I.

INSURANCE

A. Concept of insurance

Contract of Insurance – an agreement whereby one undertakes for a consideration to

indemnify another against loss, damage or liability arising from an unknown contingent event.

B. Elements of an insurance contract =Paris

1. Payment of Premium - actual payment of the premium (consideration) must be made.

2. Assumption of risk - against loss, damage, or liability.
3. Risk of loss - happening of designated events, will subject the insurable interest to some
kind of loss.
4. Insurable interest - an insurable interest to prevent wagering under the guise of insurance.
5. Scheme to distribute the losses - distribute the actual losses, a large group of persons
bearing a similar risk.

C. Characteristics and nature of insurance contracts

Nature of of an insurance contract. = C VAPOR

1. Voluntary - such terms or conditions as they may deem convenient.

2. Aleatory - dependent on the happening of an event, which is uncertain.
3. Property - it is property in legal contemplation.
4. Onerous - valuable consideration
5. Risk distributing device - distribute the risk those who are subject to the same kind of loss.
6. Consensual - cognition theory applies; is perfected offer or learns of the acceptance of his
offer by the other party.

Characteristics of Insurance Contracts=RAPE U2C3

1. Risk Distributing Device

2. Aleatory - what the insured will pay in pesos is not equal to what he will receive in loss.
3. Personal - presumes that the insurer considered the personal qualifications of the insured.
4. Executory - is executory to the insurer and subject to conditions, principal one of which is
happening of the event insured against.
5. Contract of Adhesion or Fine Print Rule - do not result from mutual negotiations prescribed
in printed form.
6. Conditional - dependent upon the happening of the principal conditions and other condi-
tions.
7. Uberrimae Fidei, Contract - must not only perform their obligations in good faith but must
avoid material concealment or misrepresentations as contracts of insurance are one of ut-
most good faith.
8. Consensual - perfected by mere consent.
9. Unilateral - payment of the premium, insurer has the obligation to pay the proceeds.

(POSSIBLE MO GAWAS SA BAR EXAM)

I. Mendoza Corporation is family corporation, the stockholders of which are Juan Dela Cruz,
Pedros Santos, Julia Mendoza and their children. Prior to August 9, 1979, an agent of X first
Bank proposed to Mendoza Corporation to insure its building. Although at first reluctant, Men-
doza Corp. finally agreed. X Bank sent an inspector to inspect the building and agreed to in-
sure the same for P500,000 for which Mendoza Corp. paid an annual premium of P2,500. On

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Aug. 9, 1979, X Bank issued to Mendoza Corp. a fire insurance policy. On March 12, 1980, dur-
ing the effectivity of said insurance policy, the insured property was totally burned rendering it a
total loss. A claim was made by Mendoza Corp, upon X Bank but the latter denied it contend-
ing that the former had no insurable interest over the building constructed on the piece of land
in the name of the late Juan Deal Cruz as owner. It was contended that both the lot and the
building were owned by Juan Deal Cruz and NOT by Mendoza Corporation. Does Mendoza
Corporation have the right over the proceeds of the insurance contract?

Regardless of the nature of the title of the insured or even if he did not have little to the
property insured, the contract of fire insurance should still be upheld if his interest in or his rela-
tion to the benefited in its continued existence or suffer a direct pecuniary loss from its de-
struction or injury. The test in determining insurance interest derive pecuniary benefit or advan-
tage from its preservation, suffer pecuniary loss or damage from its destruction, termination or
injury by the happening of the event insured against.

II. JQ, owner of a condiminium unit, insured the same against fire with the XYZ Insurance Co.,
and made the loss payable to his brother, MLQ. In case of loss by fire of the said condominium
unit, who may recover on the fire insurance policy? State the reason(s) for your answer (2001)

He has the insurable interest as owner-insured. As beneficiary in the fire insurance poli-
cy, MLQ cannot recover on the fire insurance policy. For the beneficiary to recover on the fire or
property insurance policy, it is required that he must have insurable interest in the property in-
sured.

D. Classes

1. Marine;

I. What is marine insurance?

With navigation, ship, cargo, freightage, profits or other insurable interest in movable
property exposed during a certain voyage or a fixed period of time. However it also covers in-
land marine insurance.

II. What are the different kinds of marine insurance?

1. Ocean Marine Insurance;

2. Inland Marine Insurance; and
3. Aircraft Hull Policy.

III. What are the rules on marine protection and indemnity insurance?

1. Valued policy - bound by the valuation, insured had interest at risk; no fraud.



2. Open policy

a. Value of the ship - the beginning of the risk;

b. Value of the cargo - actual cost when laden on board or market at the time and place of
lading.
c. Value of freightage - gross freightage exclusive of primage.
d. Cost of insurance - to be added to the estimated value.

IV. Discuss the Special Marine Insurance Contracts and Clauses.

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1. All-Risks Policy - all causes of conceivable loss or damage. Except:
a. Otherwise excluded in the policy; or
b. Result of fraud or intentional misconduct on the part of the insured.

2. Barratry clause – a clause which provides that there can be no recovery on the policy in case
of any willful misconduct on the part of the master or crew in pursuance of some unlawful or
fraudulent purpose without the consent of the owner and to the prejudice of owner’s interest. It
requires an intentional and willful act in its commission. No honest error or judgment or mere
negligence, unless criminally gross, can be barratry. (Roque v. IAC, G.R. No. L-‐ 66935, Nov.
11, 1985)

3. Inchmaree Clause - makes the insurer liable for loss or damage to the hull or machinery:

a. Bursting of the broiler

b. Breaking of shafts
c. Latent defect of machinery or hull
d. Faults and errors in the navigation or management
e. Negligence of the captain or engineers

4. Sue and Labor Clause - insurer may become liable to pay the insured, in addition to the loss
actually suffered, in his efforts to protect against a peril for which the insurer would have been
liable.

V. What are the implied warranties in a contract of marine insurance?

1. Ship will not deviate unless it is proper;

2. Will not engage in an illegal venture;
3. Seaworthy;
4. Neutrality;
5. Possession of documents of neutrality: carry the requisite documents of nationality.
6. Insurable interest

VI. When is a ship or vessel seaworthy?

Reasonably fit to perform the service, and to encounter the ordinary perils of the voy-
age.

VII. What is the obligation of the insured to keep its vessel seaworthy?

The insured implied warrants the insurer that the vessel is seaworthy and such warrant
is as much a term of the contract as if expressly written obligation of the cargo owner to look
for a reliable common carrier that keeps its vessel in a seaworthy. No control over the vessel
has full control in the selection of the common carrier.

VIII. Must the insured always prove that its vessel is seaworthy?

Policy stipulates that the seaworthiness of the vessel as between the insured and the
insurer is admitted, the question of seaworthiness cannot be rated by the latter without show-
ing concealment or misrepresentation.

IX. What are the kinds of loss in marine insurance?

1. Total loss; and

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2. Partial loss

X. What constitutes total loss?

1. Actual Total Loss - is destroyed or so damaged as to cease to be a thing of the kind in-
sured or where the insured is irretrievably deprived thereof.
2. Constructive Total Loss or Commercial Total Loss - reduced to such a state or placed in
such position. Total destruction or annihilation, yet highly imminent or its ultimate arrival under
the policy is hopeless yet exceeding double.

XI. What constitutes constructive total loss?

1. Damage valueless;
2. Irretrievable loss by sinking or by being broken;
3. Total destruction;
4. Other event effectively deprives the owner of the possession.

XII. What constitutes constructive total loss?

1. Damage reducing, by more than 3/4, the value of the vessel and or cargo;
2. Expense of transshipment exceeds 3/4 of value of cargo;
3. Actual loss of more than 3/4 of the value of the object.

Note: Constructive total loss

1. Abandon goods or vessel claim for whole insured value

2. Without abandoning vessel, claim for actual loss

XIII. What constitutes partial loss?

It is a loss which is not total.

XIV. M/V Juan, a passenger and cargo vessel, was insured for P40,000,000.00 against con-
structive total loss. Due to a typhoon, it sank near Palawan. Luckily, there were no casualties,
only injured passengers. The ship owner sent a notice of abandonment of his interest over the
vessel to the insurance company which then hired professionals to afloat the vessel for
P900,000.00. When refloated, the vessel needed repairs estimated at P2,000,000.00. The in-
surance company refused to pay the claim of the ship owner, stating that there was no con-
structive total loss. Was there constructive total loss to entitle the ship owner to recover from
the insurance company? Explain. (2005 Bar)

The vessel was reflected and the costs of reflecting plush the needed repairs (2.9 mil-
lion) will not be more than three-fourths of the value of the vessel. A constructive total loss
gives to a person insured a right to abandon. The insurance company shall pay for the total
costs of reflecting and needed repairs.

XV. What is abandonment and what are its requisites?

After a constructive total loss, he declares the relinquishment to the insurer of his inter-
est. Requisites for validity are:

1. Neither be partial nor conditional;

2. Must be explicit, specify the particular cause of the abandonment;
3. Giving notice;
4. Be factual

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5. Actual relinquishment by
6. A constructive total loss
7. With a reasonable time after receipt of reliable information of the loss.

XVI. What are the averages?

Extraordinary or accidental expenses in order to reserve the vessel, the cargo, or both
from the time it is loaded and the voyage commenced until it ends and the cargo unloaded.

XV. What are the two kinds of averages?

1. General average- gross average, all the damages and expenses deliberately caused save
the vessel from real and known risk.

2. Particular average - caused to the vessel or to her cargo which have not insured to the
common benefit and profit of all the persons interested in the vessel.

2. Fire

I. What is fire insurance?

Agrees to indemnify the insured by hostile fire, lightning, windstorm, tornado or earth-
quake and other allied risks, covered by extension to fire insurance policies or under separate
policies.

GENERAL RULE: the financial loss due the DIRECT PHYSICAL DAMAGE of the proper-
ty.

EXCEPTION: may ONLY be liable to pay for the indirect or consequential losses arising
out of the loss of use of the property, extension to such fire policies or insured under a separate
policy.

II. Distinguish Hostile Fire from Friendly Fire.

Hostile fire: escapes and burns in a place where it is not supposed to be. Started out as
a friendly fire but escapes from its original place or it becomes too strong and out of control.

Friendly fire: burns in a place where it is supposed to burn.

III. What are the risks covered by the fire insurance?

1. Financial losses - direct physical damage.

2. Indirect or consequential losses - extension or separate policy.

a. Extraordinary expenses
b. Loss of earnings
c. Loss of rental income

IV. What are the measures of indemnity in fire insurance?

1. Open policy - no valuation, the expense it would be to the insured at the time of the com-
mencement of the fire to replace the thing lost or injured in the condition at the time of the
injury.

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2. Valued policy - shall be conclusive between the parties provided there is no fraud or mistake,
rescind.

V. What are the requisites in order that an insurer may rescind the contract on the ground of
alteration?

1. Without the consent of the insurer;

2. Use or condition as limited by the policy is altered;
3. Specifically limited or stipulated;
4. Violation of a policy provision;
5. Alteration increases the risk;
6. Alteration is made by means within the control of the insured.

VI. What is the Fall-of-Building Clause?

If the building or any part thereof falls, except as a result of fire, the policy shall immedi-
ately cease.

VII. What is the Option to Rebuild Clause?

The insurer may cause the repair, rebuilding, or replacement of the buildings or struc-
tures wholly or partially destroyed.

3. Casualty

I. What is casualty insurance?

Loss or liability; accident or mishap, excluding under other types of insurance such as
fire or marine.

II. What may be included in casualty insurance?

1. Theft and Burglary insurance - excludes those persons in the insured’s service and em-
ployment.
2. Motor Vehicle Liability Insurance - voluntary or compulsory insurer becomes liable for the
damage or injury.
3. Plate Glass Insurance - breakage or damage cause by chemicals accidentally or malicious-
ly applied.
4. Other Substantially Similar Kinds - pollution, liability insurance.
5. Personal Accident and Health Insurance by Non-Life Insurance Companies - specified per-
ils which may affect the person and/or property of the insured.
6. Employer’s Liability Insurance - arise out of and in the course of the insured employee’s
employment.

III. What are the classification of casualty insurance?

1. Accident or health insurance - specified perils; affect he person and/or property of the in-
sured.
2. Third party liability insurance - specified perils; on the part of the insured for claims for in-
juries to or damage to property of others.

IV. What is the No Action Clause?

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 That suit and final judgment be first obtained only thereafter can the person injured re-
cover on the policy.

V. Distinguish Intentional from Accidental as used in Insurance Policies.

Intentional exercise of the reasoning faculties, consciousness, and violation. It is the

intention of the person inflicting the injury that is controlling.

Accidental which happens by chance or fortuitously without intention design, one that
is unexpected, unusual and unforeseen.

4. Suretyship

I. Define the contract of suretyship.

A surety guarantees the performance by the principal or obligor in favor of an obligee.

Making or proposing to make, as surety, any contract of suretyship as a vocation and not as
merely incidental to any other legitimate business or activity of the surety.

II. What is the nature of liability of surety?

1. Solidary;
2. Amount of the bond;
3. Determined strictly by the terms of the contract of suretyship.

III. What does continuing surety?

Unless a specified period, the obligation the surety subsists so long as the principal
obligation subsists.

5. Life

I. What is a contract of life insurance?

Insurance in human lives and insurance appertaining thereto connected therewith. A

contract or pledge for the payment of endowments or annuities. Payable on the death surviving
a specified period.

II. What are the kids of life insurance?

1. Variable contract - to reflect investment results of any segregated portfolio of investment

2. Industrial life - entitling the insured to pay premiums weekly, or where premiums are payable
monthly or oftener.

3. Ordinary life, general life or old line policy - pays a fixed premium every year until he dies.
The insured is entitled to surrender value after 3 years.

4. Limited Payment Policy - insured pays premium for a limited period, dies within the period,
beneficiary is paid, outlives the period.

5. Endowment policy - outlives the period, face value, beneficiaries receive the benefit.

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6. Term insurance - the insured pays the premium only once, insured for a specified period; no
one shall benefit from the insurance.

III. What is the liability of the insurer in case the insured commits suicide?

Insurer is liable:

1. Committed after two years from the date of the policy’s issue or its last reinstatement.

Note: But may be limited by contract, extending the 2-year period is null and void.

2. After a shorter period provided for

3. In a state of insanity unless suicide is an expected peril.

IV. What is the liability of the insurer in case the death was occasioned 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.

Note: Miravite book also opines that the beneficiary of an insured who is executed for a crime
he committed cannot recover from the 2 reasons:

1. His death is caused through his connivance, and

2. Any stipulation to render the insurer liable under these circumstances would be contrary to
public policy.

V. Who shall receive the life insurance proceeds if the beneficiary willfully caused the death of
the insured?

General rule, interest of a beneficiary in a life insurance policy shall be forfeited princi-
pal, accomplice or accessory pass on to the other beneficiaries, absence, in accordance with
the policy contract, estate of. The expectations are as follows:

1. Insanity of the beneficiary;

2. Self-defense;
3. By accident.

VI. What is the Accidental Death Benefit Clause?

Additional benefits through accidental means.

VII. Define accident as used in life insurance policies?

Without one’s foresight or expectations, unknown cause, on usual effect of a known

case but not expected.

VIII. What is the cash surrender value as applied to a life insurance policy?

Default after the payment of at least 3 full annual premiums, is entitled to receive if he
surrenders the policy and releases.

6. Microinsurance

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 SEC. 187. Microinsurance is a financial product or service that meets the risk protection
needs of the poor where:

(a) The amount of contributions, premiums, fees or charges, computed on a daily basis,
does not exceed seven and a half percent (7.5%) of the current daily minimum wage rate for
nonagricultural workers in Metro Manila; and

(b) The maximum sum of guaranteed benefits is not more than one thousand (1,000)
times of the current daily minimum wage rate for nonagricultural workers in Metro Manila.

SEC. 188. No insurance company or mutual benefit association shall engage in the
business of microinsurance unless it possesses all the requirements as may be prescribed by
the Commissioner. The Commissioner shall issue such rules and regulations governing mi-
croinsurance.

7. Compulsory motor vehicle liability insurance (CMVLI)

I. What is the Compulsory Motor Vehicle Liability Insurance?

Protection coverage answer for legal liability for losses and damages due to bodily in-
juries or property damage arising from the use and operation of motor vehicle by its owner.

II. What is the purpose of CMVLI?

To assure that victims and/or their dependents assured of immediate financial capacity.

III. Who is a passenger?

Fare-paying person being transported and conveyed and by a motor vehicle.

IV. Who is a third party?

Any person other than the passenger, excluding a member of the household or a mem-
ber of the family within the second degree of consanguinity or his employee.

V. What is the “No Fault Clause?”

Gives the victim option to file a claim for DEATH or INUURY without the necessity of
proving fault or negligence of any kind.

VI. What are the different special clauses?

1. Cooperation Clause
2. Authorized Driver Clause - indemnify the insured owner against loss or damage limits the
use to the insured himself or any person who drives on his order or with his permission.
3. Theft Clause - includes theft as among the risks insured against and if the vehicle was un-
lawfully taken.

VII. Risk de la Cruz insured his passenger jeepney with Asiatic Insurers, Inc. The policy provid-
ed that the authorized driver of the vehicle should have a valid and existing driver’s license. The
passenger jeepney of Rick de la Cruz which was at the time driven by Jay Cruz, figured in an
accident resulting in the death of a passenger. At the time of the accident, Jay Cruz was li-
censed to drive but it was confiscated by an LTO agent who issued him a Traffic Violation Re-

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port (TVR) just minutes before the accident. Could Asiatic Insurers, Inc., be liable under its poli-
cy? Why? (2003 Bar)

The fact that the driver was merely holding a TVR does not violate the condition that the
driver should have a valid and existing driver’s license. Such a condition should be disregarded
because what is involved is a passenger jeepney, and what is involved her is not own damage
insurance but third party liability where the injured party is a third party not privy to the contract
of insurance.

VIII. What is the effect of change of ownership?

Transfer of ownership does not suspend the policy provided:

1. Insurance company shall agree;

2. Change of ownership indicated in an endorsement by the insurer;
3. Signed duplicate of the endorsement must be filed with the LTO.

8. Compulsory insurance coverage for agency-hired workers

(RA 10022) SEC. 37-A. Compulsory Insurance Coverage for Agency-Hired Workers. - In
addition to the performance bond to be filed by the recruitment/manning agency under Section
10, each migrant worker deployed by a recruitment/manning agency shall be covered by a
compulsory insurance policy which shall be secured at no cost to the said worker. Such insur-
ance policy shall be effective for the duration of the migrant worker's employment and shall
cover xxxx

E. Variable contracts

SEC. 238. (a) No insurance company authorized to transact business in the Philippines
shall issue, deliver, sell or use any variable contract in the Philippines, unless and until such
company shall have satisfied the Commissioner that its financial and general condition and its
methods of operations, including the issue and sale of variable contracts, are not and will not
be hazardous to the public or to its policy and contract owners. No foreign insurance company
shall be authorized to issue, deliver or sell any variable contract in the Philippines, unless it is
likewise authorized to do so by the laws of its domicile.

(MOST IMPORTANT HERE. Memorize if possible) (b) The term variable contract shall
mean any policy or contract on either a group or on an 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 investments or of a designated
separate account in which amounts received in connection with such contracts shall have been
placed and accounted for separately and apart from other investments and accounts. This
contract may also provide benefits or values incidental thereto payable in fixed or variable
amounts, or both. It shall not be deemed to be a security or securities as defined in The Securi-
ties Act, as amended, or in the Investment Company Act, as amended, nor subject to regula-
tions under said Acts.

(c) In determining the qualifications of a company requesting authority to issue, deliver,

sell or use variable contracts, the Commissioner shall always consider the following:

(1) The history, financial and general condition of the company: Provided, That such
company, if a foreign company, must have deposited with the Commissioner for the benefit
and security of its variable contract owners in the Philippines, securities satisfactory to the

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Commissioner consisting of bonds of the Government of the Philippines or its instrumentalities
with an actual market value of Two million pesos (P2,000,000.00);

(2) The character, responsibility and fitness of the officers and directors of the company;
and

(3) The law and regulation under which the company is authorized in the state of domi-
cile to issue such contracts.

(d) If after notice and hearing, the Commissioner shall find that the company is qualified
to issue, deliver, sell or use variable contracts in accordance with this Code and the regulations
and rules issued thereunder, the corresponding order of authorization shall be issued. Any de-
cision or order denying authority to issue, deliver, sell or use variable contracts shall clearly and
distinctly state the reasons and grounds on which it is based.

SEC. 239. Any insurance company issuing variable contracts pursuant to this Code
may in its discretion issue contracts providing a combination of fixed amount and variable
amount of benefits and for option lump-sum payment of benefits.

SEC. 240. Every variable contract form delivered or issued for delivery in the Philip-
pines, and every certified form evidencing variable benefits issued pursuant to any such con-
tract on a group basis, and the application, rider and endorsement forms applicable thereto
and used in connection therewith, shall be subject to the prior approval of the Commissioner.

SEC. 241. Illustration of benefits payable under any variable contract shall not include
or involve projections of past investment experience into the future and shall conform with the
rules and regulations promulgated by the Commissioner.

SEC. 242. Variable contracts may be issued on the industrial life basis, provided that
the pertinent provisions of this Code and of the rules and regulations of the Commissioner
governing variable contracts are complied with in connection with such contracts.

SEC. 243. Every life insurance company authorized under the provisions of this Code to
issue, deliver, sell or use variable contracts shall, in connection with the same, establish one or
more separate accounts to be known as separate variable accounts. All amounts received by
the company in connection with any such contracts which are required by the terms thereof, to
be allocated or applied to one or more designated separate variable accounts shall be placed
in such designated account or accounts. The assets and liabilities of each such separate vari-
able account shall at all times be clearly identifiable and distinguishable from the assets and
liabilities in all other accounts of the company. Notwithstanding any provision of law to the con-
trary, the assets held in any such separate variable account shall not be chargeable with liabili-
ties arising out of any other business the company may conduct but shall be held and applied
exclusively for the benefit of the owners or beneficiaries of the variable contracts applicable
thereto. In the event of the insolvency of the company, the assets of each such separate vari-
able account shall be applied to the contractual claims of the owners or beneficiaries of the
variable contracts applicable thereto. Except as otherwise specifically provided by the con-
tract, no sale, exchange or other transfer of assets may be made by a company, between any
of its separate accounts or between any other investment account and one or more of its sepa-
rate accounts, unless in the case of a transfer into a separate account, such transfer is made
solely to establish the account or to support the operation of the contracts with respect to the
separate account to which the transfer is made, or in case of a transfer from a separate ac-
count, such transfer would not cause the remaining assets of the account to become less than
the reserves and other contract liabilities with respect to such separate account. Such transfer,
whether into or from a separate account, shall be made by a transfer of cash, or by a transfer

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of securities having a valuation which could be readily determined in the market place: Provid-
ed, That such transfer of securities is approved by the Commissioner. The Commissioner may
authorize other transfers among such accounts, if, in his opinion, such transfers would not be
inequitable. All amounts and assets allocated to any such separate variable account shall be
owned by the company and with respect to the same the company shall not be nor hold itself
out to be a trustee.

SEC. 244. Any insurance company which has established one or more separate vari-
able accounts pursuant to the preceding section may invest and reinvest all or any part of the
assets allocated to any such account in the securities and investments authorized by Sections
204, 206, 207 and 208 for any of the funds of an insurance company in such amount or
amounts as may be approved by the Commissioner. In addition thereto, such company may
also invest in common stocks or other equities which are listed on or admitted to trading in a
securities exchange located in the Philippines, or which are publicly held and traded in the
over-the-counter market as defined by the Commissioner and as to which market quotations
have been available: Provided, however, That no such company shall invest in excess of ten
percent (10%) of the assets of any such separate variable accounts in any one corporation is-
suing such common stock. The assets and investments of such separate variable accounts
shall not be taken into account in applying the quantitative investment limitations applicable to
other investments of the company. In the purchase of common capital stock or other equities,
the insurer shall designate to the broker, or to the seller if the purchase is not made through a
broker, the specific variable account for which the investment is made.

SEC. 245. Assets allocated to any separate variable account shall be valued at their
market value on the date of any valuation, or if there is no readily available market value then in
accordance with the terms of the variable contract applicable to such assets, or if there are no
such contract terms then in such manner as may be prescribed by the rules and regulations of
the Commissioner.

SEC. 246. The reserve liability for variable contracts shall be established in accordance
with actuarial procedures that recognize the variable nature of the benefits provided, and shall
be approved by the Commissioner.

F. Insurable Interest

1. In life/health

SEC. 10. 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 respect-
ing 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. 11. The insured shall have the right to change the beneficiary he designated in the
policy, unless he has expressly waived this right in said policy. Notwithstanding the foregoing,
in the event the insured does not change the beneficiary during his lifetime, the designation
shall be deemed irrevocable.

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Note: Insured is also the cestui que vie (insurance upon one’s life). The insured can make it
payable to anyone he chooses, regardless of whether or not such beneficiary has an insurable
interest in his (insured’s) life. Where a person names himself beneficiary in a policy he takes on
the life of another, he must have insurable interest in the life of the latter.

I. When must insurable interest in life or health exist?

A general rule, must exist when the insurance takes effect, but need not exist thereafter
or when the loss occurs.

Exceptions:

1. Taken by the creditor on the life of the debtor;

2. The insurance is taken by the employer on the life of the employee.

2. In property

SEC. 13. Every interest in property, whether real or personal, or any relation thereto, or
liability in respect thereof, of such nature that a contemplated peril might directly damnify the
insured, is an insurable interest.

SEC. 14. An insurable interest in property may consist in:

(a) An existing interest;

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

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

SEC. 15. A carrier or depository of any kind has an insurable interest in a thing held by
him as such, to the extent of his liability but not to exceed the value thereof.

SEC. 16. A mere contingent or expectant interest in any thing, not founded on an actual
right to the thing, nor upon any valid contract for it, is not insurable.

SEC. 17. The measure of an insurable interest in property is the extent to which the in-
sured might be damnified by loss or injury thereof.

SEC. 18. No contract or policy of insurance on property shall be enforceable except for
the benefit of some person having an insurable interest in the property insured.

SEC. 19. An interest in property insured must exist when the insurance takes effect, and
when the loss occurs, but need not exist in the meantime; and interest in the life or health of a
person insured must exist when the insurance takes effect, but need not exist thereafter or
when the loss occurs.

3. Double insurance and over insurance

I. What is double insurance and what are its requisites?

Same person is injured by several insurers separately, the same subject and interest.

1. Two or more insurers insuring separately;

2. Same insured person;

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3. Same risk or peril insured against;

4. Same interest insured;

5. Same subject matter.

II. What is over-insurance and how does it differ from double insurance?

Amount greater than the value of that property.

Amount of Insurance

Over-insurance: amount of the insurance beyond the value of the insured’s

Double insurance: may be no over-insurance sum total of the amounts of the policies does not
exceed the insurable interest.

Number of Insurers

Over-insurance: only by one insurer

Double insurance: always several insurers.

III. What are the effects in case of loss?

Insurer pay the extent of the real value of the property lost. Insured is entitled to recover
the amount of premium.

IV. What are the effects of over-insurance by double insurance?

1. Insured, claim payment from the insurers in such order as he may elect, up to the amount
for which the insurers are severally liable.

2. A Valued Policy, insured must give credit as against the valuation for any sum received him
under any other policy without regard to the actual value of the matter insured.

3. An unvalued policy, must give credit, as against the full insurable value, for any sum received
by him.

4. Insured receives any sum in excess of the valuation in the case of valued, policies, or insur-
able value in the case of unvalued polices, must hold such sum in trust for the insurers.

5. Each insurer is bound, contribute ratably to the loss in proportion to the amount for which he
is liable under his contract.

V. What is the nature of the liability of the several insurers in double insurance? Explain (2005
Bar Question)

To contribute ratably in proportion to the amount for which liable under his contract.

LIABILITY OF THE INSURER - (AMOUNT OF POLICY/TOTAL INSURANCE TAKEN)*LOSS [LI-

AP/TIT[*L)

ALTERNATIVE ANSWER: Each insurer is bound, contribute ratably in proportion to the amount
fo which liable under his contract.

VI. What is the principle of contribution or contribution clause?

Each insurer contributes ratably the loss or damage considering that the several insur-
ances.

VII. Discuss the Additional or Other Insurance Clause

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 Requiring the insured to inform the insurer of other insurance coverage of the property
insured. Provides “policy may declare that a violation of a specified provision thereof shall
avoid it, otherwise the breach of an immaterial provision does not avoid it.

4. Multiple or several interests on same property

I. What is the measure of insurable interest in property?

The extent to which the insured might be damnified by the loss or injury thereof. Does
not necessarily imply property interest, lien, or possession. It is sufficient so situated that he
would be liable to loss should it be injured or destroyed by the peril against which it is insured.
Derives a benefit from its existence or would suffer loss from its destruction.

II. Distinguish Standard or Union Mortgage Clause from Open or Loss Payable Mortgage
Clause.

Standard or Union Mortgage Clause: Subsequent acts of the mortgagor cannot affect the
rights of the assignee.

Reason: is as if the insurer made a new and independent contract.

Open or Loss Payable Mortgage Clause: Acts of the mortgagor affect the mortgagee.

Reason: Mortgagor does not cease to be a party to the contract.

III. What are the effects of loss payable clause?

1. Deemed to be upon the interest of the mortgagor, does not cease to be a party to the con-
tract;

2. Loss, mortgagee is entitled to the proceeds to the extent of his credit;

3. Any act of the mortgagor prior to the loss, otherwise avoid the insurance affects the mort-
gagee even if in the hands of the mortgagee;

4. Recovery by the debt is extinguished;

5. Any act, to be performed by the mortgagor, may be performed by the mortgagee with the
same effect;

Note: The rule on subrogation does not apply in this case.

IV. What is Mortgage Redemption Insurance?

A group mortgage redemption scheme on the life of a mortgagor, mortgages the house
constructed to the extent of the mortgage indebtedness, if the mortgagor dies, the proceeds of
his life insurance will be used to pay for his indebtedness and the deceased heirs will thereby
be relived from paying the unpaid balance.

G. Perfection of the contract of insurance

1. Offer and acceptance/consensuality

I. How is an insurance contract perfected?

A meeting of the minds object and the cause or consideration. The “cognition theory.”

a. Delay in acceptance

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 Mere delay by the insurer, although unreasonable, in acting upon the application raises
no implication of acceptance or it does not estop. Implied acceptance-other circumstances
that will indicate such acceptance other than inaction or delay.

I. Why is acceptance necessary for the perfection of the contract

Must be assented to by both parties either in person or by their agents. So long as an

application for insurance has not been either accepted or rejected, merely an offer or proposal
to make a contract to be binding must have been a completed contract. Acceptance by letter.

b. Delivery of policy

Q SEC. 232. No policy, certificate or contract of insurance shall be issued or delivered

within the Philippines unless in the form previously approved by the Commissioner, and no ap-
plication form shall be used with, and no rider, clause, warranty or endorsement shall be at-
tached to, printed or stamped upon such policy, certificate or contract unless the form of such
application, rider, clause, warranty or endorsement has been approved by the Commissioner.

2. Premium payment

I. What is the rule on payment of premium?

Valid and binding until actual payment. “Cash and Carry Rule.”

Exceptions:

1. Life and industrial life grace period provision applies

2. Acknowledgment is premium had already been paid.

3. Credit term.

4. Agreed to the payment of the premium in installments and partial payment has been made
at the time of the loss.

5. Barred by estoppel.

Note: Section 77 merely precludes the parties from stipulating that the policy is valid even if the
premiums are not paid.

II. What is the effect of acknowledge of receipt of premium in a policy?

Conclusive evidence of its payment, in so far as to make the policy binding, not-
withstanding any stipulation therein that it shall not be binding until the premium is actually
paid. Conclusive presumption question as to the binding effect payment of the premium itself
is concerned, acknowledgment only a prima facie evidence of the fact of such payment.

III. Give examples of devices used to prevent the forfeiture of a life insurance after the payment
of the first premium.

1. Cash Surrender Value- the insurer agrees to pay to the holder of the policy if he sur-
renders and releases his claim.

2. Paid Up Insurance- a single and final premium.

3. Automatic Loan Clause- that upon default in payment of premium, paid from the loan
value of the policy until that value is consumed. Continued in force as fully and effectively as
though the premiums had been paid by the insured.

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 4. Grace Period- grace period of thirty (30) days

5. Extended Insurance- insurance originally contracted for continued for such period as
the amount available therefore will pay when is terminated.

6. Reinstatement- entitled to a reinstatement of the contract at any time within three (3)
years from the date of default in the payment of premium unless the cash surrender value has
been paid, extension period expired, upon production of evidence of insurability, and payment
of all overdue premiums.

3. Non-default options in life insurance

Art. 233 (f): A provision specifying the options to which the policyholder is entitled to in the
event of default in a premium payment after three (3) full annual premiums shall have been
paid. Such option shall consist of:

(1) A cash surrender value payable upon surrender of the policy which shall not be less
than the reserve on the policy, the basis of which shall be indicated, for the then current policy
year and any dividend additions thereto, reduced by a surrender charge which shall not be
more than one-fifth (1/5) of the entire reserve or two and one-half percent (2½%) of the amount
insured and any dividend additions thereto; and

(2) One or more paid-up benefits on a plan or plans specified in the policy of such value
as may be purchased by the cash surrender value.

(h) A table showing in figures cash surrender values and paid-up options available un-
der the policy each year upon default in premium payments, during at least twenty (20) years of
the policy beginning with the year in which the values and options first become available, to-
gether with a provision that in the event of the failure of the policyholder to elect one of the said
options within the time specified in the policy, one of said options shall automatically take ef-
fect and no policyholder shall ever forfeit his right to same by reason of his failure to so elect;

Cash Surrender Value: is the accumulated reserve on the policy after at least three full
annual premiums and is payable upon surrender of the policy.

-It is a portion of the reserve in a life policy which accumulates from premium over-
charges over the years.

-Premium payment is uniform all thought but the risk is lesser when insured was
younger, thus cost of protection was smaller and there is an excess amount paid.

-The cash surrender value is an amount which the insurance company holds in trust for
the insured t one delivered to him upon demand. It is therefore a liability of the company to the
insured (Manufacturer’s Life vs. Meer).

-To get CSV: surrender policy and contract is terminated.

I. What are the forms of non-default options?

Extended Insurance(shorter period): is a form of non-default option which uses the CSV
as a SINGLE premium and extends the insurance contract until the CSV can afford.

-Face value of insurance remains the same but only within the term covered by
value of CSV

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 -During extended period: insured can recover if he dies or he can reinstate his
policy

-After extended period: contract terminates and cannot even reinstate

Paid-up Insurance (smaller face value): is a form of non-default option where the total
cash surrender value (CSV) is treated as a SINGLE SINGLE premium and will cover an entire
period that the CSV can purchase except that it only covers the “paid up value”.

-obligation to pay premiums is deemed consummated forever and can reinstate the
policy anytime

-better option if insured is young and then just reinstate the policy later

. Automatic Premium Loan: is a form of non-default option where the CSV is used as
payment of the premium but only as a loan with interest as illustrated in Manufacturer’s Life In-
surance v Meer. It also provided for

-insurer lends/advances to the insured w/o need of application amount necessary to

pay overdue premium

-insurance continues in force for period covered by CSV.

4. Reinstatement of a lapsed policy of life insurance

Reinstate the contract at any time within three (3) years from the date of default in the
payment of premium, unless the cash surrender value, extension period expired, upon produc-
tion of evidence of insurability satisfactory to the company and the payment of all overdue
premiums.

5. Refund of premiums

I. Discuss the effects on refund of premiums.

1. Whole

a. Never exposed to the risks

b. Is voidable fraud or misrepresentation of the insurer

c. is voidable, existence of facts insured was ignorant without his fault.

d. default of the insured other than actual fraud, the insurer never incurred liability.

e. insurer’s breach of contract.

2. Pro rata

a. definite period and the insured surrenders his policy before the termination thereof;

b. Except:

i. not made for a definite period of time;

ii. short period rate is agreed upon

ii. it involves a life insurance policy

c. Over-insurance

d. over-insurance by double insurance, insurers is not entitled to that portion of the premium
corresponding to the excess of the insurance.

e. over-insurance by several insurers, ratable return of the premium.

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H. Concealment

I. What are the grounds for rescission of an insurance contract?

1. False representation

2. Alteration of the thing insured;

3. Breach of material warranty;

4. BREach of condition subsequent; and

5. Concealment

1. Concealment

I. What is concealment?

Communicate that which a party knows and ought to communicate intentional or un

intentional entitles the injured party to rescind a contract of insurance.

II. Requisites of concealment

1. party knows a fact (a material fact)

2. party concealing is duty bound to disclose such fact to the other party;

3. makes no warranty as to the fact concealed;

4. No means of ascertaining the fact concealed.

Note: Test of Materiality: not by event, by the probable and reasonable influence of the
facts upon the party to whom the communication is due, in forming his estimate of the advan-
tages of the proposed contract, or in making has inquiries.

III. What are the matters that need to be disclosed?

EXCEPT in answer to inquiries of the other:

1. in the exercise of ordinary care, the other Ought to know and of which, the former
has no reason to suppose him ignorant;

2. Waives the communication;

3. other already Knows;

4. prove or tend to prove the existence of a risk Excluded by a warranty, are not other-
wise material;

5. relate to a risk Excepted

Note: Neither party is bound to communicate, even upon inquiry, information of own
judgment.

IV. What are the matters that must be disclosed even in the absence of the inquiry?

1. No means of ascertaining

2. material to the contract

3. duty to communicate makes no warranty.

V. What are the effects of concealment?

1. The remedy of the insurer is rescission;

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 2. claiming the existence of concealment must prove knowledge of the fact concealed
on the part of the party charged with concealment;

3. Good faith is not a defense in concealment. Whether intentional or unintentional enti-

ties;

4. matter concealed need not be the cause of the loss;

5. a party must have knowledge of the fact

6. Failure to communicate information acquired AFTER the effectivity will NOT be a

ground to rescind the contract.

2. Misrepresentation/omissions

I. When is there misrepresentation?

Makes erroneous statements of facts with the intent of inducing the insurer to enter into
the insurance contract.

II. Requisites of misrepresentation:

1. stated a fact which is untrue;

2. knowledge that it is untrue;

3. material to the risk.

III. What are the kinds of representations?

1. Affirmative

2. Promissory

3. Oral or written

IV. What are the effects of misrepresentation?

1. Entitled to rescind the contract from the TIME when the representation becomes
false.

2. insurer accepted the payment of premium with the knowledge of waiver.

3. no waiver, the insurer had no knowledge of the ground therefor at the time of accep-
tance.

V. Enumerate the characteristics of misrepresentation.

1. Not a part of the contract, a collateral inducement;

2. Oral or written;

3. at the time of, or before issuing the policy not after;

4. Altered or withdrawn before the insurance is effected;

5. Refers to the date the contract goes into effect.

3. Breach of warranties

I. What are the warranties and what is its purpose?

Statements or promises by the insured set forth in the policy itself or incorporated in it
by proper reference, untruth or non-fulfillment of which in fact prejudiced by such untruth or
non-fulfillment render the policy voidable by the insurer.

II. What are the effects of breach of warranty?

Page 20 of 56
 1. Material

a. General Rule: will entitle the other party to rescind the contract

b. Exceptions:

i. Loss occurs before the time for the performance of the warranty;

ii. becomes unlawful at the place of the contract

iii. Performance becomes impossible

2. Immaterial

a. General Rule: it will not avoid the policy

b. Exceptions: the policy expressly provides or declares that a violation thereof will
avoid it.

I. Claims settlement and subrogation

I. In case of an unreasonable delay/denial in the payment of the insured’s claim by the insurer,
what can the insured recover?

1. Attorney’s fees;

2. Expenses incurred unreasonable withholding

3. Interest at double the legal interest;

4. Amount of the claim

1. Notice and proof of loss

I. What are the purposes of notice and proof of loss?

1. Give the insurer information by which he may determine the extent;

2. afford the insurer means of detecting any fraud;

3. operate as a check upon extravagant claims.

II. When is notice and proof of loss required and what is the effect of failure to furnish the
same?

In fire insurance: required

In other types of insurance: not required

Effect of failure to furnish

In fire insurance: will defeat

In other types of insurance: will not exonerate

2. Guidelines on claims settlement

I. Discuss the guidelines on claims settlement.

1. Life Insurance

a. immediately upon the maturity

b. death of the insured, within sixty (60) days after presentation of the claim, filing of the
proof of the death

2. Property Insurance

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 a. within thirty (30) days after proof of loss and ascertainment of the loss or damage.

Note: no ascertainment is made within 60 days, pain within 90 days.

a. Unfair claims settlement; sanctions

I. What constitute unfair claim settlement practices?

By an insurance company, a general business practice

1. Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to

coverage at issue;

2. Failing acknowledge pertinent communications

3. Failing reasonable standards for the prompt investigation

4. Not attempting in good faith prompt, fair compelling policy holders to institute suits

Note: each instance of non-compliance may be treated as a separate violation suffi-

cient cause suspension or revocation of the company’s certificate of authority.

b. Prescription of action

I. What are the rules on prescription of actions?

May validly agree an action should be brought within a limited period of time, NOT less
than 1 year from the time the cause of action accrues. Less than 1 year is void.

1. Begin to run from the date of the insurer’s rejection of the claim not from the time of
the loss.

2. A petition for reconsideration counted from the date the claim was denied at the first
instance and not from the denial of the reconsideration.

Note: No stipulation within 10 years in case the contract is written in CMVLI. Within 6
months from the date of the accident deemed waived. Suit for damages, proper court, the In-
surance Commissioner within 1 year from the date of the denial of the claim by the insurer, oth-
erwise shall prescribe.

c. Subrogation

I. What is Subrogation?

Of legal substitution the insurer steps into the shoes of the insured, latter’s rights
against the wrongdoer.

Note: amount paid by the insurance company does not fully cover the injury or loss,
aggrieved party entitled to recover the deficiency is a normal incident of indemnity insurance
inures to the insurer without any formal assignment. Payment to the insured makes the insurer
a subrogee in equity.

II. Discuss the rules on Subrogation.

1. Only to property insurance;

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 2. what the insured could have recovered.

NOT applicable:

a. by his own act RELEASES the wrong doer or third party liable for the loss or damage:

b. insurer PAYS the insured without notifying the carrier who has in good faith settled
the Insured’s claim.

c. insurer PAYS the insured a loss or risk not covered.

J. Business of insurance; requirements

SEC. 190. For purposes of this Code, the term insurer or insurance company shall in-
clude all partnerships, associations, cooperatives or corporations, including government-
owned or -controlled corporations or entities, engaged as principals in the insurance business,
excepting mutual benefit associations. Unless the context otherwise requires, the term shall
also include professional reinsurers defined in Section 288. Domestic company shall include
companies formed, organized or existing under the laws of the Philippines. Foreign company
when used without limitation shall include companies formed, organized, or existing under any
laws other than those of the Philippines.

SEC. 191. The provisions of the Corporation Code, as amended, shall apply to all insur-
ance corporations now or hereafter engaged in business in the Philippines insofar as they do
not conflict with the provisions of this chapter.

SEC. 192. No corporation, partnership, or association of persons shall transact any in-
surance business in the Philippines except as agent of a corporation, partnership or associa-
tion authorized to do the business of insurance in the Philippines, unless possessed of the
capital and assets required of an insurance corporation doing the same kind of business in the
Philippines and invested in the same manner; unless the Commissioner shall have granted it a
certificate to the effect that it has complied with all the provisions of this Code.

Every entity receiving any such certificate of authority shall be subject to the insurance
and other applicable laws of the Philippines and to the jurisdiction and supervision of the
Commissioner.

SEC. 193. No insurance company shall transact any insurance business in the Philip-
pines until after it shall have obtained a certificate of authority for that purpose from the Com-
missioner upon application therefor and payment by the company concerned of the fees here-
inafter prescribed.

The Commissioner may refuse to issue a certificate of authority to any insurance com-
pany if, in his judgment, such refusal will best promote the interest of the people of this coun-
try. No such certificate of authority shall be granted to any such company until the Commis-
sioner shall have satisfied himself by such examination as he may make and such evidence as
he may require that such company is qualified by the laws of the Philippines to transact busi-
ness therein, that the grant of such authority appears to be justified in the light of local eco-
nomic requirements, and that the direction and administration, as well as the integrity and re-
sponsibility of the organizers and administrators, the financial organization and the amount of
capital, reasonably assure the safety of the interests of the policyholders and the public

In order to maintain the quality of the management of the insurance companies and af-
ford better protection to policyholders and the public in general, any person of good moral
character, unquestioned integrity and recognized competence may be elected or appointed

Page 23 of 56
director or officer of insurance companies in accordance with the pertinent provisions con-
tained in the corporate governance circulars prescribed by the Commissioner. In addition here-
to, the Commissioner shall prescribe the qualifications of directors, executive officers and other
key officials of insurance companies for purposes of this section.

No person shall concurrently be a Director and/or Officer of an insurance company and

an adjustment company.

Before issuing such certificate of authority, the Commissioner must be satisfied that the
name of the company is not that of any other known company transacting a similar business in
the Philippines, or a name so similar as to be calculated to mislead the public. The Commis-
sioner may issue rules and regulations on the use of names of insurance companies and other
supervised persons or entities.

The certificate of authority issued by the Commissioner shall expire on the last day of
December, three (3) years following its date of issuance, and shall be renewable every three (3)
years thereafter, subject to the company’s continuing compliance with the provisions of this
Code, circulars, instructions, rulings or decisions of the Commission.

Every company receiving any such certificates of authority shall be subject to the provi-
sions of this Code and other related laws and to the jurisdiction and supervision of the Com-
missioner.

No insurance company may be authorized to transact in the Philippines the business of

life and non-life insurance concurrently, unless specifically authorized to do so by the Commis-
sioner: Provided, That the terms life and non–life insurance shall be deemed to include health,
accident and disability insurance.

No insurance company shall have equity in an adjustment company and neither shall an
adjustment company have equity in an insurance company.

No insurance company issued with a valid certificate of authority to transact insurance

business anywhere in the Philippines by the Insurance Commissioner, shall be barred, prevent-
ed, or disenfranchised from issuing any insurance policy or from transacting any insurance
business within the scope or coverage of its certificate of authority, anywhere in the Philip-
pines, by any local government unit or authority, for whatever guise or reason whatsoever, in-
cluding under any kind of ordinance, accreditation system, or scheme. Any local ordinance or
local government unit regulatory issuance imposing such restriction or disenfranchisement on
any insurance company shall be deemed null and void ab initio.

SEC. 194. Except as provided in Section 289, no new domestic life or non-life insurance
company shall, in a stock corporation, engage in business in the Philippines unless possessed
of a paid-up capital equal to at least One billion pesos (P1,000,000,000.00): Provided, That a
domestic insurance company already doing business in the Philippines shall have a net worth
by June 30, 2013 of Two hundred fifty million pesos (P250,000,000.00). Furthermore, said
company must have by December 31, 2016, an additional Three hundred million pesos
(P300,000,000.00) in net worth; by December 31, 2019, an additional Three hundred fifty million
pesos (P350,000,000.00) in net worth; and by December 31, 2022, an additional Four hundred
million pesos (P400,000,000.00) in net worth.

The Commissioner may, as a pre-licensing requirement of a new insurance company, in

addition to the paid-up capital stock, require the stockholders to pay in cash to the company in
proportion to their subscription interests a contributed surplus fund of not less than One hun-

Page 24 of 56
dred million pesos (P100,000,000.00). He may also require such company to submit to him a
business plan showing the company’s estimated receipts and disbursements, as well as the
basis therefor, for the next succeeding three (3) years.

If organized as a mutual company, in lieu of such net worth, it must have available total
members equity in an amount to be determined by the Insurance Commission above all liabili-
ties for losses reported; expenses, taxes, legal reserve, and reinsurance of all outstanding risks,
and the contributed surplus fund equal to the amounts required of stock corporations. A stock
insurance company doing business in the Philippines may, subject to the pertinent law and
regulation which now or hereafter may be in force, alter its organization and transform itself into
a mutual insurance company.

The Secretary of Finance may, upon recommendation of the Commissioner, increase

such minimum paid-up capital stock or cash assets requirement under such terms and condi-
tions as he may impose, to an amount which, in his opinion, would reasonably assure the safe-
ty of the interests of the policyholders and the public. The minimum paid-up capital and net
worth requirement must remain unimpaired for the continuance of the license. The Commis-
sioner may require the adoption of the risk-based capital approach and other internationally
accepted forms of capital framework.

For the purpose of this section, net worth shall consist of:

(a) Paid-up capital;

(b) Retained earnings;

(c) Unimpaired surplus; and

(d) Revaluation of assets as may be approved by the Commissioner.

The Commission may adopt for purposes of compliance with capital build up require-
ment under this Code the recognition as part of the capital account, capital notes or deben-
tures which are subordinate to all credits and senior only to common capital stocks.

The President of the Philippines may order a periodic review every two (2) years the
capital structure set out above to determine the capital adequacy of the local insurance indus-
try from and after the integration and liberalization of the financial services, including insurance,
in the ASEAN Region. For this purpose, a review committee consisting of representatives from
the Department of Finance (DOF), the Insurance Commission (IC), the National Economic and
Development Authority (NEDA), the Securities and Exchange Commission (SEC) and other
agencies which the President may designate shall conduct the review and may recommend to
the President to adopt for implementation the necessary capital adjustment.

SEC. 195. Every company must, before engaging in the business of insurance in the
Philippines, file with the Commissioner the following:

(a) A certified copy of the last annual statement or a verified financial statement exhibit-
ing the condition and affairs of such company;

(b) If incorporated under the laws of the Philippines, a copy of the articles of incorpora-
tion and bylaws, and any amendments to either, certified by the Securities and Exchange
Commission to be a copy of that which is filed in its Office;

Page 25 of 56
 (c) If incorporated under any laws other than those of the Philippines, a certificate from
the Securities and Exchange Commission showing that it is duly registered in the mercantile
registry of that Commission in accordance with the Corporation Code. A copy of the articles of
incorporation and bylaws, and any amendments to either, if organized or formed under any law
requiring such to be filed, duly certified by the officer having the custody of same, or if not so
organized, a copy of the law, charter or deed of settlement under which the deed of organiza-
tion is made, duly certified by the proper custodian thereof, or proved by affidavit to be a copy;
also, a certificate under the hand and seal of the proper officer of such state or country having
supervision of insurance business therein, if any there be, that such corporation or company is
organized under the laws of such state or country, with the amount of capital stock or assets
and legal reserve required by this Code;

(d) If not incorporated and of foreign domicile, aside from the certificate mentioned in
paragraph (c) of this section, a certificate setting forth the nature and character of the business,
the location of the principal office, the name of the individual or names of the persons compos-
ing the partnership or association, the amount of actual capital employed or to be employed
therein, and the names of all officers and persons by whom the business is or may be man-
aged.

The certificate must be verified by the affidavit of the chief officer, secretary, agent, or
manager of the company; and if there are any written articles of agreement of the company, a
copy thereof must accompany such certificate.

SEC. 196. The Commissioner must require as a condition precedent to the transaction
of insurance business in the Philippines by any foreign insurance company, that such company
file in his office a written power of attorney designating some person who shall be a resident of
the Philippines as its general agent, on whom any notice provided by law or by any insurance
policy, proof of loss, summons and other legal processes may be served in all actions or other
legal proceedings against such company, and consenting that service upon such general agent
shall be admitted and held as valid as if served upon the foreign company at its home office.
Any such foreign company shall, as further condition precedent to the transaction of insurance
business in the Philippines, make and file with the Commissioner an agreement or stipulation,
executed by the proper authorities of said company in form and substance as follows:

The (name of company) does hereby stipulate and agree in consideration of the permis-
sion granted by the Insurance Commissioner to transact business in the Philippines, that if at
any time said company shall leave the Philippines, or cease to transact business therein, or
shall be without any agent in the Philippines on whom any notice, proof of loss, summons, or
legal process may be served, then in any action or proceeding arising out of any business or
transaction which occurred in the Philippines, service of any notice provided by law, or insur-
ance policy, proof of loss, summons, or other legal process may be made upon the Insurance
Commissioner, and that such service upon the Insurance Commissioner shall have the same
force and effect as if made upon the company.

Whenever such service of notice, proof of loss, summons, or other legal process shall
be made upon the Commissioner, he must, within ten (10) days thereafter, transmit by mail,
postage paid, a copy of such notice, proof of loss, summons, or other legal process to the
company at its home or principal office. The sending of such copy by the Commissioner shall
be a necessary part of the service of the notice, proof of loss, or other legal process.

SEC. 197. No insurance company organized or existing under the government or laws
other than those of the Philippines shall engage in business in the Philippines unless pos-
sessed of unimpaired capital or assets and reserve of not less than One billion pesos
(P1,000,000,000.00), nor until it shall have deposited with the Commissioner for the benefit and

Page 26 of 56
security of the policyholders and creditors of such company in the Philippines, securities satis-
factory to the Commissioner consisting of good securities of the Philippines, including new is-
sues of stock of registered enterprises, as this term is defined in Executive Order No. 226 of
1987, as amended, to the actual market value of not less than the amount herein required: Pro-
vided, That at least fifty percent (50%) of such securities shall consist of bonds or other instru-
ments of debt of the Government of the Philippines, its political subdivisions and instrumentali-
ties, or of government-owned or -controlled corporations and entities, including the Bangko
Sentral ng Pilipinas: Provided, further, That the total investment of a foreign insurance compa-
ny in any registered enterprise shall not exceed twenty percent (20%) of the net worth of said
foreign insurance company nor twenty percent (20%) of the capital of the registered enterprise,
unless previously authorized in writing by the Commissioner.

The Commissioner may, as a pre-licensing requirement of a new branch office of a for-

eign insurance company, in addition to the required asset or net worth, require the company to
have an additional surplus fund in an amount to be determined by the Insurance Commission.

For purposes of this Code, the net worth of a foreign insurance company shall refer only
to its net worth in the Philippines.

SEC. 198. The Commissioner shall hold the securities, deposited as required in the im-
mediately preceding section, for the benefit and security of all the policyholders and creditors
of the company depositing the same: Provided, That the Commissioner may as long as the
company is solvent, permit the company to collect the interest or dividends on the securities
so deposited, and, from time to time, with his assent, to withdraw any of such securities, upon
depositing with said Commissioner other like securities, the market value of which shall be
equal to the market value of such as may be withdrawn. In the event of any company ceasing
to do business in the Philippines, the securities deposited as aforesaid shall be returned to the
company upon the Commissioner’s written approval and only after the company has duly
proven in its application therefor that it has no further liability whatsoever under any of its poli-
cies nor to any of its creditors in the Philippines.

SEC. 199. Every foreign company doing business in the Philippines shall set aside an
amount corresponding to the legal reserves of the policies written in the Philippines and invest
and keep the same therein in accordance with the provisions of this section. The legal reserve
therein required to be set aside shall be invested only in the classes of Philippine securities de-
scribed in Section 206: Provided, however, That no investment in stocks or bonds of any single
entity shall, in the aggregate exceed twenty percent (20%) of the net worth of the investing
company or twenty percent (20%) of the capital of the issuing company, whichever is the less-
er, unless otherwise approved in writing by the Commissioner. The securities purchased and
kept in the Philippines under this section, shall not be sent out of the territorial jurisdiction of
the Philippines without the written consent of the Commissioner.

K. Insurance Commissioner and its powers

SEC. 437. The Insurance Commissioner shall be appointed by the President of the Re-
public of the Philippines for a term of six (6) years without reappointment and who shall serve
as such until the successor shall have been appointed and qualified. If the Insurance Commis-
sioner is removed before the expiration of his term of office, the reason for the removal must be
published.

The Insurance Commissioner shall have the duty to see that all laws relating to insur-
ance, insurance companies and other insurance matters, mutual benefit associations, and

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trusts for charitable uses are faithfully executed and to perform the duties imposed upon him
by this Code, and shall, notwithstanding any existing laws to the contrary, have sole and exclu-
sive authority to regulate the issuance and sale of variable contracts as defined in Section 238
hereof and to provide for the licensing of persons selling such contracts, and to issue such
reasonable rules and regulations governing the same.

The Commissioner may issue such rulings, instructions, circulars, orders and decisions
as may be deemed necessary to secure the enforcement of the provisions of this Code, to en-
sure the efficient regulation of the insurance industry in accordance with global best practices
and to protect the insuring public. Except as otherwise specified, decisions made by the
Commissioner shall be appealable to the Secretary of Finance.

In addition to the foregoing, the Commissioner shall have the following powers and
functions:

(a) Formulate policies and recommendations on issues concerning the insurance indus-
try, advise Congress and other government agencies on all aspects of the insurance industry
and propose legislation and amendments thereto;

(b) Approve, reject, suspend or revoke licenses or certificates of registration provided

for by this Code;

(c) Impose sanctions for the violation of laws and the rules, regulations and orders is-
sued pursuant thereto;

(d) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions
and provide guidance on and supervise compliance with such rules, regulations and orders;

(e) Enlist the aid and support of, and/or deputize any and all enforcement agencies of
the government in the implementation of its powers and functions under this Code;

(f) Issue cease and desist orders to prevent fraud or injury to the insuring public;

(g) Punish for contempt of the Commissioner, both direct and indirect, in accordance
with the pertinent provisions of and penalties prescribed by the Rules of Court;

(h) Compel the officers of any registered insurance corporation or association to call
meetings of stockholders or members thereof under its supervision;

(i) Issue subpoena duces tecum and summon witnesses to appear in any proceeding of
the Commission and, in appropriate cases, order the examination, search and seizure of all
documents, papers, files and records, tax returns, and books of accounts of any entity or per-
son under investigation as may be necessary for the proper disposition of the cases before it,
subject to the provisions of existing laws;

(j) Suspend or revoke, after proper notice and hearing, the license or certificate of au-
thority of any entity or person under its regulation, upon any of the grounds provided by law;

(k) Conduct an examination to determine compliance with laws and regulations if the
circumstances so warrant as determined by appropriate rules and regulations;

(l) Investigate not oftener than once a year from the last date of examination to deter-
mine whether an institution is conducting its business on a safe and sound basis: Provided,

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That, the deficiencies/irregularities found by or discovered by an audit shall be immediately ad-
dressed;

(m) Inquire into the solvency and liquidity of the institutions under its supervision and
enforce prompt corrective action;

(n) To retain and utilize, in addition to its annual budget, all fees, charges and other in-
come derived from the regulation of insurance companies and other supervised persons or en-
tities;

(o) To fix and assess fees, charges and penalties as the Commissioner may find reason-
able in the exercise of regulation; and

(p) Exercise such other powers as may be provided by law as well as those which may
be implied from, or which are necessary or incidental to the express powers granted the Com-
mission to achieve the objectives and purposes of this Code.

The Commission shall indemnify the Commissioner, Deputy Commissioner, and other
officials of the Commission, including personnel performing supervision and examination func-
tions, for all costs and expenses reasonably incurred by such persons in connection with any
civil or criminal actions, suits or proceedings to which they may be made a party to by the rea-
son of the performance of their duties and functions, unless they are finally adjudged in such
actions, suits or proceedings to be liable for negligence or misconduct.

In the event of settlement or compromise, indemnification shall be provided only in

connection with such matters covered by the settlement as to which the Commission is ad-
vised by external counsel that the persons to be indemnified did not commit any negligence or
misconduct:

The costs and expenses incurred in defending the aforementioned action, suit or pro-
ceeding may be paid by the Commission in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of the Commissioner, Deputy
Commissioner, officer or employee to repay the amount advanced should it ultimately be de-
termined by the Commission that the person is not entitled to be indemnified.

SEC. 438. In addition to the administrative sanctions provided elsewhere in this Code,
the Insurance Commissioner is hereby authorized, at his discretion, to impose upon insurance
companies, their directors and/or officers and/or agents, for any willful failure or refusal to
comply with, or violation of any provision of this Code, or any order, instruction, regulation, or
ruling of the Insurance Commissioner, or any commission or irregularities, and/or conducting
business in an unsafe or unsound manner as may be determined by the Insurance Commis-
sioner, the following:

(a) Fines not less than Five thousand pesos (P5,000.00) and not more than Two hundred
thousand pesos (P200,000.00); and

(b) Suspension, or after due hearing, removal of directors and/or officers and/or agents.

SEC. 439. The Commissioner shall have the power to adjudicate claims and complaints
involving any loss, damage or liability for which an insurer may be answerable under any kind
of policy or contract of insurance, or for which such insurer may be liable under a contract of
suretyship, or for which a reinsurer may be sued under any contract of reinsurance it may have
entered into; or for which a mutual benefit association may be held liable under the member-
ship certificates it has issued to its members, where the amount of any such loss, damage or

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liability, excluding interest, cost and attorney’s fees, being claimed or sued upon any kind of
insurance, bond, reinsurance contract, or membership certificate does not exceed in any single
claim Five million pesos (P5,000,000.00).

(VERY IMPORTANT BB Gwapa) The power of the Commissioner does not cover the
relationship between the insurance company and its agents/brokers but is limited to adjudicat-
ing claims and complaints filed by the insured against the insurance company.

The Commissioner may authorize any officer or group of officers under him to conduct
investigation, inquiry and/or hearing and decide claims and he may issue rules governing the
conduct of adjudication and resolution of cases. The Rules of Court shall have suppletory ap-
plication.

The party filing an action pursuant to the provisions of this section thereby submits his
person to the jurisdiction of the Commissioner. The Commissioner shall acquire jurisdiction
over the person of the impleaded party or parties in accordance with and pursuant to the pro-
visions of the Rules of Court.

The authority to adjudicate granted to the Commissioner under this section shall be
concurrent with that of the civil courts, but the filing of a complaint with the Commissioner shall
preclude the civil courts from taking cognizance of a suit involving the same subject matter.

Any decision, order or ruling rendered by the Commissioner after a hearing shall have
the force and effect of a judgment. Any party may appeal from a final order, ruling or decision
of the Commissioner by filing with the Commissioner within thirty (30) days from receipt of
copy of such order, ruling or decision a notice of appeal to the Court of Appeals in the manner
provided for in the Rules of Court for appeals from the Regional Trial Court to the Court of Ap-
peals.

For the purpose of any proceeding under this section, the Commissioner, or any officer
thereof designated by him is empowered to administer oaths and affirmation, subpoena wit-
nesses, compel their attendance, take evidence, and require the production of any books, pa-
pers, documents, or contracts or other records which are relevant or material to the inquiry.

A full and complete record shall be kept of all proceedings had before the Commission-
er, or the officers thereof designated by him, and all testimony shall be taken down and tran-
scribed by a stenographer appointed by the Commissioner.

In order to promote party autonomy in the resolution of cases, the Commissioner shall
establish a system for resolving cases through the use of alternative dispute resolution.

II. PRE-NEED

A. Definition

1. Pre-need plans

"Pre-need plans" are contracts, agreements, deeds or plans for the benefit of the plan-
holders which provide for the performance of future service/s, payment of monetary considera-
tions or delivery of other benefits at the time of actual need or agreed maturity date, as speci-
fied therein, in exchange for cash or installment amounts with or without interest or insurance
coverage and includes life, pension, education, interment and other plans, instruments con-
tracts or deeds as may in the future he determined by the Commission.

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 2. Pre-need company

"Pre-need company" refers to any corporation registered with the Commission and au-
thorized/licensed to sell or offer to sell pre-need plans. The term "pre-need company" also
refers to schools, memorial chapels, banks, nonbank financial institutions and other entities
which have also been authorized/

B. Registration of pre-need plans

Section 14. Registration of Pre-need Contracts/Plans. – Within a period of forty - five

(45) days after the grant of a license to do business as a pre-need company, and for every pre-
need plan which the pre-need company intends to offer for sale to the public, the pre-need
company shall file with the Commission a registration statement for the sale of pre-need plans
pursuant to this Code. The Commission shall promulgate rules governing the registration of
pre-need plans and the required documents which include, among others, the viability study
with certification, under oath, of a pre-need brochure, a copy of the pre-need plan, and infor-
mation and documents necessary to ensure the protection of planholders and the general pub-
lic. Said rules shall further set forth the conditions under which such registration may be denied
revoked, suspended or withdrawn, and the remedies of pre-need companies in such instances.

Section 15. Registration Requirements. – The Commission shall set forth the require-
ments for registration of pre-need plans and shall require the following documents, among oth-
ers;

(a) Duly accomplished Registration Statements;

(b) Board resolution authorizing the registration of applicant’s pre-need plans;

(c) Opinion of independent counsel on the legality of the issue;

(d) Audited financial statements;

(e) Viability study with certification, under oath, of pre-need actuary accredited by the
Commission;

(f) Copy of the proposed pre-need plan; and

(g) Sample of sales materials.

Such registration statements and sales materials required under this section shall con-
tain the appropriate risk factors as may be determined by the Commission.

Section 16. Accreditation of Actuary. - The Commission shall have the power to set
standards for the accreditation of actuaries directly responsible for the preparation and certifi-
cation of the viability study of the pre-need plan submitted by the pre-need company for regis-
tration or amendment with the Commission. It shall further have the power to define the obliga-
tions and liabilities of actuaries accredited by it. No actuary engaged by a pre-need company
shall at the same time be a stockholder or serve as a director of the board, chief executive offi-
cer or chief financial officer of the company or any such position that the Commission may de-
termine to have an inherent conflict of interest to the position of an actuary.

Section 17. Approval of Contract Forms. All forms, including amendments thereto, re-
lating to the pre-need plans shall be approved by the Commission. No pre-need contracts or
certificates shall be issued or delivered within the Philippines unless in the form previously ap-
proved by the Commission.

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 Section 18. Pre-need Advertising Rules. - Pre-need plans shall be advertised and sold
in an appropriate non - misleading manner in accordance with the rules to be prescribed by the
Commission.

It shall be unlawful for any pre-need company to advertise itself or its pre-need plans
unless the Commission has approved such advertising material. The Commission shall have a
period of ten (10) working days to approve or deny the advertising material and failure to act
within the said period shall cause the advertising material to be approved. For purposes hereof,
the Commission shall have the power to define the scope of its advertising rules to appropri-
ately cover advertising or other communications to the public.

Any person who sells or offers to sell any pre-need plan or contract by any means or
instruments of communication in violation of this section shall be liable to the person purchas-
ing such pre-need contract who may sue to recover the consideration paid for such pre-need
contract with interest thereon. In addition hereto, the Commission shall have the power to pur-
sue the erring pre-need company in an administrative or criminal proceeding.

A fine of One hundred thousand pesos (P100, 000,000.00) shall be imposed on any pre-
need company found to have violated this section: Provided, That a second violation of this
section shall, in addition to the fine imposed, result in the suspension of the license of the pre-
need company.

Section 19. Disclosures to Prospective Planholders. - No registered pre-need plan shall

be sold to prospective planholders unless an information brochure, which has been filed with
the Commission, has been provided to the purchaser. The information brochure shall contain
an explanation of the principal features of the pre-need plan, a statement that the planholder
may avail of a default or reinstatement period within which to reinstate his lapsed plan, and the
conditions of the same and the rates of return for scheduled benefit plans and illustrative yields
for contingent benefit plans; and such other information that the Commission shall require by
rule.

C. Licensing of sales counselor and general agent

Section 20. Licensing of Sales Counselors. - No sales counselor shall be allowed to so-
licit, sell or offer to sell pre-need plans under this Code without being licensed as such by the
Commission. No license shall be issued unless the following qualifications have been complied
with:

(a) The applicant must be of good moral character and must not have been convicted of
any crime involving moral turpitude;

(b) The applicant has undergone a training program approved by the Commission and
such fact has been certified under oath by a duly authorized representative of a pre-need com-
pany; and

(c) The applicant has passed a written examination administered by the. Commission:
Provided, That the administration of the examination may be delegated to an independent or-
ganization under the supervision of the Commission.

Such license shall automatically expire every thirtieth (30th) day of June or such date of
every year as may be fixed by the Commission and may be accordingly renewed.

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 Section 21. Denial, Suspension, Revocation of License. - An application for the is-
suance or renewal of a license to act as sales counselor may be denied, or such license, if al-
ready issued, shall be suspended or revoked based on the following grounds:

(a) Materially misrepresented statements in the application requirements;

(b) Obtained or attempted to obtain a license by fraud or misrepresentation;

(c) Materially misrepresented the terms and conditions of pre-need plan which he sold
or offered to sell;

(d) Solicited, sold or attempted to solicit or sell a pre-need plan by means of false or
misleading representation and other fraudulent means;

(e) Terminated for cause from another pre-need company;

(f) Similar grounds found in Section II of this Code;

(g) Willfully allowing the use of one's license by a non - licensed or barred individual;
and

(h) Analogous circumstances.

Section 22. Licensing of General Agents. - If the issuer should contract the services of
a general agent to undertake the sales of its plans, such general agent shall be required to be
licensed as such with the Commission, in accordance with the requirements imposed by the
Commission.

D. Default and termination

Section 23. Default; Reinstatement Period. - The pre-need company must provide in all
contracts issued to planholders a grace period of at least sixty (60) days within which to pay
accrued installments, counted from the due date of the first unpaid installment. Nonpayment of
a plan within the grace period shall render the plan a lapsed plan. Any payment by the plan-
holder after the grace period shall be reimbursed forthwith, unless the planholder duly rein-
states the plan. The planholder shall be allowed a period of not less than two (2) years from the
lapse of the grace period or a longer period as provided in the contract within which to rein-
state his plan. No cancellation of plans shall be made by the issuer during such period when
reinstatement may be effected.

Within thirty (30) days from the expiration of the grace period and within thirty (30) days
from the expiration of the reinstatement period, which is two (2) years from the lapse of the
grace period, the pre-need company shall give written notice to the planholder that his plan will
be cancelled if not reinstated within two (2) years. Failure to give either of the required notices
shall preclude the pre-need company from treating the plans as cancelled.

Section 24. Termination of Pre-need Plans. - A planholder may terminate his pre-need
plan at any time by giving written notice to the issuer.

A pre-need plan shall contain a schedule of termination values to which the planholder
is entitled to upon termination. Such schedule of termination value shall be required for all in -
force pre-need plans and shall be fair, equitable and in compliance with the Commission is-
suances. The termination value of the pre-need plan shall be predetermined by the actuary of
the pre-need company upon application for registration of the pre-need plans with the Com-
mission and shall be disclosed in the contract.

E. Claims settlement

Section 25. Unfair Claims Settlement Practices. - (a) No pre-need company shall refuse,
without just cause, to pay or settle claims arising under coverages provided by its plans nor

Page 33 of 56
shall any such company engage in unfair claim settlement practices. Any of the following acts
by a pre-need company, if committed without just cause, shall constitute unfair claims settle-
ment practices:

(1) Knowingly misrepresenting to claimants pertinent facts or plan provisions relating to

coverages at issue;

(2) Failing to acknowledge with reasonable promptness pertinent communications with

respect to claims arising under its plan;

(3) Failing to adopt and implement reasonable standards for the prompt investigation of
claims arising under its plan;

(4) Failing to provide prompt, fair and equitable settlement of claims submitted in which
liability has become reasonably clear; or

(5) Compelling planholders to institute suits or recover amounts due under its plan by
offering, without justifiable reason, substantially less than the amounts ultimately recovered in
suits brought by them.

(b) Evidence as to the number and types of valid and justifiable complaints to the
Commission against a pre-need company shall be deemed admissible in an administrative or
judicial proceeding brought under this section.

(c) Any violation of this section shall be considered sufficient cause for the suspension
or revocation of the company's certificate of authority.

Section 26. Payment of Plan Proceeds. - In the case of scheduled benefit plans, the
proceeds of the plan shall be paid immediately upon maturity of the contract, unless such pro-
ceeds are made payable in installments or as an annuity, in which case the installments or an-
nuities shall be paid as they become due. Refusal or failure to pay the claim within fifteen (15)
days from maturity or due date will entitle the beneficiary to collect interest on the proceeds of
the plan for the duration of the delay at the rate twice the legal interest unless such failure or
refusal to pay is based on the ground that the claim is fraudulent: Provided, That the planholder
has duly complied with the documentary requirements of the pre-need company.

In the case of contingent benefit plans, the benefits shall be paid by the pre-need com-
pany thirty (30) days upon submission of all necessary documents.

Section 27. Recovery of Investment. – The planholder may institute the necessary legal
action in court to recover his/her investment in the pre-need company thirty (30) days upon
submission of all necessary documents.

However, in case the insolvency or bankruptcy is a mere cover - up for fraud or illegality,
the planholder may institute the legal action directly against the officers and/or controlling
owners of the said pre-need company.

Section 28. Consequences of Delay or Default. – In case of any litigation for the en-
forcement of any pre-need plan, it shall be the duty of the Commission to determine whether
the payment of the claim of the planholder has been unreasonably denied or withheld. If found
to have unreasonably denied or withheld the claim, the pre-need company shall be liable to
pay damages, consisting of actual damages, attorney’s fees and legal interest, to be computed
from the date the claim is made until it is fully satisfied: Provided, That the failure to pay any
such claim within the time prescribed in Section 26 hereof shall be considered prima facie evi-
dence of unreasonable delay in payment.

Page 34 of 56
 Section 29. Distribution of Profits. – A pre-need company may declare divided: Provid-
ed, That the following shall remain unimpaired, as certified under oath by the president and the
treasurer with respect to items (a) and (b); and in the case of item (c), by the trust officer:

(a) One hundred percent (100%) of the capital stock;

(b) An amount sufficient to pay all net losses reported, or in the course of settlement,
and all liabilities for expenses and taxes; and

(c) Trust fund.

Any dividend declared under the preceding paragraph shall be reported to the Commis-
sion within thirty (30) days after such declaration.

III. TRANSPORTATION LAW

A. COMMON CARRIERS

I. What is a common carrier?

Business of carrying or transporting passengers or goods or both by land, water, or air,

for compensation, services to the public.

II. A is a carrier of petroleum products. It delivers petroleum products from B, supplier to a

small community in Laguna. On July 1, 2014, A’s truck exploded and all the petroleum prod-
ucts of B were lost. B sued A contending that the latter failed to exercise extraordinary dili-
gence as required by a common carrier. A answered that it is not a common carrier because it
is only serving a limited clientele. Is A a common carrier?

The fact that it has a limited clientele does not exclude it from the definition of common
carrier. A public employment.

III. A is a carrier of pharmaceutical products of B supplier. A undertook to deliver the goods to

the Philippines .However, upon arrival, the goods were damaged. B sued A for damages as it
did not exercise extraordinary diligence. A defended that it is a private carrier as it is only un-
dertaking a single transaction.

A distinction between a common carrier and a private carrier lies in the character of the
business, such that if the undertaking is a SINGLE TRANSACTION, not a part of the general
business or corporation, although involving the carriage of goods for a fee.

1. Diligence required of common carrier

I. What is the diligence required of common carriers?

Extraordinary diligence, vigilance over the goods, and safety of the passengers.

II. Generally, what is extraordinary diligence?

Rendition of services with the greatest skill and utmost foresight.

III. What is extraordinary diligence in the carriage of goods?

Requires the common carrier to know and to follow the required precaution of the
goods entrusted to it for sale, carriage and delivery with the greatest skill and foresight and “to

Page 35 of 56
use all reasonable means to ascertain the nature and characteristics of goods tendered for
shipment, and to exercise due care in the handling and stowage, including such methods as
their nature requires.”

IV. What is extraordinary diligence in the carriage of passengers?

Bound to carry the passengers safely as far as human care and foresight can provide,
utmost diligence.

2. Liabilities of common carriers

I. What are the principles governing the liabilities of a common carrier/

1. Is contractual arises upon breach of its obligation. It fails to exert extraordinary diligence
according to all circumstances of each;
2. Its passenger utmost diligence of a very cautious person, due regard for al the circum-
stances;
3. Is presumed duty to prove that it exercised extraordinary diligence;
4. Is not an insurer against all risks.

II. What are the obligations of common carrier in the carriage of goods?

1. Deliver the goods to the proper person;

2. Accept the goods;
3. Seasonably deliver the goods to the destination;
4. Transport the goods safely to the agreed destination;
5. Exercise extraordinary diligence.

III. What are the valid grounds for non-acceptance of goods for transporation?

Carrier may validly refuse to accept goods:

1. Dangerous objects
2. Untoward danger
3. Unfit for transportation
4. Overloading
5. Contrabands or illegal goods
6. Injuries to health
7. Failure to tender godos on time
8. Exposed to diseases
9. Strike

IV. What are the obligations of a common carrier in the carriage of passengers?

1. Utmost diligence to passengers;

2. Seasonably bring the passenger to the destination;
3. Transport the passenger safely to the agreed destination;
4. Accept passengers without discrimination;
5. Take care of the passengers’ baggage.

3. Classification of transport network vehicle services and transport network companies

Transport Network Vehicle Service (TNVS) - a Public Utility Vehicle accredited with a
Transport Network Corporation (TNC, which is granted authority or franchise by the LTFRB to
run a public transport service.

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 Transport Network Corporation (TNC) - an organization whether a corporation, partner-
ship, or sole proprietor that provides pre-arranged transportation services for compensation
using an internet-based technology application or digital platform technology to connect pas-
sengers with drivers using their personal vehicles.

Operation: Door-to-door service.

Fare Collection: Pre-arranged fare as authorized by the LTFRB.

Body Make: Van, Sedan, Utility Vehicle, Sports Utility Vehicle, or other similar vehicles

Seating: Not more than seven (7) passengers excluding the driver.

Other features: With GNSS receiver, free Wi-Fi, CCTV with continuous recording of past
72 hours of operation, and dashboard camera (at least 24 hours of recording) compliant with
LTFRB specifications; compliant with prescribed DENR emission standards or better; with lay-
over or garage with sufficient space for all units, plus additional space of at least 30% of the
total PUV space requirement).

Further directives on fare collection, regulation and specifications of TNVS shall be pro-
vided by the LTFRB.

B. VIGILANCE OVER GOODS

I. What is the responsibility of a common carrier with respect to the carriage of goods?

Loss, destruction, or deterioration unless any of the following causes only:

1. Character of the goods or defects in packaging or in the containers;

2. Auto or omission of the shipper or owner of the goods;
3. Public enemy in war, international or civil
4. flood, storm, earthquake, lightning, or other natural disaster or calamity;
5. Character of goods.

Note: In all cases other those mentioned, presumed to have been at fault.

II. What is the Oft-Repeated Rule regarding a carrier’s liability for delay?

Not an insurer against delay implies a contract delivered to its destination within a rea-
sonable time

III. What is the basis of determining whether the delivery is made within a reasonable time?

Expected date of arrival reflected in the bill of lading nature of the goods perishable or
not.

IV. What are the consequences of delay in carriage of goods?

1. Excusable delay:
a. Merely suspends but generally does not terminate the contract cause is removed, must
proceeding with the voyage and make delivery.
b. The vessel continues to be liable as a common carrier, not a warehouseman, remains duty
bound to exercise extraordinary diligence.

2. Inexcusable delay:

a. Duty bound to exercise extraordinary diligence;

b. Still liable if a natural disaster causes the damage;

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c. Stipulation limiting the liability cannot be loss or deterioration;
d. Liable for the damages caused by the delay; and
e. Consignee may exercise his right to abandon
1. Exempting causes

a. Requirement of absence of negligence

Except in cases expressly specified by law, or when it is otherwise declared by stipula-

tions, or when the nature of the obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or which though foreseen, were in-
evitable. The sudden act of the passenger who stabbed another passenger in the bus is within
the context of force major. However, in order that common carrier may be absolved from liabili-
ty in case of force majeur, it is not enough that the accident was caused by force majeure. The
common carrier must still prove that it was not negligent in causing the injuries resulting from
such accident (Bachelor Express, Inc. vs. CA, G.R. No. 85691, July 31, 1990).

Fortuitous Event

I. When can a common carrier raise the defense of fortuitous event to escape liability?

The fortuitous event be the proximate cause of the loss. The following requisites:

1. The cause of the unforeseen and unexpected occurrence, failure of the debtor to comply,
independent of the human will.
2. Impossible to force
3. Such as to render it impossible for the debtor to fulfill his obligation on
4. Free from any participation in or the aggravation of the injury resulting to the creditor.

Natural Disaster

I. When can a common carrier raise the defense of natural disaster to escape liability in case
of loss of goods?

1. Proximate and only cause of the loss.

2. Must exercise due diligence to prevent or minimize loss before, during and after occurrence
of flood, in order that the common carrier may be exempted.

b. Absence of delay

I. What is the effect of absence of delay?

If delays is without just cause, contract limiting the common carrier’s liability cannot be
availed of. If there is an absence of delay, limiting the liability of the common carrier can be in-
voked.

II. What is the effect of negligently incurring delay?

Common carrier negligently incurs in delay, a natural disaster shall not free such carrier
from responsibility.

III. What happens when there is delay on account of strikes or riots?

Agreement limiting the common carrier’s liability for delay on account of strikes or riots
is valid.

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c. Due diligence to prevent or lessen the loss

I. Should the common carrier still exercise due diligence to prevent or lessen loss even if
there is a fortuitous event?

Must exercise due diligence to prevent or minimize loss, before during and after occur-
rence of flood, storm or other natural disaster in order that common carrier may be exempted.

II. Should the common carrier still exercise due diligence to prevent or lessen loss even if the
loss of the goods is caused by the character of the goods?

Caused by the character of the goods, or the faulty nature of the packing…, the com-
mon carrier must exercise due diligence to forestall or lessen the loss.

2. Contributory negligence

I. What is the effect of contributory negligence of the shipper or owner of the goods?

Merely contributed, proximate cause, negligence of the common carrier, equitably re-
duced. However, the only cause due to any of the following acts of the shipper:

1. Failure of the shipper to disclose the nature of the goods;

2. Improper marking or direction; and
3. Improper loading.

3. Duration of liability

a. Delivery of goods to common carrier

I. When does the duty to exercise extraordinary diligence in the carriage of goods start?

From the time the goods are unconditionally placed in the possession of, and received
by the carrier for transportation.

II. When does the duty to exercise extraordinary diligence in the carriage of goods end?

The goods are delivered, actually or constructively, to the consignee or to the person
who has a right to receive them.

b. Actual or constructive delivery

I. When is there delivery of goods to the carrier?

Ready for and have been placed in the exclusive possession, custody and control of
the carrier for the purpose of their immediate transportation, the carrier has accepted them.
Liability of the carrier commences.

II. When is there delivery of goods to the consignee?

Actual or constructive delivery (1) consignee or (2) to the person who has a right to re-
ceive them.

III. When is there constructive delivery of goods shipped to the consignee?

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 Notice of the arrival of the goods and the consignee fails to claim the same after the
lapse of a reasonable period.

c. Temporary unloading or storage

I. Does the duty of the common carrier cease upon temporary unloading or storage?

No. Common carrier’s duty to observe extraordinary diligence in full force and effect are
temporarily unloaded or stored in transit, unless shipper or owner has made use of the right
stoppage in transitu.

II. Does the duty of the common carrier cease upon storage of the goods in a warehouse of the
carrier at the place of destination?

Stored in a warehouse of the carrier at the place of destination, until consignee has
been advised of the arrival had reasonable opportunity thereafter to remove them or otherwise
dispose of them.

4. Stipulation for limitation of liability

1. When is a stipulation limiting the liability of the common carrier considered valid?

Stipulation common carrier liability of the former for the loss, destruction, or deteriora-
tion goods degree less than extraordinary diligence valid, provided:

1. In writing, signed by the shipper or owner;

2. Supported by a valuable consideration;
3. Reasonable, just and not contrary to public policy on account of strikes or riots is valid.

a. Void stipulation

I. What are the void stipulations limiting the liability of the common carrier?

Unreasonable unjust and contrary to public policy:

1. Goods are transported at the risk of the owner or shipper;

2. Common carrier will not be liable for any loss;
3. Common carrier need not observe any diligence;
4. Exercise a degree of diligence less than that of a good father of a family or a man of ordi-
nary prudence.
5. Shall not be responsible for the acts or omission of or its employees;
6. Acts committed by thieves or of robbers who do not act with grave or irresistible threat, vi-
olence or force, is dispensed with or diminished;
7. Not responsible for loss, destruction, deterioration of goods on account of the defective
condition of the car, vehicle, ship, airplane or other equipment.

b. Limitation of liability to fixed amount

I. When does a stipulation limiting the liability of the common carrier to a fixed amount valid?

Fixing the sum is valid, if it is reasonable and just under the circumstances, fairly and
freely agreed upon.

II. Suppose the common carrier has no competitor along the line or route, may such fact be
considered in determining whether the limitation of the liability of the carrier is reasonable?

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 Fact hat the common carrier has no competitor along the line or route of a part thereof
taken into consideration on the question of whether or not a stipulation limiting the common
carrier’s liability is reasonable, just and in consonance with public policy.

III. Does the limitation on the liability of the common carrier remove the disputable presumption
of negligence on its part?

Even when there is an agreement limiting the liability, common carrier is disputably pre-
sumed to have been negligent loss, destruction or deterioration.

IV. What happens when the common carrier refused to carry the goods of the shipper?

May be annulled by the shipper or owner if the common carrier refused to carry the
goods unless the former agreed to such stipulation. \

c. Limitation of liability in absence of declaration of greater value

I. Is it valid for the common carrier to limit its liability to the value of the goods appearing in
the bill of lading?

Common carrier’s liability is limited to the value of the goods appearing in the bill of lad-
ing, unless shipper or owner declares a greater value, is binding.

5. Liability for baggage of passengers

a. Checked-in baggage

I. What is the responsibility of the common carrier with respect to checked-in baggage?

Articles 1733 to 1753, not in his personal custody or in that of his employee, the
checked-in baggage shall be treated as goods subject to carriage.

b. Baggage in possession of passengers

I. What is the responsibility of the common carrier with respect to baggage in the possession
of passengers?

Responsibility of hotel-keepers shall be applicable as necessary deposit.

II. What is the difference between the responsibility of a common carrier with respect to bag-
gage in the custody of the passengers (hand-carried baggage) and passenger’s baggage in its
custody (checked-in baggage)?

1. Rules that are applicable;

2. Legal nature of the baggage as a necessary deposit, as “goods;”
3. Diligence (ordinary diligence), extraordinary diligence.

C. SAFETY OF PASSENGERS

I. What is the responsibility of a common carrier with respect to a carriage of passengers?

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 To carry the passengers safely as far as human care and foresight can provide, utmost
diligence of very cautious person, due regard for all the circumstances.

II. What is the presumption of negligence of common carriers in the carriage of passengers?

Death of injuries common carriers are presumed to have been at fault or to have acted,
negligently, extraordinary diligence as prescribed.

1. Void stipulations

I. In the carriage of passengers, can there be a stipulation lessening the utmost diligence re-
quired from the common carrier?

Cannot be dispensed with or lessened by stipulation.

II. Can a common carrier limit its liability for negligence to passengers carried gratuitously?

Liability for negligence is valid, but not for willful acts or gross negligence. Reduction of
fare does not justify any limitation of the carrier’s liability.

2. Duration of liability

a. Waiting for carrier or boarding of carrier

I. When does the duty in the carrier of passenger begins?

From the moment the person who purchased the ticket or token presents himself at the
proper place and in a proper manner bona fide intention to use the facilities of the carrier.

II. When does the duty to exercise utmost diligence in carriage of passengers begin?

1. With respect to carriage of passengers by train:

a. Purchases the ticket from the carrier;
b. Presents himself at the proper place and in a proper manner;
c. Bona fide intent to ride the coach;

2. With respect to carriage of passengers by sea: bona fide intention of taking passage places
himself in the care of the carrier or its employees and is accepted as a passenger.

3. With respect to carriage of passengers by land: duty bound to stop their conveyances for a
reasonable length of time in order to afford passengers an opportunity to board and enter, li-
able for injuries, sudden starting up or jerking of their conveyances while they do so, stops
continuous offer to bus riders.

b. Arrival at destination

I. Does the duty in the carriage of passengers continue even after reaching the destination?

Safely alighted from the carrier’s conveyance had a reasonable opportunity to leave the
carrier’s premises and to look after his baggage and prepare for his departure.

II. Does the duty in the carriage of passenger already exist when the passenger is in the
premises of the carrier?

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 Duty of a common carrier provide safety to its passengers so not only during the course
of the trip so long as the passengers are within its premises and where they ought to be in pur-
suance of the contract of carriage.

3. Liability for acts of others

a. Employees

I. Are common carriers liable for the negligence or willful acts of their employees?

Liable for the death of or injuries to passengers negligence or willful acts of the former’s
employees. Although may have acted beyond the scope of their authority or in violation of the
orders of the common carriers.

II. What is the recourse of the common carrier which paid damages due to the negligence or
willful acts of its employees?

Recover what it has paid from its negligent employee.

III. Can common carriers raise as a defense diligence of a good father of a family in the selec-
tion and supervision of employees?

Does not cease upon proof that they exercised all the diligence of a good father of a
family.

b. Other passengers and strangers

I. Are common carriers responsible for the willful acts or negligence of other passengers or
strangers?

If common carrier’s employees diligence of a good father could have prevented or

stopped the act or omission.

Required diligence:

For acts of its employees: extraordinary diligence.

For acts of other passengers or strangers: ordinary diligence.

Nature of liability:

For acts of its employees: the employee must be on duty at the time of the act.

For acts of other passengers or strangers: not absolute.

4. Liability for delay in commencement of voyage

5. Liability for defects in equipment and facilities

6. Extent of liability for damages

I. What is the extent of the liability of the carrier and the driver?

Solidarily liable as joint tortfeasors.

II. Can the ACT that breaches the contract be likewise considered a tort or quasi- delict?

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 Relation of passenger and carrier is contractual, origin and nature. The act that breaks
the contract may also be a tort.

III. X rode the bus of Y driven by Z. During the course of the trip, the bus collided with the jeep
of A, driven by B. X suffered injuries. Against whom should X file a complaint for damages?

Either or both of the carriers, the drivers as well as the owners of the two vehicles jointly
and severally liable for damages. Should not make any difference springs from a contract while
that of the driver springs from a quasi-delict.

IV. If the carrier is made liable for the injuries suffered by its passenger due to the negligence of
its driver, what is its recourse?

Recover what it has paid from its negligent employee.

V. Does contributory negligence of the passenger bar his recovery of damages from the carri-
er?

The contributory negligence of the passenger does not bar recovery damages for his
death or injuries if proximate cause. The amount of damages shall be equitably reduced.

D. BILL OF LADING

1. Three-fold character

1. Receipt of the goods shipped;

2. Evidence of the contract between the parties;
3. Contract, three parties: shipper, the carrier and the consignee undertake specific responsi-
bilities and assume stipulated obligations.

Note: Charter of the entire vessel, issued by the master to the charterer, merely a receipt and a
document of tile, not a contract, for the contract is the charter party.

2. Delivery of goods

a. Period for delivery

I. What is the period of delivery?

Whether (1) there has been a stipulation in the contract or bill lading or (2) there has
been no stipulation.

II. Who is a consignee?

Shipper or any 3rd person, goods are to be delivered or made.

III. What happens when the period of delivery is stated in the contract or bill of lading?

Carrier bound to fulfill the contract is liable for any delay; no matter from what cause it
may have arisen. Presumed that the carrier might have provided a contingency for such delay.

IV. What is the period of delivery when there has been no stipulation in the contract or bill of
lading?

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 Within reasonable time depending on the expected date of arrival in the bill of lading or
in the nature of goods bound to forward them in the first shipment of the same or similar
goods.

V. When is the consignee bound by the agreement between the shipper and the carrier?

Without the intervention of the consignee. However, can be bound by the stipulations of
the bill of lading when:

1. Relation of agency shipper or consignor and the consignee; or

2. Consignee demands fulfillment of the stipulation of the bill of lading which was drawn up in
its favor.

Vi. When can a consignee be deemed t have accepted the stipulations in the bill of lading?

Received by the consignee who does not object to any terms or stipulations contained
therein. It constitutes as an acceptance of the contract and of all of its terms and conditions.

b. Delivery without surrender of bill of lading

I. What is the liability of the legitimate holder of the bill of lading if he fails to present it to the
captain of the vessel?

Responsible for the expenses of warehousing and other expenses arising therefrom.

c. Refusal of consignee to take delivery

I. What is the effect of the refusal of the consignee to take delivery?

Notice of the arrival fails to claim the goods after the lapse of a reasonable period, con-
structive delivery no longer be a contract of carriage but a contract of deposit.

3. Period for filing claims

I. What is the period for filing claims by the consignee against the carrier?

It depends whether (1) the Code of Commerce or (2) the Carriage of Goods by Sea Act
is applicable.

II. When is the Code of Commerce applicable?

1. Domestic/Inter-island/coastwise transportation;
2. Land, water, air transportation.

III. When is the Carriage of Goods by Sea Act (COGSA) applicable?

1. International/overseas/foreign (From foreign country to Philippines).

2. Water/maritime transportation.

IV. What is the period for filing claims by the consignee against the carrier?

Code of Commerce,

1. Apparent damage - the claim shall be admitted only at the time of receipt.

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2. Latent damage - 24 hours following receipt upon opening the packages, provided indica-
tions of the damage or average which gives rise to the claim cannot ascertained from the
outside part of such packages.

V. What is the effect of failure to file claims within the period prescribed?

No claim shall be admitted against the carrier with regard to the condition.

VI. Under the Code of Commerce, is the filing of a claim considered as a condition precedent in
bringing a suit against the carrier under Code of Commerce?

Filing a claim is a condition precedent for the consignee to bring a suit against the car-
rier.

4. Period for filing actions

I. What is the prescriptive period in bringing a suit against the carrier?

Code of Commerce, a bill of lading, a 10 year prescriptive period. No bill, 6 year pre-
scriptive period.

II. Does extrajudicial demand toll the prescriptive period in bringing a suit against the carrier?

Yes, but must be a written extrajudicial demand.

5. Effects of stipulations

I. Can parties stipulate to shorter prescriptive period under the Code of Commerce?

Yes, according to the Code of Commerce and the Civil Code.

E. MARITIME COMMERCE

I. What is a Maritime or Admiralty Law?

Maritime or Admiralty Law is the system of laws which particularly relates to the affairs
and business of the sea, to ships, their crews and navigation, and to maritime conveyance of
persons and property.

1. Charter parties

I. What is a charter party?

An entire ship, or some principal part thereof, is lent by the ship owner to another per-
son. Charter parties are two types: (1) contract of affreightment or (b) a contract by demise or
bareboat charter.

a. Bareboat/demise charter

I. What is a bareboat or demise charter?

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 The shipowner leases to the charterer the whole vessel, entire command, possession
and consequent control including master and the crew, the charter’s servants.

II. What are the implications of a bareboat charter?

The owner pro hac vice. The charterer is liable for damages arising from negligence. The mas-
ter is converters into a private carrier. The charterer is also liable for the expenses of the voy-
age. The ship owner is not liable for any loss.

b. Time charter

c. Voyage/trip charter

III. What is a contract of affreightment?

Part of all of its space to haul goods for others.

IV. What are the kinds of contract of affreightment?

1. Time charter -A time charter is the hiring of a vessel for a specific period of time; the own-
er still manages the vessel but the charterer selects the ports and directs the vessel where
to go. The charterer pays for all fuel the vessel consumes, port charges, commissions, and
a daily hire to the owner of the vessel.

2. Voyage or trip charter - A voyage charter is the hiring of a vessel and crew for a voyage
between a load port and a discharge port.

V. What are the implications of a contract of affreightment?

The charterer hires the vessel only and the master and crew remain in the employ of the
shipowner. Ship owner shall be liable for the expenses of the voyage also for any loss or injury
during the voyage.

2. Liability of shipowners and shipping agents

I. What are the liabilities of a ship owner or ship agent?

1. Chartered wholly, but to accept cargo from others;

2. Represented capacity;

3. Unload cargo clandestinely placed;

4. Substitute another vessel if load is less than 3/5 of capacity;

5. Leave the port if the charterer does not bring the cargo within;

6. Place in a vessel in a condition to navigate;

7. Bring cargo to nearest neutral port.

II. What are the liabilities of a charter?

1. Pay the agreed charter price;

2. Pay freightage on unbounded cargo;

3. Pay losses;

4. Wait if the vessel needs repair;

5. Pay expenses for deviation;

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a. Liability for acts of captain

I. What is the liability of the ship agent with respect to the acts of the captain?

The agent shall be civilly liable indemnities in favor of third persons from the conduct of
the captain but may exempt himself by abandoning the vessel all her equipment, the freight
may have earned during the trip.

II. What is the liability of the part owners of the vessel with respect to the acts of the captain?

Civilly liable, in proportion of their contribution to the common fund, results of the acts
of the captain referred to Article 587. Each part owner may exempt himself from his liability by
the abandonment.

b. Exceptions to limited liability

I. What is the limited liability of the ship owner or ship agent?

No vessel, no liability is limited to the amount of interest in said vessel such that where
vessel is entirely lost, the obligation is extinguished. If the vessel, equipment or freightage were
completely lost or destroyed, the ship owner shall not be liable anymore.

II. What is the extent of the interest of the ship owner or ship agent with respect to the limited
liability?

1. Vessel itself;

2. Equipment;

3. Freightage; and

4. Insurance proceeds.

III. What are the exceptions of the limited liability rule?

1. No total loss the vessel is not abandoned;

2. Vessel is insured;

3. Injury or damage due to ship owner, concurring negligence;

4. Expenses for repair and provisioning of the ship before its loss;

5. Claims under workmen’s compensation.

3. Accidents and damages in maritime commerce

a. General average

I. What is an average?

All extraordinary or accidental expenses during the voyage in order to preserve the vessel, the
cargo, or both. Includes any damage or deterioration which the vessel may suffer from the time
it puts to sea from the port of departure until it casts anchor in the port of destination, suffered
by the merchandise from the time they are loaded in the port of shipment until they are un-
loaded in the port of their consignment.

Include all the damage and expenses which are deliberately caused in order to save the vessel,
its cargo or both at the same time from real and known risk. Both vessel and cargo are saved,
is general average. Person whose property has been saved must contribute to reimburse the
damage.

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II. What are the requisites of general average?

1. Common Danger

a. Both the ship and the cargo, subject to the same danger, during the voyage, the port of
loading or unloading.

b. Diner arises from the (1) accidents of the sea, (2) dispositions of the authority of faults of
men provided the circumstances producing the peril should be ascertained and imminent
or may rationally be said to be certain and imminent.

2. Deliberate Sacrifice

a. General Rule: the jettison of the cargo or part of the ship is thrown overboard during the
voyage.

b. Exceptions:

i. Sinking of a vessel is necessary to extinguish a fire in a port, roadsteads, creak or bay.

ii. Cargo is transferred to lighten the ship on account of a storm to facilitate entry into a port.

3. Proper formalities and legal steps.

a. Procedure for recovery;

b. Assembly and deliberation;

c. Resolution of the captain;

d. Entry of the resolution in the logbook;

e. Detailed minutes;

f. Delivery of the minutes to the maritime juridical authority within 24 hours from arrival;

g. Ratification by the captain under oath.

III. What the consequences of having a General Average?

All the persons having an interest shall contribute to satisfy the general average. Those who
cargoes were saved must contribute to the general average in proportion to the value of the
owner’s property saved.

IV. What is a particular average?

Have not insured to the common benefit for all the persons interested in the vessel and her
cargo if only the vessel or only the cargo is saved, it is particular average.

V. What are the consequences of having a particular average?

Owner of the goods which gave rise to the expense or suffered the damage shall bear this av-
erage whose cargoes were lost or destroyed due to the particular average shall bear the ex-
pense of their own shall not receive any reimbursement.

VI. Are expenses incurred to refloat a vessel, which accidentally ran aground, considered as
general average?

Refloat a vessel which accidentally ran aground, in order to continue its voyage, do not consti-
tute general average. Safety of the property, and not the voyage, which constitutes the true
foundation of general average.

b. Collisions and allisions

I. What is a collision?

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Collision is an impact or sudden contact of a vessel with another whether both are in motion,
or one is stationary. IF one vessel is moving while the other is stationary, called allusion.

II. What are the different zones of time in collision of vessels?

1. First zone - risk of collision may be said to have begun. No rule is as yet applicable. Each
vessel is free to direct its course…

2. Second zone - when the risk of collision begins and moment when it has become a partial
certainty. Conduct of the vessels is primordial. Vessels must strictly observe nautical rules, un-
less a departure therefrom becomes necessary to avoid imminent danger.

3. Third zone - collusion is certain and time of impact. Error in this zone would not longer be
legally consequential.

III. What is an error in extremis?

Sudden movement made by a faultless vessel during the third zone of collision with another
vessel which is at fault during the 2nd zone. Even if such sudden movement is wrong, no re-
sponsibility will fall on said faultless vessel.

IV. What are the cases covered by Collision and Allision?

The following are the cases covered by collision and allision:

1. One vessel at fault - vessel at fault is liable for damage caused to innocent vessel damages
suffered by the owners of cargo of vessels.

2. Both vessels at fault - each vessel must bear its own loss, but the shippers be solidarity li-
able.

3. Vessel at fault not known - shippers of both vessels may go against the ship owners who will
solidarity liable.

Note: Doctrine of Inscrutable Fault - both vessels bear their respective damage, but should be
solidarity liable for damage the cargo of both vessels.

4. Third vessel at fault - third vessel will be liable.

5. Fortuitous event/force majeure.

4. Carriage of Goods by Sea Act

a. Application

I. When is the Carriage of Goods by Sea Act (COGSA) applciable?

1. Water/maritime transportation;

2. For the carriage of goods;

3. Overseas/International/foreign (From foreign port to Philippine port).

b. Notice of loss or damage

I. What is the period for filing claims by the consignee against the carrier under the COGSA?

Page 50 of 56
1. Apparent damage - notice of loss or damage general nature of such loss given in writing to
the carrier or agent (1) at the port of discharge or (2) at the time of the removal of the goods
into the custody of the person entitled to delivery thereof under the contract of carriage.

2. Latent damage - not apparent (or latent) within three (3) days from the time of the delivery.

II. What is the effect of failure to file claims within the period prescribed under the COGSA?

Unless notice of loss or damage and the general nature of such loss or damage be given in
writing to the carrier or his agent at the port of discharge or the time of the removal of the
goods, the removal of goods is a prima facie evidence of the delivery by the carrier of the
goods as described in the bill of lading.

III. Under COGSA, is the filing of a claim considered as a condition precedent in bringing suit
against the carrier?

The fact shall not affect or prejudice the right of shipper to bring suit within one (1) year after
the delivery of the goods or the date when the good should have been delivered, the carrier
and the receiver shall give all reasonable facilities to each other for inspecting and tallying the
goods.

IV. Does delivery of the goods to the arrastre-operator commence the running of the prescrip-
tive period under COGSA?

Run from delivery to the arrestre-operator and not to the consignee.

c. Period of prescription

I. What is the prescriptive period in bringing a suit against the carrier under the COGSA?

Unless suit is brought within one year after the delivery of goods or the date when the goods
should have been delivered.

II. Does extrajudicial demand toll the prescriptive period in bringing a suit against the carrier
under COGSA?

No. The one-year period shall run from delivery of the last package.

III. Can the parties, by stipulation, shorten the prescriptive period provided under the COGSA?

1-year period cannot be shortened.

d. Limitation of liability

I. What are the acts that suspend the one-year prescriptive period?

1. Express agreement;

2. Filing of an action in court until it is dismissed.

II. What is the limitation on the liability of the carrier with respect of unseaworthiness?

Resulting from unseaworthiness unless want of due diligence on the part of the carrier to make
the ship seaworthy and to secure that the ship is properly manned, equipped, and supplied.

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III. Who has the burden of proof with respect to due diligence when a loss or damage resulted
from unseaworthiness?

On the carrier or other person claiming exemption.

IV. Under what instances is the carrier not liable for the loss or damage of goods under
COGSA?

1. Act, neglect, or default of the master, mariner, or the servants of the carrier in the navigation
or in the management of the ship;

2. The actual fault or privity of the carrier;

3. perils, dangers, and accidents of the same or other navigable water;

4. Act of god;

5. Act of war;

6. Act of public enemies;

7. Arrest or restraint of prices, rulers, or people, or seizure;

8. Quarantine restrictions;

9. Shipper or owner;

10. Strikes or lockouts or stoppage or restraint of labor;

11. Riots and civil commotions;

12. Riots and civil commotions;

13. Saving or attempting to save life or property at sea;

14. Wastage in bulk or weight;

15. Insufficiency or packing;

16. Insufficiency or inadequacy of marks;

17. Latent defects not discoverable by due diligence

18. Any other cause arising without the actual fault and privity of the carrier. Without the fault or
neglect of the agents or servants of the carrier.

V. What is the limitation on the liability of the shipper under COGSA?

Shipper shall not be responsible for loss or damage sustained by the carrier or the ship arising
or resulting from any cause without the act, or neglect of the shipper, his agents, or his ser-
vants.

VI. How are attempts to save life or property at sea treated under COGSA?

Any deviation saving or attempting to save life or property at sea, reasonable deviation shall
not be deemed to be an infringement or breach COGSA or of the contract of carriage, carrier
shall not be liable for any loss or damage resulting therefrom: provided the deviation is for the
purpose of loading or unloading cargo or passengers it shall prima facie be regarded as unrea-
sonable.

VII. Under COGSA, can the maximum value of limited liability of the carrier be fixed by the par-
ties?

Provided, such maximum shall not be less than $500 per package or in case of goods not
shipped in packages, per customary freight unit, or the equivalent of that sum in other curren-
cy, unless nature and value of such goods have been declared by the shipper before shipment
and inserted in the bill of lading. In no event the carrier be liable for more than the amount of
damage actually sustained. Neither carrier nor the ship if the nature or value thereof has been
knowingly and fraudulently misstated by the shipper in the bill of lading.

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F. PUBLIC SERVICE ACT

1. Definition of public utility

Synonymous with public service.

As currently worded, the Public Service Act defines a “public service” to include “every
person that now or hereafter may own, operate, manage, or control in the Philippines, for hire
or compensation, with general or limited clientele, whether permanent, occasional or acciden-
tal, and done for general business purposes, any common carrier, railroad, street railway, trac-
tion railway, sub-way motor vehicle, either for freight or passenger, or both with or without fixed
route and whether may be its classification, freight or carrier service of any class, express ser-
vice, steamboat or steamship line, pontines, ferries, and water craft, engaged in the transporta-
tion of passengers or freight or both, shipyard, marine railways, marine repair shop, [ware-
house] wharf or dock, ice plant, ice-refrigeration plant, canal, irrigation system, gas, electric
light, heat and power, water supply and power, petroleum, sewerage system, wire or wireless
communications system, wire or wireless broadcasting stations and other similar public ser-
vices.”

2. Necessity for certificate of public convenience

a. Requisites

i. Citizenship

Applicant must be a citizen of the Philippines. If the applicant is a Corporation, 60% of

its capital must be owned by Filipinos.

ii. Promotion of public interests

Applicant must prove the operation of proposed public service will promote public in-
terest in a proper and suitable manner.

iii. Financial capability

Applicant must have sufficient financial capability to undertake proposed services and
meeting responsibilities incidental to its operation. (Kilusang Mayo Uno v. Garcia G.R. No.
108584, Dec. 22, 1994)

b. Prior operator rule

i. Meaning

Definition of “Prior Operator Rule:” before permitting a new operator to operate in the
territory of another operator already established with a certificate of public convenience, the
PRIOR operator must first be given the opportunity to EXTEND its service in order to meet the
public needs. Public operators must be shielded from ruinous competition by giving the prior
operator the opportunity to IMPROVE his equipment and services before allowing a new opera-
tor to serve in the same territory.

ii. Exceptions

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 An instance when the Prior Operator rule is NOT APPLICABLE is when the new opera-
tor is only granted a MAIDEN franchise, or one which does not really overlap with the entire
route of the old operator but covers only a short portion of the old operator’s route AS A CON-
VERGENCE POINT. (So if a maiden franchise is granted to a new operator covering a portion of
the old operator’s route, the Prior Operator rule cannot be invoked by the old operator to con-
test the grant of the new franchise).

[Note: this second doctrine was not really in the case but it is in the book of Perez p. 292,
which, I think, more clearly emphasized the point of the case].

iii. Ruinous competition

Competition between two or more companies so fierce that they are unable to recoup
the costs of making their product

3. Fixing of rate

a. Rate of return

The rate of return is a judgment percentage which, if multiplied with the rate base, pro-
vides a fair return on the public utility for the use of its property for service to the public. The
rate of return of a public utility is not prescribed by statute but by administrative and judicial
pronouncements. This Court has consistently adopted a 12% rate of return for public utilities

b. Exclusion of income tax as expense

4. Unlawful arrangements

a. Boundary system

Under this system the driver is engaged to drive the owner/operator’s unit and pays the
latter a fee commonly called boundary for the use of the unit. Whatever he earned in excess of
that amount is his income. (Paguio Transport Corp. v. NLRC, G.R. No. 119500, Aug. 28, 1998)

It is already settled that the relationship between jeepney owners/operators and jeepney
drivers under the boundary system is that of employer-employee and not of lessor-lessee. The
fact that the drivers do not receive fixed wages but only get the amount in excess of the so-
called "boundary" that they pay to the owner/operator is not sufficient to negate the relation-
ship between them as employer and employee

b. Kabit system (Illegal)

The "Kabit System" has been defined by the Supreme Court as an arrangement
"whereby a person who has been granted a certificate of convenience allows another person
who owns motor vehicles to operate under such franchise for a fee." (Lita Enterprises, Inc. v.
Second Civil Cases Division, IAC, et al., G.R. No. 64693, April 27, 1984). lwphl@itç

The determining factor, therefore, is the possession of a franchise to operate which

negates the existence of the "Kabit System" and not the issuance of one SSS ID Number for
both bus lines from which the existence of said system was inferred.

5. Approval of sale, encumbrance or lease of property

No public utility as herein defined shall:

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 h) Without the approval of the Public Utility Commission first had, sell, alienate, mort-
gage, encumber, or lease its property franchises, privileges or rights, or any part thereof; nor
merge or consolidate its property, franchises, privileges or rights, or any part thereof, with that
of any other public utility as herein defined. The approval herein required shall be given, after
notice to the public and after hearing the persons interested at a public hearing, if it be shown
that there are just and reasonable grounds for making the sale, alienation, mortgage, or en-
cumbrance for liabilities of more than one year maturity, lease, merger, or consolidation to be
approved, and that the same are not detrimental to the public interest, and in case of a sale,
the date on which the same is to be consummated shall be fixed in the order of approval: Pro-
vided, however, That the sale, alienation, mortgage or encumbrance, and lease of the property
of public utilities which, on account of the nature and conditions of their business, are, in the
judgment of the Commission, of little importance to the public interest, shall be exempt from
the requisite of the approval of the Commission; but the public utilities shall in every case give
notice of these transactions to the Commission. Any sale, alienation, mortgage or encum-
brance, lease, fusion or consolidation made without the approval herein required shall be null
and void: Provided, further, That nothing herein contained shall be construed to prevent the
sale, alienation, or lease by any public utility of any of its property in the ordinary course of its
business.

G. THE WARSAW CONVENTION

1. Applicability

1. International transportation;
2. Air transportation;
3. Carriage of passengers, baggage or goods;
4. Fortuitous events by legal entities constituted under public law of the High Contracting Par-
ties.

2. Limitation of liability

a. Liability to passengers

250 francs per kilogram. However, a special declaration of value and payment of a sup-
plementary sum by consignor. Pay not more than the declared sum, unless it proves the sum is
greater than actual value.

b. Liability for checked baggage

$20 per kilogram. However, a special declaration of value and payment of a supplemen-
tary sum in such a case, the carrier is liable to pay not more than the declared sum.

c. Liability for hand-carried baggage

5,000 Frances per passenger.

3. Willful misconduct

I. Can the carrier limit its liability if the damage was caused by the willful misconduct by an
agent of the carrier?

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 Denies to the carrier “availment of the provisions which exclude or limit his liability, if the
damage is caused by his willful misconduct or by such default on his part as, in accordance
with the law of the court seized of the case, is considered to be equivalent to willful misconduct
or the damage is (similarly) caused by any agent of the carrier acting within the scope of his
employment.

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