 125);
3. Against illegal venture;  Applicability of implied warranty of
4. Warranty of neutrality: the ship will seaworthiness to cargo owners: It
carry the requisite documents of becomes the obligation of a cargo owner
nationality or neutrality of the ship to look for a reliable common carrier,
or cargo where such nationality or which keeps its vessels in seaworthy
neutrality is expressly warranted; conditions. The shipper may have no
(Sec. 120) control over the vessel but he has
5. Presence of insurable interest. control in the choice of the common
carrier that will transport his goods
 While the payment by the insurer for (Roque v. IAC, 139 SCRA 596).
the insured value of the lost cargo
operates as a waiver of the insurer’s Deviation
right to enforce the term of the implied  A departure from the course of the
warranty against the assured under the voyage insured, or an unreasonable
marine insurance policy, the same delay in pursuing the voyage or the
cannot be validly interpreted as an commencement of an entirely different
automatic admission of the vessel’s voyage. (Sec.123)
seaworthiness by the insurer as to  Instances:
foreclose recourse against the common 1. Departure of vessel from the
carrier for any liability under the course of the sailing fixed by
contractual obligation as such common mercantile usage
carrier. (Delsan Transportation Lines vs. 2. Departure of vessel from the
CA, 364 SCRA 24) most natural, direct and
advantageous route if not fixed
Seaworthiness by mercantile usage
 A relative term depending upon the 3. Unreasonable delay in pursuing
nature of the ship, voyage, service and voyage
goods, denoting in general a ship’s 4. Commencement of an entirely
fitness to perform the service and to different voyage (Secs. 121-123)
 46

 Kinds: the preservation of the vessel, cargo, or

1. Proper - both, and all damages to the vessel and
a. When caused by circumstances outside cargo from the time it is loaded and the
the control of the ship captain or ship voyage commenced until it ends and the
owner; cargo unloaded.
b. When necessary to comply with a
warranty or to avoid a peril; GENERAL PARTICULAR
c. When made in good faith to avoid a Has inured to the Has not inured to the
peril; common benefit and common benefit and
d. When made in good faith to save profit of all persons profit of all persons
human life or to relieve another vessel interested in the interested in the
in distress (Sec. 124) vessel and cargo vessel and her cargo.
 Effect: In case of loss, the To be borne equally To be borne alone by
by all of the interests the owner of the
insurer is still liable. concerned in the cargo or the vessel,
2. Improper - Every deviation not venture. as the case may be.
specified in Sec. 124 (Sec. 125). Requisites for the
 Effect: In case of loss or right to claim
damage, the insurer is not liable. contribution:
(Sec. 126) 1. Common
danger to the
vessel or
LOSS cargo;
1. Total: 2. Part of the
a. Actual - vessel or cargo
i. Total destruction; was sacrificed
ii. Irretrievable loss by sinking; deliberately;
iii. Damage rendering the thing 3. Sacrifice must
valueless; or be for the
iv. Total deprivation of owner of common safety
possession of thing insured. or for the
(Sec. 130) benefit of all;
b. Constructive - 4. Sacrifice must
i. Actual loss of more than ¾ be made by
of the value of the object; the master or
ii. Damage reducing value by upon his
more than ¾ of the value of authority;
the vessel and of cargo; and 5. It must be not
iii. Expense of transshipment be caused by
exceed ¾ of value of cargo. any fault of
(Sec. 131, in relation to Sec. the party
139) asking the
 In case of constructive contribution;
total loss, insured may: 6. It must be
1. Abandon goods or successful, i.e.
vessel to the insurer and resulted in the
claim for whole insured saving of the
value (Sec. 139), or vessel or
2. Without abandoning cargo; and
vessel, claim for partial Necessary.
actual loss. (Sec. 155)
2. Partial: That which is not total (Sec. RIGHT OF INSURED IN CASE OF
128). GENERAL AVERAGE
GENERAL RULE: The insured may
AVERAGE either hold the insurer directly liable for
 Any extraordinary or accidental the whole of the insured value of the
expense incurred during the voyage for property sacrificed for the general
 47

benefit, subrogating him to his own right the loss, are at the risk of the
of contribution or demand contribution insurer and for his benefit.
from the other interested parties as soon (Transfer Of Agency)(Sec.148)
as the vessel arrives at her destination
EXCEPTIONS:  If an insurer refuses to accept a valid
1. After the separation of interests abandonment, he is liable upon an
liable to contribution actual total loss, deducting form the
2. When the insured has neglected or amount any proceeds of the thing
waived his right to contribution insured which may have come to the
hands of the insured. (Sec.154)
FPA Clause (Free From Particular
Average) CO-INSURANCE
A clause agreed upon in a policy of  A marine insurer is liable upon a
marine insurance in which it is stated partial loss, only for such proportion of
that the insurer shall not be liable for a the amount insured by him as the loss
particular average, such insurer shall be bears to the value of the whole interest
free therefrom, but he shall continue to of the insured in the property insured.
be liable for his proportion of all general (Sec. 157)
average losses assessed upon the thing  When the property is insured for less
insured. (Sec. 136) than its value, the insured is considered
ABANDONMENT a co-insurer of the difference between
 The act of the insured by which, after the amount of insurance and the value of
a constructive total loss, he declared the the property.
relinquishment to the insurer of his
interest in the thing insured. (Sec. 138)  Requisites:
 Requisites for validity: 1. The loss is partial;
1. There must be an actual 2. The amount of insurance is less than
relinquishment by the person insured the value of the property insured.
of his interest in the thing insured
(Sec. 138);  Rules:
2. There must be a constructive total 1. Co-insurance applies only to marine
loss (Sec. 139); insurance
3. The abandonment be neither partial 2. Logically, there cannot be co-
nor conditional (Sec. 140); insurance in life insurance.
4. It must be made within a reasonable 3. Co-insurance applies in fire insurance
time after receipt of reliable when expressly provided for by the
information of the loss (Sec. 141); parties.
5. It must be factual (Sec. 142);
6. It must be made by giving notice CO-INSURANCE REINSURANCE
thereof to the insurer which may be A percentage in the Situation where the
done orally or in writing (Sec. 143); value of the insured insurer procures a 3rd
and property which the party called the
7. The notice of abandonment must be insured himself reinsurer to insure
explicit and must specify the assumes to act as him against liability
insurer to the extent by reason of an
particular cause of the abandonment
of the deficiency in original insurance.
(Sec. 144). the insurance of the Basically,
insured property. In reinsurance is an
 Effects: case of loss or insurance against
1. It is equivalent to a transfer by the damage, the insurer liability which the
insured of his interest to the insurer will be liable only for original insurer may
with all the chances of recovery and such proportion of incur in favor of the
indemnity (Transfer of Interest) the loss or damage as original insured.
(Sec.146) the amount of the
insurance bears to
2. Acts done in good faith by those who
the designated
were agents of the insured in respect percentage of the
to the thing insured, subsequent to full value of the
 48

property insured. agreed upon. (Commercial Law

(Bar Review Reviewer, Aguedo Agbayani,
Materials in 1988 ed.)
Commercial Law,
Jorge Miravite, 2002
ALTERATION AS A SPECIAL GROUND
ed.)
FOR RESCISSION BY INSURER
 Requisites:
1. The use or condition of the thing
XVII. FIRE INSURANCE
is specifically limited or
 A contract by which the insurer for a
stipulated in the policy;
consideration agrees to indemnify the
2. Such use or condition as limited
insured against loss of, or damage to,
by the policy is altered;
property by hostile fire, including loss by
3. The alteration is made without
lightning, windstorm, tornado or
the consent of the insurer;
earthquake and other allied risks, when
4. The alteration is made by means
such risks are covered by extension to
within the control of the
fire insurance policies or under separate
insured;
policies. (Sec. 167)
5. The alteration increases the risk;
(Sec. 168) and
6. There must be a violation of a
 Prerequisites to recovery:
policy provision. (Sec. 170)
1. Notice of loss – must be immediately
given, unless delay is waived expressly
Fall-of-building clause
or impliedly by the insurer
 A clause in a fire insurance policy that
2. Proof of loss – according to best
if the building or any part thereof falls,
evidence obtainable. Delay may also be
except as a result of fire, all insurance
waived expressly or impliedly by the
by the policy shall immediately cease.
insurer
Option to rebuild clause
HOSTILE FIRE FRIENDLY FIRE  A clause giving the insurer the option
One that escapes One that burns in a
to reinstate or replace the property
from the place place where it was
where it was intended to burn damaged or destroyed or any part
intended to burn and ought to be thereof, instead of paying the amount of
and ought to be. the loss or the damage.
Insurer is liable Insurer is not liable  The insurer, after electing to rebuild,
cannot be compelled to perform this
Measure of Indemnity undertaking by specific performance
1. Open policy: only the expense because this is an obligation to do, not
necessary to replace the thing lost or to give. Remedy: Art. 1167, NCC.
injured in the condition it was at the
time of the injury XVIII. CASUALTY OR ACCIDENT
2. Valued policy: the parties are bound INSURANCE
by the valuation, in the absence of fraud  Insurance covering loss or liability
or mistake arising from accident or mishap,
excluding those falling under other types
Note: It is very crucial to determine of insurance such as fire or marine. (Sec.
whether a marine vessel is covered by a 174)
marine insurance or fire insurance. The
determination is important for 2 reasons:  Classifications:
1. Rules on constructive total loss 1. Insurance against specified perils
and abandonment – applies only which may affect the person and/or
to marine insurance; property of the insured. (accident or
2. Rule on co-insurance – applies health insurance)
primarily to marine insurance;  Examples: personal accident,
3. Rule on co-insurance applies to robbery/theft insurance
fire insurance only if expressly

2. Insurance against specified perils
which may give rise to liability on the
part of the insured for claims for
injuries to or damage to property of
others. (third party liability insurance)
 Insurable interest is based on the
interest of the insured in the safety of
persons, and their property, who may
maintain an action against him in case of
their injury or destruction, respectively.
 Examples: workmen’s compensation,
motor vehicle liability
 In a third party liability (TPL)
insurance contract, the insurer assumes
the obligation by paying the injured
third party to whom the insured is liable.
Prior payment by the insured to the third
person is not necessary in order that the
obligation may arise. The moment the
insured becomes liable to third persons,
the insured acquires an interest in the
insurance contract which may be
garnished like any other credit. (Perla
Comapnia de Seguro, Inc vs. Ramolete,
205 SCRA 487)
 Aside from compulsory motor vehicle
liability insurance, the Insurance Code
contains no other provisions applicable
to casualty insurance. Therefore, such
casualty insurance are governed by the
general provisions applicable to all types
of insurance, and outside of such
statutory provisions, the rights and
obligations of the parties must be
determined by their contract, taking into
consideration its purpose and always in
accordance with the general principles
of insurance law.
 In burglary, robbery and theft
insurance, the opportunity to defraud
the insurer – the moral hazard – is so
great that insurer have found it
necessary to fill up the policies with
many restrictions designed to reduce the
hazard. Persons frequently excluded are
those in the 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.
(Fortune Insurance vs. CA, 244 SCRA 208)
Right of a third party injured to sue the
insurer
49
1. Indemnity against liability – A third
party injured can directly sue the
insurer.
2. Indemnity for actual loss or
reimbursement after actual payment by
the insured – A third party has no cause
of action against the insurer (Sec. 53,
Bonifacio Bros. v. Mora, 20 SCRA 261).
 The insurer is not solidarily liable with
the insured. The 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 (Pan
Malayan Insurance Corporation v. CA,
184 SCRA 54).
“INTENTIONAL” vs. “ACCIDENTAL” AS
USED IN INSURANCE POLICIES
1. Intentional – Implies the exercise of
the reasoning faculties, consciousness
and volition. Where a provision of the
policy excludes intentional injury, it is
the intention of the person inflicting the
injury that is controlling. If the injuries
suffered by the insured clearly resulted
from the intentional act of the third
person, the insurer is relieve from
liability as stipulated. (Biagtan v. the
Insular Life Assurance Co. Ltd., 44 SCRA
58, 1972)
2. Accidental – That which happens by
chance or fortuitously, without intention
or design, which is unexpected, unusual
and unforeseen.
NO ACTION CLAUSE
 A requirement in a policy of liability
insurance which provides that suit and
final judgment be first obtained against
the insured; that only thereafter can the
person injured recover on the policy.
(Guingon vs. Del Monte, 20 SCRA 1043)
XIX. COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE (CMVLI)
 A species of compulsory insurance
that provides for protection coverage
that will answer for legal liability for
losses and damages for bodily injuries or
property damage that may be sustained

by another arising from the use and
operation of motor vehicle by its owner.
 Purpose: To give immediate financial
assistance to victims of motor vehicle
accidents and/or their dependents,
especially if they are poor regardless of
the financial capability of motor vehicle
owners or operators responsible for the
accident sustained (Shafer v. Judge,
RTC, 167 SCRA 386).
 Claimants/victims may be a a. In case of an occupant: Insurer
“passenger” or a “3rd party”
 It applies to all vehicles whether
public and private vehicles.
Note: It is the only compulsory insurance
coverage under the Insurance Code.
Method of coverage
1. Insurance policy
2. Surety bond
3. Cash deposit
Passenger – Any fare-paying person
being transported and conveyed in and
by a motor vehicle for transportation of
passengers for compensation, including
persons expressly authorized by law or
by the vehicle’s operator or his agents to
ride without fare. (Sec. 373[b])
Third Party – Any person other than the
passenger, excluding a member of the
household or a member of the family
within the second degree of
consanguinity or affinity, of a motor
vehicle owner or land transportation
operator, or his employee in respect of
death or bodily injury arising out of and
in the course of employment. (Sec.
373[c])
“No-Fault” Clause
 A clause that allows the victim
(injured person or heirs of the deceased)
to an option to file a claim for death or
injury without the necessity of proving
fault or negligence of any kind.
 Purpose: To guarantee compensation
or indemnity to injured persons in motor
vehicle accidents.
 Rules:
50
1. Total indemnity - maximum of P5,000
2. Proofs of loss -
a. Police report of accident;
b. Death certificate and evidence
sufficient to establish proper payee;
c. Medical report and evidence of
medical or hospital disbursement.
3. Claim may be made against one motor
vehicle only
4. Proper insurer from which to claim -
of the vehicle in which the occupant is
riding, mounting or dismounting from;
b. In any other case: Insurer of the
directly offending vehicle. (Sec. 378)
 The claimant is not free to choose
from which insurer he will claim the “no
fault indemnity” as the law makes it
mandatory that the claim shall lie
against the insurer of the vehicle in
which the occupant is riding, mounting
or dismounting from. That said vehicle
might not be the one that caused the
accident is of no moment since the law
itself provides that the party paying may
recover against the owner of the vehicle
responsible for the accident. (Perla
Compania de Seguros, Inc. v. Ancheta,
169 SCRA 144)
 This no-fault claim does not apply to
property damage. If the total indemnity
claim exceeds P5,000 and there is
controversy in respect thereto, the
finding of fault may be availed of by the
insurer only as to the excess. The first
P5,000 shall be paid without regard to
fault. (Prof. De Leon, p. 716)
 The essence of the no-fault indemnity
insurance is to provide victims of
vehicular accidents or their heirs
immediate compensation although in
limited amount, pending final
determination of who is responsible for
the accident and liable for the victims
injuries or death. (Ibid.)
SPECIAL CLAUSES
A. Authorized Driver Clause
 A clause which aims to indemnify the
insured owner against loss or damage to
the car but limits the use of the insured
vehicle to the insured himself or any
person who drives on his order or with
 51

his permission (Villacorta v. Insurance

Commissioner) SURETYSHIP PROPERTY
 The requirement that the person INSURANCE
driving the insured vehicle is permitted Accessory contract Principal contract
in accordance with the licensing laws or 3 parties: surety, 2 parties: insurer
other laws or regulations to drive the obligor and oblige and insured
motor vehicle (licensed driver) is Credit Contract of
applicable only if the person driving is accommodation indemnity
other than the insured. Surety can recover Insurer has no such
from principal right; only right of
subrogation
B. Theft Clause
Bond can be May be cancelled
 A clause which includes theft as cancelled only with unilaterally either by
among the risks insured against. consent of obligee, insured or insurer on
 Where the car is unlawfully and Commissioner or grounds provided by
wrongfully taken without the owner’s court law
consent or knowledge, such taking Requires No need of
constitutes theft, and thus, it is the acceptance of acceptance by any
“theft clause” and not the “authorized obligee to be valid third party
driver clause that should apply (Palermo Risk-shifting device; Risk-distributing
v. Pyramids Ins., 161 SCRA 677). premium paid being device; premium paid
in the nature of a as a ratable
service fee contribution to a
common fund
C. Cooperation Clause XXI. LIFE INSURANCE
 A clause which provides in essence  Insurance on human lives and
that the insured shall give all such insurance appertaining thereto or
information and assistance as the insurer connected therewith which includes
may require, usually requiring every contract or pledge for the
attendance at trials or hearings. payment of endowments or annuities.
XX. SURETYSHIP (Sec. 179)
 An agreement whereby a surety  Kinds: (Bar Review Materials in
guarantees the performance by the Commercial Law, Jorge Miravite, 2002
principal or obligor of an obligation or ed.)
undertaking in favor of an obligee. (Sec. 1. Ordinary Life, General Life or Old
175) Line Policy - Insured pays a fixed
 It is essentially a credit premium every year until he dies.
accommodation. Surrender value after 3 years.
 It is considered an insurance contract 2. Group Life – Essentially a single
if it is executed by the surety as a insurance contract that provides
vocation, and not incidentally. (Sec. 20 coverage for many individuals.
 When the contract is primarily drawn Examples: In favor of employees,
up by 1 party, the benefit of doubt goes “mortgage redemption insurance”.
to the other party (insured/obligee) in 3. Limited Payment Policy – insured
case of an ambiguity following the rule pays premium for a limited period.
in contracts of adhesion. Suretyship, If he dies within the period, his
especially in fidelity bonding, is thus beneficiary is paid; if he outlives the
treated like non-life insurance in some period, he does not get anything.
respects. 4. Endowment Policy – pays premium
for specified period. If he outlives
Nature of liability of surety the period, the face value of the
1. Solidary; policy is paid to him; if not, his
2. Limited to the amount of the bond; beneficiaries receive the benefit.
3. It is determined strictly by the terms 5. Term Insurance – insurer pays once
of the contract of suretyship in only, and he is insured for a
relation to the principal contract specified period. If he dies within
between the obligor and the obligee. the period, his beneficiaries
(Sec. 176) benefits. If he outlives the period,

no person benefits from the
insurance.
6. Industrial Life - life insurance
entitling the insured to pay
premiums weekly, or where
premiums are payable monthly or
oftener.
Mortgage Redemption Insurance
 A life insurance taken pursuant to a
group mortgage redemption scheme by
the lender of money on the life of a
mortgagor who, to secure the loan,
mortgages the house constructed from
the use of the proceeds of the loan, to
the extent of the mortgage indebtedness
such that if the mortgagor dies, the
proceeds of his life insurance will be
used to pay for his indebtedness to the
lender assured and the deceased’s heirs
will thereby be relieved from paying the
unpaid balance of the loan. (Great
Pacific Life Assurance Corp. vs. Court of
Appeals, 316 SCRA 677)
LIABILITY OF INSURER IN CERTAIN
CAUSES OF DEATH OF INSURED
1. Suicide
 Insurer is liable in the following cases:
1. If committed after two years
from the date of the policy’s
issue or its last reinstatement;
2. If committed in a state of
insanity regardless of the date of
the commission unless suicide is
an excepted peril. (Sec. 180-A)
3. If committed after a shorter
period provided in the policy
 Any stipulation extending the 2-year
period is null and void.
2. At the hands of the law (E.g. by legal
execution)
 It is one of the risks assumed by the
insurer under a life insurance policy in
the absence of a valid policy exception.
(Vance,p.572 cited in de Leon, p. 107)
Note: Justice Vitug believes that death
by suicide (if the insured is sane) or at
the hands of the law obviates against
recovery as being more in consonance
with public policy and as being implicit
under Section 87, ICP. (Pandect of
Commercial Law and Jurisprudence,
1997 ed. P. 191)
3. Killing by the beneficiary
52
GENERAL RULE: The interest of a
beneficiary in a life insurance policy
shall be forfeited when the beneficiary is
the principal accomplice or accessory in
willfully bringing about the death of the
insured, in which event, the nearest
relative of the insured shall receive the
proceeds of said insurance if not
otherwise disqualified. (Sec. 12)
EXCEPTIONS:
1. Accidental killing
2. Self-defense
3. Insanity of the beneficiary at the
time he killed the insured
 If the premiums paid came from
conjugal funds, the proceeds are
considered conjugal. If the beneficiary is
other than the insured’s estate, the
source of premiums would not be
relevant. (Del Val v. Del Val, 29 Phil 534)
 The measure of indemnity in life or
health insurance policy is the sum fixed
in the policy except when a creditor
insures the life of his debtor. (Sec. 183)
IS THE CONSENT OF THE BENEFICIARY
NECESSARY TO THE ASSIGNMENT OF A
LIFE INSURANCE POLICY?
 It depends. If the designation of the
beneficiary is irrevocable, the
beneficiary’s consent is essential
because of his vested right. If the
designation is revocable, the policy may
be assigned without such consent
because the beneficiary only has a mere
expectancy to the proceeds. (The
Insurance Code of the Philippines
Annotated, Hector de Leon, 2002 ed.)
Cash Surrender Value
 As applied to a life insurance policy,
it is the amount the insured in case of
default, after the payment of at least 3
full annual premiums, is entitled to
receive if he surrenders the policy and
releases his claims upon it.
LIFE INSURANCE FIRE INSURANCE
Contract of Contract of indemnity
investment not of
indemnity
Valued policy Open or valued policy
May be transferred The insurable
or assigned to any interest of the
person even if he transferee or
 53

has no insurable assignee is essential

interest
Consent of insurer is Consent of insurer
not essential to must be secured in
validity of the absence of waiver
assignment
Contingency that is Contingency insured
contemplated is a against may or may
certain event, the not occur
only uncertainty
being the time when
it will take place
A long-term May be cancelled by
contract and cannot either party and is
be cancelled by the usually for a term of
insurer one year
Beneficiary is under Insured is required to
no obligation to submit proof of his
prove actual actual pecuniary loss
financial loss as a condition
precedent to
collecting the
insurance.

XXII. VARIABLE CONTRACT  The Insurance Commissioner has no

 Any policy or contract on either a
group or individual basis issued by an
insurance company providing for benefits
or other contractual payments or values
thereunder to vary so as to reflect
investment results of any segregated
portfolio of investment.
XXIII. INSURANCE COMMISSIONER
 Main agency charged with the
enforcement of the Insurance Code and
other related laws.
 Functions:
1. ADJUDICATORY/QUASI-JUDICIAL
a. Exclusive original jurisdiction –
Any dispute in the enforcement of any
policy issued pursuant to Chapter VI
(CMVLI). (Sec. 385, par. 2)
b. Concurrent original jurisdiction
(with the RTC) – Where the maximum
amount involved in any single claim is
P100,000 (Sec. 416), except in case of
maritime insurance which is within the
exclusive jurisdiction of the RTC. (BP
129; admiralty & maritime jurisdiction)
 Where the amount exceeds
P100,000, the RTC has
jurisdiction.
jurisdiction to decide the legality of a
contract of agency entered into between
an insurance company and its agent. The
same is not covered by the term “doing
or transacting insurance business” under
Sec 2, ICP, neither is it covered by Sec.
416 of the same Code which grants the
Commissioner adjudicatory powers
(Philippine American Life Insurance Co.
v. Ansaldo, 234 SCRA 509).
2. ADMINISTRATIVE/REGULATORY
a. Enforcement of insurance laws
b. Issuance, suspension or
revocation of certificate of
authority
c. Power to examine books and
records, etc.
d. Rule-making authority
e. Punitive