Notes on Insurance – Rene Callanta

INSURANCE CODE
(P.D. 1460, as amended)

WHAT IS A CONTRACT OF INSURANCE? It is 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)

CHARACTERISTICS OF AN INSURANCE CONTRACT

1. Synallagmatic (where both parties have reciprocal obligations of equal value)

2. Aleatory

3. Voluntary

4. Executory

6. Compensatory

5. Personal

7. Contract of perfect good faith

Insurance is a contract of Uberrima Fides, or of perfect good faith, because the parties are
required to disclose any material fact which the applicant knows or ought to know.

An insurance contract is also considered a contract of indemnity, where the insured is

indemnified to the extent of the value of loss or damage.

EVENT COVERED BY AN INSURANCE CONTRACT

General Rule: Only a future event can be covered by and insurance contract.

Exception: In marine insurance, even a past event can be covered, provided that the loss of
the vessel in the past could not have been known by ordinary means of communication. (Sec.
109)

INTERPRETATION OF AN INSURANCE CONTRACT: If the terms are ambiguous, the policy

is to be construed strictly against the insurer, and liberally in favor of the insured. If the terms
are clear, there is no need for interpretation.

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CONTRACT OF ADHESION or the 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 printed form to which the insured can “adhere to” if he so
chooses but the terms of which he cannot change. Hence, in case of doubt, the contract shall
be construed strictly against the insured and liberally in favor of the insured.

ELEMENTS OF INSURANCE

1. Existence of insurable interest;

2. Risk of Loss;
3. Assumption of Risk;
4. Payment of premium; and
5. Scheme to distribute losses.

Principle of Risk Distribution. The device of 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. By
contributing a pre-determined amount to a general fund, each member contributes to a small
degree towards compensating for losses suffered by any member of the group.

The Right of Subrogation has its roots in equity. It is designed to promote and accomplish
justice and is the mode equity adopts to compel the ultimate payment of a debt by one who in
justice and good conscience ought to pay. It does not depend upon any privity of contract or
assignment of claim. It accrues simply upon payment by the insurance company of the
insurance claim. Consequently, payment made by the insurer to the insured operates as an
equitable assignment to the insurer of all the remedies the insured may have against the obligor.
(PHILAMGEN vs. CA, 273 SCRA 262)

EXCEPTIONS TO THE RIGHT OF SUBROGATION

1. Where the insured releases wrongdoer from liability;

2. Where insurer pays without notifying the carrier, which in good faith, has already paid the
insured;

3. Where the insurer pays for a loss not among the risks insured against by the policy

3 TYPES OF INSURANCE CONTRACTS

1. LIFE

a. Individual Life (Secs. 179-183, 227)

b. Group Life (Sec. 50, and the last par. of Sec. 228)

c. Industrial Life (Secs. 229-231)

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 2. NON-LIFE

a. Marine (Secs, 99-166)

b. Fire (Secs. 167-173)

c. Casualty (Secs. 174)

3. CONTRACT OF SURETYSHIP (Secs. 175-178)

PARTIES TO AN INSURANCE CONTRACT

1. The INSURER is the person who undertakes to indemnify the other.

2. The INSURED is the person to be indemnified upon the occurrence of the loss. Anyone
can be the insured, subject to the following limits:

a. He must have the capacity to contract;

b. He must have insurable interest;

c. He must not be a public enemy, who is a citizen or subject of a nation with

whom the Philippines is at war. (Sec. 7)

3. The BENEFICIARY is the person designated to receive the proceeds of the policy when
the risk attaches.

GENERAL RULE: The insured may designate anyone as his beneficiary.

EXCEPTION: Article 739 of the NCC on forbidden donations. Hence a married man
cannot assign as beneficiary his concubine or a married woman her paramour. Under
the said article, the action to annul the designation can be proven by preponderance of
evidence. In one case a married man’s designation of his adulterous children as
beneficiaries was held valid.

What is the effect of an irrevocable designation of beneficiary?

The 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 a new beneficiary

5. Change the irrevocable designation to revocable

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INSURABLE INTEREST is the interest which a person must have in the person or thing insured
to prevent the contract from becoming a wagering contract.

When is there insurable interest?

In LIFE insurance:

Every person has an insurable interest in the life and health: (a) Of himself, of his spouse and of
his children; (b) Of any person on whom he depends wholly or in part for education or support,
or in whom he has a pecuniary interest; (c) Of any person under a legal obligation to him for the
payment of money, or respecting property or services, of which death or illness might delay or
prevent the performance; and (d) Of any person upon whose life any estate or interest vested in
him depends. (Sec. 10)

In PROPERTY insurance:

An insurable interest in property may consist in:

(a) An existing interest (i.e. an owner, a mortgagee);

(b) An inchoate interest founded on an existing interest (i.e. carrier on a cargo of freightage);
or

(c) An expectancy, coupled with an existing interest in that out of which the expectancy arises.
(i.e. growing crops)

(Sec. 14)

Insurable Interest in Life Insurable Interest in Property

1. Must exist at the time the
policy is taken.
2. Taken on insured’s life, his
beneficiaries need not have
insurable interest on his life.
3. No limit on the amount of
insurable interest.
1. Must exist at the time the policy
is taken and at the time loss
occurs.
2. Beneficiary must have an
insurable interest in property
insured.
3. Insurable interest is limited to
the value of interest in property
insured.

In life insurance, the general rule is no limit on the amount of insurable interest. The exception is
an insurance taken by the creditor on the life of his debtor. In which case, the insurable
interest is limited only to the extent of the debt. (Sec. 10)

INSURABLE INTEREST OF MORTGAGOR AND MORTGAGEE OVER MORTGAGED

PROPERTY

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Both the mortgagor and mortgagee each have an insurable interest in the property mortgaged
and this interest is separate and distinct from the other, such that each of them may insure the
same property for his own benefit. While the mortgagor, as owner, has an insurable interest
equivalent to the value of the property, the mortgagee’s interest is only up to the extent of his
debt.

WHEN IS CONSENT OF INSURER NECESSARY?

Consent of insurer is necessary only when the seller assigns the policy in connection with
the transfer of ownership of the property such that the seller wants to assign his rights as an
insured, to the buyer.

Mr. X wants to borrow P200 million from a bank and offers his building as collateral. If Mr. X
already has an existing policy at the time of the loan application, the policy could be assigned to
the bank. The consent of insurer is not necessary because what is assigned is not the policy
itself but only the proceeds.

DEAN’S TIP: If the problem is an assignment of policy involving collateral, the insured remains
a party to the insurance contract since only the proceeds are assigned to the mortgagee and
therefore, the consent of the insurer is not required.

WHAT IS the effect of a change of interest unaccompanied by a corresponding change in

interest in the insurance?

GENERAL RULE: The effect of a change of interest in any part of a thing insured
unaccompanied by a corresponding change in interest in the insurance, suspends the
insurance to an equivalent extent, until the interest in the thing and the interest in the insurance
are vested in the same person. (Sec. 20)

EXCEPTIONS TO THE REQUIREMENT OF INSURABLE INTEREST:

a. in case of life, health and accident insurance (Sec. 20)

b. change in interest results after occurrence of an injury which results in loss (Sec.
21)
c. change in interest in one or more several distinct things, separately insured by
one policy (Sec. 22)
d. change in interest by will or succession on death of insured (Sec. 23); and
e. transfer of interest by one of several partners, joint owners, or owners in common
who are jointly insured, to the others. (Sec. 24)

(If the transfer is to a third person other than partner, joint-owner or co-owner, the
exception will not apply)

WHAT ARE THE PRIMARY CONCERNS OF PARTIES ENTERING TO AN INSURANCE

CONTRACT?

1. Correct estimation of the risk;

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 2. Precise delimitation of the risk;
3. Control of the risk;
4. Determining whether a loss occurred and if so, the amount of loss.

In DELIMITING the risks, the following devices are used:

1. Warranties, whereby parties stipulate that certain circumstances did or did not exist;
2. Exceptions, which is an expressed enumeration of excluded risks which otherwise
would have been included; and
3. Conditions, whereby parties stipulate that the contract would be voidable if certain
circumstances were found to exist.

GROUNDS FOR RECISSION OF AN INSURANCE CONTRACT

1. Concealment
2. Misrepresentation
3. Breach of Warranty

CONCEALMENT is the neglect to communicate that which a party knows and ought to
communicate. (Sec. 26)

Each party to a contract of insurance must communicate to the other, in good faith, all facts
within his knowledge which are material to the contract, and which the other has not the means
of ascertaining, and as to which he makes no warranty. (Sec. 28). The test is: If the applicant is
aware of the existence of some circumstances which he knows would influence the insurer in
acting upon his application, good faith requires him to disclose that circumstance, though
unasked.

Facts: Bacani procured a life insurance providing for double indemnity in case of accidental
death and appointed his mother as beneficiary. Subsequently, he died in a plane crash and his
mother sought to recover the indemnity. The insurer refused to pay on the ground that Bacani
failed to disclose his confinement in the Lung Center for renal failure.

Held: The mother is not entitled to receive payment. The insured need not die of the disease he
had failed to disclose to the insurer; it is sufficient that his non-disclosure misled the
insurer in forming his estimates of the risks of the proposed insurance policy or in making
inquiries. (Sunlife Assurance vs. CA, 245 SCRA 268)

Waiver of medical examination in a non-medical insurance contract renders even more

material the information required of the applicant concerning previous condition of health and
diseases suffered, for such information necessarily constitutes an important factor which the
insurer takes into consideration in deciding whether to issue the policy or not. (Saturnino vs.
Philippine American Life, 7 SCRA 316)

If the policy was procured through fraudulent representations, the contract of insurance was
never legally existent. It can be assumed that had the true facts been disclosed by the insured,
the insurance would never have been granted. (Argente vs. West Coast Life, 51 Phil. 725)

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REPRESENTATION is an oral or written statement of a fact or condition affecting the risk, made
by insured to insurer, tending to induce insurer to enter into the contract. (Sec. 36)

The injured party is entitled to rescind from the time when the representation becomes false.
However, the right of the insurer to rescind is waived by acceptance of premium despite
knowledge of the ground for rescission. (Sec. 45)

Both CONCEALMENT AND REPRESENTATION

1. Refer to the same subject matter and both take place before the
contract is entered.
2. Concealment or Misrepresentation prior loss or death gives rise
to the same remedy: Cancellation by the insurer of the policy.
(Secs. 27 and 45)
3. The test of materiality is the same. (Secs. 31 and 46)
4. The rules of concealment and representation is the same with
life and non-life insurance.

APPLICATION OF CONCEALMENT AND MISREPRESENTATION

GENERAL RULE: If the concealment or misrepresentation is discovered before loss or death,

the insurer can cancel the policy. If the discovery is after loss or death, the insurer can refuse
to pay.

EXCEPTION: The Incontestability Clause under par. 2 of Sec. 48.

EXCEPTIONS to the EXCEPTION (Incontestability Clause)

1. Non-payment of premiums;
2. Violation of condition—re: military/naval service in time of war;
3. No insurable interest;
4. Cause of death was excepted or not covered;
5. Fraud of a vicious type;
6. Proof of death was not given.

LIMITATIONS ON THE RIGHT OF INSURER TO RESCIND

1. He must not have accepted premiums despite knowledge of rescission; (Sec. 45)
2. He cannot rescind if he has already commenced any action on the contract; (Sec. 48,
par. 1)
3. In life insurance, defenses which may be raised as grounds for rescission are available
during the first two years of the life insurance policy. (Sec. 48, par. 2)

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WARRANTY is a statement or promise 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.

PURPOSE OF WARRANTY

It eliminates the potentially increasing hazards which may either be due to the acts of the
insured or to the change to the condition of the property.

TYPES OF WARRANTY

1. Express

2. Implied—peculiar only to marine insurance, and therefore is deemed included in the

contract, although not expressly mentioned:
a. that the ship will not deviate from agreed voyage unless deviation is proper;
(Sec. 123-125)
b. that the ship will not engage in illegal venture;
c. warranty of neutrality, that the ship will carry the requisite documents of
nationality or neutrality where such nationality or neutrality is warranted;
d. presence of insurable interest
e. that the ship is seaworthy at the time of the commencement of the Insurance
contract;

EFFECT OF BREACH OF WARRANTY

1. Violation of a material warranty—entitles insurer to rescind (Sec. 74)

2. Violation of an immaterial warranty—will not avoid the policy

EXCEPTION: When the policy expressly declares that a violation thereof will
avoid it. (Sec. 75)

ILLUSTRATION:

An “Other Insurance Clause” is a condition in the policy requiring the insured to inform
the insurer of any other insurance coverage of the property. A violation of the clause by
the insured will not constitute a breach unless there is an additional provision stating
that the violation thereof will avoid the policy.

WARRANTY

REPRESENTATION

1. Part of the contract

1. Mere collateral inducement

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 2. Written on the face of the policy, actually or by reference

2. Maybe written on the policy or in a totally disconnected piece

of paper

3. Conclusively presumed to be material

3. Insurer has the burden to show materiality

4. Must be actually complied with

4. Substantial truth is required

5. Made only by the insured

5. Made by both insurer and insured

THREE TYPES OF INSURANCE CONTRACTS

1. Policy—It is a written instrument in which a contract of insurance is set forth. (Sec. 49)

Kinds of Policies:

a. OPEN POLICY—value of thing insured is not agreed upon, but left to be

ascertained at time of the loss. (Sec. 60)
b. VALUED—definite valuation of the property insured is agreed by both parties,
and written on the face of the policy. (Sec. 61)
c. RUNNING—contemplates successive insurances and which provides that the
subject of the policy may from time to time be defined. (Sec. 62)

A Rider is a printed stipulation usually attached to the policy because they constitute
additional stipulations between the parties.

May a Policy be unilaterally cancelled?

The Insurer may, upon notice to the insured, stating grounds for cancellation, and stating
further that it can prove the ground should the insured require it, unilaterally cancel the policy.

Only Grounds for Cancellation

1. Non-payment of premium;

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 2. Physical changes in property making it uninsurable or increasing hazard;
3. Conviction of crime increasing hazard;
4. Discovery of Fraud or misrepresentation;
5. Discovery of willful or reckless acts increasing the hazard;
6. Determination by the Insurance Commission that continuation of policy would violate the
Code. (Sec. 64)

Prescriptive Period

The Insurer may provide in the policy that unless the insured brings an action within one (1)
year from time cause of action accrues, the action shall be barred. (Sec. 63)

The one (1) year period is computed from the date the cause of action accrues, which is the
denial of the claim and not upon the happening of the loss.

CONDITIONAL or BINDING COVER NOTE or BINDING SLIP

RECEIPT
It is an acknowledgment on
behalf of the company that their
branch office had received from
applicant the insurance
premium and had accepted the
application subject to
processing by the head
office. (Great Pacific Life vs.
CA, 89 SCRA 543)
Apply this term to life insurance
A written contract issued by the
insurer through its authorized
agent. It is intended to give the
insured temporary protection
(good only for 60 days) pending
the investigation of the risk by
the insurer or until the
issuance of a regular policy.
Apply this term to non-life
insurance (such as in marine
insurance, pending investigation
of the vessel which is still at sea)

There are two types of Conditional or Binding Receipt:

1. One that affords immediate protection—Insured is covered so long as he files his

application and pays the premium. The prevailing trend now is the use of this type, which
is entirely fair to both parties to the contract.
2. One that does not afford immediate protection—There is no coverage if anything
happens to the insured prior to favorable action on his application at the home office.

When does the policy become binding?

1. When all the conditions precedent stated in the offer have been satisfied; and
2. When delivered.

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Requisites for a valid delivery:

1. Intention of the insurer to give legal effect as a completed instrument;

2. Word or act by insurer putting the instrument beyond his legal, though not necessarily,
physical control;
3. Insured must acquiesce in this intention.

2 Types of Delivery

1. Actual—delivery to the person of the insured

2. Constructive—

a. By mail: If policy was mailed already and premium was paid and nothing is left to be done by
the insured, the policy is considered constructively delivered if insured died before receiving the
policy.

b. By agent: If delivered to the agent of the insurer, whose duty is ministerial, or delivered to the
agent of the insured, the policy is considered constructively delivered.

Who signs the policy?

Only the insurer or its authorized officer signs the policy. The policy is not the contract itself but
merely sets forth what has been agreed upon. The signature of the insured is needed only when
there is a rider or endorsement for countersigning purposes. (par. 3 of Sec. 50)

Premium is the consideration paid an insurer for undertaking to indemnify the insured against a
specific peril.

WHEN IS THE INSURED ENTITLED TO RETURN OF PREMIUMS PAID?

1. If thing insured was never exposed to the risks insured against (Sec. 79);
2. If contract was voidable due to fraud or misrepresentation of insurer (Sec. 81) ; and
3. If insurer never incurred liability

WHEN IS THE INSURED NOT ENTITLED TO RETURN OF PREMIUMS PAID?

1. If the risk has already attached and the risk is entire and indivisible;
2. In life policies;
3. If contract is void ab initio because of fraud by the insured;
4. If contract is illegal and the parties are in pari delicto

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GENERAL RULE: “Cash and Carry Rule.”—No policy or contract of insurance issued
by an insurance company is valid and binding unless and until the premium thereof has
been paid (Sec. 77)

EXCEPTIONS:

Statutory Jurisprudential
1. In life or industrial life 1. When the insured and the
policy whenever grace insurer have agreed to the
period is applicable (Sec. 77)payment of premium by
installments and partial payment
has been made at the time of
loss. (Makati Tuscany
Condominium Corp. vs. CA, 1992)
2. Written acknowledgment 2. When public interest so
by the insurer of receipt of requires, as determined by the
premium, which the law Insurance Commissioner.
declares to be conclusive
evidence of payment so as to (Example: In Compulsory Motor
make the policy binding and Vehicle insurance, if the policy was
the insurer liable, without issued without payment of
prejudice to the right of the premium by the vehicle owner, the
insurer to collect insurer will still be held liable. To
corresponding premium. (Sec. rule otherwise would prejudice the
78) 3rd party victim.

Loss is the injury or damage sustained by insured from perils insured against.

PROXIMATE CAUSE is the active efficient cause which sets to motion a train of events which
in turn brings about a result without intervention of any force operating and working actively from
a new and independent force.

Loss for which Insurer is Loss for which Insurer is NOT

LIABLE LIABLE
1. Loss the proximate 1. Loss due to insured’s willful
cause of which is a act
peril insured against 2. Loss due to connivance of
(Sec. 84) the insured (Sec. 87)
2. Loss the immediate 3. Loss where an excepted
peril is the proximate cause
cause of which is a
peril insured against,
except where
proximate cause is an
excepted peril

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 3. Loss through simple
negligence of insured
4. loss caused by efforts
to rescue the thing
from peril insured
against
5. during the course of
the rescue, the thing is
exposed to a peril not
insured against, which
permanently deprives
the insured of
possession, in whole
or in part

Simple negligence as a defense will not exonerate the insurer from liability as most loss or
damage arises from negligence. However, defense of gross or willful negligence (amounting
to bad faith) is a valid defense.

EFFECT OF FAILURE TO GIVE NOTICE OF LOSS

In fire insurance, such failure defeats the right of insured to recover

In other types of insurance, unless a stipulation in the policy requires the insured to give
notice, such failure will not exonerate insurer from liability.

Double Insurance exists where the same person is insured by several insurers separately in
respect to the same subject and interest. (Sec. 93)

REQUISITES OF DOUBLE INSURANCE

1. Person insured is the same

2. Two or more insurers insuring separately
3. Subject matter is the same
4. Interest insured is the same
5. Risk or peril insured against is the same

Double insurance is not prohibited by law. A person may therefore procure two or more
insurances to cover his property. However, the insurer may insert an “Other Insurance
Clause” which will prohibit double insurance. The rationale is to prevent the danger that
the insured will over insure his property.

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 Double Insurance Over Insurance
1. Two or more insurers 1. At least one insurer, with whom the
insured takes an insurance beyond the
value of his insurable interest
2. Not prohibited by law, 2. Prohibited by law because it is a
unless there is a wagering contract, and no longer a
stipulation to the contract of indemnity
contrary

Reinsurance is one by which an insurer procures a third person to insure him against loss or
liability by reason of such original insurance (Sec. 95)

PURPOSE: To distribute the risk, when the insurer finds a single risk so great that the
happening of the peril insured against would render him insolvent, it is customary to reinsure
such risk with one or more insurers.

Double Insurance (Sec. Reinsurance (Sec. 95)

93)
1. involves the same 1. insurance is of different interest
interest
2. insurer remains in such 2. insurer becomes an insured in
capacity relation to the reinsurer
3. subject of insurance is 3. subject of insurance is the original
property insurer’s risk
4. insured has to give his 4. consent of original insured, not
consent necessary

TWO KINDS OF REINSURANCE TREATIES

1. Automatic Reinsurance Treaty—A mandatory requirement by the Insurance

Commission to all insurance companies. The Commission specifies that the maximum
retention of value the insurer can cover per policy should not exceed 20% of the
company’s net worth. Any excess is absorbed by the reinsurer through the Automatic
Reinsurance Treaty. Note that the contract is between the reinsurer and the insurer.

2. Facultative Reinsurance—the insurer calls out to other insurance companies and

invites them to share the risk.

MARINE INSURANCE is 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 fixed period of time. (Sec. 99)

INSURABLE INTEREST IN MARINE INSURANCE

1. Shipowner—over the vessel,

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 EXCEPT: if chartered, the insurance is only up the amount not recoverable from
charterer. (Sec. 100)

If hypothecated by bottomry, the interest is only the excess of the value of the
vessel over the loan. (Sec. 101)

—shipowner also has insurable interest in

expected freightage (Sec. 103)

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.

Perils of the Sea Perils of the Ship

Includes only those Is a loss which in the ordinary course of
losses due to unusual events, results:
violence or
extraordinary action 1. From the natural and
of wind and wave or
to other extraordinary inevitable action of the sea;
causes connected 2. From wear and tear of the
with navigation. ship;
3. From the negligent failure
of the ships’ owner to
provide the vessel with
proper equipment to
convey the cargo under
ordinary conditions

RULE: Marine insurance covers only perils of the sea and not perils of the ship.

EXCEPTION: The stipulation of an All-Risks Clause, which covers all losses during the voyage
whether arising from a marine peril or not. However, it does not cover loss through willful or
fraudulent act of the insured.

BARRATRY is the willful misconduct on the part of the master or crew in pursuance of some
unlawful or fraudulent purpose without consent of owners and to the prejudice of owner’s
interest.

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INCHAMAREE CLAUSE covers loss or damage to the hull or machinery through:

1. Negligence of captain, engineers, etc.

2. Explosions, breaking of shafts, etc.
3. Latent defect of machinery or hull.

WHAT MATTERS ALTHOUGH CONCEALED, WILL NOT VITIATE THE CONTRACT,

EXCEPT WHEN THEY CAUSED THE LOSS?

1. National character of insured;

2. Use of false or simulated papers;
3. Liability of insured thing to capture or detention;
4. Liability to seizure from breach of foreign laws;
5. Want of necessary documents (Sec. 110)

SEAWORTHINESS is a relative term depending upon the nature of the ship, nature of
the voyage, nature of the service. In general, a vessel is seaworthy if it is fit to perform
the service and to encounter the ordinary perils of the voyage contemplated by the
parties to the policy. (Sec. 114)

INSURED CARGO OWNERS IMPLIEDLY WARRANT TO THE INSURER THE

SEAWORTHINESS OF THE CARRIER

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. (PHILAMGEN vs. CA,
273 SCRA 262)

DEVIATION is a departure from the course of the voyage insured, or an unreasonable delay in
pursuing the voyage or the commencement of an entirely different voyage. (Sec. 123)

RULE: Improper or unjustified deviation bars recovery and releases the insurer from
liability.

Deviation is proper only in the following cases:

1. To comply with a warranty;

2. In good faith to avoid a peril;
3. In good faith to save a human life;
4. Caused by circumstances beyond the control of the vessel. (Sec. 124)

Deviation to save goods belonging to a ship in distress is proper only if incidental to the
prime purpose of saving human life.

LOSS may either be TOTAL or PARTIAL. (Sec. 129)

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I. TOTAL loss is classified into:

ACTUAL total loss, CONSTRUCTIVE total loss, involving:

involving:
1. total destruction; 1. actual loss of more than ¾ of the
value of the object;
2. total deprivation of
owner of possession of 2. damage reducing value by more
thing insured; than ¾ of the value of the vessel and
of cargo; and 3. Expense of
3. loss by sinking; transshipment exceeds ¾ of the value
of the cargo (Sec. 131)
4. damage rendering thing
valueless (Sec. 130)
II. PARTIAL loss, which is not a total loss. (Sec. 128)

ABANDONMENT in marine insurance is the act of the insured by which, after a constructive
total loss, he declares the relinquishment to the insurer of his interest in the thing insured. (Sec.
138)

REQUISITES OF A VALID ABANDONMENT

1. Actual relinquishment by the insured of his interest in thing insured (Sec. 138)
2. Constructive total loss (Sec. 139)
3. Abandonment must not be partial or conditional (Sec. 140)
4. Must be made within reasonable time after receipt of reliable information of the loss
(Sec. 141)
5. Must be made by giving notice to the insurer either orally or in writing (Sec. 143) and
6. Notice of abandonment must be explicit and specify the particular cause of the
abandonment (Sec. 144)

General Average Loss Particular Average Loss

It is an expense on damage
suffered deliberately in order
to save the vessel, its cargo,
or both, from a real and
known risk
Effect: The insurers of both
the ship and cargo bear the
loss equally.
It is an expense on damage suffered
which did not inure to the benefit of
all persons interested in the vessel
and cargo.
Effect: Only the insurer of the
particular cargo benefiting from the
loss shall be liable

C0-INSURANCE is a relative division of the risk between the insurer and the insured dependent
upon the relative amount of the policy and the actual value of the property insured, taking effect
only if the actual loss is partial and less than the amount in the policy.

Renato Ma. S. Callanta, Jr. Page 17

ILLUSTRATION

Mr. X owns a vessel worth P300,000. He insures it for only P200,000. Mr. X is considered a co-
insurer of the vessel to the extent of P100,000 or 1/3 of the vessel’s value. Hence, if there is a
loss of P90,000, the insurer is liable for only P60,000. If Mr. X was not a co-insurer, the insurer
would be liable for P90,000. Of course, if a total loss occurred, the insurer would be liable for the
entire amount of P300,000, because co-insurance takes place only in case of a partial loss.

Rationale: To encourage the insured to insure the full value of the vessel considering that
maritime ventures are full of many risks.

Co-insurance is implied in a marine insurance. In other forms of insurance, co-insurance

must be expressed.

FIRE INSURANCE is a contract by which the insurer for a consideration agrees to indemnify the
insured against loss of or damage by fire, lightning, windstorm, tornado or earthquake and other
allied risks (FLEW-AT), when such risks are covered by extension to fire insurance policies or
under separate policies. (Sec. 167)

TO DETERMINE LIABILITY OF INSURER, DISTINGUISH BETWEEN:

FRIENDLY FIRE HOSTILE FIRE

1. One that burns in a place 1. One that escapes from the
where it is intended to burn and place where it was intended to
ought to be (i.e. stove or furnace) burn and ought to be (i.e. fire
escaping from stove or furnace
damaging property of the
insured)
2. Insurer is not liable. Friendly 2. Insurer is liable.
fire is deemed an agency for the
accomplishment of some
purpose, and not a hostile peril.

FALL OF BUILDING CLAUSE is a clause in 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.

What is the effect of ALTERATION?

Alteration results in rescission if—the alteration violates the contract and increases the risk.

1. alteration in the use or condition from that which is limited in the policy
2. increasing the risk
3. made without consent of insurer
4. means within control of insured (Sec. 168)

Renato Ma. S. Callanta, Jr. Page 18

Alteration not resulting in rescission if—the alteration violates the contract but does
not increase the risk (Sec. 169)

—the alteration does not violate the contract but increases the risk (Sec. 170);

OPTION TO REBUILD CLAUSE gives the insurer the option to rebuild the destroyed property
instead of paying the indemnity. This clause serves to protect the insurer against unfair
appraisals friendly to the insured. This clause is sanctioned and recognized under the last
sentence of Sec. 172.

CASUALTY OR ACCIDENT INSURANCE is insurance covering loss or liability arising from

accident or mishap, excluding those falling under other types of insurance as fire or marine.
(Sec. 174)

Accident or accidental have been taken to mean that which happens by chance or fortuitously,
without intention or design, which is unexpected, unusual or unforeseen. (Pan Malayan
Insurance Corp. vs. CA, 184 SCRA 54)

Insured was a boxer. During a bout, he was hit in the face and fell backwards, hitting a post.
HELD: Accident (De la Cruz vs. Capital Insurance, 64 O.G. 760)

Insured was murdered. In case of murder or homicide, there is intent to kill.

HELD: No accident. (Kanapi vs. Insular Life, 94 Phil. 397)

Accused charged with robbery with homicide. The intent was to rob. Insured was killed by
accident.

HELD: Accident (Calanoc vs. CA, 98 Phil. 79)

INTENTIONAL as used in Accident Insurance

Intentional as used in an accident policy excepting intentional injuries inflicted by the insured or
any other person implies the exercise of the reasoning faculties, consciousness and
volition. Where a provision of the policy excludes intentional injury, it is the intention if the
person inflicting the injury that is controlling. If the injuries suffered by the insured clearly
resulted from the intentional act of the third person, the insurer is relieved from liability
as stipulated. (Biagtan vs., Insular Life, 44 SCRA 58)

SURETYSHIP is an agreement whereby a surety guarantees the performance by another of an

undertaking or an obligation in favor of a 3rd party. (Sec.175)

Nature of the LIABILITY of the Surety

1. Solidary;

2. Limited to the amount in the bond (it cannot be extended by implication);

Renato Ma. S. Callanta, Jr. Page 19

 3. It is determined strictly by the terms of the contract of suretyship in relation to the
principal contract between the obligor and the obligee (Sec. 176)

The insurer acts as a surety and not a guarantor. A guarantor, unlike a surety, has the right of
exhaustion not available to a contract of suretyship.

The rule on payment of premium is the same as ordinary insurance. Pay first before the contract
becomes effective. EXCEPTION: If the surety bond is accepted by the obligee irrespective of
payment of premium, the contract of suretyship is binding upon the insurer. (Sec. 177)

LIFE INSURANCE is insurance on human lives and insurance appertaining thereto or

connected therewith. (Sec. 179)

KINDS OF LIFE INSURANCE POLICIES

1. Ordinary Life, General Life or Old Line Policy—

insured pays a premium every year until he dies.

Surrender value after 3 years.

2. Limited Payment—insured pays premium for a limited period. If he dies within the
period, his beneficiary is paid; if he outlives the period, he does not get anything.
3. Endowment—insured pays a premium for a specified period. If he outlives the period,
the face value of the policy is paid to him; if not, his beneficiaries receive the benefit.
4. Term Insurance—insured pays once only, and he is insured for a specified period. If he
dies within the period, his beneficiaries benefit. If he outlives the period, no person
benefits from the insurance.
5. Industrial Life—life insurance entitling the insured to pay premiums weekly, or where
premiums are payable monthly or oftener; and
6. Variable Contract—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.

BAR Q: What is the liability of the insurer in case of SUICIDE?

After the policy has been in force for a period of two years from its date of issue or last
reinstatement, the insurer is liable for suicide committed by the insured.

If suicide was committed before the lapse of the two year period, the insurer is not liable.

If suicide was committed in the state of insanity, date of commission is immaterial. The insurer
is always liable. (Sec. 180-A)

Renato Ma. S. Callanta, Jr. Page 20

If the insured was convicted of a capital offense and executed by lethal injection, can the
beneficiary recover?

Yes. This is part of the risk assumed by the insurer.

COMPULSORY MOTOR VEHICLE INSURANCE (Sec. 373)

If you are the owner of a motor vehicle, whether public or private, you must secure a
compulsory motor vehicle insurance, which is a requisite before you can register your vehicle.

Purpose: To give immediate financial assistance to victims of motor vehicle accidents and/or
their dependents, especially if they are poor regardless of financial capability of motor vehicle
owners or operators responsible for the accident sustained.

Passenger is 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.

Third-Party is any person other than a passenger as defined in this section and shall also
exclude 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, as likewise
defined herein, or his employee in respect of death, bodily injury, or damage to property arising
out of and in the course of employment. (Sec. 373 pars. (c) and (d))

“NO FAULT” CLAUSE provides that any claim for death or injury to any passenger or third
party shall be paid without necessity of proving fault or negligence provided the indemnity with
respect to any one person does not exceed P5,000.00 provided the following proofs of loss
under oath are submitted:

1. Death certificate and evidence sufficient to establish proper payee;

2. Police report;
3. Medical report and evidence of medical or hospital disbursement

If more than P5,000.00 is sought, negligence which is the basis of the award must be
proven in court.

If the offended party is a—

1. Passenger, file claim against insurer of the vehicle he was a passenger of. (Sec. 378
(iii))
2. Pedestrian, file claim against 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 the

Renato Ma. S. Callanta, Jr. Page 21

occupant is riding, mounting, or dismounting from. The 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 vs. Ancheta, 169 SCRA 144)

AUTHORIZED DRIVER CLAUSE indemnifies 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.

Where a car is admittedly and wrongfully taken without the knowledge and consent of the owner,
such taking constitutes “theft” and it is the theft clause, not the authorized driver clause which
should apply. (Perla Compania vs. CA, 208 SCRA 487)

COOPERATION CLAUSE is a clause in automobile insurance policy which provides that the
insured shall give all such information and assistance as the insurer may require, usually
including attendance at trials or hearings.

Renato Ma. S. Callanta, Jr. Page 22