30
INSURANCE CODE
(P.D. No. 1460)
I. GENERAL CONCEPTS
CONTRACT OF INSURANCE
 An agreement whereby one
undertakes for a consideration to
indemnify another against loss, damage
or liability arising from an unknown or
contingent event. (Sec. 2, par. 2, IC)
“DOING AN INSURANCE BUSINESS OR
TRANSACTING AN INSURANCE
BUSINESS” (Sec. 2, par. 4)
1. Making or proposing to make, as
insurer, any insurance contract;
2. Making or proposing to make, as
surety, any contract of suretyship as
a vocation, not as a mere incident to
any other legitimate business of a
surety;
3. Doing any insurance business,
including a reinsurance business;
4. Doing or proposing to do any
business in substance equivalent to
any of the foregoing
II. CHARACTERISTICS OF AN INSURANCE
CONTRACT (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. Consensual – it is perfected by the
meeting of the minds of the parties.
2. Voluntary – the parties may
incorporate such terms and
conditions as they may deem
convenient.
3. Aleatory – it depends upon some
contingent event.
4. Unilateral – imposes legal duties only
on the insurer who promises to
indemnify in case of loss.
5. Conditional – It is subject to
conditions the principal one of
which is the happening of the event
insured against.
6. Contract of indemnity – Except life
and accident insurance, a contract
of insurance is a contract of
indemnity whereby the insurer
promises to make good only the loss
of the insured.
7. Personal – each party having in view
the character, credit and conduct of
the other.
REQUISITES OF A CONTRACT OF
INSURANCE (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. A subject matter which the insured
has an insurable interest.
2. Event or peril insured against which
may be any future contingent or
unknown event, past or future and a
duration for the risk thereof.
3. A promise to pay or indemnify in a
fixed or ascertainable amount.
4. A consideration known as “premium”.
5. Meeting of the minds of the parties.
5 CARDINAL PRINCIPLES IN INSURANCE
1. Insurable Interest
2. Principle of Utmost Good Faith
 An insurance contract requires utmost
good faith (uberrimae fidei) between
the parties. The applicant is enjoined to
disclose any material fact, which he
knows or ought to know.
 Reason: An insurance contract is an
aleatory contract. The insurer relies on
the representation of the applicant, who
is in the best position to know the state
of his health.
3. Contract of Indemnity
 It is the basis of all property
insurance. The insured who has insurable
interest over a property is only entitled
to recover the amount of actual loss
sustained and the burden is upon him to
establish the amount of such loss
(Reviewer on Commercial Law,
Professors Sundiang and Aquino)
Rules:
a. Applies only to property
insurance except when the
creditor insures the life of his
debtor.
b. Life insurance is not a contract
of indemnity.
c. Insurance contracts are not
wagering contracts. (Sec. 4)
4. Contract of Adhesion (Fine Print Rule)

 Most of the terms of the contract do
not result from mutual negotiations
between the parties as they are
prescribed by the insurer in final printed
form to which the insured may “adhere”
if he chooses but which he cannot
change. (Rizal Surety and Insurance Co.,
vs. CA, 336 SCRA 12)
5. Principle of Subrogation
 It is a process of legal substitution
where the insurer steps into the shoes of
the insured and he avails of the latter’s
rights against the wrongdoer at the time
of loss.
 The principle of subrogation is a
normal incident of indemnity insurance
as a legal effect of payment; it inures to
the insurer without any formal
assignment or any express stipulation to
that effect in the policy. Said right is not
dependent upon nor does it grow out of
any private contract. Payment to the
insured makes the insurer a subrogee in
equity. (Malayan Insurance Co., Inc. v.
CA, 165 SCRA 536; see also Art. 2207,
NCC)
 Purposes: (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. To make the person who caused the
loss legally responsible for it.
2. To prevent the insured from
receiving a double recovery from the
wrongdoer and the insurer.
3. To prevent tortfeasors from being
free from liabilities and is thus
founded on considerations of public
policy.
 Rules:
1. Applicable only to property insurance.
2. The insurer can only recover from the
third person what the insured could have
recovered.
3. There can be no subrogation in cases:
a. Where the insured by his own act
releases the wrongdoer or third party
liable for the loss or damage;
b. Where the insurer pays the insured the
value of the loss without notifying the
carrier who has in good faith settled
the insured’s claim for loss;
c. Where the insurer pays the insured for
a loss or risk not covered by the policy.
(Pan Malayan Insurance Company v.
CA, 184 SCRA 54)
d. In life insurance
31
e. For recovery of loss in excess of
insurance coverage
CONSTRUCTION OF INSURANCE
CONTRACT
 The ambiguous terms are to be
construed strictly against the insurer,
and liberally in favor of the insured.
However, if the terms are clear, there is
no room for interpretation. (Calanoc vs.
Court of Appeals, 98 Phil. 79)
III. DISTINGUISHING ELEMENTS OF AN
INSURANCE CONTRACT
1. The insured possesses an insurable
interest susceptible of pecuniary
estimation;
2. The insured is subject to a risk of loss
through the destruction or
impairment of that interest by the
happening of designated perils;
3. The insurer assumes that risk of loss;
4. Such assumption is part of a general
scheme to distribute actual losses
among a large group or substantial
number of persons bearing somewhat
similar risks; and
5. The insured makes a ratable
contribution (premium) to a general
insurance fund.
 A contract possessing only the first 3
elements above is a risk-shifting device.
If all the elements, it is a risk-
distributing device. (The Insurance Code
of the Philippines Annotated, Hector de
Leon, 2002 ed.)
IV. PERFECTION OF AN INSURANCE
CONTRACT
 An insurance contract is a consensual
contract and is therefore perfected the
moment there is a meeting of minds with
respect to the object and the cause or
consideration.
 What is being followed in insurance
contracts is what is known as the
“cognition theory”. Thus, “an
acceptance made by letter shall not bind
the person making the offer except from
the time it came to his knowledge”.
(Enriquez vs. Sun Life Assurance Co. of
Canada, 41 Phil. 269)
Binding Receipt
 A mere acknowledgment on behalf of
the company that its branch office had

received from the applicant the
insurance premium and had accepted
the application subject to processing by
the head office.
Cover Note (Ad Interim)
 A concise and temporary written
contract issued to the insurer through its
duly authorized agent embodying the
principal terms of an expected policy of
insurance.
Purpose: It is intended to give
temporary insurance protection coverage
to the applicant pending the acceptance
or rejection of his application.
 Duration: Not exceeding 60 days
unless a longer period is approved by
Insurance Commissioner (Sec. 52).
Riders
 Printed stipulations usually attached
to the policy because they constitute
additional stipulations between the
parties. (Ang Giok Chip vs. Springfield,
56 Phil. 275)
 In case of conflict between a rider
and the printed stipulations in the
policy, the rider prevails, as being a
more deliberate expression of the
agreement of the contracting parties.
(C. Alvendia, The Law of Insurance in
the Philippines, 1968 ed.)
Clauses
 An agreement between the insurer
and the insured on certain matter
relating to the liability of the insurer in
case of loss. (Prof. De Leon, p.188)
Endorsements
 Any provision added to the contract
altering its scope or application. (Prof.
De Leon, p.188)
POLICY OF INSURANCE
 The written instrument in which a
contract of insurance is set forth. (Sec.
49)
 Contents: (Sec. 51)
1. Parties
2. Amount of insurance, except in open
or running policies;
3. Rate of premium;
4. Property or life insured;
32
5. Interest of the insured in the
property if he is not the absolute
owner;
6. Risk insured against; and
7. Duration of the insurance.
 Persons entitled to recover on the
policy (sec. 53): The insurance proceeds
shall be applied exclusively to the proper
interest of the person in whose name or
to whose benefit it is made, unless
otherwise specified in the policy.
 Kinds:
1. OPEN POLICY – value of thing insured
is not agreed upon, but left to be
ascertained in case of loss. (Sec. 60)
 The actual loss, as determined,
will represent the total indemnity
due the insured from the insurer
except only that the total indemnity
shall not exceed the face value of
the policy. (Development Insurance
Corp. vs. IAC, 143 SCRA 62)
2. VALUED POLICY – definite valuation
of the property insured is agreed by both
parties, and written on the face of
policy. (Sec. 61)
 In the absence of fraud or
mistake, the agreed valuation will be
paid in case of total loss of the
property, unless the insurance is for
a lower amount.
3. RUNNING POLICY – contemplates
successive insurances and which provides
that the object of the policy may from
time to time be defined (Sec. 62)
V. TYPES OF INSURANCE CONTRACTS
1. Life insurance
a. Individual life (Secs. 179–183, 227)
b. Group life (Secs. 50, last par., 228)
c. Industrial life (Secs. 229–231)
2. Non-life insurance
a. Marine (Secs. 99–166)
b. Fire (Secs. 167–173)
c. Casualty (Sec. 174)
3. Contracts of bonding or suretyship
(Secs. 175–178)
Note:
1. Health and accident insurance are
either covered under life (Sec. 180) or
casualty insurance. (Sec. 174).
2. Marine, fire, and the property aspect
of casualty insurance are also referred to
as property insurance.

VI. PARTIES TO INSURANCE CONTRACT
1. Insurer - Person who undertakes to
indemnify another.
 For a person to be called an
insurance agent, it is necessary
that he should perform the
function for compensation.
(Aisporna vs. CA, 113 SCRA 459)
2. Insured - The party to be indemnified
upon the occurrence of the loss. He must
have capacity to contract, must possess
an insurable interest in the subject of
the insurance and must not be a public
enemy.
 A public enemy- a nation with
whom the Philippines is at war
and it includes every citizen or
subject of such nation.
3. Beneficiary - A person designated to
receive proceeds of policy when risk
attaches.
 Rules in the designation of the
beneficiary:
a. LIFE
i. A person who insures his own
life can designate any person
as his beneficiary, whether
or not the beneficiary has an
insurable interest in the life
of the insured subject to the
limitations under Art. 739
and Art. 2012 of the NCC.
 Reason: in essence, a life
insurance policy is no
different form a civil
donation insofar as the
beneficiary is concerned.
Both are founded on the
same consideration of
liberality. (Insular Life vs.
Ebrado, 80 SCRA 181)
ii. A person who insures the life
of another person and name
himself as the beneficiary
must have an insurable
interest in such life. (Sec.
10)
iii. As a general rule, the
designation of a beneficiary
is revocable unless the
insured expressly waived the
right to revoke in the policy.
(Sec. 11)
iv. The interest of a beneficiary
in a life insurance policy
shall be forfeited when the
33
beneficiary is the principal
accomplice or accessory in
willfully bringing about the
death of the insured in which
event, the nearest relative
of the insured shall receive
the proceeds of said
insurance if not otherwise
disqualified. (Sec. 12)
b. PROPERTY
 The beneficiary of property
insurance must have an insurable
interest in such property, which
must exist not only at the time
the policy takes effect but also
when the loss occurs. (Sec. 13
and 18).
Effects of Irrevocable Designation Of
Beneficiary
 Insured cannot:
1. Assign the policy
2. Take the cash surrender value of
the policy
3. Allow his creditors to attach or
execute on the policy;
4. Add new beneficiary; or
5. Change the irrevocable
designation to revocable, even
though the change is just and
reasonable.
 The insured does not even retain the
power to destroy the contract by
refusing to pay the premiums for the
beneficiary can protect his interest by
paying such premiums for he has an
interest in the fulfillment of the
obligation. (Vance, p. 665, cited in de
Leon, p. 101, 2002 ed.)
VII. INSURABLE INTEREST
A. In General
 A person has an insurable interest in
the subject matter if he is so connected,
so situated, so circumstanced, so
related, that by the preservation of the
same he shall derive pecuniary benefit,
and by its destruction he shall suffer
pecuniary loss, damage or prejudice.
B. Life
 Every person has an insurable interest
in the life and health:
a. of himself, of his spouse and of
his children;
b. of any person on whom he
depends wholly or in part for
education or support;
 34

c. of any person under a legal exist at the time of when the loss
obligation to him to pay money loss occurs
or respecting property or Unlimited except in Limited to actual
services, of which death or life insurance value of interest in
illness might delay or prevent effected by creditor property insured.
on life of debtor.
performance; and
The expectation of An expectation of a
d. of any person upon whose life benefit to be derived benefit to be
any estate or interest vested in from the continued derived from the
him depends. (Sec. 10) existence of life need continued
 When it should exist: When the not have any legal existence of the
insurance takes effect; not thereafter or basis whatever. A property insured
when the loss occurs. reasonable must have a legal
 Amount: probability is basis.
GENERAL RULE: There is no limit in the sufficient without
amount the insured can insure his life. more.
The beneficiary need The beneficiary
EXCEPTION: In a creditor-debtor
not have an insurable must have
relationship where the creditor insures interest over the life insurable interest
the life of his debtor, the limit of of the insured if the over the thing
insurable interest is equal to the amount insured himself insured.
of the debt. secured the policy.
Note: If at the time of the death of the However, if the life
debtor the whole debt has already been insurance was
paid, the creditor can no longer recover obtained by the
on the policy because the principle of beneficiary, the
latter must have
indemnity applies.
insurable interest
over the life of the
C. Property insured.
 Every interest in property whether
real or personal, or any relation thereto, SPECIAL CASES
or liability in respect thereof, of such 1. In case of a carrier or depositary
nature that the contemplated peril  A carrier or depository of any kind has
might directly damnify the insured (Sec. an insurable interest in a thing held by
13), which may consist in: him as such, to the extent of his liability
1. an existing interest; but not to exceed the value thereof
2. any inchoate interest (Sec. 15)
founded on an existing 2. In case of a mortgaged property
interest; or  The mortgagor and mortgagee each
3. an expectancy coupled with have an insurable interest in the
an existing interest in that property mortgaged and this interest is
out of which the expectancy separate and distinct from the other.
arises. (Sec. 14) a. Mortgagor – As owner, has an
 When it should exist: When the insurable interest therein to the
insurance takes effect and when the loss extent of its value, even though the
occurs, but need not exist in the mortgage debt equals such value.
meantime. The reason is that the loss or
 Amount: The measure of insurable destruction of the property insured
interest in property is the extent to will not extinguish the mortgage
which the insured might be damnified by debt.
loss or injury thereof. (Sec. 17) b. Mortgagee – His interest is only up
to the extent of the debt. Such
INSURABLE INSURABLE interest continues until the mortgage
INTEREST IN LIFE INTEREST IN debt is extinguished.
PROPERTY
Must exist only at the Must exist at the  The lessor cannot be validly a
time the policy takes time the policy
beneficiary of a fire insurance policy
effect and need not takes effect and
taken by a lessee over his merchandise,
 35

and the provision in the lease contract 2. Past unknown event resulting in loss
providing for such automatic assignment or damage – Ex. Fact of past sinking
is void for being contrary to law and of a vessel unknown to the parties
public policy. (Cha vs. Court of Appeals, 3. Contingent liability – Ex. Reinsurance
227 SCRA 690)
IX. PREMIUM PAYMENTS
STANDARD OR OPEN OR LOSS  Consideration paid an insurer for
UNION PAYABLE undertaking to indemnify the insured
MORTGAGE MORTGAGE against a specified peril.
CLAUSE CLAUSE  Basis of the right of the insurer to
Subsequent acts Acts of the collect premiums: Assumption of risk.
of the mortgagor mortgagor affect
cannot affect the the mortgagee. GENERAL RULE: No policy issued by an
rights of the Reason: insurance company is valid and binding
assignee Mortgagor does until actual payment of premium. Any
not cease to be a agreement to the contrary is void. (Sec.
party to the 77)
contract. (Secs. 8
and 9) EXCEPTIONS:
1. In case of life or industrial life
Effects of Loss Payable Clause insurance, when the grace periods
a. The contract is deemed to be upon applies; (Sec. 77)
the interest of the mortgagor; hence, he 2. When the insurer makes a written
does not cease to be a party to the acknowledgment of the receipt
contract. premium; (Sec. 78)
b. Any act of the mortgagor prior to the 3. Section 77 may not apply if the
loss, which would otherwise avoid the parties have agreed to the payment
insurance affects the mortgagee even if of the premium in installments and
the property is in the hands of the partial payment has been made at
mortgagee. the time of the loss. (Makati
c. Any act, which under the contract of Tuscany Condominium Corp. v. CA,
insurance is to be performed by the 215 SCRA 462)
mortgagor, may be performed by the 4. Where a credit term has been
mortgagee with the same effect. agreed upon. (UCPB vs. Masagana
d. In case of loss, the mortgagee is Telemart, 308 SCRA 259)
entitled to the proceeds to the extent of 5. Where the parties are barred by
his credit. estoppel. (UCPB vs. Maagana
e. Upon recovery by the mortgagee to Telemart, 356 SCRA 307)
the extent of his credit, the debt is
extinguished.  Section 77 merely precludes the
parties from stipulating that the policy is
 In case a mortgagee insures his own valid even if the premiums are not paid.
interest and a loss occurs, he is entitled (Makati Tuscany Condominium Corp. v.
to the proceeds of the insurance but he CA, 215 SCRA 462)
is not allowed to retain his claim against
the mortgagor as the claim is discharged Effect of Acknowledgment of Receipt
but it passes by subrogation to the of Premium in Policy: Conclusive
insurer to the extent of the money paid evidence of its payment, so far as to
by such insurer. (Palileo vs. Cosio) make the policy binding,
notwithstanding any stipulation therein
VIII. RISK that it shall not be binding until the
 What may be insured against: premium is actually paid. (Sec. 78)
1. Future contingent event resulting in
loss or damage – Ex. Possible future
fire
 36

ENTITLEMENT OF INSURED TO RETURN

OF PREMIUMS PAID Payment is not Payment is
enforceable against enforceable once
A. Whole: the insured. levied unless
otherwise agreed
1. If the thing insured was never
upon.
exposed to the risks insured
against; (Sec. 79)
2. If contract is voidable due to the Not a debt. It becomes a debt
fraud or misrepresentation of once properly
insurer or his agents; (Sec. 81) levied unless
3. If contract is voidable because of otherwise agreed.
the existence of facts of which
the insured was ignorant without X. TRANSFER OF POLICY
his fault; (Sec. 81) 1. Life Insurance
4. When by any default of the  It can be transferred even without the
insured other than actual fraud, consent of the insurer except when
the insurer never incurred there is a stipulation requiring the
liability; (Sec. 81) consent of the insurer before transfer.
5. When rescission is granted due (Sec. 181)
to the insurer’s breach of  Reason: The policy does not represent
contract. (Sec. 74) a personal agreement between the
B. Pro rata: insured and the insurer.
1. When the insurance is for a 2. Property insurance
definite period and the insured  It cannot be transferred without the
surrenders his policy before the consent of the insurer.
termination thereof;  Reason: The insurer approved the
 Exceptions: policy based on the personal
a. policy not made for a qualification and the insurable interest
definite period of time of the insured.
b. short period rate is 3. Casualty insurance
agreed upon  It cannot be transferred without the
c. life insurance policy consent of the insurer. (Paterson cited in
2. When there is over-insurance de Leon p. 82)
(Sec. 82);  Reason: The moral hazards are as
great as those of property insurance.
Instances when premiums are not
recoverable: CHANE OF INTEREST IN THE THING
1. When the risk has already INSURED
attached and the risk is entire and  The mere (absolute) transfer of the
indivisible. thing insured does not transfer the
2. In life insurance. policy, but suspends it until the same
3. When the contract is rescindable person becomes the owner of both the
or rendered void ab initio by the policy and the thing insured. (Sec. 58)
fraud of the insured.  Reason: Insurance contract is
4. When the contract is illegal and personal.
the parties are in pari delicto. GENERAL RULE: A change of interest in
any part of a thing insured
PREMIUM ASSESSMENT unaccompanied by a corresponding
change of interest in the insurance
Levied and paid to Collected to meet suspends the insurance to an equivalent
meet anticipated actual losses. extent, until the interests in the thing
losses. and the interest in the insurance are
vested in the same person. (Sec. 20)

EXCEPTIONS:
1. In life, health and accident
insurance.(Sec. 20);
2. Change in interest in the thing
insured after occurrence of an
injury which results in a loss.
(Sec. 21);
3. Change in interest in one or
more of several distinct things
separately insured by one policy.
(Sec. 22);
4. Change of interest, by will or
succession, on the death of the
insured. (Sec. 23);
5. Transfer of interest by one of
several partners, joint owners,
or owners in common, who are
jointly insured, to others. (Sec.
24);
6. When a policy is so framed that
it will inure to the benefit of
whomsoever, during the
continuance of the risk, may
become the owner of the
interest insured. (Sec. 57);
7. When there is an express
prohibition against alienation in
the policy, in case of alienation,
the contract of insurance is not
merely suspended but avoided.
(Art. 1306, NCC).
XI. ASCERTAINMENT AND CONTROL OF
RISK AND LOSS
A. Four Primary Concerns of the
Parties:
1. Correct estimation of the risk;
2. Precise delimitation of the risk;
3. Control of the risk;
4. Determining whether a loss occurred
and if so, the amount of such loss.
B. Devices used for ascertaining and
controlling risk and loss:
1. Concealment – A neglect to
communicate that which a party knows
and ought to communicate (Sec. 26)
 Requisites:
a. A party knows a fact which he
neglects to communicate or
disclose to the other.
b. Such party concealing is duty
bound to disclose such fact to
the other.
37
c. Such party concealing makes no
warranty as to the fact
concealed.
d. The other party has not the
means of ascertaining the fact
concealed.
e. Material
 Effects: Entitles insurer to rescind,
even if the death or loss is due to a
cause not related to the concealed
matter (Sec. 27).
Note: Good Faith is not a defense in
concealment. Sec. 27 clearly provides
that, “the concealment whether
intentional or unintentional entitles the
injured party to rescind the contract of
insurance.”
Test of Materiality: Determined not by
the event, but solely by the probable
and reasonable influence of the facts
upon the party to whom the
communication is due, in forming his
estimate of the advantages of the
proposed contract, or in making his
inquiries (Sec. 31).
 Exception to Sec. 31:
a. Incontestability clause
b. Matters under Sec.110 (marine
insurance)
 The waiver of medical examination in
a non-medical insurance contract
renders even more material the
information required of the applicant
concerning the previous conditions of
health and diseases suffered. (Sunlife v.
Sps. Bacani, 246 SCRA 268).
 The right to information of material
facts may be waived, either by the terms
of the insurance or by neglect to make
inquiries as to such facts where they are
distinctly implied in other facts of which
information is communicated. (Sec.33)
 Where matters of opinion or judgment
are called for, answers made in good
faith and without intent to deceiver will
not avoid the policy even though they
are untrue. Reason: The insurer cannot
rely on those statements. He must make
further inquiry. (Philamcare Health
Systems vs. CA, G.R. No. 125678, March
18, 2002).
 38

2. Representations – Factual untruth or non-fulfillment of which in

statements made by the insured at the any respect, and without reference to
time of, or prior to, the issuance of the whether insurer was in fact prejudiced
policy to give information to the insurer by such untruth or non-fulfillment,
and induce him to enter into the renders the policy voidable by the
insurance contract. They are considered insurer.
an active form of concealment.  Purpose: To eliminate potentially
 Requisites of a false representation increasing hazards which may either be
(misrepresentation): due to the acts of the insured or to the
a. The insured stated a fact which change to the condition of the property.
is untrue.  Kinds:
b. Such fact was stated with a. EXPRESS – an agreement expressed in
knowledge that it is untrue and a policy whereby the insured stipulates
with intent to deceive or which that certain facts relating to the risk are
he states positively as true or shall be true, or certain acts relating
without knowing it to be true to the same subject have been or shall
and which has a tendency to be done.
mislead. b. IMPLIED - it is deemed included in the
c. Such fact in either case is contract although not expressly
material to the risk. mentioned. Example: In marine
 Characteristics: insurance, seaworthiness of the vessel.
a. It is not a part of the contract but  Effects of breach of warranty:
merely a collateral inducement to it. a. Material
b. It may be oral or written. GENERAL RULE: Violation of material
c. It is made at the same time of issuing warranty or of a material provision of a
the policy or before but not after. policy will entitle the other party to
d. It may be altered or withdrawn before rescind the contract. (Sec. 74)
the insurance is effected but not EXCEPTIONS:
afterwards. a. Loss occurs before the time of
e. It always refers to the date the performance of the warranty.
contract goes into effect. b. The performances becomes
 Kinds: unlawful at the place of the
a. AFFIRMATIVE – affirmation of a fact contract.
when the contract begins; and c. Performance becomes
b. PROMISSORY – promise to be impossible. (Sec. 73)
performed after policy was issued. b. Immaterial (ex. Other insurance
 Effect of Misrepresentation: the clause)
injured party is entitled to rescind from GENERAL RULE: It will not avoid the
the time when the representation policy.
becomes false. EXCEPTION: When the policy expressly
provides or declares that a violation
Test of Materiality: Same as that in thereof will avoid it. (Sec. 75)
concealment.
WARRANTY REPRESENTATION
 Where the insured merely signed the Part of the contract Mere collateral
application form and made the agent of inducement
the insurer fill the same for him, it was Written on the May be written in
held that by doing so, the insured made policy, actually or by the policy or may
the agent of the insurer his own agent reference be oral.
and he was responsible for his acts for Presumed material Must be proved to
that purpose. (Insular Life Assur. Co. vs. be material
Feliciano, 74 Phil. 469) Must be strictly Requires only
complied with substantial truth
3. Warranties – Statement or promise and compliance
by the insured set forth in the policy or
by reference incorporated therein, the

4. Conditions – Events signifying in its
broadest sense either an occurrence or a
non-occurrence that alters the
previously existing legal relations of the
parties to the contract. They may be
conditions precedent or conditions
subsequent.
 Effect of breach:
a. Condition precedent – prevents
the accrual of cause of action
b. Condition subsequent – avoids
the policy or entitles the insurer
to rescind
 The insurer may also protect himself
against fraudulent claims of loss and this
he attempts to do by inserting in the
policy various conditions which take the
form of conditions precedent. For
instance, there are conditions requiring
immediate notice of loss or injury and
detailed proofs of loss within a limited
period.
5. Exceptions – Provisions that may
specify excepted perils. It makes more
definite the coverage indicated by the
general description of the risk by
excluding certain specified risk that
otherwise would be included under the
general language describing the risks
assumed.
 Effect: Limit the coverage of the
contract.
RESCISSION
 Grounds:
A. Concealment
B. Misrepresentation
C. Breach of material warranty
D. Breach of a condition subsequent
 Waiver of the right to rescind:
Acceptance of premium payments
despite the knowledge of the ground for
rescission. (Sec. 45)
 Limitations on the right of the
insurer to rescind:
1. Non-life – such right must be
exercised prior to the commencement of
an action on the contract;
2. Life – such right must be availed of
during the first two years from the date
of issue of policy or its last
reinstatement; prior to
“incontestability.” (Sec. 48)
39
CANCELLATION OF NON-LIFE
INSURANCE POLICY
 Right of the insurer to abandon the
contract on the occurrence of certain
grounds after the effectivity date of a
non-life policy.
 Grounds:
1. Non-payment of premium;
2. Conviction of a crime out of acts
increasing the hazard insured
against;
3. Discovery of fraud or material
misrepresentation;
4. Discovery of willful or reckless acts
of omissions increasing the hazard
insured against;
5. Physical changes in property making
the property uninsurable; and
6. Determination by the Insurance
Commissioner that the continuation
of the policy would violate the
Insurance Code. (Sec. 64)
 Requirements:
1. Prior notice of cancellation to
the insured;
2. Notice must be in writing,
mailed or delivered to the
named insured at the address
shown in the policy;
3. Notice must state which of the
grounds set forth in Sec. 64 is
relied upon and upon request of
the insured, the insurer must
furnish facts on which the
cancellation is based;
4. Grounds should have existed
after the effectivity date of the
policy.
XII. INCONTESTABILITY CLAUSE
 Clause in life insurance policy that
stipulates that the policy shall be
incontestable after a stated period.
 Requisites:
1. Life insurance policy
2. Payable on the death of the insured
3. It has been in force during the
lifetime of the insured for a period
of at least two years from the date
of its issue or of its last
reinstatement
Note: The period of 2 years may be
shortened but it cannot be extended by
stipulation.
 40

 Incontestability only deprives the corresponding to the excess in value

insurer of those defenses which arise in of the property;
connection with the formation and
operation of the policy prior to loss. B. DOUBLE INSURANCE – exists where
(Prof. De Leon, p. 173 citing Wyatt and same person is insured by several
Wyatt, p. 878) insurers separately in respect to same
subject and interest. (Sec. 93)
BARRED DEFENSES NOT  Requisites:
DEFENSES BARRED 1. Person insured is the same;
OF THE INSURER 2. Two or more insurers insuring
1. Policy is void ab 1. That the person separately;
initio taking the insurance 3. Subject matter is the same;
2. Policy is lacked insurable 4. Interest insured is also the same;
rescindable by interest as required 5. Risk or peril insured against is
reason of the by law; likewise the same.
fraudulent 2. That the cause of
concealment or the death of the
misrepresentation of insured is an  Effects: Where double insurance is
the insured or his excepted risk; allowed, but over insurance results:
agent 3. That the (Sec. 94)
premiums have not 1. The insured, unless the policy
been paid (Secs. 77, otherwise provides, may claim
227[b], 228[b], payment from the insurers in such
230[b]); order as he may select, up to the
4. That the amount for which the insurers are
conditions of the
severally liable under their
policy relating to
military or naval respective contracts;
service have been 2. Where the policy under which the
violated (Secs. insured claims is a valued policy, the
227[b], 228[b]); insured must give credit as against
5. That the fraud is the valuation for any sum received
of a particularly by him under any other policy
vicious type; without regard to the actual value of
6. That the the subject matter insured;
beneficiary failed to
3. Where the policy under which the
furnish proof of
death or to comply insured claims is an unvalued policy
with any condition he must give credit, as against the
imposed by the full insurable value, for any sum
policy after the loss received by him under any policy;
has happened; or 4. Where the insured receives any sum
7. That the action in excess of the valuation in the case
was not brought of valued policies, or of the
within the time insurable value in the case of
specified.
unvalued policies, he must hold such
sum in trust for the insurers,
XIII. according to their right of
A. OVER-INSURANCE – results when the contribution among themselves;
insured insures the same property for an 5. Each insurer is bound, as between
amount greater than the value of the himself and the other insurers, to
property with the same insurance contribute ratably to the loss in
company. proportion to the amount for which
 Effect in case of loss: he is liable under his contract.
1. The insurer is bound only to pay to
the extent of the real value of the Additional or “Other Insurance” Clause
property lost;  A condition in the policy requiring the
2. The insured is entitled to recover insured to inform the insurer of any
the amount of premium other insurance coverage of the property
 41

insured. It is lawful and specifically reinsured under the contract. (Prof. De

allowed under Sec. 75 which provides Leon, p. 305)
that “(a) policy may declare that a 3. Facultative reinsurance – There is no
violation of a specified provision thereof obligation to cede or accept
shall avoid it, otherwise the breach of an participation in the risk each party
immaterial provision does not avoid it.” having a free choice. But once the share
 A stipulation against double is accepted, the obligation is absolute
insurance. and the liability thereunder can be
 Purposes: discharged only by payment. (Equitable
1. To prevent an increase in the Ins. & Casualty Co. vs. Rural Ins. &
moral hazard Surety Co., Inc. 4 SCRA 343)
2. To prevent over-insurance and
fraud. 4. Retrocession – A transaction whereby
 To constitute a violation of the the reinsurer in turn, passes to another
clause, there should have been double insurer a portion of the risk reinsured. It
insurance. is really the reinsurance of reinsurance.
(Prof. De Leon, p. 305)
C. REINSURANCE – a contract by which
the insurer procures a third person to XIV.
insure him against loss or liability by A. LOSS, IN INSURANCE
reason of an original insurance (also  Injury or damage sustained by the
known as “Reinsurance Cession”). (Sec. insured in consequence of the happening
95) of one or more of the accidents or
 In every reinsurance, the original misfortune against which the insurer, in
contract of insurance and the contract of consideration of the premium, has
reinsurance are covered by separate undertaken to indemnify the insured.
policies. (Bonifacio Bros. Inc. vs. Mora, 20 SCRA
261)
DOUBLE REINSURANCE
INSURANCE Loss for which Loss for which
Involves the same Involves different insurer is liable insurer is not
interest interest liable
Insurer remains in Insurer becomes the 1. Loss the 1. Loss by
such capacity insured in relation proximate cause of insured’s willful
to reinsurer which is the peril act;
Insured is the party Original insured has insured against 2. Loss due to
in interest in the 2 no interest in the (Sec. 84); connivance of the
contracts reinsurance 2. Loss the insured (Sec. 87);
contract. immediate cause of and
Subject of Subject of insurance which is the peril 3. Loss where the
insurance is is the original insured against excepted peril is
property insurer’s risk except where the proximate
Insured has to give Insured’s consent proximate cause is cause.
his consent not necessary an excepted peril;
3. Loss through
TERMS: negligence of
insured except
1. Reinsurance treaty – Merely an
where there was
agreement between two insurance gross negligence
companies whereby one agrees to cede amounting to willful
and the other to accept reinsurance acts; and
business pursuant to provisions specified 4. Loss caused by
in the treaty. (Prof. De Leon, p. 306) efforts to rescue the
thing from peril
2. Automatic reinsurance – The insured against;
reinsured is bound to cede and the 5. If during the
course of rescue,
reinsurer is obligated to accept a fixed
the thing is exposed
share of the risk which has to be
 42

to a peril not annuity, in which later than 90 days

insured against, case, the from such receipt of
which permanently installments or proof of loss
deprives the insured annuities shall be whether or not
of its possession, in paid as they ascertainment is
whole or in part become due. had or made.
(Sec. 85). b. Maturing at
the death of the
Proximate Cause – An event that sets all insured, occurring
other events in motion without any prior to the
expiration of the
intervening or independent case,
term stipulated –
without which the injury or loss would The proceeds are
not have occurred. payable to the
beneficiaries
REQUISITES FOR RECOVERY UPON within 60 days
INSURANCE after presentation
1. The insured must have insurable and filing of proof
interest in the subject matter; of death.
2. That interest is covered by the policy;
3. There must be a loss; and
4. The loss must be proximately caused  In case of an unreasonable delay in
by the peril insured against. the payment of the insured’s claim by
the insurer, the insured can recover: 1)
NOTICE OF LOSS attorney’s fees; 2) expenses incurred by
In fire insurance In other types of reason of the unreasonable withholding;
insurance 3) interest at double the legal interest
rate fixed by the Monetary Board; and 4)
Required Not required the amount of the claim. (Zenith
Insurance Corp. vs. CA, 185 SCRA 398)
Failure to give Failure to give
notice will defeat notice will not XV. PRESCRIPTIVE PERIOD (Secs. 63 &
the right of the exonerate the 384)
insured to recover. insurer, unless  Rules:
there is a 1. In the absence of an express
stipulation in the stipulation in the policy, it being based
policy requiring the on a written contract, the action
insured to do so.
prescribes in 10 years.
2. However the parties may validly agree
on a shorter period provided it is not less
B. CLAIMS SETTLEMENT
than one year from the time the cause of
 The indemnification of the loss of the
action accrues.
insured.
3. The cause of action accrues from the
rejection of the claim of the insured and
TIME FOR PAYMENT OF CLAIMS
not from the time of loss.
NON-LIFE
It shall commence from the denial of
LIFE POLICIES POLICIES
the claim, not from the resolution of the
a. Maturing The proceeds shall
motion for reconsideration, otherwise it
upon the be paid within 30 can be used by the insured as a scheme
expiration of the days after the or device to waste time until the
term – The receipt by the evidence which may be used against him
proceeds are insurer of proof of is destroyed. (Sun Insurance Office, Ltd.
immediately loss, and v. CA, 195 SCRA)
payable to the ascertainment of 4. In CMVLI, the written notice of claim
insured, unless the loss or damage must be filed within 6 months from the
they are made by agreement of the
date of the accident otherwise the claim
payable in parties or by
installments or as arbitration but not
is deemed waived. The suit for damages
either with the proper court or with the

Insurance Commissioner should be filed
within 1 year from the date of the denial
of the claim by the insurer, otherwise
claimant’s right of action shall prescribe.
(Sec. 384)
PARTICULAR KINDS OF INSURANCE
CONTRACTS
XVI. MARINE INSURANCE
 Insurance against risks connected with
navigation, to which a ship, cargo,
freightage, profits or other insurable
interest in movable property, may be
exposed during a certain voyage or a
fixed period of time. (Sec. 99)
 Coverage:
A.
1. Vessels, goods, freight, cargo,
merchandise, profits, money,
valuable papers, bottomry and
respondentia, and interest in respect
to all risks or perils of navigation;
2. Persons or property in connection
with marine insurance;
3. Precious stones, jewels, jewelry and
precious metals whether in the
course of transportation or
otherwise; and
4. Bridges, tunnels, piers, docks and
other aids to navigation and
transportation. (Sec. 99)
 Cargo can be the subject of
marine insurance, and once it is
entered into, the implied
warranty of seaworthiness
immediately attaches to
whoever is insuring the cargo,
whether he be the shipowner or
not. (Roque v. IAC, 139 SCRA
596)
B. Marine Protection and Indemnity
Insurance
 Classes of inland marine insurance:
(Prof. De Leon, p. 325)
1. Property in transit – provides
protection to property
frequently exposed to loss while
it is transportation form one
location to another.
2. Bailee liability - insurance for
those who have temporary
custody of the goods.
3. Fixed transportation property –
they are so insured because they
are held to be an essential part
43
of the transportation system
such as bridges, tunnels, etc.
4. Floater – provides insurance to
follow the insured property
wherever it may be located,
subject always to the territorial
limits of the contract.
 Insurable interest:
A.
1.Shipowner
a. Over the vessel to the
extent of its value, except
that if chartered, the
insurance is only up to the
amount not recoverable
from the charterer. (Sec.
100).
b. He also has an insurable
interest on expected
freightage. (Sec. 103).
c. No insurable interest if he
will be compensated by
charterer for the value of
the vessel, in case of loss.
2. Cargo owner
 Over the cargo and expected
profits (Sec. 105).
3. Charterer
 Over the amount he is liable
to the shipowner, if the ship is
lost or damaged during the
voyage (Sec. 106).
B.
In loans on bottomry and respondentia
 Repayment of the loan is subject to
the condition that the vessel or goods,
respectively, given as a security, shall
arrive safely at the port of destination.
1. Owner/Debtor
 Difference between the value
of vessel or goods and the
amount of loan. (Sec. 101)
2. Creditor/lender
 Amount of the loan
Note: If a vessel is hypothecated by
bottomry, only the excess is insurable,
since a loan on bottomry partakes of the
nature of an insurance coverage to the
extent of the loan accommodation. The
same rule would apply to the
hypothecation of the cargo by
respondentia. (Pandect of Commercial
Law and Jurisprudence, Justice Jose
Vitug, 1997 ed.)
 44

PERILS OF THE PERILS OF THE 1. Negligence of the captain,

SEA SHIP engineers, etc.
Includes only those A loss which in the 2. Explosions, breakage of shafts; and
casualties due to ordinary course of 3. Latent defect of machinery or hull.
the: events, results (Bar Review Materials in Commercial
1. unusual from the: Law, Jorge Miravite, 2002 ed.)
violence; or 1. natural and
2. extraordinary inevitable action of
D. Sue and Labor Clause
action of wind and the sea
wave; or 2. ordinary wear  A clause under which the insurer may
3. Other and tear of the become liable to pay the insured, in
extraordinary causes ship or addition to the loss actually suffered,
connected with 3. Negligent such expenses as he may have incurred
navigation. failure of the in his efforts to protect the property
ship’s owner to against a peril for which the insurer
provide the vessel would have been liable. (Sec. 163)
with proper
equipment to
convey the cargo MATTERS ALTHOUGH CONCEALED,
under ordinary WILL NOT VITIATE THE CONTRACT
conditions. EXCEPT WHEN THEY CAUSED THE LOSS
(Sec. 110)
Note: It is only perils of the sea which 1. National character of the insured;
may be insured against unless perils of 2. Liability of the thing insured to
the ship is covered by an all-risk policy. capture or detention;
3. Liability to seizure from breach of
SPECIAL MARINE INSURANCE foreign laws;
CONTRACTS AND CLAUSES 4. Want of necessary documents; and
A. All Risks Policy – insurance against all 5. Use of false or simulated papers.
causes of conceivable loss or damage, Note: This should be related to the
except: 1) as otherwise excluded in the general rule regarding material
policy; or 2) due to fraud or intentional concealment.
misconduct on the part of the insured.
 The insured has the initial burden of DISTINCTIONS ON CONCEALMENT
proving that the cargo was in good (Commercial Law Reviewer, A.F.
condition when the policy attached and Agbayani, 1988 ed.)
that the cargo was damaged when
unloaded from the vessel; thereafter, MARINE INSURANCE OTHER
the burden then shifts to the insurer to PROPERTY
show the exception to the coverage. INSURANCE
(Filipinas Merchants Insurance vs. Court The information of the The information or
of Appeals, 179 SCRA 638) belief or expectation belief of a 3rd party
of 3rd persons is is not material and
B. Barratry Clause material and must be need not be
communicated communicated
 A clause which provides that there
unless it proceeds
can be no recovery on the policy in case form an agent of
of any willful misconduct on the part of the insured whose
the master or crew in pursuance of some duty it is to give
unlawful or fraudulent purpose without information
consent of owners, and to the prejudice The concealment of Concealment of any
of the owner’s interest. (Roque vs. IAC, any fact in relation to material fact will
139 SCRA 596) any of the matters vitiate the entire
stated in Sec. 110 contract, whether
C. Inchamaree Clause does not vitiate the or not the loss
entire contract but results for the risk
 A clause which makes the insurer merely exonerates the concealed.
liable for loss or damage to the hull or insurer from a risk
machinery arising from the: resulting from the fact

concealed
IMPLIED WARRANTIES
1. Seaworthiness of the ship at the
inception of the insurance (Sec.
113);
2. Against improper deviation (Sec.
123, 124, 125);
3. Against illegal venture;
4. Warranty of neutrality: the ship will
carry the requisite documents of
nationality or neutrality of the ship
or cargo where such nationality or
neutrality is expressly warranted;
(Sec. 120)
5. Presence of insurable interest.
 While the payment by the insurer for
the insured value of the lost cargo
operates as a waiver of the insurer’s
right to enforce the term of the implied
warranty against the assured under the
marine insurance policy, the same
cannot be validly interpreted as an
automatic admission of the vessel’s
seaworthiness by the insurer as to
foreclose recourse against the common
carrier for any liability under the
contractual obligation as such common
carrier. (Delsan Transportation Lines vs.
CA, 364 SCRA 24)
Seaworthiness
 A relative term depending upon the
nature of the ship, voyage, service and
goods, denoting in general a ship’s
fitness to perform the service and to
encounter the ordinary perils of the
voyage, contemplated by the parties to
the policy (Sec. 114).
GENERAL RULE: The warranty of
seaworthiness is complied with if the
ship be seaworthy at the time of the
commencement of the risk. Prior or
subsequent unseaworthiness is not a
breach of the warranty nor is it material
that the vessel arrives in safety at the
end of her voyage.
EXCEPTIONS:
1. In the case of a time policy, the ship
must be seaworthy at the
commencement of every voyage she
may undertake
2. In the case of cargo policy, each
vessel upon which the cargo is
shipped or transshipped, must be
45
seaworthy at the commencement of
each particular voyage
3. In the case of a voyage policy
contemplating a voyage in different
stages, the ship must be seaworthy
at the commencement of each
portion
 Applicability of implied warranty of
seaworthiness to cargo owners: It
becomes the obligation of a cargo owner
to look for a reliable common carrier,
which keeps its vessels in seaworthy
conditions. The shipper may have no
control over the vessel but he has
control in the choice of the common
carrier that will transport his goods
(Roque v. IAC, 139 SCRA 596).
Deviation
 A departure from the course of the
voyage insured, or an unreasonable
delay in pursuing the voyage or the
commencement of an entirely different
voyage. (Sec.123)
 Instances:
1. Departure of vessel from the
course of the sailing fixed by
mercantile usage
2. Departure of vessel from the
most natural, direct and
advantageous route if not fixed
by mercantile usage
3. Unreasonable delay in pursuing
voyage
4. Commencement of an entirely
different voyage (Secs. 121-123)
 Kinds:
1. Proper -
a. When caused by circumstances outside
the control of the ship captain or ship
owner;
b. When necessary to comply with a
warranty or to avoid a peril;
c. When made in good faith to avoid a
peril;
d. When made in good faith to save
human life or to relieve another vessel
in distress (Sec. 124)
 Effect: In case of loss, the
insurer is still liable.
2. Improper - Every deviation not
specified in Sec. 124 (Sec. 125).
 Effect: In case of loss or
damage, the insurer is not liable.
(Sec. 126)
 46

danger to the
vessel or
LOSS cargo;
1. Total: 2. Part of the
a. Actual - vessel or cargo
i. Total destruction; was sacrificed
ii. Irretrievable loss by sinking; deliberately;
iii. Damage rendering the thing 3. Sacrifice must
valueless; or be for the
iv. Total deprivation of owner of common safety
possession of thing insured. or for the
(Sec. 130) benefit of all;
b. Constructive - 4. Sacrifice must
i. Actual loss of more than ¾ be made by
of the value of the object; the master or
ii. Damage reducing value by upon his
more than ¾ of the value of authority;
the vessel and of cargo; and 5. It must be not
iii. Expense of transshipment be caused by
exceed ¾ of value of cargo. any fault of
(Sec. 131, in relation to Sec. the party
139) asking the
 In case of constructive contribution;
total loss, insured may: 6. It must be
1. Abandon goods or successful, i.e.
vessel to the insurer and resulted in the
claim for whole insured saving of the
value (Sec. 139), or vessel or
2. Without abandoning cargo; and
vessel, claim for partial Necessary.
actual loss. (Sec. 155)
2. Partial: That which is not total (Sec. RIGHT OF INSURED IN CASE OF
128). GENERAL AVERAGE
GENERAL RULE: The insured may
AVERAGE either hold the insurer directly liable for
 Any extraordinary or accidental the whole of the insured value of the
expense incurred during the voyage for property sacrificed for the general
the preservation of the vessel, cargo, or benefit, subrogating him to his own right
both, and all damages to the vessel and of contribution or demand contribution
cargo from the time it is loaded and the from the other interested parties as soon
voyage commenced until it ends and the as the vessel arrives at her destination
cargo unloaded. EXCEPTIONS:
1. After the separation of interests
GENERAL PARTICULAR liable to contribution
Has inured to the Has not inured to the 2. When the insured has neglected or
common benefit and common benefit and waived his right to contribution
profit of all persons profit of all persons
interested in the interested in the FPA Clause (Free From Particular
vessel and cargo vessel and her cargo.
Average)
To be borne equally To be borne alone by
by all of the interests the owner of the A clause agreed upon in a policy of
concerned in the cargo or the vessel, marine insurance in which it is stated
venture. as the case may be. that the insurer shall not be liable for a
Requisites for the particular average, such insurer shall be
right to claim free therefrom, but he shall continue to
contribution: be liable for his proportion of all general
1. Common
 47

average losses assessed upon the thing  When the property is insured for less
insured. (Sec. 136) than its value, the insured is considered
ABANDONMENT a co-insurer of the difference between
 The act of the insured by which, after the amount of insurance and the value of
a constructive total loss, he declared the the property.
relinquishment to the insurer of his
interest in the thing insured. (Sec. 138)  Requisites:
 Requisites for validity: 1. The loss is partial;
1. There must be an actual 2. The amount of insurance is less than
relinquishment by the person insured the value of the property insured.
of his interest in the thing insured
(Sec. 138);  Rules:
2. There must be a constructive total 1. Co-insurance applies only to marine
loss (Sec. 139); insurance
3. The abandonment be neither partial 2. Logically, there cannot be co-
nor conditional (Sec. 140); insurance in life insurance.
4. It must be made within a reasonable 3. Co-insurance applies in fire insurance
time after receipt of reliable when expressly provided for by the
information of the loss (Sec. 141); parties.
5. It must be factual (Sec. 142);
6. It must be made by giving notice CO-INSURANCE REINSURANCE
thereof to the insurer which may be A percentage in the Situation where the
done orally or in writing (Sec. 143); value of the insured insurer procures a 3rd
and property which the party called the
7. The notice of abandonment must be insured himself reinsurer to insure
explicit and must specify the assumes to act as him against liability
insurer to the extent by reason of an
particular cause of the abandonment
of the deficiency in original insurance.
(Sec. 144). the insurance of the Basically,
insured property. In reinsurance is an
 Effects: case of loss or insurance against
1. It is equivalent to a transfer by the damage, the insurer liability which the
insured of his interest to the insurer will be liable only for original insurer may
with all the chances of recovery and such proportion of incur in favor of the
indemnity (Transfer of Interest) the loss or damage as original insured.
(Sec.146) the amount of the
insurance bears to
2. Acts done in good faith by those who
the designated
were agents of the insured in respect percentage of the
to the thing insured, subsequent to full value of the
the loss, are at the risk of the property insured.
insurer and for his benefit. (Bar Review
(Transfer Of Agency)(Sec.148) Materials in
Commercial Law,
 If an insurer refuses to accept a valid Jorge Miravite, 2002
abandonment, he is liable upon an ed.)
actual total loss, deducting form the
amount any proceeds of the thing
insured which may have come to the XVII. FIRE INSURANCE
hands of the insured. (Sec.154)  A contract by which the insurer for a
consideration agrees to indemnify the
CO-INSURANCE insured against loss of, or damage to,
 A marine insurer is liable upon a property by hostile fire, including loss by
partial loss, only for such proportion of lightning, windstorm, tornado or
the amount insured by him as the loss earthquake and other allied risks, when
bears to the value of the whole interest such risks are covered by extension to
of the insured in the property insured. fire insurance policies or under separate
(Sec. 157) policies. (Sec. 167)

 Prerequisites to recovery:
1. Notice of loss – must be immediately
given, unless delay is waived expressly or
impliedly by the insurer
2. Proof of loss – according to best
evidence obtainable. Delay may also be
waived expressly or impliedly by the
insurer
HOSTILE FIRE FRIENDLY FIRE
One that escapes One that burns in a
from the place place where it was
where it was intended to burn
intended to burn and ought to be
and ought to be.
Insurer is liable Insurer is not liable
Measure of Indemnity
1. Open policy: only the expense
necessary to replace the thing lost or
injured in the condition it was at the
time of the injury
2. Valued policy: the parties are bound
by the valuation, in the absence of fraud
or mistake
Note: It is very crucial to determine
whether a marine vessel is covered by a
marine insurance or fire insurance. The
determination is important for 2 reasons:
1. Rules on constructive total loss
and abandonment – applies only
to marine insurance;
2. Rule on co-insurance – applies
primarily to marine insurance;
3. Rule on co-insurance applies to
fire insurance only if expressly
agreed upon. (Commercial Law
Reviewer, Aguedo Agbayani,
1988 ed.)
ALTERATION AS A SPECIAL GROUND
FOR RESCISSION BY INSURER
 Requisites:
1. The use or condition of the thing
is specifically limited or
stipulated in the policy;
2. Such use or condition as limited
by the policy is altered;
3. The alteration is made without
the consent of the insurer;
4. The alteration is made by means
within the control of the
insured;
48
5. The alteration increases the risk;
(Sec. 168) and
6. There must be a violation of a
policy provision. (Sec. 170)
Fall-of-building clause
 A clause in a fire insurance policy that
if the building or any part thereof falls,
except as a result of fire, all insurance
by the policy shall immediately cease.
Option to rebuild clause
 A clause giving the insurer the option
to reinstate or replace the property
damaged or destroyed or any part
thereof, instead of paying the amount of
the loss or the damage.
 The insurer, after electing to rebuild,
cannot be compelled to perform this
undertaking by specific performance
because this is an obligation to do, not
to give. Remedy: Art. 1167, NCC.
XVIII. CASUALTY OR ACCIDENT
INSURANCE
 Insurance covering loss or liability
arising from accident or mishap,
excluding those falling under other types
of insurance such as fire or marine. (Sec.
174)
 Classifications:
1. Insurance against specified perils
which may affect the person and/or
property of the insured. (accident or
health insurance)
 Examples: personal accident,
robbery/theft insurance
2. Insurance against specified perils
which may give rise to liability on the
part of the insured for claims for
injuries to or damage to property of
others. (third party liability insurance)
 Insurable interest is based on the
interest of the insured in the safety of
persons, and their property, who may
maintain an action against him in case of
their injury or destruction, respectively.
 Examples: workmen’s compensation,
motor vehicle liability
 In a third party liability (TPL)
insurance contract, the insurer assumes
the obligation by paying the injured
third party to whom the insured is liable.
Prior payment by the insured to the third
person is not necessary in order that the

obligation may arise. The moment the
insured becomes liable to third persons,
the insured acquires an interest in the
insurance contract which may be
garnished like any other credit. (Perla
Comapnia de Seguro, Inc vs. Ramolete,
205 SCRA 487)
 Aside from compulsory motor vehicle
liability insurance, the Insurance Code
contains no other provisions applicable
to casualty insurance. Therefore, such
casualty insurance are governed by the
general provisions applicable to all types
of insurance, and outside of such
statutory provisions, the rights and
obligations of the parties must be
determined by their contract, taking into
consideration its purpose and always in
accordance with the general principles
of insurance law.
 In burglary, robbery and theft
insurance, the opportunity to defraud
the insurer – the moral hazard – is so
great that insurer have found it
necessary to fill up the policies with
many restrictions designed to reduce the
hazard. Persons frequently excluded are
those in the insured’s service and
employment. The purpose of the
exception is to guard against liability
should theft be committed by one having
unrestricted access to the property.
(Fortune Insurance vs. CA, 244 SCRA 208)
Right of a third party injured to sue the
insurer
1. Indemnity against liability – A third
party injured can directly sue the
insurer.
2. Indemnity for actual loss or
reimbursement after actual payment by
the insured – A third party has no cause
of action against the insurer (Sec. 53,
Bonifacio Bros. v. Mora, 20 SCRA 261).
 The insurer is not solidarily liable with
the insured. The insurer’s liability is
based on contract; that of the insured is
based on torts. Furthermore, the
insurer’s liability is limited by the
amount of the insurance coverage (Pan
Malayan Insurance Corporation v. CA,
184 SCRA 54).
49
“INTENTIONAL” vs. “ACCIDENTAL” AS
USED IN INSURANCE POLICIES
1. Intentional – Implies the exercise of
the reasoning faculties, consciousness
and volition. Where a provision of the
policy excludes intentional injury, it is
the intention of the person inflicting the
injury that is controlling. If the injuries
suffered by the insured clearly resulted
from the intentional act of the third
person, the insurer is relieve from
liability as stipulated. (Biagtan v. the
Insular Life Assurance Co. Ltd., 44 SCRA
58, 1972)
2. Accidental – That which happens by
chance or fortuitously, without intention
or design, which is unexpected, unusual
and unforeseen.
NO ACTION CLAUSE
 A requirement in a policy of liability
insurance which provides that suit and
final judgment be first obtained against
the insured; that only thereafter can the
person injured recover on the policy.
(Guingon vs. Del Monte, 20 SCRA 1043)
XIX. COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE (CMVLI)
 A species of compulsory insurance
that provides for protection coverage
that will answer for legal liability for
losses and damages for bodily injuries or
property damage that may be sustained
by another arising from the use and
operation of motor vehicle by its owner.
 Purpose: To give immediate financial
assistance to victims of motor vehicle
accidents and/or their dependents,
especially if they are poor regardless of
the financial capability of motor vehicle
owners or operators responsible for the
accident sustained (Shafer v. Judge,
RTC, 167 SCRA 386).
 Claimants/victims may be a
“passenger” or a “3rd party”
 It applies to all vehicles whether
public and private vehicles.
Note: It is the only compulsory insurance
coverage under the Insurance Code.

Method of coverage
1. Insurance policy
2. Surety bond
3. Cash deposit
Passenger – Any fare-paying person
being transported and conveyed in and
by a motor vehicle for transportation of
passengers for compensation, including
persons expressly authorized by law or
by the vehicle’s operator or his agents to
ride without fare. (Sec. 373[b])
Third Party – Any person other than the
passenger, excluding a member of the
household or a member of the family
within the second degree of
consanguinity or affinity, of a motor
vehicle owner or land transportation
operator, or his employee in respect of
death or bodily injury arising out of and
in the course of employment. (Sec.
373[c])
“No-Fault” Clause
 A clause that allows the victim
(injured person or heirs of the deceased)
to an option to file a claim for death or
injury without the necessity of proving
fault or negligence of any kind.
 Purpose: To guarantee compensation
or indemnity to injured persons in motor
vehicle accidents.
 Rules:
1. Total indemnity - maximum of P5,000
2. Proofs of loss -
a. Police report of accident;
b. Death certificate and evidence
sufficient to establish proper payee;
c. Medical report and evidence of
medical or hospital disbursement.
3. Claim may be made against one motor
vehicle only
4. Proper insurer from which to claim -
a. In case of an occupant: Insurer
of the vehicle in which the occupant is
riding, mounting or dismounting from;
b. In any other case: Insurer of the
directly offending vehicle. (Sec. 378)
 The claimant is not free to choose
from which insurer he will claim the “no
fault indemnity” as the law makes it
mandatory that the claim shall lie
50
against the insurer of the vehicle in
which the occupant is riding, mounting
or dismounting from. That said vehicle
might not be the one that caused the
accident is of no moment since the law
itself provides that the party paying may
recover against the owner of the vehicle
responsible for the accident. (Perla
Compania de Seguros, Inc. v. Ancheta,
169 SCRA 144)
 This no-fault claim does not apply to
property damage. If the total indemnity
claim exceeds P5,000 and there is
controversy in respect thereto, the
finding of fault may be availed of by the
insurer only as to the excess. The first
P5,000 shall be paid without regard to
fault. (Prof. De Leon, p. 716)
 The essence of the no-fault indemnity
insurance is to provide victims of
vehicular accidents or their heirs
immediate compensation although in
limited amount, pending final
determination of who is responsible for
the accident and liable for the victims
injuries or death. (Ibid.)
SPECIAL CLAUSES
A. Authorized Driver Clause
 A clause which aims to indemnify the
insured owner against loss or damage to
the car but limits the use of the insured
vehicle to the insured himself or any
person who drives on his order or with
his permission (Villacorta v. Insurance
Commissioner)
 The requirement that the person
driving the insured vehicle is permitted
in accordance with the licensing laws or
other laws or regulations to drive the
motor vehicle (licensed driver) is
applicable only if the person driving is
other than the insured.
B. Theft Clause
 A clause which includes theft as
among the risks insured against.
 Where the car is unlawfully and
wrongfully taken without the owner’s
consent or knowledge, such taking
constitutes theft, and thus, it is the
“theft clause” and not the “authorized
driver clause that should apply (Palermo
v. Pyramids Ins., 161 SCRA 677).
 51

in the nature of a as a ratable

service fee contribution to a
C. Cooperation Clause common fund
 A clause which provides in essence XXI. LIFE INSURANCE
that the insured shall give all such  Insurance on human lives and
information and assistance as the insurer insurance appertaining thereto or
may require, usually requiring connected therewith which includes
attendance at trials or hearings. every contract or pledge for the
XX. SURETYSHIP payment of endowments or annuities.
 An agreement whereby a surety (Sec. 179)
guarantees the performance by the  Kinds: (Bar Review Materials in
principal or obligor of an obligation or Commercial Law, Jorge Miravite, 2002
undertaking in favor of an obligee. (Sec. ed.)
175) 1. Ordinary Life, General Life or Old
 It is essentially a credit Line Policy - Insured pays a fixed
accommodation. premium every year until he dies.
 It is considered an insurance contract Surrender value after 3 years.
if it is executed by the surety as a 2. Group Life – Essentially a single
vocation, and not incidentally. (Sec. 20 insurance contract that provides
 When the contract is primarily drawn coverage for many individuals.
up by 1 party, the benefit of doubt goes Examples: In favor of employees,
to the other party (insured/obligee) in “mortgage redemption insurance”.
case of an ambiguity following the rule 3. Limited Payment Policy – insured
in contracts of adhesion. Suretyship, pays premium for a limited period.
especially in fidelity bonding, is thus If he dies within the period, his
treated like non-life insurance in some beneficiary is paid; if he outlives the
respects. period, he does not get anything.
4. Endowment Policy – pays premium
Nature of liability of surety for specified period. If he outlives
1. Solidary; the period, the face value of the
2. Limited to the amount of the bond; policy is paid to him; if not, his
3. It is determined strictly by the terms beneficiaries receive the benefit.
of the contract of suretyship in 5. Term Insurance – insurer pays once
relation to the principal contract only, and he is insured for a
between the obligor and the obligee. specified period. If he dies within
(Sec. 176) the period, his beneficiaries
benefits. If he outlives the period,
SURETYSHIP PROPERTY no person benefits from the
INSURANCE insurance.
Accessory contract Principal contract 6. Industrial Life - life insurance
3 parties: surety, 2 parties: insurer entitling the insured to pay
obligor and oblige and insured premiums weekly, or where
Credit Contract of premiums are payable monthly or
accommodation indemnity oftener.
Surety can recover Insurer has no such
from principal right; only right of Mortgage Redemption Insurance
subrogation  A life insurance taken pursuant to a
Bond can be May be cancelled group mortgage redemption scheme by
cancelled only with unilaterally either by the lender of money on the life of a
consent of obligee, insured or insurer on mortgagor who, to secure the loan,
Commissioner or grounds provided by
mortgages the house constructed from
court law
Requires No need of
the use of the proceeds of the loan, to
acceptance of acceptance by any the extent of the mortgage indebtedness
obligee to be valid third party such that if the mortgagor dies, the
Risk-shifting device; Risk-distributing proceeds of his life insurance will be
premium paid being device; premium paid used to pay for his indebtedness to the
 52

lender assured and the deceased’s heirs source of premiums would not be
will thereby be relieved from paying the relevant. (Del Val v. Del Val, 29 Phil 534)
unpaid balance of the loan. (Great
Pacific Life Assurance Corp. vs. Court of  The measure of indemnity in life or
Appeals, 316 SCRA 677) health insurance policy is the sum fixed
in the policy except when a creditor
LIABILITY OF INSURER IN CERTAIN insures the life of his debtor. (Sec. 183)
CAUSES OF DEATH OF INSURED IS THE CONSENT OF THE BENEFICIARY
1. Suicide NECESSARY TO THE ASSIGNMENT OF A
 Insurer is liable in the following cases: LIFE INSURANCE POLICY?
1. If committed after two years  It depends. If the designation of the
from the date of the policy’s beneficiary is irrevocable, the
issue or its last reinstatement; beneficiary’s consent is essential
2. If committed in a state of because of his vested right. If the
insanity regardless of the date of designation is revocable, the policy may
the commission unless suicide is be assigned without such consent
an excepted peril. (Sec. 180-A) because the beneficiary only has a mere
3. If committed after a shorter expectancy to the proceeds. (The
period provided in the policy Insurance Code of the Philippines
 Any stipulation extending the 2-year Annotated, Hector de Leon, 2002 ed.)
period is null and void.
2. At the hands of the law (E.g. by legal Cash Surrender Value
execution)  As applied to a life insurance policy,
 It is one of the risks assumed by the it is the amount the insured in case of
insurer under a life insurance policy in default, after the payment of at least 3
the absence of a valid policy exception. full annual premiums, is entitled to
(Vance,p.572 cited in de Leon, p. 107) receive if he surrenders the policy and
Note: Justice Vitug believes that death releases his claims upon it.
by suicide (if the insured is sane) or at
the hands of the law obviates against LIFE INSURANCE FIRE INSURANCE
recovery as being more in consonance
with public policy and as being implicit Contract of Contract of indemnity
under Section 87, ICP. (Pandect of investment not of
indemnity
Commercial Law and Jurisprudence, Valued policy Open or valued policy
1997 ed. P. 191) May be transferred The insurable
3. Killing by the beneficiary or assigned to any interest of the
GENERAL RULE: The interest of a person even if he transferee or
beneficiary in a life insurance policy has no insurable assignee is essential
shall be forfeited when the beneficiary is interest
the principal accomplice or accessory in Consent of insurer is Consent of insurer
not essential to must be secured in
willfully bringing about the death of the validity of the absence of waiver
insured, in which event, the nearest assignment
relative of the insured shall receive the Contingency that is Contingency insured
proceeds of said insurance if not contemplated is a against may or may
otherwise disqualified. (Sec. 12) certain event, the not occur
EXCEPTIONS: only uncertainty
being the time when
1. Accidental killing it will take place
2. Self-defense A long-term May be cancelled by
3. Insanity of the beneficiary at the contract and cannot either party and is
time he killed the insured be cancelled by the usually for a term of
insurer one year
 If the premiums paid came from Beneficiary is under Insured is required to
conjugal funds, the proceeds are no obligation to submit proof of his
prove actual actual pecuniary loss
considered conjugal. If the beneficiary is financial loss as a condition
other than the insured’s estate, the precedent to
collecting the

insurance.
XXII. VARIABLE CONTRACT
 Any policy or contract on either a
group or individual basis issued by an
insurance company providing for benefits
or other contractual payments or values
thereunder to vary so as to reflect
investment results of any segregated
portfolio of investment.
XXIII. INSURANCE COMMISSIONER
 Main agency charged with the
enforcement of the Insurance Code and
other related laws.
 Functions:
1. ADJUDICATORY/QUASI-JUDICIAL
a. Exclusive original jurisdiction –
Any dispute in the enforcement of any
policy issued pursuant to Chapter VI
(CMVLI). (Sec. 385, par. 2)
b. Concurrent original jurisdiction
(with the RTC) – Where the maximum
amount involved in any single claim is
P100,000 (Sec. 416), except in case of
maritime insurance which is within the
exclusive jurisdiction of the RTC. (BP
129; admiralty & maritime jurisdiction)
 Where the amount exceeds
P100,000, the RTC has
jurisdiction.
53
 The Insurance Commissioner has no
jurisdiction to decide the legality of a
contract of agency entered into between
an insurance company and its agent. The
same is not covered by the term “doing
or transacting insurance business” under
Sec 2, ICP, neither is it covered by Sec.
416 of the same Code which grants the
Commissioner adjudicatory powers
(Philippine American Life Insurance Co.
v. Ansaldo, 234 SCRA 509).
2. ADMINISTRATIVE/REGULATORY
a. Enforcement of insurance laws
b. Issuance, suspension or
revocation of certificate of
authority
c. Power to examine books and
records, etc.
d. Rule-making authority
e. Punitive