APRIL 2018 INSURANCE REVIEWER

LECTURE NOTES OF ATTY RONDEZ AND COMPILED BY LAWRENCE BULLANDAY

WHAT LAWS GOVERN CONTRACTS OF INSURANCE IN THE PHILIPPINES?

1. The Insurance Code or R.A. 10607
2. Civil Code, in the absence of applicable provisions in the Insurance Code
3. in the absence of applicable provisions in the Insurance Code and the Civil Code

CONTRACT OF INSURANCE
 It is an agreement whereby one undertakes for a consideration to indemnify another
against the loss, damage or liability arising from an unknown or contingent event. (IC, Sec.
2[a])
 A Contract of Suretyship shall also be deemed an insurance contract if made by a surety
who or which is doing an insurance business.
“DOING AN INSURANCE BUSINESS” OR “TRANSACTING AN INSURANCE BUSINESS”
1. Making or proposing to make, as Insurer, any insurance contract;
2. Making or proposing to make, as Surety, any contract of suretyship as a vocation and
not as merely incidental to any other legitimate business or activity of the surety;
3. Doing any kind of business, including a Reinsurance business, specifically recognized as
constituting the doing of an insurance business.
4. Doing or proposing to do Any business in substance equivalent to any of the foregoing in
a manner designed to evade the provisions of the Insurance Code. (Sec. 2[b], ibid)

 In the application of the provisions of the Insurance Code, the fact that no profit is
derived from the making of the insurance contracts, agreements or transactions or
that no separate or direct consideration is received therefor, shall NOT be deemed
conclusive to show that the making thereof does not constitute the doing or
transacting of an insurance business.

CONCEPT OF INSURANCE
 Insurance is a means by which one seeks to be covered against the consequences of
an event that may cause loss or damage.
 The concept is that the premiums that are paid are accumulated in a pool from which
payment of claims are to be obtained. As a basis, it is assumed that the people
contributing premiums are in excess of those making claims resulting in a larger pool
of money than the amounts being claimed.

 Insurance is a matter of addressing risks (risks we can live with and risks we cannot live with)

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PURE AND SPECULATIVE RISKS
 The risk that may be insured against are what are known as pure risks as opposed to
speculative risks.
 A pure risk is whether a person will suffer or will not suffer a loss from the occurrence
of an event.
 A speculative risk is whether a person will profit or suffer a loss form the occurrence
of an event. This kind of risk is not covered by insurance.
INSURANCE IS RISK DISTRIBUTING
 Insurance is a risk distributing device because when the insurer assumes the risk, it is
distributing potential liability, in part, among others.
 It is not risk shifting because the entirety of risk of loss is not shifted to another.
WHAT MAY BE INSURED AGAINST
 ANY UNKNOWN OR CONTINGENT EVENT, WHETHER PAST OR FUTURE, WHICH MAY
DAMNIFY A PERSON HAVING INSURABLE INTEREST OR CREATE A LIABILITY AGAINST HIM,
MAY BE INSURED AGAINST (Section 3)
Example:
Insurance against damage, liability, unknown past event (in marine insurance – insurance over
the vessel against perils of the sea, lost or not lost), or future event like loss or theft of the
object
 NOTE: In relation to the insurance so secured,
1. The consent of the husband is not necessary for the validity of an insurance policy taken
by a MARRIED woman on her life and that of her children. Under Article 145 of the
Family Code, she can also insure her separate property without the consent of the
husband.
2. A minor may take out a contract for life, health and accident insurance with any
company authorized to do business in the Philippines, provided it be taken out on his
own life and the beneficiary named is his estate, father, mother, husband, wife, child,
brother or sister. In so doing, the married woman / minor may exercise all the rights or
privileges under the policy.

 BUT – WHAT IS THE EFFECT OF THE DEATH OF THE ORIGINAL OWNER OF A POLICY WHICH
COVERS THE LIFE OF A MINOR, AHEAD OF THE MINOR- all rights, title and interest in the
policy shall automatically vest in the minor unless otherwise provided in the policy.
WHAT CANNOT BE INSURED
 An insurance for or against the drawing of any lottery or for or against any chance or ticket
in a lottery drawing a prize. BECAUSE GAMBLING RESULTS IN PROFIT AND INSURANCE ONLY
SEEKS TO INDEMNIFY THE INSURED AGAINST LOSS (Section 4).

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ELEMENTS OF AN INSURANCE CONTRACT
1. Payment of Premium
As a consideration for the insurer’s promise, the insured makes a ratable contribution
called a premium to the general insurance fund.
2. Assumption of Risk
The insurer assumes the risk of loss.
3. Risk of Loss
The insured is subject to risk of loss through the destruction and impairment of that
interest by the happening of the designated risks.
4. Existence of an insurable interest
The insured should possess an interest of some kind, susceptible of pecuniary
estimation – known as “insurable interest”.

GENERALLY – a person has insurable interest in the subject matter insured when:
HE HAS SUCH A RELATION OR CONNECTION WITH, OR CONCERN IN, SUCH SUBJECT
MATTER THAT HE WILL DERIVE PECUNIARY BENEFIT OR ADVANTAGE FROM ITS
PRESERVATION OR WILL SUFFER PECUNIARY LOSS OR DAMAGE FROM ITS
DESTRUCTION, TERMINATION OR INJURY BY THE HAPPENING OF THE EVENT INSURED
AGAINST. (Lalican vs Insular Life Ins. Co., 2009)

Exception:
 The expectation of benefit from the continued life of the person insured need
not be of a pecuniary nature.
 A person has insurable interest in life, health, and property.
 It is necessary because its absence renders the contract VOID. This is based on
the principle that insurance is a contract of indemnity. If the insured has no
interest, he will not stand to suffer loss or injury by the happening of the event
insured against.

5. Scheme to distribute losses

Such assumption of risks is part of a general scheme to distribute actual loss among a
large group of persons bearing somewhat similar risks.
 Based on the cash and carry basis or “no premium payment no policy” rule which states
that the payment of a premium is essential to the validity of an insurance policy.

CHARACTERISTICS/NATURE OF INSURANCE CONTRACTS

1. IT IS AN ALEATORY CONTRACT - the liability of the Insurer depends upon the happening of a
contingent event. It is not a wagering contract.
2. IT IS A CONTRACT OF INDEMNITY FOR NON-LIFE – recovery is commensurate to the loss. IT
IS AN INVESTMENT IN LIFE INSURANCE – secured by the insured as a measure of economic

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 security for him during his lifetime and for his beneficiary upon his death EXCEPT one
secured by the creditor on the life of the debtor.
3. IT IS A PERSONAL CONTRACT - an insurer contracts with reference to the character of the
insured and vice versa.
4. IT IS EXECUTORY AND CONDITIONAL ON THE PART OF THE INSURER - because upon
happening of the event or peril insured against, the conditions having been met, it has the
obligation to execute the contract by paying the insured. IT IS EXECUTED ON THE PART OF
THE INSURED after the payment of the premium.
5. IT IS ONE OF PERFECT GOOD FAITH for both Insurer and Insured, but more so for the
INSURER, since its dominant bargaining position imposes a stricter liability/responsibility.
6. IT IS A CONTRACT OF ADHESION – Insurance companies manage to impose upon the
insured prepared contracts which the insured cannot change; take it or leave it contract.
RULES ON CONSTRUCTION
a) In case there is no doubt as to the terms of the insurance contract, it is to be construed
in its PLAIN, ORDINARY, AND POPULAR SENSE.
b) If DOUBTFUL, AMBIGUOUS, UNCERTAIN it is to be construed strictly against the insurer
and liberally in favor of the insured because the latter has no voice in the selection of
the words used, and the language used is selected by the lawyers of the Insurer. (QUA
CHEE GAN v. LAW UNION ROCK INS. CO. LTD 98 Phil. 85)
ILLUSTRATIONS:
a. P Bank obtained insurance against robbery which excluded loss by any criminal act of the
insured or any authorized representative. While transferring funds from one branch to another,
the insured’s armored truck was robbed. The driver was assigned by a labor contractor with the
insured, while the security guard was assigned by an agency contracted by the insured. Both
driver and guard were found to be involved. Can the loss be excluded?
HELD: THE LOSS IS EXCLUDED, the DRIVER/GUARD ALTHOUGH ASSIGNED BY LABOR
CONTRACTORS – ARE AUTHORIZED REPRESENTATIVES. THE TERMS ARE CLEAR AND
UNAMBIGUOUS (Fortune Insurance v. CA, 244 SCRA 308).
b. Personal Accident policies providing payment for “loss of hand”. The Insurance policy defines
it as amputation. Insured has an accident resulting in a temporary total disability but hand is
not amputated.
HELD: Insurer is not liable (TY v. First National Surety and Assurance Company – 17 SCRA 364)
BUT – in a case where the policy provided for loss of both legs by amputation, a claim against
the policy was allowed for a total paralysis to exclude total paralysis is contrary to public policy,
public good and sound morality, as it would force the insured to have his legs amputated to be
able to claim on the policy (Panaton v. Malayan – 2 Court of Appeals 783).
c. Warranty in a fire insurance policy prohibited storage of oils having a flash point of below 300
Fahrenheit. Gasoline is stored. Is there a policy violation?

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HELD: The clause is ambiguous. In ordinary parlance oil means lubricants – not gasoline. There
is no reason why gasoline could not be expressed clearly in the language the public can readily
understand. (QUA CHEE GAN 98 Phil. 85)
d. An action to recover the amount of PHP 2,000.00 due to death by drowning where the policy
provided for indemnity in the amount of PHP 1,000.00 to PHP 3,000.00.
HELD: The interpretation of the obscure stipulation in contract must not favor the one who
caused the obscurity. Hence, judgment for an additional PHP 2,000.00 was affirmed (Del
Rosario vs. Equitable Insurance and Casualty Company, 8 SCRA 343).
e. Denial of a claim on the ground that the insured vehicle was a private “owner” type vehicle
on the ground that the policy issued to the insured was a Common Carrier’s Liability Insurance
Policy which covers a public vehicle for hire.
HELD: Insurer is liable as it was aware all along that the vehicle of the insured was a private
vehicle. (Fieldmans Insurance v. Mercedes Vargas vda De Songco, 25 SCRA 70)
f. Denial of claim for benefit due to the death of Flaviano Landicho in a plane crash under a GSIS
Policy on the ground of non-payment of the premium.
HELD: The policy contained a provision that the application for insurance is authority for GSIS to
cause the deduction of premium from the insured’s salary (Landicho v. GSIS, 44 SCRA 7)
OTHER CASE REFERENCES: New Life Enterprises v. CA, 207 SCRA 669

Insurance as an Uberrimae Fides contract (1993 Bar)

The contract of insurance is one of perfect good faith (uberrimae fidei) not for the insured
alone, but equally so for the insurer; in fact, it is more so for the latter, since its dominant
bargaining position carries with it stricter responsibility (Qua Chee Gan vs. Law Union and Rock
Insurance, Co. Ltd., GR No. L-4611, December 17, 1955). It requires the parties to the contract to
communicate that which a party knows and ought to communicate, that is, the duty to disclose
in good faith all facts material to the contract. This doctrine is essential on account of the fact
that the full circumstances of the subject matter of insurance are, as a rule, known to the
insured only and the insurer, in deciding whether or not to accept a risk, must rely primarily
upon the information supplied to him by the applicant. (Sundiang Sr. & Aquino, 2014)

Insurance as contracts of adhesion (Fine Print Rule)

While generally, stipulations in a contract come about after deliberate drafting by the parties
thereto, there are certain contracts in which almost all the provisions of which have been
drafted only by one party, usually a corporation. Such contracts are called contracts of
adhesion, because the only participation of the other party is the signing of his signature or his
'adhesion' thereto. Insurance contracts fall into this category (Sweet Lines, Inc. vs. Teves, GR No.
L-37750, May 19, 1978). An illustration of a contract of adhesion is when the insurer used “fine
print” letters in conditions stated in a contract of insurance (Ibid).

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What is the nature of a health care agreement?
• In the case of Fortune Medicare, Inc. v. Amorin, G.R. No. 195872, March 12, 2014, it was held
to be in the nature of non-life insurance, which is primarily a contract of indemnity. Once the
member incurs hospital, medical or any other expense arising from sickness, injury or other
stipulated contingency, the health care provided must pay for the same to the extent provided
under the contract.
• The Court also interpreted an ambiguity in favor of the insured allowing him to recover for his
medical expenses incurred while abroad.

D. Classes
1. Marine
WHAT IS MARINE INSURANCE
Insurance against loss or damage to:
(a) Vessels, craft, aircraft, vehicles ,goods, freights, cargoes, merchandise, effects,
disbursements, profits, moneys, securities, choses in action, evidences of debt, valuable papers,
bottomry or respondentia interest and all other kinds of property and interests therein, in
respect to, appertaining to or in connection with any and all risks or PERILS OF NAVIGATION,
TRANSIT OR TRANSPORTATION OR WHILE BEING ASSEMBLED, PACKED, CRATED, BALED,
COMPRESSED OR SIMILARLY PREPARED FOR SHIPMENT OR WHILE AWAITING SHIPMENT OR
DURING ANY DELAYS, STORAGE, TRANSHIPMENT OR RESHIPMENT INCIDENT THERETO,
including WAR RISKS, MARINE BUILDER’S RISK, AND ALL PERSONAL PROPERTY FLOATER RISKS
(follows property wherever it may be)
(b) Person or property in connection with or appertaining to marine, island marine, transit or
transportation insurance, including liability for loss or in connection with the construction,
repair, operation, maintenance, use of the subject matter of the insurance (BUT NOT
INCLUDING LIFE INSURANCE, OR SURETY BONDS, NOR INSURANCE AGAINST LOSS BY REASON
OF BODILY INJURY TO ANY PERSON ARISING OUT OF THE OWNERSHIP, MAINTENANCE, USE OF
AUTOMOBILES)
(c) Precious stones, jewels, jewelry, precious metals whether in the course of transportation or
otherwise.
(d) Bridges, tunnels or other instrumentalities of transportation and communications (excluding
buildings, their furniture and furnishings, fixed contents, and supplies held in storage), piers,
wharves, docks, slips, and other aids to navigation and transportation, including dry docks,
marine railways, dams and appurtenant facilities for the control of waterways.
AND – “Marine Protection and Indemnity insurance” meaning insurance against, or against
legal liability of the insured for loss damage or expense incident to ownership, operation,
chartering, maintenance, use, repair or construction of any vessel, craft or instrumentality in

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use in ocean or island waterways, including liability of the insured for personal injury, illness or
death or for loss or damage to the property of another person (Section 99).
NOTE – that marine insurance is really TRANSPORTATION INSURANCE which is a kind of
insurance which is concerned with the perils of property in (or incidental to) transit as opposed
to property perils at a generally fixed location. BUT it does not include normal motor vehicle
insurance which is treated separately by law.
WHAT ARE THE DIVISIONS OF TRANSPORTATION INSURANCE
The divisions of transportation insurance are:
(1) Ocean Marine Insurance pertaining primarily to sea perils of ships and cargoes, and
(2) Inland Marine Insurance pertaining primarily to land or over land (but sometimes water)
transportation perils of property shipped by railroads, motor trucks, airplanes and other means
of transportation.
WHAT RISKS ARE INSURED AGAINST
 The basic risk insured against is what is commonly known as PERILS OF THE SEA (all kinds of
marine casualties and damages done to the ship or goods at sea by the violent action of
the winds or waves, one that could not be foreseen and is not attributable to the fault of
anybody.
EXAMPLES:
shipwrecks, foundering, stranding, collision, including the jettisoning of cargo if made for the
purpose of saving the vessel) although it also includes FIRE, ENEMIES, PIRATES, THIEVES,
JETTISON, SURPRISALS, TAKING AT SEA, ARRESTS, RESTRAINTS, DETAINMENTS OF KINGS,
PRINCESS AND PEOPLE OF WHAT NATION, CONDITION OR QUALITY, BARRATRY OF THE MASTER
AND ALL OTHER PERILS LOSSES, MISFORTUNES THAT HAVE OR SHALL COME TO HURT,
DETRIMENT OR DAMAGE OF THE SAID GOODS, MERCHANDISE, SHIP OR ANY PART THEREOF.
WHAT ARE NOT COVERED
 Generally – PERILS OF THE SHIP ARE NOT COVERED (losses or damages that result from
(a) natural and inevitable action of the sea
(b) ordinary wear and tear of the ship
(c) negligent failure of the ship owner to provide the vessel with the proper equipment to
convey the cargo under ordinary conditions.

EXAMPLES:
(a) Insurance upon a cargo of rice, when sea water entered the compartment where the rice
was found through a defective steel pipe

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(b) The insured loaded logs unto a barge. The logs are covered by insurance. The barge sank
due to improper loading and leaks because the barge was not provided with tarpaulins that
could have prevented the barge from retaining sea water splashing into it during the voyage.

WHO MUST CHECK ON THE SEA WORTHINESS OF A VESSEL

 Since there is an implied warranty of seaworthiness, it becomes the obligation of the cargo
owner or the insured to look for a reliable common carrier which keeps it vessels
seaworthy. The insured may have no control on the vessel but has full control in the choice
of common carrier.
WHAT PERILS ARE INSURED IN AN “ALL RISKS POLICY”
 It is to be construed as creating a special insurance and extending to all risks than are
usually contemplated and will cover all losses except such that may arise from intentional
fraud, intentional misconduct, or that otherwise excluded. It may include all losses whether
arising from a marine peril or not, to include pilferage during a war (Filipino Merchants
Insurance Co. vs. CA, 179 SCRA 638).
WHAT CONSTITUTES INSURABLE INTEREST IN OCEAN MARINE INSURANCE
1. The owner of a vessel has insurable interest in the vessel, and such shall continue even if
(a) the vessel has been chartered by one who covenants to pay the owner the value of
the vessel upon loss BUT, in case of loss, the insurer is liable only for the part of the loss
which the insured cannot recover from the from the charterer (Section 100)

2. The insurable interest of the owner of a ship hypothecated by bottomry is only the
excess of its value over the amount secured by bottomry (Section 101)

 BOTTOMRY/RESPONDENTIA DEFINED is a loan payable only if the vessel given

as security for said loan arrives safely at port from contemplated voyage
(BOTTOMRY) or a loan payable only upon the safe arrival in port of the goods
given as security (RESPONDENTIA).

 These CONTRACTS ARE IN THE NATURE OF A MORTGAGE as the owner borrows

money for the use, equipment or repair of the vessel for a definite term with the
ship as security with maritime or extraordinary interest on account of the risks
borne by the lender, it being stipulated that if the ship be lost during the voyage
or within a limited period, the lender also loses his money (NOTE THAT THE
LENDER HAS INSURABLE INTEREST TO THE EXTENT OF LOAN)

Example:
The owner of the vessel valued at PHP 300,000 as security for a loan of PHP 200,000.00.
His insurable interest is the excess of the value of the vessel over the loan or PHP

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 100,000.00. If the vessel is lost, the owner does not have to pay the loan of PHP
200,000.00.

3. The OWNER OF A VESSEL ALSO HAS INSURABLE INTEREST IN EXPECTED FREIGHTAGE,

WHICH ACCORDING TO THE ORDINARY COURSE OF THINGS HE WOULD HAVE EARNED
BUT FOR THE INTERVENTION OF A PERIL INSURED AGAINST OR OTHER PERIL INCIDENT
TO THE VOYAGE. (Section 103)

 FREIGHTAGE DEFINED are the benefits derived by the owner from (a) chartering
of the ship (b) its employment for the carriage of his own goods or those of
others (Section 102) IT EXISTS:
1. In case of a charter party – when the ship has broken on the
chartered voyage
2. if a price is to be paid for the carriage of goods, when they are
actually on board or there is contract to put them on board AND
the vessel and goods are ready for the specified voyage (Section
104).

ARE THERE PERSONS/ PARTIES OTHER THAN THE OWNER WHO HAS INSURABLE INTEREST
1. One who has an interest in the thing from which profits are expected to proceed, has
insurable interest on the profits (Section 105).

Example:
Owner of cargo transported on a vessel not only has insurable interest on the cargo but
also on the expected profits from a future sale.

2. The charterer of a ship has insurable interest to the extent that he is liable to be
damnified by its loss (Section 106).

Example:
A charters B’s vessel on condition that A would pay B in case of loss the amount of PHP
300,000.00. A has insurable interest to the extent of PHP 300,000.00.

PECULIARITIES of MARINE INSURANCE

CONCEALMENT IN MARINE INSURANCE
 A PARTY IS BOUND TO COMMUNICATE, in addition to what is required by Section 28 (facts
within his knowledge, material to the contract, other party has not the means of
ascertaining, as to which party with a duty to communicate makes no warranty)
INFORMATION that he possesses, that are material to the risk AND, to state the EXACT and
WHOLE TRUTH in relation to all matters that he represents, or upon inquiry discloses or
assumes to disclose EXCEPT those that the insurer knows or those in the exercise of
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 ordinary care, the other ought to know, and which the former has no reason to suppose
him to be ignorant under Section 30 (Section 107).
NOTE: that the rules on concealment in marine insurance are stricter as it is sufficient that
the insured is in POSSESSION OF THE MATERIAL FACT, ALTHOUGH HE IS UNAWARE OF IT.
Example:
If an agent fails to notify principal of the loss of the cargo and the latter, after the loss but
ignorant thereof, secured insurance lost or not lost, the insurance will be void due to
concealment.
 A PARTY IS ALSO BOUND TO COMMUNICATE, the information belief or expectation of a 3rd
person, in reference to a material fact, is material.
Note: under Section 35 such is not required to be communicated in ordinary insurance.
PRESUMPTION OF A PRIOR LOSS
 Insured in marine insurance is presumed to have knowledge, AT THE TIME OF INSURING, of
a prior loss, if INFORMATION MIGHT POSSIBLY HAVE REACHED HIM IN THE USUAL MODE OF
TRANSMISSION AND AT THE USUAL RATE OF COMMUNICATION (Section 109)
EFFECT OF CONCEALMENT
 WHILE CONCEALMENT AS A RULE ENTITLES THE INJURED PARTY TO RESCIND, the rule must
yield to Section 110 – as it does not vitiate the contract but merely exonerates the insurer
FROM A LOSS RESULTING FROM THE RISKS CONCEALED as related to
1. the national character of the insured
2. the liability of the thing insured to capture and detention
3. the liability to seizure from breach of foreign laws of trade
4. the want of the necessary documents
5. the use of false/simulated documents.

Example:
The vessel is seized due to lack of documents, the insurer is exonerated. If the vessel is
lost due to a storm, the insurer is liable despite concealment of lack of documents.
DISTINGUISHING ORDINARY CONCEALMENT FROM THAT IN MARINE INSURANCE
1. In ordinary insurance, opinion or belief of a 3rd person or own judgment of the insured
is not material and need not be communicated (Section 35) while in marine insurance,
belief or expectation of a 3rd person in reference to a material fact is material and has
to be communicated.
2. In ordinary insurance, a causal connection between the fact concealed and cause of loss
is not necessary for the insurer to rescind, while in marine insurance the concealment of

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 any of the matters stated in Section 110 merely exonerates the insurer from loss, if the
loss results from the fact concealed.

REPRESENTATION IN MARINE INSURANCE

WHEN IS THE INSURER ENTITLED TO RESCIND - If the representation is INTENTIONALLY FALSE
IN ANY MATERIAL RESPECT, OR, in respect of any fact on which the character and nature of the
risk depends, the insurer may rescind (Section 111) BUT – the eventual falsity of a
representation as to an EXPECTATION does not, IN THE ABSENCE OF FRAUD, avoid the contract
(Section 112).
Example: statement as to time of sailing, nature of the cargo or amount of profits.
WHAT ARE THE IMPLIED WARRANTIES IN MARINE INSURANCE
(1) In every contract of marine insurance upon a SHIP OR FREIGHT, FREIGHTAGE or UPON
ANYTHING WHICH IS THE SUBJECT OF marine insurance, there is an implied warranty that the
SHIP IS SEAWORTHY (Section 113).
o A SHIP IS SEAWORTHY when it is reasonably fit to perform the service and to
encounter the ordinary perils of the voyage, contemplated by the parties to the
policy (Section 114).
o NOTE that it is relative and is made to depend on the circumstances.
WHEN IS THE IMPLIED WARRANTY OF SEAWORTHINESS COMPLIED WITH?
 The implied warranty of seaworthiness is complied with as a general rule when it is
seaworthy at the time of the commencement of the risk except:
(a) when the insurance is made for a specified length of time, it must be seaworthy
at the commencement of every voyage it undertakes at that time
(b) when the insurance is upon cargo, which by the terms of the policy, description
of the voyage, or established custom of trade, is required to be transshipped at an
immediate port, in which case – each vessel upon which the cargo is shipped or
transshipped must be seaworthy at the commencement of each particular voyage
(c) where different portions of the voyage contemplated in the policy differ in
respect to the things requisite to make the ship seaworthy, in which case it must be
seaworthy at the commencement of eFach portion.

Example:
The voyage will pass thru rivers – then seas – the warranty is not complied with if at the
time it goes out to sea – it is not seaworthy to encounter the perils of the sea.
TO WHAT DOES THE WARRANTY OF SEAWORTHINESS EXTEND TO
 The warranty of seaworthiness extends not only to the condition of the structure of the
ship, but it requires that:

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 (a) it be properly laden or loaded with cargo
(b) is provided with a competent master, sufficient number of officers and
seamen
(c) it must have the requisite equipment and appurtenances LIKE ballasts, cables,
anchors, cordage, sails, food, water, fuel, lights and other necessary and proper
stores and implements for the voyage (Section 116).

 NOTE that WHEN A SHIP BECOMES UNSEAWORTHY DURING THE VOYAGE – it will not avoid
the policy – AS LONG AS –there is no UNREASONABLE DELAY IN REPAIRING THE DEFECT.
OTHERWISE – the insurer is exonerated on the ship or the ship owner’s interest from any
liability from any loss arising therefrom (Section 118). HENCE, if loss is not one due to the
defect or peril was not increased by the defect INSURER is still liable.

 ALSO, while a ship may be seaworthy for purposes of insurance on it, it may by reason of
BEING UNFITTED TO RECEIVE CARGO, be unseaworthy for the purpose of insurance on the
CARGO (Section 119).
Example:
A cargo of wheat was laden on a ship which had a port hole insecurely fastened at the time of
lading. The port hole was foot above the water line, and in the course of the voyage, water
entered the cargo area and damaged the wheat. The ship was deemed unworthy with
reference to the cargo, hence the insurer of the cargo was not liable (Steel vs. State Line
Steamship, cited in Go Tiaco vs. Union Society of Canton, 40 Phil 40)
(2) That it shall carry the requisite documents to show its nationality or neutrality and that it
SHALL NOT carry any document that will cast reasonable suspicion on the vessel (Section 120).
 THIS WARRANTY ARISES ONLY WHEN NATIONALITY OR THE NEUTRALITY OF THE VESSEL OR
CARGO IS EXPRESSLY WARRANTED.
 Always proceeds from an express warranty.
 This is why it is not always that the 4 implied warranties exist together.
(3) That the vessel shall not make any improper deviation from the intended voyage.
HOW IS THE INTENDED VOYAGE DETERMINED
(a) When it is described by places of beginning and ending, the voyage is the course of
sailing fixed by mercantile usage between those places (Section 121).
(b) When it is not fixed by mercantile usage, the voyage is the way between the places
specified which to a master of ordinary skill and discretion would seem the most
natural, direct and advantageous (Section 122).

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WHAT IS A DEVIATION
 It is a departure from the course of the voyage as defined by Sections 121 and 122 OR an
unreasonable delay in pursuing the voyage OR the commencement of an entirely different
voyage (Section 123).
WHEN IS A DEVIATION PROPER
1. When it is caused by circumstances over which neither the master nor the owner of the
ship has any control. Example: An ailment strikes the crew of the vessel.
2. When necessary to comply with a warranty, or to avoid a peril, whether or not the peril
is insured against. Example: When repairs are necessary or to avoid getting caught in a
conflict.
3. When made in good faith, and upon reasonable grounds of belief in its necessity to
avoid a peril. Example: When undertaken to avoid the eye of a storm. Here it recognizes
that the deviation may be mistaken.
4. When made in good faith, for the purpose of saving human life or relieving another
vessel in distress. Example: When assistance is given

WHEN IS DEVIATION IMPROPER?

 ANY DEVIATION THAT IS NOT SO INCLUDED IS NOT PROPER (Sections 124 and 125)
CONSEQUENCE OF AN IMPROPER DEVIATION
 Insurer is not liable for any loss happening to the thing insured subsequent to an improper
deviation (Section 126). This applies whether the risk has been increased or diminished.
(4) That the vessel does not or will not engage in any illegal venture.
 Nobody in his right mind will say it will engage in any illegal venture that is why it is implied.
LOSSES IN MARINE INSURANCE
 Losses in marine insurance may be partial or total (Section 127).
 A loss that is not TOTAL is PARTIAL (Section 128).
KINDS OF TOTAL LOSSES (question exam)
 A total loss may be ACTUAL or CONSTRUCTIVE (Section 129).
(1) If it is an ACTUAL TOTAL LOSS it may be caused by:
a) total destruction of the thing insured
b) the irretrievable loss of the thing by sinking or by being broken up
c) any damage to the thing which renders it valueless to the owner for the purpose that he
held it
d) any other event which effectively deprives the owner of the possession, at the port of
destination, of the thing insured (Section 130)

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Example:
When palay was rendered valueless because they began to germinate, thus it no longer
remains as the same thing, it was an ACTUAL TOTAL LOSS (Pan Malayan v. CA 201 SCRA 382)
 AN ACTUAL TOTAL LOSS CAN ALSO BE PRESUMED from the continued absence of the
ship without being heard of (Section 132). The length of time which is sufficient to raise
this presumption DEPENDS on the CIRCUMSTANCES of the case
 IF THE VESSEL BE PREVENTED, AT AN IMMEDIATE PORT, FROM COMPLETING THE
VOYAGE, by the perils insured against, the liability of the marine insurer on the cargo
continues after they are reshipped (Section 133) and the liability extends to damages,
expenses of discharging, storage, reshipment, extra freightage and all other expenses
incurred in saving the cargo reshipped UP TO THE AMOUNT INSURED – NOTHING SHALL
RENDER THE INSURER LIABLE FOR AN AMOUNT IN EXCESS OF THE INSURED VALUE OR IF
NONE, OF THE INSURABLE VALUE (Section 134).
 UPON ACTUAL TOTAL LOSS, the insured is entitled to payment without notice of
abandonment (Section 135) AND IF THE insurance is confined to an ACTUAL LOSS it will
not cover a CONSTRUCTIVE LOSS, but it will cover any loss, which necessarily results in
depriving the insured of possession, at the port of destination of the entire thing insured
(Section 137)
(2) It is a CONSTRUCTIVE TOTAL LOSS when the person insured is given a right to ABANDON
 ABANDONMENT is the act of the insured by which, AFTER A CONSTRUCTIVE TOTAL
LOSS, he declares to the insurer the RELINQUISHMENT in its favor of his INTEREST in the
thing insured (Section 138).
 WHEN CAN YOU ABANDON?
A person insured by a contract of marine insurance may abandon the thing insured, or
any particular portion thereof separately valued by the policy, or otherwise separately
insured AND RECOVER A TOTAL LOSS – WHEN THE CAUSE OF LOSS IS A PERIL INSURED
AGAINST IF :
a) more than ¾ thereof in value is actually lost or would have to be expended to
recover it from the peril
b) if it is injured to such extent as to reduce its value by more than ¾ of value
c) if the thing injured is a ship, and the contemplated voyage cannot lawfully be
performed without incurring either an expense to the insured of more than
¾ the value of the thing abandoned OR a risk which a prudent man would not
take under the circumstances
d) if the insured is FREIGHTAGE OR CARGO – and the voyage cannot be
performed – NOR another ship procured by the master – WITHIN A
REASONABLE TIME WITH REASONABLE DILIGENCE– to forward the cargo
without incurring the like expense or risk mentioned in item (c) BUT,
FREIGHTAGE cannot be abandoned unless the ship is also abandoned
(Section 139).

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  ABANDONMENT MUST NEITHER BE PARTIAL NOR CONDITIONAL (Section 140). Hence, it
must be TOTAL and ABSOLUTE.
 ABANDONMENT MUST BE MADE within a reasonable time after receipt of RELIABLE
information of the loss BUT, where the information is of DOUBTFUL CHARACTER, the
INSURED is entitled to a reasonable time to make an inquiry (Section 141). This is to
enable the insurer to take steps to preserve the property.
 If the information proves INCORRECT or thing insured is RESTORED when the
abandonment was made that there was then in fact NO TOTAL LOSS – the abandonment
becomes INEFFECTUAL (Section 142)
EFFECTS OF ABANDONMENT
1. It is equivalent to a transfer by the insured of his interest to the insurer, with all the
chances of recovery and indemnity (Section146).
 -NOTE THOUGH, if the insurer pays for a loss as if it were an actual total loss, he
is entitled to whatever may remain of the thing insured, or its proceeds or
salvage as if there has been a formal abandonment. HERE THE INSURER HAS
OPTED TO PAY FOR A TOTAL ACTUAL LOSS notwithstanding the absence on
actual abandonment

2. Acts done in good faith by those who were agents of the insured in respect to the thing
insured SUBSEQUENT TO THE LOSS, are at the risk of the insurer and for his benefit.
(Section 148).
 THE AGENTS OF THE INSURED BECOME AGENTS OF THE INSURER. This retroacts
to the date of the loss when abandonment is effectively made.

EFFECTIVITY OF ABANDONMENT
1. Abandonment becomes effective upon the acceptance of the insurer.

 ACCEPTANCE may either be EXPRESS or IMPLIED from the conduct of the INSURER. The
MERE SILENCE of the insurer for an UNREASONABLE LENGTH OF TIME after NOTICE shall be
construed as acceptance (Section 150).
 ONCE ACCEPTED, it is conclusive between the parties, the loss is admitted together with the
sufficiency of the abandonment (Section 151).
 IT IS ALSO IRREVOCABLE upon acceptance and upon its being made UNLESS the ground
upon which it is was made proves to be UNFOUNDED (Section 152). Thus, if the insurer
accepts the abandonment, it cannot raise any question as to insufficiency of the form under
Section 143, time for giving notice under Section 141, or right to abandon under Section
139.
 THE ONLY EXCEPTION THEN is under Section 152 when the ground is unfounded which is
defined in Section 142, and/ or as related to Section 145.

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2. On an accepted abandonment involving a ship, FREIGHTAGE earned previous to the loss
belongs to the insurer of the FREIGHTAGE, that subsequently earned belongs to the insurer
of the SHIP (Section 153).

Example: The contemplated voyage for the transport of cargo is from Point X to Point Y. In
between, a loss occurs and the ship is abandoned. The freightage already earned from Point
X until the point of loss, belongs to the insurer of the freightage. If the ship is subsequently
repaired, and continues on to point Y, the freightage due belongs to the insurer of the ship.

3. IF ABANDONMENT IS NOT ACCEPTED despite its validity, the insurer is liable upon an
ACTUAL TOTAL LOSS, deducting from the amount any proceeds of the thing insured that
may have come to the hands of the insured (Section 154).

 This is due to the fact that under Section 149 which provides that if notice is properly given,
it does not prejudice the insured, if the INSURER refuses to accept the abandonment.
IF ABANDONMENT IS NOT MADE OR OMITTED
 The fact that abandonment is not made or is omitted does not prejudice the insured as he
may nevertheless recover his ACTUAL LOSS (Section 155)
LIABILITY FOR AVERAGES
AVERAGE DEFINED – is any extraordinary or accidental expense incurred during the voyage for
the preservation of the vessel, cargo, or both AND all damages to the vessel or cargo from the
time it is loaded and the voyage commenced until it ends and the cargo is unloaded.
KINDS OF AVERAGES
1. PARTICULAR OR SIMPLE AVERAGE
- is a damage or expense caused to the vessel or cargo which has NOT INURED to the
COMMON BENEFIT and PROFIT of all PERSONS interested in the CARGO or the
VESSEL.
- This damage or expense is borne ordinarily by the owner of the vessel or cargo that
gives rise to the expenses or suffered the damage.
Examples:
Damage sustained by a cargo from the time it is loaded to the time it is unloaded OR
additional expenses that are incurred by the vessel from the time it puts out to sea
until it reaches its destination.

2. GENERAL OR GROSS AVERAGE

- is an expense or damage suffered deliberately in order to save the vessel or its cargo
or both from a REAL or KNOWN risk.

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 - THUS, all persons having an interest in the VESSEL and CARGO or both at the
occurrence of the AVERAGE shall contribute.
- Example: Jettisoning of cargo.
IN CASE OF A GENERAL AVERAGE LOSS
 The insurer is liable for the loss falling upon the insured, through a contribution in respect to
the thing insured when required to be made by him towards a general average loss called
for a peril insured against BUT liability is limited to the proportion of the contribution
attaching to his policy value where this is less than the contributing value of the thing
insured (Section 164).
 MEANING that the insured can hold his insurer liable for his contribution up to the value of
the policy.
WHAT IS THE RULE ON LIABILITY FOR AN AVERAGE?
 As a rule, when it has been agreed that an insurance upon a particular thing or class of
things shall be free from a particular average, a marine insurer is not liable for a particular
average loss not depriving the insured at the port of destination, of the whole such thing, or
class of things, even though it becomes entirely worthless, but such insurer is liable for his
proportion of all general average loss assessed upon the thing insured.

WHAT IS CO-INSURANCE
 Co-insurance is a form of insurance in which the person who insures his property for less
than the entire value is understood to be his own insurer for the difference which exists
between the true value of the property and the amount of insurance.
WHEN DOES CO-INSURANCE EXIST?
 Co-insurance exists when the subject matter is insured for an amount less than its value.
In this case, the insured is considered as a co-insurer for the portion not covered by
insurance. This will apply only if the loss is partial. This is also known as the “average
clause.”
 NOTE: That co-insurance exists in Marine Insurance. In Fire Insurance, there is no co-
insurance unless expressly stipulated (Sections 171/172). In Life Insurance, there is none
also as value is fixed in the policy (Section 183)
 In such a case, a marine insurer is liable upon a partial loss only for such proportion of
the amount insured by him as the loss bears to the value of the whole interest of the
insured in the property insured. (IC, Sec. 159)

REQUISITES FOR CO-INSURANCE

1. The loss is partial; and
2. The amount of insurance is less than the value of the property insured. (Sundiang Sr. &
Aquino, 2014)

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 CO-INSURANCE IN MARINE INSURANCE CO-INSURANCE IN FIRE INSURANCE
There is co-insurance by virtue of Section 159 There has to be an express stipulation to that
of the Insurance Code, as long as the above- effect
enumerated requisites are present.

CO-INSURANCE
A plan of indemnity insurance under which
the reinsurer assumes the obligation on
the amount reinsured, in the same fashion
as the insurer is obligated to the insured
(excluding policy loans). For this risk, the
insurer the insurer usually pays to the
reinsurer the gross premium (less
commissions and expense, allowances) it
has collected from the insured on the
amount insured (it should be noted that
the insurer has no relationship with the
insured or beneficiary).
The insurer remains as the insurer of the
original insured
REINSURANCE
It is a contract through which the insurer
procures a third person to insure him against
loss or liability by reason of such original
insurance. In every reinsurance, the original
contract of insurance and the contract of
reinsurance are separate and distinct from
each other and covered by separate policies.
(Diaz, et. al. 2014)
The insurer becomes the insured, insofar as
the reinsurer is concerned

The subject of insurance is the property The subject is the original insurer’s risk

An insurance of the same interest Insurance of a different interest

The insured party is the party in interest in all
contracts
The insured has to give consent
The original insured has no interest in the
contract of reinsurance which is independent
of the original contract of insrurance
Consent of the original insured (who is hardly
even aware of the reinsurance transaction) is
not necessary. (De Leon, 2014)

FORMULA TO DETERMINE THE AMOUNT RECOVERABLE IN CO-INSURANCE

Illustration
(Partial) Loss X Amount of = Amount of
recovery
Insurance
(Insurer’s Liability)
Value of thing Insured
 If a vessel valued at P1M is insured for only P800, 000 and is damaged to the extent of
P400, 000, the insurer will be required to pay only 80% of the loss suffered, or P320,000;
the other 20% or P80,000 being borne by the insured himself.

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 P400,000 or 2/5 X P800,000 = P320, 000
P1M

 The insured is considered a co-insurer as to the uninsured portion of P200, 000. (1M –
800,000).
 If the loss is total, the insurer is liable for the full amount of P800, 000. On the other
hand, if the property is insured to its full value, the insured is entitled to recover the full
amount of the partial loss of P400, 000.

2. Fire
WHAT IS FIRE INSURANCE?
 Is insurance against loss through a hostile fire.
WHAT IS INCLUDED IN FIRE INSURANCE
 Insurance against fire includes loss or damage due to LIGHTNING, WINDSTORM,
TORNADO, EARTHQUAKE OR OTHER ALLIED RISKS when such risks are covered by
extensions to the fire insurance policy or under separate policies (Section 167).
 Hence, while it is not limited to loss or damage due to fire, coverage as to other risks is
not automatic
FIRE DEFINED
 In insurance, it is defined as the active principle of burning, characterized by heat and
light combustion.
 Combustion without visible light or glow is not fire (Example: Damage caused by smoke
from a lamp when no ignition occurred outside the lamp)
REQUISITES TO ALLOW RECOVERY
 it must be the proximate cause of the damage or loss AND the fire must be HOSTILE as
opposed to a friendly fire BUT the policy itself may limit or restrict coverage to losses
under ordinary conditions but not those due to extra-ordinary circumstances or
abnormal conditions like war, invasion, rebellion, civil war or similar causes. In these
cases recovery is still possible.
FIRE IS HOSTILE WHEN IT:
1. burns at a place where it is not intended to burn
2. is friendly but becomes hostile because it escapes from the place where it is intended to
burn and becomes uncontrollable
3. is a friendly fire which becomes hostile because of the unsuitable material used to light
it and it becomes inherently dangerous and uncontrollable.

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WHAT IS A FRIENDLY FIRE
 one that burns in a place where it is intended to burn and employed for the ordinary
purpose of lighting, heating or manufacturing
WHAT IS AN ALTERATION?
 An alteration is a change in the use or condition of a thing insured from that to which it
is limited by the policy, made without the consent of the insurer, by means within the
control of the insured, and increasing the risk, which entitles the insurer to rescind the
contract of insurance.
REQUISITES WHICH MUST BE PRESENT TO CONSTITUTE AN ALTERATION SO AS TO ALLOW THE
RESCISSION OF THE CONTRACT
1. The use or condition of the thing insured is specifically limited or stipulated in the policy
BUT under Section 170, the contract of insurance is not affected by an act of the insured
SUBSEQUENT to the execution of the policy, which does not violate its provisions, even
though it increases the risk and is the cause of the loss.
Example:
(1) If the insured stored thinner, paints and varnish. A fire subsequently occurs and
there is no express prohibition as to storage of such items, even if the risk is increased,
the insurer is still liable (BACHRACH v. BRITISH ASSURANCE,17 Phil 555), OR
(2) The policy states that the 1st floor is unoccupied, it is later occupied. There is no
alteration that entitles the insurer to rescind, the description of the house cannot be
said to be a limitation as to use (HODGES v. CAPITAL INSURANCE (60 O.G. 2227)
2. There is an alteration in the said use or condition
3. The alteration is without the consent of the insurer.
4. The alteration is made by means within the insured’s control. If the alteration be by
accident or means beyond the control of the insured, the requisite is not met.

Example:
The alteration is made by a tenant with the consent or knowledge of the insured, the
insurer can rescind. If the alteration was undertaken by the tenant without the consent
or knowledge of the insured, the insurer cannot rescind.

5. The alteration increases the risk of loss BUT under Section 169 any alteration in the use
or condition of the thing insured from that to which is limited by the policy, which does
not increase the risk does not affect the contract.

 BUT THERE MUST NOT BE ANY VIOLATION OF THE CONTRACT OTHERWISE.

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  THE BASIS FOR RESCISSION IS THAT payment of the premium is based on the risk as
assessed at the time of the issuance of the policy when the risk is increased without a
corresponding increase in premium, it is as if no premium is paid.
3. Casualty

WHAT IS CASUALTY INSURANCE?

 Generally, it is one that covers loss or liability arising from an accident or mishap,
excluding those that fall exclusively within other types of insurance like fire or marine
insurance.
 It includes employer’s liability, workmen’s compensation, public liability, motor vehicle
liability, plate glass liability, burglary and theft, personal accident and health insurance
as written by non-life companies, and other substantially similar insurance.

TWO DIVISIONS OF CASUALTY INSURANCE

1. Accident or health insurance – Insurance against specified perils which may affect the person
and/or property of the insured. (E.g. personal accident, robbery/theft insurance)
2. Third party liability insurance (TPL) – Insurance against specified perils which may give rise to
liability on the part of the insured of claims for injuries or damage to property of others. (De
Leon, 2010)

CAN A CBA PROVISION BE INTERPRETED AS AN INSURANCE CONTRACT?

• In the case of Mitsubishi Motors Philippines Salaried Employees Union v. Mitsubishi Motors
Philippines Corporation, G.R. No. 175773, June 17, 2013, a CBA provision providing for an
MMPC obligation to pay for the medical expenses of MMPSEU dependents was considered as a
non- life insurance contract and interpreted as a contract of indemnity.
• This interpretation barred the application of the “collateral source rule,” which disallows a
wrongdoer from claiming a benefit arising from a contract which the injured party may have
with third persons to lessen his liability. In this case, MMPC is not the wrongdoer, rather, it is a
no-fault insurer.

4. Suretyship
WHAT IS SURETYSHIP?
 Suretyship is an agreement whereby a party called the surety guarantees the
performance by another party called the principal or obligor of an obligation or
undertaking in favor of a 3rd party called the obligee.
 It is deemed to be an insurance contract when made by a surety who or which, as such,
is doing an insurance business as provided by the Insurance Code.

Page 21 of 48
THE LIABILITY OF THE SURETY
 It is solidary with the obligor but limited to the amount of the bond and determined
strictly by the terms of the contract in relation to the principal contract between obligor
and obligee.

5. Life
LIFE INSURANCE DEFINED
 Is insurance on human lives and insurance appertaining thereto or connected therewith.
WHEN IS IT PAYABLE
 An insurance upon life may be made payable on:
(1) death of the person, unless excepted or
(2) surviving a specified period, or
(3) contingently on the continuance or cessation of life.

 NOTE THAT Section 180 provides that as far as a minor, who is the insured or a beneficiary
in an insurance contract, in the absence or incapacity of a JUDICIAL GUARDIAN, the father,
in default, the mother, MAY ACT IN BEHALF OF THE MINOR WITHOUT NEED OF BOND OR
COURT AUTHORITY when it involves the exercise of any right under the policy, to include
but not limited to obtaining a policy loan, surrendering the policy, receiving the proceeds of
the policy and giving the minor’s consent to any transaction on the policy PROVIDED the
interest of the minor does not exceed PHP 20,000.00.
WHAT RISKS ARE COVERED
 Generally – all causes of death are covered UNLESS excluded by law, by the policy or public
policy.
Examples:
 By law - beneficiary is the principal, accomplice or accessory in bringing death of the
insured.
 By the policy - when it does not cover assault, murder or injuries inflicted intentionally
by a 3rd person BUT where the insured is not the intended victim, insurer is liable
(Calanoc vs. CA, 98 Phil 79) What must be considered is that death or injury is not the
natural or probable result of the insured’s voluntary act (Finman General Assurance
Corporation vs. CA, 213 SCRA 493) as opposed to an act of the insured to confront
burglars (Biagtan vs. Insular Life Assurance Company, 44 SCRA 58).
 By public policy- when the insured is executed for a crime committed.
 SUICIDE, if committed after the policy has been in force for a period of two years from
date of issue or last reinstatement unless policy provides a shorter period BUT it is
nevertheless compensable if committed in the state of insanity regardless of date of
commission (Section 180 A). (Can the period be extended? No clear answer yet. It can
Page 22 of 48
 because the parties are free to stipulate; it cannot because it would in effect amend the
Insurance Code.)
IS THE CONSENT OF THE BENEFICIARY REQUIRED
 Yes, if he is designated as an irrevocable beneficiary as he has acquired a vested right.
TO WHOM SHALL THE PROCEEDS GO TO IF THE BENEFICIARY IS DISQUALIFIED
1. Other beneficiaries not disqualified
2. Person specifically stipulated in the policy
3. Estate of the insured
IS A LIFE INSURANCE POLICY TRANSFERABLE OR ASSIGNABLE
 Yes, it may pass by transfer, will or succession to any person, whether he has insurable
interest or not (Section 181).
 EFFECT, the person to whom it is transferred may recover upon it whatever the insured
might have recovered.
 NOTE while there is no need for the assignee/transferee to have insurable interest, it
should not be used to circumvent the law prohibiting insurance without insurable interest.
THUS, an assignment CONTEMPORANEOUS with ISSUANCE may invalidate the policy unless
made in good faith.
IS NOTICE TO THE INSURER OF TRANSFER OR BEQUEST REQUIRED
 No. It is not necessary to preserve the validity of the policy UNLESS THEREBY EXPRESSLY
REQUIRED (Section 182)
WHAT IS THE MEASURE OF INDEMNITY IN LIFE INSURANCE
 UNLESS the interest of a person insured is susceptible of pecuniary estimation, the amount
stated or specified in the policy is the measure of indemnity (Section 183). HENCE a life
insurance policy has been held to be a VALUED POLICY.
DISTINGUISHING LIFE INSURANCE FROM PAYMENT OF ANNUITY
1. In the former, it is payable upon the death of the insured, while in the latter, it is
payable during the lifetime of the annuitant.
2. In the former, the premium is paid in installments, while in the latter, annuitant pays a
single premium. In the former, there is lump sum payment upon death, while in the
latter, annuities are paid until death.

6. Compulsory Motor Vehicle Liability Insurance

MOTOR VEHICLE LIABILITY INSURANCE
 is a contract of insurance against passenger and third-party liability for death or bodily
injuries and damage to property arising from, motor vehicle accidents.

Page 23 of 48
CONCEPT OF COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
 It is an insurance policy that directly insures against liability. The insurer’s liability accrues
immediately upon the occurrence of the injury upon which liability depends, and does not
depend on the recovery of judgment by the injured party against the insured.

WHAT IS COVERED
 It is to provide protection or coverage to answer for bodily injury or property damage that
may be sustained by another arising from the use of a motor vehicle.
 PLEASE NOTE THOUGH that what is now compulsory is death or bodily injury arising from
motor vehicle accidents AS PER AN AMENDMENT TO THE INSURANCE CODE BY PD 1814 and
PD1455 brought about by insurance losses due to padded claims for property damage.
HENCE, property damage is now optional.
WHAT IS A “NO FAULT INDEMNITY CLAIM”?
 A no fault indemnity claim is a claim for payment for death or injury to a passenger or third
party without necessity of proving fault or negligence.
 This is payable by the insurer provided
a) indemnity in respect of one person shall not exceed PHP 15,000.00, and
b) the necessary proof of loss under oath to substantiate the claim are submitted.

AGAINST WHOM IS THE PAYMENT CLAIMED

 A claim under the no fault indemnity clause may be made against one motor vehicle insurer
only as follows:
a) in case of an occupant of a vehicle- against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting from;
b) in any other case, from the insurer of the directly offending vehicle;
c) in all cases, the right of the party paying the claim to recover against the owner of
the vehicle responsible for the accident shall be maintained.

HOW IS THE “AUTHORIZED DRIVER” DEFINED?

 The authorized driver clause is interpreted to refer to the insured or any person driving on
the order of the insured or with his permission provided, such person is permitted to
operate a motor vehicle in accordance with our licensing laws or regulations and who is not
otherwise disqualified.
 When the insured is the one driving the vehicle, a license is not necessary. He has a right to
recover the damage even if he has no driver’s license or that the same had expired at the
time of the accident.

NOTE the following jurisprudence:

1. If license is expired, person is not authorized to operate a motor vehicle (Tarco Jr. v. Phil
Guaranty – 15 SCRA 313)

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 2. Issued a Temporary Operator’s Permit or a Temporary Vehicle Receipt, a person is
authorized to operate a motor vehicle, but if it has expired, it is as if he had no license
(Gutierrez v. Capital Insurance 130 SCRA 618, PEZA v. Alikpala, 160 SCRA 31)
3. A tourist with license but in the country for more than 90 days, is not authorized to
operate a motor vehicle because it is as if he has no license (Stokes vs. Malayan 127
SCRA 766)
4. A driver’s license that bears all the earmarks of a duly issued license is presumed
genuine
5. a license is not necessary, where the insured himself is the driver (Paterno v. Pyramid
Insurance 161 SCRA 677, 1986 BAR)

HOW ITS COMPULSORY NATURE IS ENFORCED

 The compulsory nature of the insurance is enforced by prescribing that any land
transportation operator or owner of a motor vehicle would be considered as unlawfully
operating a motor vehicle UNLESS there is a
(a) policy of insurance (contract of insurance against passenger or 3rd party liability for
death or bodily injury arising from motor vehicle accidents),or
(b) guaranty in cash, or
(c) surety bond, to INDEMNIFY THE DEATH OR INJURY TO A THIRD PARTY other than a
passenger, excluding a member of the household, or a member of the family of a motor
vehicle owner or lane transportation operator or his employee in respect to death,
bodily injury or damage to property arising out of and in the course of employment) OR
PASSENGER ARISING FROM THE USE THEREOF.

 COMPLIANCE by the motor vehicle owner or the land transportation operator is

monitored as the Land Transportation Office shall not allow registration or renewal of
registration without compliance with Section 374 (Section 376).
THIRD PARTY LIABILITY DISTINGUISHED FROM OWN DAMAGE COVERAGE AND
COMPREHENSIVE MOTOR VEHICLE INSURANCE

 Third Party Liability answers for liabilities arising from death or bodily injury to 3rd
persons or passengers.
 Own Damage Insurance answers for reimbursement of the cost of repairing the damage
to vehicle of the insured.
 Comprehensive Insurance answers for all liabilities/damages arising from the
use/operation of a motor vehicle, it includes Third Party, Own Damage, Theft and
Property Damage.

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E. Insurable Interest
WHEN IS THERE INSURABLE INTEREST?
 Insurable interest will exist when the insured has such a relation or connection with, or
concern in, such subject matter that he will derive pecuniary benefit or advantage from
its preservation or will suffer pecuniary loss or damage from its destruction,
termination, or injury by the happening of the event insured against.

WHO ARE THE PARTIES TO A CONTRACT OF INSURANCE

1. INSURER - Every person, partnership, association or corporation duly authorized to
transact insurance business as provided in the Code may be an insurer. It is the party
who agrees to indemnify another upon the happening of specified contingency (Section
6).
2. INSURED – Party to be indemnified in case of a loss (Section 7). Anyone except a public
enemy (is a nation at war with the Philippines and every citizen or subject of such
nation. WHY – the purpose of war is to cripple the power and exhaust the resources of
the enemy, and it is inconsistent to destroy it’s resources then pay it the value of what
has been destroyed) may be insured.
3. BENEFICIARY – the person who receives the benefits of an insurance policy upon its
maturity.

1. In Life/Health
IN WHAT DOES A PERSON HAVE INSURABLE INTEREST IN
Every person has an insurable interest in the LIFE and HEALTH of

(1) himself, his spouse and of his children

(2) any person on whom he depends wholly or in fact for education or support, or in whom
he has a pecuniary interest (Note Article 195 of the Family Code specifying the persons
obligated to support each other. Example-pecuniary interest-partners, employees)
(3) any person under a legal obligation to him for the payment of money, respecting
property or services, of which death or illness might delay or prevent performance
(Examples: Mortgagors. Debtors)
(4) any person upon whose life, any estate or interest vested in him depends (Example:
Usufructuary X allows Y to receive fruits of the land of the former as long as he is alive. Y
has insurable interest in the life of X, because the death of X will terminate his right and
cause him damage). (Section 10)

WHAT IS THE BASIS OF INSURABLE INTEREST IN LIFE

 It exists when there is reasonable ground founded on the relation of the parties, either
pecuniary or contractual or by blood, or by affinity to expect some benefit from the
continuance of life of the insured.

Page 26 of 48
WHEN MUST INSURABLE INTEREST IN LIFE EXIST
 Insurable interest in life must exist at the time of the effectivity of the policy and need
not exist at the time of the death of the insured as life insurance is not a contract of
indemnity.
 IT IS MEANT TO GIVE FINANCIAL SECURITY EITHER TO THE INSURED OR HIS
BENEFICIARIES (Section 19).
 However, insurable interest of a creditor on the life of a debtor must exist not only at
the time of effectivity but also at the time of the death of the debtor– as in this instance
it is a contract of indemnity. HIS INTEREST IS CAPABLE OF EXACT PECUNIARY
MEASUREMENT

WHAT IS THE EXTENT OF INSURABLE INTEREST IN ONE’S LIFE

 He has unlimited interest in his own life or that of another person regardless of whether
or not the latter has insurable interest.
 Provided, that if the beneficiary has no insurable interest, there is no force or bad faith.
BUT, if he takes out a policy on the life of another and names himself as the beneficiary,
he must have an insurable interest in the life of the insured.

IS THE CONSENT OF THE INSURED REQUIRED WHEN INSURANCE IS TAKEN

 The law does not require the consent of the person insured and such has been
considered as not essential to the validity of the contract as long as there is insurable
interest at the beginning.

WHO MAY BE BENEFICIARIES IN LIFE INSURANCE

 Anyone, except those who are prohibited by law to receive donations from the insured.
Note Article 739 of the Civil Code, hence the following cannot be designated as
beneficiaries:
1. Those made between persons guilty of adultery or concubinage at the time of the
designation;
2. Those found guilty of the same criminal offense in consideration thereof;
3. Those made to a public officer or his wife, descendants / ascendants by reason of his
office.

 A PRIOR CONVICTION FOR ADULTERY / CONCUBINAGE IS NOT REQUIRED, it can be

proven by a preponderance of evidence in the same action nullifying the designation.
Note the cases of Insular Life vs. Ebrado, 80 SCRA 181, where a common law wife of the
insured who is married could not be named as a beneficiary and SSS vs. Davac, 17 SCRA
863, where the insured designated his second wife as a beneficiary was upheld as the
latter was not aware of the first marriage.
 The disqualification does not extend to the children of the adultery or concubinage in
view of the express recognition of the successional rights of illegitimate children (Article
287,NCC and Article 176, Family Code).
Page 27 of 48
MUST THE BENEFICIARY HAVE INSURABLE INTEREST ON THE LIFE OF THE INSURED
 It is recognized that the insured may name anyone he chooses, except those disqualified
to receive donations, as a beneficiary in his life insurance, even if he is a stranger and
has no insurable interest in the life of the insured.
 The designation, however, must be in GOOD FAITH AND WITHOUT FRAUD OR INTENT
TO ENTER INTO A WAGERING CONTRACT.
 Example: Jose obtains several life insurance policies that he cannot afford. Named as
beneficiary is Juan, the spouse or children of Jose are not named as beneficiaries. The
premiums are paid by Juan, who did not have insurable interest in the life of Jose. In this
case the policies are void because they were entered into as wagering contracts.
CAN THE BENEFICIARY BE CHANGED
 The insured shall have the right to change the beneficiary he designated – unless he has
expressly waived the right in the policy (Section 11)
 If he has waived the right, the effect is to make the designation as irrevocable.
 Note though that the designation of the guilty spouse as irrevocable beneficiary is
revocable at the instance of the innocent spouse in cases of termination of:
(1) a subsequent marriage
(2) nullification of marriage
(3) annulment of marriage, and
(4) legal separation

WHAT IS THE EXTENT OF THE INTEREST OF THE IRREVOCABLE BENEFICIARY IN A LIFE

INSURANCE CONTRACT
 The beneficiary has a vested right that cannot be taken away without his consent.
 In fact should the insured discontinue payment of the premium, the beneficiary may
continue paying.
 Neither can the insured get a loan or obtain the cash surrender value of the policy
without his consent (Nario vs. Philamlife, 20 SCRA 434).
 Note where the wife and minor children were named irrevocable beneficiaries, wife
dies, the husband seeks to change the beneficiaries with the consent of the children.
The consent is not valid due to minority (Philamlife vs. Pineda, 170 SCRA 416).
WHAT IS THE INTEREST OF AN IRREVOCABLE BENEFICIARY IN AN ENDOWMENT POLICY
 His interest is contingent as benefits are to be paid him only if the assured dies before
the specified period. If the insured outlives the period, the benefits are paid to the
insured.
WHAT IS THE EFFECT OF THE FAILURE TO DESIGNATE OR BENEFICIARY IS DISQUALIFIED
 The benefits of the policy shall accrue to the estate of the insured.

Page 28 of 48
WHO RECOVERS IF BENEFICIARY PREDECEASES THE INSURED
 IF DESIGNATION IS IRREVOCABLE, the legal representatives of the beneficiary may
recover unless it was stipulated that the benefits are payable only “IF LIVING”.
 IF DESIGNATION IS REVOCABLE, and no change is made, the benefits passes to the
estate of the insured. The rule holds also if benefits were payable “only if living” or “if
surviving” and the beneficiary dies before the insured.
WHAT HAPPENS TO INTEREST OF THE BENEFICIARY IN LIFE INSURANCE WHERE HE WILLFULLY
KILLS THE INSURED
 If the killing is WILLFUL, the interest is forfeited if he is the principal, an accomplice, or
an accessory. The NEAREST RELATIVE OF INSURED GETS THE PROCEEDS IF NOT
OTHERWISE DISQUALIFIED (Section 12).
 If not willful or felonious, the provision does not apply.

Page 29 of 48
2. In Property
WHAT DOES INSURABLE INTEREST IN PROPERTY CONSIST OF?
1. An existing interest.
2. An inchoate interest founded on an existing interest.
3. An expectancy, coupled with an existing interest in that out of which the expectancy
arises.
4. A carrier or depository of any kind has insurable interest in the thing held by him as such
to the extent of his liability but not to exceed the value thereof.

WHAT IS THE TEST OR MEASURE OF INSURABLE INTEREST IN PROPERTY

 Whether one will derive pecuniary benefit or advantage from its preservation or will suffer
pecuniary loss or damage from its destruction. (Section 17)

MUST THE BENEFICIARY IN PROPERTY INSURANCE HAVE INSURABLE INTEREST ON THE

PROPERTY INSURED
 YES, as no contract or policy of insurance on property shall be enforceable EXCEPT for the
benefit of some person having insurable interest in the property insured.

EXAMPLE:
The owner insures his building against fire naming his nephew as beneficiary. In case of loss –
only the owner can recover – what is not enforceable is the designation of beneficiary – not the
entire policy itself.
WHEN MUST INSURABLE INTEREST IN PROPERTY EXIST
 Must exist at the time the insurance takes effect and when the loss occurs but need not
exist in the meantime (Section 19)
EXAMPLES:
1. If A insures his house on May 2002 for 1 yr – and without assigning the policy, he sold it to B
– if a fire occurs after it is sold to B – A cannot recover. B cannot recover also as he has no
insurable interest at the time the insurance was procured.
2. An unsecured creditor secures insurance over the house of his debtor, A. The house is
burned. The creditor cannot recover as he has no insurable interest at the time the insurance
was obtained.
What if A sold the house to the creditor before the loss? Still no recovery as there was no
insurable interest at the time it took effect.
3. If A re-acquires the property from B before the fire – A can recover on the policy
WHO MAY INSURE A MORTGAGED PROPERTY
 Both the Mortgagor and Mortgagee may take out separate policies with the same or
different companies. The mortgagor – to the extent of the value of his property, the
mortgagee – to the extent of his credit (Section 8).
WHAT ARE THE CONSEQUENCES WHERE THE MORTGAGOR INSURES THE PROPERTY
MORTGAGED IN HIS OWN NAME BUT MAKES THE LOSS PAYABLE TO THE MORTGAGEE OR
ASSIGNS THE POLICY TO HIM.
 UNLESS THE POLICY PROVIDES OTHERWISE
a. The insurance is still deemed to be upon the interest of the mortgagor who does
not cease to be a party to the original contract. HENCE, if the policy is cancelled,
notice must be given to the mortgagor.
b. Any act of the mortgagor, prior to loss, which would otherwise avoid the policy
or insurance, will have the same effect, although the property is in the hands of
Page 30 of 48
 the mortgagee. HENCE, if there is a violation of the policy by the mortgagor , the
mortgagee cannot recover.
c. Any act required to be done by the mortgagor may be performed by the
mortgagee with the same effect as if it has been performed by the mortgagor.
Example: if notice of loss is required, the mortgagee may give it.
d. Upon the occurrence of the loss, the mortgagee is entitled to recover to the
extent of his credit, and the balance, if any, is to be paid to the mortgagor, since
such is for both their benefits.
e. Upon recovery by the mortgagee, his credit is extinguished.

 IF ON THE OTHER HAND, (Section 9), the Insurer assents to the transfer of the insurance
from the mortgagor to the mortgagee, and at the time of his assent, imposes further
qualifications on the assignee, making a new contract with him, the acts of the
MORTGAGOR cannot affect the rights of the assignee – NOTE UNION MORTGAGE CLAUSE –
Creates the relation of insured and insurer between the mortgagee and the insurer
independent of the contract of the mortgagor. In such case, any act of the mortgagor can
no longer affect the rights of the mortgagee – the insurance contract is now independent of
that with the mortgagor.
WHAT IS THE EFFECT OF INSURANCE PROCURED BY THE MORTGAGEE WITHOUT REFERENCE
TO THE RIGHT OF THE MORTGAGOR
a. The mortgagee may collect from the insurer upon occurrence of the loss to the extent of
his credit.
b. Unless, otherwise stated, the mortgagor cannot collect the balance of the proceeds,
after the mortgagee is paid.
c. The insurer, after payment to the mortgagee, becomes subrogated to the rights of the
mortgagee against the mortgagor and may collect the debt to the extent paid to the
mortgagee.
d. The mortgagee after payment cannot collect anymore from the mortgagor BUT if he is
unable to collect in full from the insurer, he can recover from the mortgagor.
e. The mortgagor is not released from the debt because the insurer is subrogated in place
of the mortgagee.

WHAT DIFFERENTIATES INSURABLE INTEREST IN LIFE FROM THAT IN PROPERTY?

 Insurable interest in life can be based on consanguinity, affinity, contract or a pecuniary
interest, while insurable interest in property is based on pecuniary interest.
 Insurable interest in life must exist only at the effectivity of the contract except that taken
by a creditor on the life of the debtor while insurable interest in property must exist at the
time of effectivity of the contract and when loss occurs, although it may not exist in the
meantime.
 The value of insurable interest in life is not limited unless taken by a creditor on the life of
the debtor while insurable interest in property is limited to the actual value of the interest
in the property.

Insurable interest in life insurance vs. Insurable interest in property insurance (2002 Bar)
LIFE PROPERTY INSURANCE
INSURANCE
As to extent GR: Every Limited to the actual value of the property
person has
an unlimited
insurable
Page 31 of 48
 interest in
his own life
XPN: Where
life insurance
is taken out
by a creditor
on the life of
the debtor,
insurable
interest is
limited to
the amount
of debt
When must Must exist at GR: Must exist both at the time the policy takes effect and the
insurable the time the time of loss, but need not exist in the period in between. (Sec.
interest exist policy takes 19, ibid)
effect and XPN: Secs. 21-24; 25, ibid.
need not 1. A change in interest in a thing insured, after the occurrence
exist of an injury which results in a loss, does not affect the right of
thereafter. the insured to indemnity for the loss. (Sec. 21, ibid)
(IC, Sec. 19) EG.
A buyer of a property insured by the previous owner who has
not obtained a transfer of the insurance policy in his name –
cannot recover.
RELATED QUERY – How about the seller – NO – no insurable
interest at the time of loss – (Sec 19)
2. A change of interest in one or more several distinct things,
separately insured by one policy, does not avoid the insurance
as to the others. (Sec. 22, ibid)
3. A change on interest, by will or succession, on the death of
the insured, does not avoid an insurance; and his interest in
the insurance passes to the person taking his interest in the
thing insured. (Sec. 23, ibid)
4. A transfer of interest by one of several partners, joint
owners, or owners in common, who are jointly insured, to the
others, does not avoid an insurance even though it has been
agreed that the insurance shall cease upon
an alienation of the thing insured. (Sec. 24, ibid)
5. Every stipulation in a policy of insurance for the payment of
loss whether the person insured has or has not any interest in
the property insured, or that the policy shall be received as
proof of such interest, and every policy executed by way of
gaming or wagering, is void. (Sec. 25, ibid)

As to the The The beneficiary must have insurable interest over the thing
beneficiary’s beneficiary insured.
interest need not
have
insurable
interest over
the life of

Page 32 of 48
 the insured if
the insured
himself
secured the
policy.
However, if
the life
insurance
was obtained
by the
beneficiary,
the latter
must have
insurable
interest over
the life of
the insured.
(De Leon, 2010; Sundiang Sr. & Aquino, 2014)
VOID STIPULATIONS IN PROPERTY INSURANCE
1. A stipulation for the payment of the loss whether the person insured has or has no interest
in the property insured – because it is a contract of indemnity.
2. Stipulation that the policy shall be received as proof of such interest – existence of insurable
interest does not depend on the policy. - Every policy issued by way of gaining or wagering
shall be void.
3. Those insured without insurable interest – as they do not suffer a damage from the
occurrence of the event insured against – they vested profit.

3. Double Insurance and Over Insurance

WHAT IS DOUBLE INSURANCE
 Double insurance exists where the same person is insured by several insurers separately in
respect to same subject and interest. Its requisites are:
1. same person is insured
2. there are several insurers
3. subject insured is the same
4. interest insured is the same
5. risk or peril insured against is the same.

WHAT IS OVER-INSURANCE
 Over insurance occurs when property is insured for an amount in excess of its value.
DISTINGUISHING OVER – INSURANCE FROM DOUBLE INSURANCE
1. In double insurance, there must be 2 or more insurers. In over insurance, 1 insurer is
sufficient.
2. In double insurance, the total amount of the policies need not exceed the value of insurable
interest. In over insurance, the value must always be in excess of the insurable interest.

 There is a prohibition TO PREVENT OVER-INSURANCE, thus preventing fraud.

EFFECTS OF OVER-INSURANCE BY DOUBLE INSURANCE

Page 33 of 48
 1. Insured, unless the policy otherwise provides, may claim payment from the insurers in
such order as he may select up to the amount for which the insurers are severally liable
under their respective contracts.

Example: A house is insured with X Insurance for 10K, with Y Insurance for 20K, and with
Z Insurance for 20K. It is valued at 20K. In case of loss – A can recover 10K from X
Insurance and 10K from either Y Insurance or Z Insurance.

2. Where the policy under which the insured claims is a valued policy, the insured must
give credit as against the valuation for any sum received by him under any policy
without regard to the actual value of the subject matter insured.

Example: A owns a house valued at 40K. He insured it with X Insurance for 35K and with
Y Insurance for 5K. The value of the house with both companies is 20K. If it is lost – A
can collect 5K from Y Insurance. He cannot collect 35K from Y Insurance but only the
difference between the value of the house (20K) and the value of the policy with Y
Insurance (5K)

3. Where the policy under which the insured claims is an unvalued policy, he must give
credit, as against the full insurable value, for any sum received by him under any policy.

Example: A insured his house with X Insurance for 40K and with Y Insurance for 30K, and
with Z Insurance for 20K. The policies are open. The loss is 70K. If Y Insurance and Z
Insurance have paid 50K, X Insurance will only have to pay A, the difference between
what he received from Y and Z (50K) and the amount of loss (70K) or 20K.

4. Where the insured receives any sum in excess of the valuation in case of a valued policy
or the insurable value in case of an unvalued policy, he must hold such sum in trust for
the insurers, according to their right of contribution among them.

Example: If A collects 35K from X Insurance and 5K from Y Insurance when the value of
the house is only 20K, he must hold the 20K excess in trust. If the policies are open, if A
can collect 40K from X Insurance, 30K from Y Insurance and 20K from Z Insurance, when
the actual loss is only 70K – he must hold the excess in trust.
5. In relation to Paragraph (4) – Each insurer is bound, as between himself and the other
insurers to contribute ratably to the loss in proportion to the amount for which it is
liable under his contract. ALSO REFERRED TO AS THE PRINCIPLE OF CONTRIBUTION –
WHICH HAS ALREADY BEEN INCORPORATED IN ALMOST ALL POLICIES – that should
there be other insurances covering the same property, the liability of the company
would be limited to its ratable proportion of the loss or damage (Also known as
CONTRIBUTION CLAUSE)

 The formula is: Insurer Policy / total amount of policies times the amount of loss equals the
share of the insurer
Example:
10K x 20K = 4,000 – X Insurance
50K
20K x 20K = 8,000 – Y Insurance
50K

Page 34 of 48
 20K x 20K = 8,000 – Z Insurance
50K
 If Z Insurance paid 20K but since it’s share is only 8K, it may collect 4,000 from X Insurance
and 8K from Y Insurance, so that it only pays its ratable share (Section 94)
TEST TO DETERMINE EXISTENCE OF DOUBLE INSURANCE
 Whether the insured, in case of happening of the risk, can be directly benefited by
recovering on both policies? If yes – there is double insurance.
IS DOUBLE INSURANCE VALID
 If there is an OTHER INSURANCE CLAUSE – one that prevents other insurance on the
property except with the consent of the company – THEN IT WILL PREVENT ENFORCEMENT
OF THE POLICY, the policy then will be NULL AND VOID. If there is no OTHER INSURANCE
CLAUSE, then double insurance is allowed but the provisions of Section 94 must be followed
because property insurance is a contract of indemnity.

WHAT IS REINSURANCE
 Reinsurance occurs when an insurer procures a 3rd person to insure him against loss or
liability by reason of such original insurance (Section 95)

DISTINGUISH REINSURANCE FROM DOUBLE INSURANCE

1. In double insurance, the insurer remains an insurer. In reinsurance, the insurer becomes
the insured.
2. In double insurance, the subject matter is property. In reinsurance, the subject matter is
the insurer’s risk or liability
3. In double insurance, the same interest and risk is insured with another. In reinsurance,
different risk and interest are insured,

4. Multiple or Several Interests on Same Property

WHO WILL QUALIFY AS AN INSURED?

 Anyone except a public enemy or a nation at war with the Philippines and every citizen or
subject of such nation may be insured.

WHO WILL QUALIFY AS A BENEFICIARY?

• In life insurance, anyone, except those who are prohibited by law to receive donations from
the insured.
• In property insurance, only the insured with insurable interest will qualify as a beneficiary.
• In insurance against liability, the party in whose favor liability exists is the beneficiary.

WHEN IS THERE MULTIPLE INSURABLE INTEREST?

 Multiple insurable interest exists when more than one insurable interest may exist in the
same property.

Examples are that of:

Page 35 of 48
(a) mortgagor and mortgagee
(b) a trustor and trustee
(c) a lessor and a lessee

F. Perfection of the Contract of Insurance

WHEN IS AN INSURANCE CONTRACT PERFECTED?

 It is perfected when the assent or consent is manifested by the meeting of the minds of the
offer and acceptance upon the thing and the cause which are to constitute the contract.

1. Offer and Acceptance/Consensual

 Acceptance of premium within the stipulated period for payment thereof, including the
agreed grace period, merely assures continued effectivity of the insurance policy in
accordance with its terms. (Stoke v. Malayan Insurance Co., Inc., G.R. No. L-34768,
February 28, 1984)
 Payment of the premium to agent of the insurance company is binding on it (Malayan
Insurance v. Arnaldo G.R. No. L-67835, October 12, 1987 and Areola v. CA G.R. No.
95641, September 22, 1994).
 If an insurance company delivers a policy to an insurance broker, it is deemed to have
authorized him to receive the payment of the premium. (Sec. 306, South Sea v. CA G.R.
No. 102253, June 2, 1995; American Home Assurance v. Chua, G.R. No. 130421, June 28,
1999)
“CASH AND CARRY” RULE (2003 BAR)
GR: No policy or contract of insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid. Any agreement to the contrary is void.
XPN: A policy is valid and binding even when there is non-payment of premium:
1. In case of life or industrial life policy whenever the grace period provision applies, or
whenever under the broker and agency agreements with duly licensed intermediaries, a ninety
(90)-day credit extension is given. No credit extension to a duly licensed intermediary should
exceed ninety (90) days from date of issuance of the policy. (IC, Sec. 77)
2. When there is acknowledgment in a policy of a receipt of premium, which the law declares to
be conclusive evidence of payment, even if there is stipulation therein that it shall not be
binding until the premium is actually paid. This is without prejudice however to right of insurer
to collect corresponding premium. (Sec. 77, ibid)
3. When there is an agreement allowing the insured to pay the premium in installments and
partial payment has been made at the time of loss. (Makati Tuscany Condominium Corp. v. CA,
G.R. No. 95546, Nov. 6, 1992)
4. When there is an agreement to grant the insured credit extension for the payment of the
premium. (Art. 1306, NCC), and loss occurs before the expiration of the credit term. (UCPB
General Insurance v. Masagana Telemart, G.R. No. 137172, Apr. 4, 20012006, 2007 Bar)
5. When estoppel bars the insurer to invoke non-recovery on the policy.
6. When the public interest so requires, as determined by the Insurance Commissioner

Example: In compulsory motor vehicle insurance, if the policy was issued without payment of
premium by the vehicle owner, the insurer will still be held liable. To rule otherwise would
prejudice the 3rd party victim.

Page 36 of 48
HOW IS AN OFFER AND ACCEPTANCE MADE IN LIFE OR HEALTH INSURANCE?
 If the premium is not paid when the insurance is applied for, it is an invitation to the insurer
to make an offer which the insured must accept. If a premium is paid with the application, it
is considered an offer.
 Acceptance occurs when a policy is issued strictly in accordance with the offer. If otherwise,
the insurer is making an offer, which the insured can accept or reject.
 Unreasonable delay in the return of the premium raises a presumption that the offer has
been accepted.

HOW IS AN OFFER AND ACCEPTANCE MADE IN PROPERTY AND LIABILITY INSURANCE?

 When the insured applies for the insurance, he is already making an offer to the insurer,
who may now, accept, reject or make a counter-offer.
 Acceptance occurs in the same manner as in life and health insurance.

a. Delay in Acceptance
 The acceptance of an insurance policy must be unconditional, but it need not be by a formal
act. (De Leon, 2010)
 Delay in acceptance of the insurance application will not result in a binding contract. Court
cannot impose upon the parties a contract if they did not consent. However, in proper
cases, the insurer may be liable for tort. (Sundiang Sr. & Aquino, 2014)
 Unreasonable delay in returning the premium raises the presumption of acceptance of the
insurance application. (Gloria v. Philippine American Life Ins. Co., CA 73 O.G. [No.37] 8660)
b. Delay in issuance of Policy

 Delivery is not necessary in the formation of the contract of insurance since the contract of
insurance is consensual. (Sundiang Sr. & Aquino, 2014).
 The mere delivery of an insurance policy to someone does not give rise to the formation of
a contract in the absence of proof that he had agreed to be insured.
2. Premium Payment
WHAT IS MEANT BY THE PREMIUM
 The premium is the agreed price for assuming and carrying the risk which the insurer is
entitled to the payment of a premium as soon as the thing insured is exposed to the peril
insured against.

WHEN IS THE INSURER ENTITLED TO A PREMIUM

 The insurer is entitled to the payment of a premium as soon as the thing insured is exposed
to the peril insured against. Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and binding unless and until
the premium is paid.
WHY MUST IT BE PAID
 The payment of a premium is essential to the validity of an insurance policy is known as the
“cash and carry basis” or “no premium payment no policy” rule.

WHEN IS INSURANCE EFFECTIVE DESPITE NON-PAYMENT OF THE PREMIUM?

This occurs:

Page 37 of 48
 1. in case of life or industrial life where the premium is payable monthly or oftener,
whenever the grace period applies;
2. when the insurer makes a written acknowledgment of the receipt of premium, such is
conclusive evidence of the payment of the premium to make it binding notwithstanding
any stipulation therein that it shall not be binding until the premium is paid; and
3. where the obligee has accepted the bond or suretyship contract.

 It also occurs when the insurer is estopped from claiming otherwise.

3. Non-Default Options in Life Insurance

What are the non-default options in life insurance?
 They are devices used to prevent the forfeiture of a life insurance after the payment of the
first premium and they are as follows:
(a) grace period
(b) cash surrender value
(c) Extended insurance
(d) paid up insurance
(e) automatic loan clause, and
(f) reinstatement

4. Reinstatement of a Lapsed Policy of Life Insurance

 It is not a non-default option. It does not create a new contract but merely revives the
original policy so insurer cannot require a higher premium than the amount stipulated in
the contract.
 It does not apply to group/industrial insurance.

PURPOSE OF THE REINSTATEMENT PROVISION

 The purpose of the provision is to clarify the requirements for restoring a policy to
premium-paying status after it has been permitted to lapse.

HOW IS REINSTATEMENT OF THE POLICY EFFECTED?

 The law requires that the policy owner be permitted to reinstate the policy, subject to the
violations specified, any time within three (3) years from the date of default of premium
payment. A longer period, being more favorable to the insured, may be used.
 Reinstatement is not an absolute right of the insured, but discretionary on the part of the
insurer, which has the right to deny reinstatement if it were not satisfied as to the
insurability of the insured, and if the latter did not pay all overdue premiums and other
indebtedness to the insurer. (McGuire vs. Manufacturer’s Life Ins. Co., G.R. No. L-3581,
September 21, 1950)
REQUISITES FOR THE REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCE:
1. It must be exercised within 3 years from date of default.
2. The insured must present evidence of insurability satisfactory to the insurer.
3. He must pay all back premiums and al indebtedness to the insurer.
4. The cash surrender value must not have been duly paid to the insured nor did the
extension period expire.
5. The application must be filed during the insured’s lifetime. (Andres vs. Crown Life Ins.
(1958)

Page 38 of 48
5. Refund of Premiums

INSTANCES WHEN THE INSURED ENTITLED TO RECOVER PREMIUMS ALREADY PAID OR A

PORTION THEREOF (2000 BAR)
1. Whole:
1. When no part of the thing insured has been exposed to any of the perils insured against.
2. When the contract is voidable because of the fraud or misrepresentations of the insurer
or his agent.
3. When the insurance is voidable because of the existence of facts of which the insured
was ignorant without his fault.
4. When the insurer never incurred any liability under the policy because of the default of
the insured other than actual fraud.
5. When rescission is granted due to insurer’s breach of contract.

 NOTE: When the contract is voidable, a person insured is entitled to a return of the
premium when such contract is subsequently annulled under the provisions of the New
Civil Code.
 A person insured is not entitled to a return of premium if the policy is annulled,
rescinded or if a claim is denied by reason of fraud.

2. Pro rata:
1. When the insurance is for a definite period and the insured surrenders his policy before
the termination thereof, except:
(a) Policy not made for a definite period of time;
(b) Short period rate is agreed upon;
(c) Life insurance policy.
2. When there is over-insurance. The premiums to be returned shall be proportioned to
the amount by which the aggregate sum insured in all the policies exceeds the insurable
value of the thing at risk. (IC, Sec. 83)
(a) In case of over-insurance by double insurance, the insurer is not liable for the
total amount of the insurance taken, his liability being limited to the property
insured. Hence, the insurer is not entitled to that portion of the premium
corresponding to the excess of the insurance over the insurable interest of the
insured. (1990 Bar)
(b) In case of over-insurance by several insurers, the insured is entitled to a ratable
return of the premium, proportioned to the amount by which the aggregate sum
insured in all the policies exceeds the insurable value of the thing insured. (IC,
Sec. 83)

Illustration:
Where there is a total over insurance of P500, 000.00 in an aggregate P2, 000,000.00
policy (P1, 500,000.00 is only the insurable value), 25% (proportion of P500k to P2M) of
the premiums paid to the several insurers should be returned.
INSURED IS NOT ENTITLED TO RETURN OF PREMIUMS PAID
1. If the peril insured against has existed, and the insurer has been liable for any period,
the peril being entire and indivisible;
2. In life insurance policies;
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 3. If the policy is annulled, rescinded or if a claim is denied by reason of fraud;
4. If contract is illegal and the parties are in pari delicto.

G. Rescission of Insurance Contracts

1. Concealment
WHAT IS CONCEALMENT?
 Concealment is a neglect to communicate that which a party knows and ought to
communicate.
WHAT ARE ITS REQUISITES?
1. A party knows a fact which he neglects to communicate or disclose to the other.
2. Such party concealing is duty bound to disclose such fact to the other;
3. Such party concealing makes no warranty of the fact concealed;
4. The other party has not the means of ascertaining the fact concealed; and
5. The fact concealed is material.

HOW IS THE MATERIALITY OF CONCEALMENT OR REPRESENTATION DETERMINED

 Materiality is determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the communication is due, in forming his
estimate of the disadvantages of the proposed contract or in making his inquiries (Section
31).

TEST OF MATERIALITY
 The test of materiality is whether knowledge of the true facts could have influenced a
prudent insurer in determining whether to accept the risk of in fixing the premiums.

MUST THERE BE A CAUSAL CONNECTION BETWEEN THE FACT CONCERNED AND THE CAUSE
OF LOSS
 Concealment, need not, in order to be material, be of facts which bring about or contribute
to, or are connected of the insured’s loss. It is immaterial that there is no causal relationship
between the fact concealed and the loss sustained. It is sufficient that the non-revelation
has misled the insurer in forming its estimate of disadvantage or in fixing the premium as
when the insured had concealed that he had kidney disease. He later dies in plane crash.
The insurer would not be liable due to concealment.

WHAT FACTS THEN MUST BE COMMUNICATED

 Each party to an insurance contract is bound to communicate to the other all facts that
meet the following requisites which must all be present:
1. Such facts that must be within his knowledge – as concealment requires knowledge
of the fact concealed by the party charged with concealment.
2. Fact/s must be material to the contract – it must be of such nature that had the
insurer known of it, it would not have accepted the risk or demanded a higher
premium
3. That the other party had no means of ascertaining such fact/s

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 4. That the party with a duty to communicate makes no warranty (Section 28) as the
existence of a warranty makes the requirement to disclose superfluous BUT – an
intentional and fraudulent omission on the part of the one insured to communicate
information on a matter PROVING OR TENDING TO PROVE THE FALSITY OF A
WARRANTY entitles the insurer to rescind (Section 29).

Example:
 Warranty that the ship is seaworthy – THE INTENTIONAL AND FRAUDULENT OMISSION OF
THE INSURED TO state that the ship’s communications equipment is out of order will entitle
the insurer to rescind.

WHAT MATTERS NEED NOT BE COMMUNICATED

Except in answer to the inquiries of the other, the following matters need not be
communicated:
1. Those which the other knows – as the insurer cannot say that it has been deceived or
misled.

 Example: Insured discloses that he has tuberculosis to the agent of the insurer, who in turn
omits to state the same in the application of the insured was deemed knowledge of the
insurer (Insular Life Assurance Co vs. Feliciano, 74 Phil 468). Insurer had surveyed the
location and surrounding area of a building that is to be insured against fire, an omission to
state that there are neighboring buildings will not avoid policy.

2. Those, which, in the exercise of ordinary care, the other ought to know, and of which, the
former has no reason to suppose him to be ignorant.

 The facts that the other ought to know as per Section 32 are:

a. All the general causes which are open to his inquiry, equally with that of the other,
and which may affect the political or material perils contemplated.
Example: Public events like the fact that a nation at war, or laws or political conditions
in other countries. Here, the source of information is equally open to the insurer, who is
therefore presumed to know them.

b. all the general uses of trade

Examples: Rules of navigation, kinds of seasons, and all the risks of navigation.

3. Those of which the other waives communication.

 A waiver takes place either, by the terms of the insurance or by the neglect to make
inquiries as to such facts where they are distinctly implied in other facts of which
information is communicated (Section 33).

Example: where an application for insurance is made in writing and the questions
therein are unanswered or incompletely answered – and the insurer without further
inquiries, issues the policy. It thereby waives all right to a disclosure or to a more
complete answer. If question asks whether the insured has submitted himself to any
infirmary, sanitarium or hospital for consultation or treatment. Insured replies that he
was confined at the Quezon Memorial Hospital for five days due to influenza. There is
no waiver and shall constitute concealment as the answer was complete and could be
relied upon by the insurer. If the insured answered “yes”, the answer would have been

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 incomplete and ambiguous. This would constitute a waiver as the insured did not make
any further inquiry. (Note Ng Gan Zee vs. Asian Crusader Life Assurance, 122 SCRA 461)
ISSUE: Is the waiver of a medical examination tantamount to a waiver of material
information?
NO, because waiver of medical examination is made when the insured represents
himself to be in good health. It is reasonable to assume that had the insured revealed
material information – the insurer would not have waived the examination.
Example: A obtained a non-medical insurance. In the policy, it was stated that A never
had cancer – but 2 months prior she was operated on for cancer – the beneficiaries
claimed payment stating that there was no material misrepresentation in view of the
waiver of the medical examination. The misrepresentation was to be taken into
consideration before issuing the policy, it was A’s representation that she had a clean
bill of health that led the insurer not to require a medical examination (Saturnino v. Phil-
Am – 7 SCRA 316).
4. Those which prove or tend to prove the existence of a risk excluded by a warranty, and
which are not otherwise material.

Example: The insurance only covers loss due to hijacking or terrorism. A warranty has been
made by the insured that loss due to perils of the sea is excluded. Consequently, the fact
that the vessel’s engines have been fitted with used parts need not be disclosed as the
seaworthiness of the vessel is not material.

5. Those which relate to a risk exempted from the policy, and which are not otherwise
material (Section 30).

Example: Policy covers against loss by theft. There is no need to disclose that the area
where the object is located is earthquake prone area if loss due to earthquake is not
covered by the policy.
OTHER MATTERS THAT DO NOT NEED TO BE COMMUNICATED
a. Information of the nature or amount of the interest of one insured need not be
communicated unless in answer to inquiry, except as prescribed by Section 51 as the extent
of the interest of the insured in property insured must be specified if he is not the absolute
owner. Also – a trustee, mortgagee or building contractor must communicate his particular
insurable interest in the property even if no inquiry is made. (Section 34)

b. Neither party to a contract is bound to communicate even upon inquiry any information
of his own opinion or judgment upon the matters question (Section 35). Only material
facts are required – not opinions, speculations or expectations, EXCEPT in marine insurance
– where the belief or the expectation of a 3rd person in reference to a material fact is
material and must be communicated.

Example: The insured is required to disclose an opinion of marine experts as to

seaworthiness of a vessel (See Section 108).

WHEN IS THERE A WAIVER OF INFORMATION?

 A waiver takes place either, by the terms of the insurance or by the neglect to make
inquiries as to such facts where they are distinctly implied in other facts of which
information is communicated.
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WHAT IS THE EFFECT OF CONCEALMENT
 Whether intentional or not, it entitles the injured party to rescind the contract of insurance.
WHEN MUST IT TAKE PLACE?
 Generally, concealment requires a party to have knowledge of the fact concealed prior to or
at the effectivity of the policy.
 Information acquired after effectivity is not concealment and does not constitute ground to
rescind the policy, as after the policy is issued, information subsequently acquired is no
longer material as it will not affect or influence the party to enter into contract.
 However, in case of the reinstatement of a lapsed policy, facts known after effectivity but
before reinstatement must be disclosed.

2. Misrepresentation/Omissions
WHAT ARE REPRESENTATIONS?
 A representation is an oral or written statement of a fact or a condition affecting the risk
made by the insured to the insurance company, tending to induce the insurer to take the
risk.

WHAT ARE THE FORMS AND KINDS OF REPRESENTATIONS?

 Representations may be ORAL or WRITTEN and can either be:
AFFIRMATIVE- which is an affirmation of a fact existing when the contract begins.
Example: That the insured is of good health at the time of the contract.
PROMISSORY – which is a statement by the insured concerning what is to happen
during the term of the insurance.
Example: That the insured will install additional fire extinguishers at a stipulated future
date. A representation as to the future is to be deemed a promise, unless it was merely
a statement of belief or expectation.
IS A REPRESENTATION PART OF THE INSURANCE CONTRACT?
 No. A representation does not form part of the contract as an express provision thereof as it
is a collateral inducement to the same.
 While it does not form part of the contract, it may qualify an implied warranty. Example is
seaworthiness.

TO WHAT DATE DOES A REPRESENTATION REFER TO?

 It presumed to refer to the date on which the contract goes into effect.
 There is no false representation if it is true at the time the contract takes effect although
false at the time it is made.
 There is a false representation, if it is true at the time it is made but false at the time the
contract takes effect.

WHEN IS A REPRESENTATION FALSE (MISREPRESENTATION) AND WHAT IS ITS EFFECT?

 A representation is said to be false when the facts fail to correspond with its assertions or
stipulations.
 If it is false on a material point, whether affirmative or promissory, the injured party is
entitled to rescind the contract from the time the representation becomes false.
 However, the right to rescind is considered waived by the acceptance of premium payments
despite knowledge of the ground to rescind.

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 There is no waiver, if the insurer had no knowledge of the ground at the time of the
acceptance of the premium.

WHAT IS THE INCONTESTABILITY CLAUSE?

 It is a clause in a life insurance policy that is payable on the death of the insured, and which
has been in force during the lifetime of the insured for a period of 2 years from the date of
issue or its last reinstatement that would prevent the insurer from proving that the policy is
void ab initio or is subject to rescission by reason of a fraudulent concealment or
misrepresentation of the insured or his agent.

WHAT IS THE THEORY AND OBJECT BEHIND THE INCONTESTABILITY CLAUSE

 On the part of the INSURER – an insurer has/should have a reasonable opportunity to
investigate the statements which are made by the applicant and that after a definite period,
it should no longer be permitted to question its validity.
 On the part of the INSURED – its object is to give the greatest possible assurance that the
beneficiaries would receive payment of the proceeds without question as to validity of the
policy.
WHAT ARE THE REQUISITES
1. It is a life insurance policy;
2. It is a payable on the death of the insured; and
3. It has been in force during the lifetime of the insured for AT LEAST TWO YEARS from
date of issue / or last reinstatement.
NOTE: TAN vs. CA – 174 SCRA 403- DURING THE LIFETIME OF THE INSURED MEANS THAT THE
POLICY IS NO LONGER IN FORCE IF THE INSURED DIES.
FACTS: Philam issued policy on November 6, 1973. On April 26, 1975 the insured died. The
beneficiaries claimed but the insurer denied the claim on September 11, 1975 and rescinded
the policy on the ground of misrepresentation and concealment.
HELD – Insurer has two years from date of issue / reinstatement within which to contest the
policy whether or not the insured still lives within the period.
WHAT DEFENSES ARE NOT BARRED BY INCONTESTABILITY EVEN AFTER THE LAPSE OF 2 YEARS
1. non-payment of premiums
2. lack of insurable interest
3. that the cause of death was excepted or not covered by the terms of the policy
4. that the fraud was of a particular vicious type such as
(a) policy was taken in furtherance of a scheme to murder the insured
(b) where the insured substituted another for the medical examination
(c) where the beneficiary feloniously killed the insured
5. violation of a condition in the policy relating to military or naval service in time of war
6. the necessary notice or proof of death was not given
7. action is not brought within time specified in the policy, which in no case should be less
than 1 year as per Section 63.
HOW IS CONCEALMENT DISTINGUISHED FROM MISREPRESENTATION?
 Concealment is the neglect of one party to communicate to the other material facts. The
information he gives in compliance with his duty to reveal information is representation.
 Representation therefore, is the communication required to comply with the prohibition
against concealment. Concealment is the passive and misrepresentation is the active form
of the same bad faith.

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CONCEALMENT AND REPRESENTATION COMPARED
1. In concealment – the insured withholds information of material facts, while in
representation – the insured makes erroneous statements
2. In concealment and misrepresentation both give the insurer the right to rescind the
contract of insurance
3. The materiality of concealment and representation are determined by the same rules
4. Whether the concealment or representation is intentional or not, the injured party can
rescind
5. Since insurance contracts are of utmost good faith – the insurer is also covered by the rules

3. Breach of Warranties

WHAT IS A WARRANTY?
 It is a statement or promise stated in the policy or incorporated therein by reference,
whereby the insured, expressly or impliedly contracts as to the past, present or future
existence of certain facts conditions or circumstances, the literal truth of which is essential
to the validity of the contract.

WHAT ARE THE KINDS OF WARRANTIES?

 Warranties can be affirmative when they refer to matters that exist at or before the
issuance of the policy or promissory when they refer to promises or undertaking of the
insured that certain matters shall exist or will be done or will be omitted after the policy
takes effect.
 They can also be express when provided for in the policy or implied when they are inferred
from the nature of the insurance.

WHAT IS THE EFFECT OF A VIOLATION OF A WARRANTY?

 There is breach of warranties.
 The violation of a material warranty, or other material provision of the policy, on the part of
either party thereto, entitles the other to rescind.
 However, a breach of a warranty without fraud, merely exonerates an insurer from the time
it occurs, or where it is broken at its inception, prevents the policy from attaching to the
risk.

WHEN IS THE NON-PERFORMANCE OF A WARRANTY EXCUSED?

 The non-performance of a promissory warranty is excused if before the arrival of the time
for performance:
1. the loss insured against happens;
2. the performance becomes unlawful at the place of the contract; or
3. the performance becomes impossible.

DISTINGUISHING WARRANTIES FROM REPRESENTATIONS

1. A warranty is part of the contract, while a representation is merely a collateral inducement
thereto.
2. A warranty is expressly set forth in the policy or incorporated therein by reference while a
representation may be oral or written in another statement.
3. A warranty must be strictly and literally performed while a representation must be
substantially true.
4. A warranty is presumed material while a representation must be shown to be so.

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5. A breach of warranty is a breach of the contract itself while a (mis)representation is ground
to rescind the contract.

H. Claims Settlement and Subrogation

1. Notice and Proof of Loss

WHAT IS A NOTICE OF LOSS, WHO AND WHEN SHOULD IT BE GIVEN?
 A notice of loss is the formal notice given by the insured or some person entitled to the
benefit of the insurance without unnecessary delay informing the insurer of the occurrence
of the loss insured against.

WHEN MUST NOTICE OF LOSS BE GIVEN AND BY WHOM

 Notice of Loss must be given without unnecessary delay by the insured or some person
entitled to the benefit of the insurance.
 IF NOT GIVEN, the insurer is exonerated.
 NOTE THE SPECIFIC APPLICATION TO FIRE INSURANCE due to the nature of the loss and
urgent need to determine the cause thereof. The longer the period that lapses from the
time of loss, the greater is the opportunity of the insured to tamper with the evidence in
preparation for a fraudulent claim.

MEANING OF WITHOUT UNNECESSARY DELAY is within a reasonable time, depending on

circumstances of a peculiar case, although courts have construed the requirement liberally in
favor of the insured.

WHAT IS MEANT BY PROOF OF LOSS?

 It refers to the evidence given by the insured to the insurer upon the occurrence of the loss
by insured against, stating the particulars and the necessary data to enable the insurer to
determine its liability and the extent thereof

2. Guidelines on Claims Settlement

WHAT IS CLAIM SETTLEMENT?

 This refers to the indemnification of the loss suffered by the insured.

PERSONS ENTITLED TO THE PROCEEDS OF THE INSURANCE IN PROPERTY INSURANCE

The claimants entitled to the indemnification may be
1. the insured,
2. the reinsured,
3. the insurer entitled to subrogation, or
4. a third party in an insurance policy providing indemnity against liability.

a. Unfair Claims Settlement; Sanctions

WHAT IS UNFAIR CLAIM SETTLEMENT?
The following constitutes unfair settlement practices:
1. Knowingly misrepresenting facts or policy provisions.
2. Failing to acknowledge pertinent communications with reasonable promptness.
3. Failing to adopt and implement reasonable standards for prompt investigation of claims.
4. Not attempting to effectuate prompt, fair and equitable settlement of claims in cases
where liability is reasonably clear.
5. Compelling policy holders to file suit by offering amounts substantially less than that
which they are entitled to.
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PURPOSE OF THE RULE
 To eliminate unfair claim settlement practices.

CLAIMS SETTLEMENT IN LIFE INSURANCE

1. The proceeds shall be paid immediately upon the maturity of the policy if there is such a
maturity date.
2. If the policy matures by the death of the insured, within sixty (60) days after presentation of
the claim and filing of the proof of the death of the insured. (Sundiang Sr. & Aquino, 2014; IC,
Section 248)

CLAIMS SETTLEMENT IN PROPERTY INSURANCE

1. Proceeds shall be paid within thirty (30) days after proof of loss is received by the insurer and
ascertainment of the loss or damage is made either by agreement or by arbitration.
2. If no ascertainment is made within sixty (60) days after receipt of proof of loss, it shall be
paid within ninety (90) days after such receipt. (Sundiang Sr. & Aquino, 2014; IC, Sec. 249).

SANCTION FOR THE INSURANCE COMPANIES WHICH ENGAGED TO UNFAIR SETTLEMENT

PRACTICES
 The sanction for insurance companies engaged in unfair settlement practices can either be
[a] suspension; or [b] revocation of an insurance company’s certificate of authority. (IC, Sec
247)

EFFECT OF REFUSAL OR FAILURE TO PAY THE CLAIM WITHIN THE TIME PRESCRIBED
 The insurer shall be liable to pay interest twice the ceiling prescribed by the Monetary
Board on the proceeds of the insurance from the date following the time prescribed under
the Insurance Code, until the claim is fully satisfied. (Prudential Guarantee and Assurance,
Inc. v. Trans-Asia Shipping Lines, Inc. G. R. No. 151890, June 20, 2006)

 NOTE: Refusal or failure to pay the loss or damage will entitle the assured to collect interest
UNLESS such refusal or failure to pay is based on the ground that the claim is fraudulent.

 Where the mortgagor and the mortgagee were, both claiming the proceeds of a fire
insurance policy and the creditors of the mortgagor also attached the proceeds, the
insurance company cannot be held liable for damages for withholding payment since the
delay was not malevolent. (Rizal Commercial Bank Corporation v. Court of Appeals, supra)
b. Prescription of Actions
WHAT IS THE PRESCRIPTIVE PERIOD FOR THE COMMENCEMENT OF AN ACTION?
 The parties can agree on a period provided it is not less than 1 year from the time the cause
of action accrues.
 If the period prescribed void because it is less than 1 year or there is no period, the insured
can bring the action within 10 years from the time the cause of action accrues.
 In a comprehensive motor liability insurance claim, a written notice of claim must be filed
within 6 months from the date of accident, otherwise, the claim is waived, even if an action
is subsequently brought within 1 year from rejection of the claim. It is a condition
precedent.
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c. Subrogation

WHAT IS THE CONCEPT BEHIND SUBROGATION?

 In the case of Malayan Insurance Co., Inc. vs Rodelio Alberto and Enrico Alberto Reyes, GR
No. 194320, February 1, 2012 it was held that subrogation is the substitution of one person
by another with reference to a lawful claim or right, so that he who is substituted succeeds
to the rights of the other in relation to a debt or claim, including its remedies or securities.

WHEN DOES SUBROGATION TAKE PLACE?

 Subrogation inures to the insurer without need of assignment or express stipulation upon
payment made to the insured.
 The act of payment makes the insurer a subrogee in equity.
 However, subrogation occurs only in property insurance.
 The payment by the insurer to the insured operates as an equitable assignment to the
insurer of all the remedies that the insured may have against the third party whose
negligence or wrongful act caused the loss.
 The right of subrogation is not dependent upon, nor does if grow out of, any privity of
contract. It accrues simply upon payment by the insurance company of the insurance claim.

WHY DOES IT TAKE PLACE?

 It is intended to make the person who caused the loss legally responsible for it, prevents the
insured from recovering twice, and upholds public policy by preventing tortfeasors from
being absolved from liability.

 NOTE: That subrogation takes effect by operation of law and does not require the consent
of the wrongdoer (Fireman’s Fire Insurance vs. Jamilla & Company, 70 SCRA 323).
WHEN IS THERE NO SUBROGATION
(a) life Insurance as it is not a contract of indemnity
(b) when proximate cause of the loss is the insured himself
(c) when the insurer pays to the insured a loss not covered by the policy.

 THE INSURED IS NO LONGER ENTITLED TO COLLECT FROM THE WRONGDOER if the amount
that he received from the insurer has fully compensated for the loss.
 If the wrongdoer is released, the insurer is also released from liability.
 If the insured recovered bot from the wrongdoer and the insurer, the insured should return
whatever he recovered from the insurer.

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