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 latters 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 insureds claim for loss;

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c.
d.
e.

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)
In life insurance
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;
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.

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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. 179183, 227)
b. Group life (Secs. 50, last par., 228)
c. Industrial life (Secs. 229231)
2. Non-life insurance
a. Marine (Secs. 99166)
b. Fire (Secs. 167173)
c. Casualty (Sec. 174)
3. Contracts of bonding or suretyship (Secs. 175178)
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 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;
c. of any person under a legal obligation to him to pay money or
respecting property or services, of which death or illness might
delay or prevent performance; and
d. of any person upon whose life any estate or interest vested in him
depends. (Sec. 10)
When it should exist: When the insurance takes effect; not thereafter
or when the loss occurs.
Amount:
GENERAL RULE: There is no limit in the amount the insured can insure his
life.

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EXCEPTION: In a creditor-debtor relationship where the creditor insures

the life of his debtor, the limit of insurable interest is equal to the amount
of the debt.
Note: If at the time of the death of the debtor the whole debt has already
been paid, the creditor can no longer recover on the policy because the
principle of indemnity applies.
C. Property
Every interest in property whether real or personal, or any relation
thereto, or liability in respect thereof, of such nature that the contemplated
peril might directly damnify the insured (Sec. 13), which may consist in:
1. an existing interest;
2. any inchoate interest founded on an existing interest; or
3. an expectancy coupled with an existing interest in that out of
which the expectancy arises. (Sec. 14)
When it should exist: When the insurance takes effect and when the
loss occurs, but need not exist in the meantime.
Amount: The measure of insurable interest in property is the extent to
which the insured might be damnified by loss or injury thereof. (Sec. 17)
INSURABLE INTEREST IN LIFE
Must exist only at the time the
policy takes effect and need not
exist at the time of loss
Unlimited except in life insurance
effected by creditor on life of
debtor.
The expectation of benefit to be
derived
from
the
continued
existence of life need not have any
legal basis whatever. A reasonable
probability is sufficient without
more.
The beneficiary need not have an
insurable interest over the life of
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.

INSURABLE INTEREST IN
PROPERTY
Must exist at the time the policy
takes effect and when the loss
occurs
Limited to actual value of interest
in property insured.
An expectation of a benefit to be
derived
from
the
continued
existence of the property insured
must have a legal basis.
The
beneficiary
must
have
insurable interest over the thing
insured.

SPECIAL CASES
1. In case of a carrier or depositary
A carrier or depository of any kind has an insurable interest in a thing
held by him as such, to the extent of his liability but not to exceed the
value thereof (Sec. 15)

2. In case of a mortgaged property

The mortgagor and mortgagee each have an insurable interest in the
property mortgaged and this interest is separate and distinct from the
other.
a. Mortgagor As owner, has an insurable interest therein to the extent
of its value, even though the mortgage debt equals such value. The
reason is that the loss or destruction of the property insured will not
extinguish the mortgage debt.
b. Mortgagee His interest is only up to the extent of the debt. Such
interest continues until the mortgage debt is extinguished.
The lessor cannot be validly a beneficiary of a fire insurance policy taken
by a lessee over his merchandise, and the provision in the lease contract
providing for such automatic assignment is void for being contrary to law
and public policy. (Cha vs. Court of Appeals, 227 SCRA 690)
STANDARD OR UNION
MORTGAGE CLAUSE
Subsequent
acts
of
the
mortgagor cannot affect the
rights of the assignee

OPEN OR LOSS PAYABLE

MORTGAGE CLAUSE
Acts of the mortgagor affect the
mortgagee. Reason: Mortgagor
does not cease to be a party to
the contract. (Secs. 8 and 9)

Effects of Loss Payable Clause

a. The contract is deemed to be upon the interest of the mortgagor; hence,
he does not cease to be a party to the contract.
b. Any act of the mortgagor prior to the loss, which would otherwise avoid
the insurance affects the mortgagee even if the property is in the hands of
the mortgagee.
c. Any act, which under the contract of insurance is to be performed by the
mortgagor, may be performed by the mortgagee with the same effect.
d. In case of loss, the mortgagee is entitled to the proceeds to the extent of
his credit.
e. Upon recovery by the mortgagee to the extent of his credit, the debt is
extinguished.
In case a mortgagee insures his own interest and a loss occurs, he is
entitled to the proceeds of the insurance but he is not allowed to retain his
claim against the mortgagor as the claim is discharged but it passes by
subrogation to the insurer to the extent of the money paid by such insurer.
(Palileo vs. Cosio)
VIII. RISK
What may be insured against:
1. Future contingent event resulting in loss or damage Ex. Possible
future fire
2. Past unknown event resulting in loss or damage Ex. Fact of past
sinking of a vessel unknown to the parties

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3.

Contingent liability Ex. Reinsurance

IX. PREMIUM PAYMENTS

Consideration paid an insurer for undertaking to indemnify the insured
against a specified peril.
Basis of the right of the insurer to collect premiums: Assumption of risk.

GENERAL RULE: No policy issued by an insurance company is valid and

binding until actual payment of premium. Any agreement to the contrary is
void. (Sec. 77)
EXCEPTIONS:
1.
In case of life or industrial life insurance, when the grace periods
applies; (Sec. 77)
2.
When the insurer makes a written acknowledgment of the receipt
premium; (Sec. 78)
3.
Section 77 may not apply if the parties have agreed to the payment of
the premium in installments and partial payment has been made at
the time of the loss. (Makati Tuscany Condominium Corp. v. CA, 215
SCRA 462)
4.
Where a credit term has been agreed upon. (UCPB vs. Masagana
Telemart, 308 SCRA 259)
5.
Where the parties are barred by estoppel. (UCPB vs. Maagana
Telemart, 356 SCRA 307)
Section 77 merely precludes the parties from stipulating that the policy
is valid even if the premiums are not paid. (Makati Tuscany Condominium
Corp. v. CA, 215 SCRA 462)
Effect of Acknowledgment of Receipt of Premium in Policy:
Conclusive evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until the
premium is actually paid. (Sec. 78)

ENTITLEMENT OF INSURED TO RETURN OF PREMIUMS PAID

A. Whole:
1. If the thing insured was never exposed to the risks insured against;
(Sec. 79)
2. If contract is voidable due to the fraud or misrepresentation of
insurer or his agents; (Sec. 81)
3. If contract is voidable because of the existence of facts of which
the insured was ignorant without his fault; (Sec. 81)
4. When by any default of the insured other than actual fraud, the
insurer never incurred liability; (Sec. 81)
5. When rescission is granted due to the insurers breach of contract.
(Sec. 74)

B. Pro rata:
1. When the insurance is for a definite period and the insured
surrenders his policy before the termination thereof;
Exceptions:
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 (Sec. 82);
Instances when premiums are not recoverable:
1. When the risk has already attached and the risk is entire and
indivisible.
2. In life insurance.
3. When the contract is rescindable or rendered void ab initio by the
fraud of the insured.
4. When the contract is illegal and the parties are in pari delicto.
PREMIUM
Levied
and
paid
anticipated losses.

ASSESSMENT
to

meet

Collected to meet actual losses.

Payment is not enforceable against

the insured.

Payment is enforceable once levied

unless otherwise agreed upon.

Not a debt.

It becomes a debt once properly

levied unless otherwise agreed.

X. TRANSFER OF POLICY
1. Life Insurance
It can be transferred even without the consent of the insurer except when
there is a stipulation requiring the consent of the insurer before transfer.
(Sec. 181)
Reason: The policy does not represent a personal agreement between the
insured and the insurer.
2. Property insurance
It cannot be transferred without the consent of the insurer.
Reason: The insurer approved the policy based on the personal
qualification and the insurable interest of the insured.
3. Casualty insurance
It cannot be transferred without the consent of the insurer. (Paterson
cited in de Leon p. 82)
Reason: The moral hazards are as great as those of property insurance.
CHANE OF INTEREST IN THE THING INSURED
The mere (absolute) transfer of the thing insured does not transfer the
policy, but suspends it until the same person becomes the owner of both
the policy and the thing insured. (Sec. 58)

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 Reason: Insurance contract is personal.

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

EXCEPTIONS:
1. In life, health and accident insurance.(Sec. 20);
2. Change in interest in the thing insured after occurrence of an injury
which results in a loss. (Sec. 21);
3. Change in interest in one or more of several distinct things
separately insured by one policy. (Sec. 22);
4. Change of interest, by will or succession, on the death of the
insured. (Sec. 23);
5. Transfer of interest by one of several partners, joint owners, or
owners in common, who are jointly insured, to others. (Sec. 24);
6. When a policy is so framed that it will inure to the benefit of
whomsoever, during the continuance of the risk, may become the
owner of the interest insured. (Sec. 57);
7. When there is an express prohibition against alienation in the
policy, in case of alienation, the contract of insurance is not merely
suspended but avoided. (Art. 1306, NCC).
XI. ASCERTAINMENT AND CONTROL OF RISK AND LOSS
A.
1.
2.
3.
4.

Four Primary Concerns of the Parties:

Correct estimation of the risk;
Precise delimitation of the risk;
Control of the risk;
Determining whether a loss occurred and if so, the amount of such loss.

B. Devices used for ascertaining and controlling risk and loss:

1. Concealment A neglect to communicate that which a party knows
and ought to communicate (Sec. 26)
Requisites:
a. A party knows a fact which he neglects to communicate or disclose
to the other.
b. Such party concealing is duty bound to disclose such fact to the
other.
c. Such party concealing makes no warranty as to the fact concealed.
d. The other party has not the means of ascertaining the fact
concealed.
e. Material
Effects: Entitles insurer to rescind, even if the death or loss is due to a
cause not related to the concealed matter (Sec. 27).
Note: Good Faith is not a defense in concealment. Sec. 27 clearly provides
that, the concealment whether intentional or unintentional entitles the
injured party to rescind the contract of insurance.

Test of Materiality: Determined not by the event, but solely by the

probable and reasonable influence of the facts upon the party to whom the
communication is due, in forming his estimate of the advantages of the
proposed contract, or in making his inquiries (Sec. 31).
Exception to Sec. 31:
a. Incontestability clause
b. Matters under Sec.110 (marine insurance)
The waiver of medical examination in a non-medical insurance contract
renders even more material the information required of the applicant
concerning the previous conditions of health and diseases suffered.
(Sunlife v. Sps. Bacani, 246 SCRA 268).
The right to information of material facts may be waived, either by the
terms of the insurance or by neglect to make inquiries as to such facts
where they are distinctly implied in other facts of which information is
communicated. (Sec.33)
Where matters of opinion or judgment are called for, answers made in
good faith and without intent to deceiver will not avoid the policy even
though they are untrue. Reason: The insurer cannot rely on those
statements. He must make further inquiry. (Philamcare Health Systems vs.
CA, G.R. No. 125678, March 18, 2002).
2. Representations Factual statements made by the insured at the
time of, or prior to, the issuance of the policy to give information to the
insurer and induce him to enter into the insurance contract. They are
considered an active form of concealment.
Requisites of a false representation (misrepresentation):
a. The insured stated a fact which is untrue.
b. Such fact was stated with knowledge that it is untrue and with
intent to deceive or which he states positively as true without
knowing it to be true and which has a tendency to mislead.
c. Such fact in either case is material to the risk.
Characteristics:
a. It is not a part of the contract but merely a collateral inducement to it.
b. It may be oral or written.
c. It is made at the same time of issuing the policy or before but not after.
d. It may be altered or withdrawn before the insurance is effected but not
afterwards.
e. It always refers to the date the contract goes into effect.
Kinds:
a. AFFIRMATIVE affirmation of a fact when the contract begins; and
b. PROMISSORY promise to be performed after policy was issued.
Effect of Misrepresentation: the injured party is entitled to rescind from
the time when the representation becomes false.
Test of Materiality: Same as that in concealment.

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b.

Where the insured merely signed the application form and made the
agent of the insurer fill the same for him, it was held that by doing so, the
insured made the agent of the insurer his own agent and he was
responsible for his acts for that purpose. (Insular Life Assur. Co. vs.
Feliciano, 74 Phil. 469)
3. Warranties Statement or promise by the insured set forth in the
policy or by reference incorporated therein, the untruth or non-fulfillment
of which in any respect, and without reference to whether insurer was in
fact prejudiced by such untruth or non-fulfillment, renders the policy
voidable by the insurer.
Purpose: To eliminate potentially increasing hazards which may either be
due to the acts of the insured or to the change to the condition of the
property.
Kinds:
a. EXPRESS an agreement expressed in a policy whereby the insured
stipulates that certain facts relating to the risk are or shall be true, or
certain acts relating to the same subject have been or shall be done.
b. IMPLIED - it is deemed included in the contract although not expressly
mentioned. Example: In marine insurance, seaworthiness of the vessel.
Effects of breach of warranty:
a. Material
GENERAL RULE: Violation of material warranty or of a material provision
of a policy will entitle the other party to rescind the contract. (Sec. 74)
EXCEPTIONS:
a. Loss occurs before the time of performance of the warranty.
b. The performances becomes unlawful at the place of the contract.
c. Performance becomes impossible. (Sec. 73)
b. Immaterial (ex. Other insurance clause)
GENERAL RULE: It will not avoid the policy.
EXCEPTION: When the policy expressly provides or declares that a
violation thereof will avoid it. (Sec. 75)
WARRANTY
Part of the contract
Written on the policy, actually or by
reference
Presumed material
Must be strictly complied with

REPRESENTATION
Mere collateral inducement
May be written in the policy or may
be oral.
Must be proved to be material
Requires only substantial truth and
compliance

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

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)
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;

7|Page

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.
Incontestability only deprives the insurer of those defenses which arise
in connection with the formation and operation of the policy prior to loss.
(Prof. De Leon, p. 173 citing Wyatt and Wyatt, p. 878)
BARRED DEFENSES
OF THE INSURER
1. Policy is void ab initio
2. Policy is rescindable by
reason of the fraudulent
concealment
or
misrepresentation
of
the
insured or his agent

DEFENSES NOT BARRED

1. That the person taking the insurance
lacked insurable interest as required by law;
2. That the cause of the death of the
insured is an excepted risk;
3. That the premiums have not been paid
(Secs. 77, 227[b], 228[b], 230[b]);
4. That the conditions of the policy relating
to military or naval service have been
violated (Secs. 227[b], 228[b]);
5. That the fraud is of a particularly vicious
type;
6. That the beneficiary failed to furnish
proof of death or to comply with any
condition imposed by the policy after the
loss has happened; or
7. That the action was not brought within
the time specified.

XIII.
A. OVER-INSURANCE results when the insured insures the same
property for an amount greater than the value of the property with the
same insurance company.
Effect in case of loss:
1. The insurer is bound only to pay to the extent of the real value of the
property lost;
2. The insured is entitled to recover the amount of premium
corresponding to the excess in value of the property;

B. DOUBLE INSURANCE exists where same person is insured by several

insurers separately in respect to same subject and interest. (Sec. 93)
Requisites:
1. Person insured is the same;
2. Two or more insurers insuring separately;
3. Subject matter is the same;
4. Interest insured is also the same;
5. Risk or peril insured against is likewise the same.
Effects: Where double insurance is allowed, but over insurance results:
(Sec. 94)
1.
The 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;
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 other policy without
regard to the actual value of the subject matter insured;
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;
4.
Where the insured receives any sum in
excess of the valuation in the case of valued policies, or of the
insurable value in the case of unvalued policies, he must hold such
sum in trust for the insurers, according to their right of contribution
among themselves;
5.
Each insurer is bound, as between himself
and the other insurers, to contribute ratably to the loss in proportion to
the amount for which he is liable under his contract.
Additional or Other Insurance Clause
A condition in the policy requiring the insured to inform the insurer of any
other insurance coverage of the property insured. It is lawful and
specifically allowed under Sec. 75 which provides that (a) policy may
declare that a violation of a specified provision thereof shall avoid it,
otherwise the breach of an immaterial provision does not avoid it.
A stipulation against double insurance.
Purposes:
1. To prevent an increase in the moral hazard
2. To prevent over-insurance and fraud.
To constitute a violation of the clause, there should have been double
insurance.
C. REINSURANCE a contract by which the insurer procures a third
person to insure him against loss or liability by reason of an original
insurance (also known as Reinsurance Cession). (Sec. 95)
In every reinsurance, the original contract of insurance and the contract
of reinsurance are covered by separate policies.

8|Page

DOUBLE INSURANCE
Involves the same interest
Insurer remains in such capacity
Insured is the party in interest in
the 2 contracts
Subject of insurance is property
Insured has to give his consent

REINSURANCE
Involves different interest
Insurer becomes the insured in
relation to reinsurer
Original insured has no interest in the
reinsurance contract.
Subject of insurance is the original
insurers risk
Insureds consent not necessary

TERMS:
1. Reinsurance treaty Merely an agreement between two insurance
companies whereby one agrees to cede and the other to accept
reinsurance business pursuant to provisions specified in the treaty. (Prof.
De Leon, p. 306)
2. Automatic reinsurance The reinsured is bound to cede and the
reinsurer is obligated to accept a fixed share of the risk which has to be
reinsured under the contract. (Prof. De Leon, p. 305)
3. Facultative reinsurance There is no obligation to cede or accept
participation in the risk each party having a free choice. But once the share
is accepted, the obligation is absolute and the liability thereunder can be
discharged only by payment. (Equitable Ins. & Casualty Co. vs. Rural Ins. &
Surety Co., Inc. 4 SCRA 343)
4. Retrocession A transaction whereby the reinsurer in turn, passes to
another insurer a portion of the risk reinsured. It is really the reinsurance of
reinsurance. (Prof. De Leon, p. 305)
XIV.
A. LOSS, IN INSURANCE
Injury or damage sustained by the insured in consequence of the
happening of one or more of the accidents or misfortune against which the
insurer, in consideration of the premium, has undertaken to indemnify the
insured. (Bonifacio Bros. Inc. vs. Mora, 20 SCRA 261)
Loss for which insurer is liable
1. Loss the proximate cause of which
is the peril insured against (Sec. 84);
2. Loss the immediate cause of which
is the peril insured against except
where proximate cause is an excepted
peril;
3. Loss through negligence of insured
except
where
there
was
gross

Loss for which insurer is

not liable
1. Loss by insureds willful
act;
2. Loss due to connivance of
the insured (Sec. 87); and
3. Loss where the excepted
peril is the proximate cause.

negligence amounting to willful acts;

and
4. Loss caused by efforts to rescue
the thing from peril insured against;
5. If during the course of rescue, the
thing is exposed to a peril not insured
against, which permanently deprives
the insured of its possession, in whole
or in part (Sec. 85).
Proximate Cause An event that sets all other events in motion without
any intervening or independent case, without which the injury or loss
would not have occurred.
REQUISITES FOR RECOVERY UPON INSURANCE
1. The insured must have insurable interest in the subject matter;
2. That interest is covered by the policy;
3. There must be a loss; and
4. The loss must be proximately caused by the peril insured against.

NOTICE OF LOSS
In fire insurance

In other types of insurance

Required

Not required

Failure to give notice will defeat

the right of the insured to
recover.

Failure to give notice will not

exonerate the insurer, unless there
is a stipulation in the policy
requiring the insured to do so.

B. CLAIMS SETTLEMENT
The indemnification of the loss of the insured.
TIME FOR PAYMENT OF CLAIMS

9|Page

LIFE POLICIES
a. Maturing upon the expiration
of the term The proceeds are
immediately payable to the insured,
unless they are made payable in
installments or as annuity, in which
case, the installments or annuities
shall be paid as they become due.
b. Maturing at the death of the
insured, occurring prior to the
expiration of the term stipulated
The proceeds are payable to the
beneficiaries within 60 days after
presentation and filing of proof of
death.

NON-LIFE POLICIES
The proceeds shall be paid within 30
days after the receipt by the insurer of
proof of loss, and ascertainment of the
loss or damage by agreement of the
parties or by arbitration but not later
than 90 days from such receipt of
proof of loss whether or not
ascertainment is had or made.

In case of an unreasonable delay in the payment of the insureds claim

by the insurer, the insured can recover: 1) attorneys fees; 2) expenses
incurred by reason of the unreasonable withholding; 3) interest at double
the legal interest rate fixed by the Monetary Board; and 4) the amount of
the claim. (Zenith Insurance Corp. vs. CA, 185 SCRA 398)
XV. PRESCRIPTIVE PERIOD (Secs. 63 & 384)
Rules:
1. In the absence of an express stipulation in the policy, it being based on
a written contract, the action prescribes in 10 years.
2. However the parties may validly agree on a shorter period provided it is
not less than one year from the time the cause of action accrues.
3. The cause of action accrues from the rejection of the claim of the
insured and not from the time of loss.
It shall commence from the denial of the claim, not from the resolution of
the motion for reconsideration, otherwise it can be used by the insured as
a scheme or device to waste time until the evidence which may be used
against him is destroyed. (Sun Insurance Office, Ltd. v. CA, 195 SCRA)
4. In CMVLI, the written notice of claim must be filed within 6 months from
the date of the accident otherwise the claim is deemed waived. The suit for
damages either with the proper court or with the Insurance Commissioner
should be filed within 1 year from the date of the denial of the claim by the
insurer, otherwise claimants 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 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

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 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.)
PERILS OF THE SEA
Includes only those casualties
due to the:
1. unusual violence; or
2. extraordinary action of wind
and wave; or
3. Other extraordinary causes
connected with navigation.

PERILS OF THE SHIP

A loss which in the ordinary course
of events, results from the:
1. natural and inevitable action of
the sea
2. ordinary wear and tear of the
ship or
3. Negligent failure of the ships
owner to provide the vessel with
proper equipment to convey the
cargo under ordinary conditions.

Note: It is only perils of the sea which may be insured against unless perils
of the ship is covered by an all-risk policy.
SPECIAL MARINE INSURANCE CONTRACTS AND CLAUSES
A. All Risks Policy insurance against all causes of conceivable loss or
damage, except: 1) as otherwise excluded in the policy; or 2) due to fraud
or intentional misconduct on the part of the insured.
The insured has the initial burden of proving that the cargo was in good
condition when the policy attached and that the cargo was damaged when
unloaded from the vessel; thereafter, the burden then shifts to the insurer
to show the exception to the coverage. (Filipinas Merchants Insurance vs.
Court of Appeals, 179 SCRA 638)
B. Barratry Clause
A clause which provides that there can be no recovery on the policy in
case of any willful misconduct on the part of the master or crew in
pursuance of some unlawful or fraudulent purpose without consent of
owners, and to the prejudice of the owners interest. (Roque vs. IAC, 139
SCRA 596)
C. Inchamaree Clause
A clause which makes the insurer liable for loss or damage to the hull or
machinery arising from the:
1. Negligence of the captain, engineers, etc.
2. Explosions, breakage of shafts; and

3.

Latent defect of machinery or hull. (Bar Review Materials

Commercial Law, Jorge Miravite, 2002 ed.)

in

D. Sue and Labor Clause

A clause under which the insurer may become liable to pay the insured, in
addition to the loss actually suffered, such expenses as he may have
incurred in his efforts to protect the property against a peril for which the
insurer would have been liable. (Sec. 163)
MATTERS ALTHOUGH CONCEALED, WILL NOT VITIATE THE
CONTRACT EXCEPT WHEN THEY CAUSED THE LOSS (Sec. 110)
1. National character of the insured;
2. Liability of the thing insured to capture or detention;
3. Liability to seizure from breach of foreign laws;
4. Want of necessary documents; and
5. Use of false or simulated papers.
Note: This should be related to the general rule regarding material
concealment.
DISTINCTIONS ON CONCEALMENT (Commercial Law Reviewer, A.F.
Agbayani, 1988 ed.)
MARINE INSURANCE

OTHER PROPERTY INSURANCE

The information of the belief or

expectation of 3rd persons is
material
and
must
be
communicated

The information or belief of a 3rd

party is not material and need not
be communicated unless it proceeds
form an agent of the insured whose
duty it is to give information
Concealment of any material fact
will vitiate the entire contract,
whether or not the loss results for
the risk concealed.

The concealment of any fact in

relation to any of the matters
stated in Sec. 110 does not
vitiate the entire contract but
merely exonerates the insurer
from a risk 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 insurers right to enforce the term of the
implied warranty against the assured under the marine insurance policy,

11 | P a g e

the same cannot be validly interpreted as an automatic admission of the

vessels 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 ships 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 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)
LOSS
1. Total:
a. Actual i. Total destruction;
ii. Irretrievable loss by sinking;
iii. Damage rendering the thing valueless; or
iv. Total deprivation of owner of possession of thing insured. (Sec.
130)
b. Constructive i. Actual loss of more than of the value of the object;
ii. Damage reducing value by more than of the value of the
vessel and of cargo; and
iii. Expense of transshipment exceed of value of cargo. (Sec.
131, in relation to Sec. 139)
In case of constructive total loss, insured may:
1. Abandon goods or vessel to the insurer and claim for
whole insured value (Sec. 139), or
2. Without abandoning vessel, claim for partial actual loss.
(Sec. 155)
2. Partial: That which is not total (Sec. 128).
AVERAGE
Any extraordinary or accidental expense incurred during the voyage for
the preservation of the vessel, cargo, or both, and all damages to the
vessel and cargo from the time it is loaded and the voyage commenced
until it ends and the cargo unloaded.

GENERAL
Has inured to the common benefit and
profit of all persons interested in the
vessel and cargo
To be borne equally by all of the
interests concerned in the venture.

PARTICULAR
Has not inured to the common
benefit and profit of all persons
interested in the vessel and her
cargo.
To be borne alone by the owner of
the cargo or the vessel, as the
case may be.

Requisites for the right to claim

contribution:
1. Common danger to the vessel or
cargo;
2. Part of the vessel or cargo was
sacrificed deliberately;

12 | P a g e

3.

Sacrifice must be for the common

safety or for the benefit of all;
4. Sacrifice must be made by the
master or upon his authority;
5. It must be not be caused by any
fault of the party asking the
contribution;
6. It must be successful, i.e. resulted
in the saving of the vessel or cargo;
and
Necessary.

RIGHT OF INSURED IN CASE OF GENERAL AVERAGE

GENERAL RULE: The insured may either hold the insurer directly liable for
the whole of the insured value of the property sacrificed for the general
benefit, subrogating him to his own right of contribution or demand
contribution from the other interested parties as soon as the vessel arrives
at her destination
EXCEPTIONS:
1. After the separation of interests liable to contribution
2. When the insured has neglected or waived his right to contribution
FPA Clause (Free From Particular Average)
A clause agreed upon in a policy of marine insurance in which it is stated
that the insurer shall not be liable for a particular average, such insurer
shall be free therefrom, but he shall continue to be liable for his proportion
of all general average losses assessed upon the thing insured. (Sec. 136)
ABANDONMENT
The act of the insured by which, after a constructive total loss, he
declared the relinquishment to the insurer of his interest in the thing
insured. (Sec. 138)
Requisites for validity:
1. There must be an actual relinquishment by the person insured of his
interest in the thing insured (Sec. 138);
2. There must be a constructive total loss (Sec. 139);
3. The abandonment be neither partial nor conditional (Sec. 140);
4. It must be made within a reasonable time after receipt of reliable
information of the loss (Sec. 141);
5. It must be factual (Sec. 142);
6. It must be made by giving notice thereof to the insurer which may be
done orally or in writing (Sec. 143); and
7. The notice of abandonment must be explicit and must specify the
particular cause of the abandonment (Sec. 144).
Effects:

1.
2.

It is equivalent to a transfer by the insured of his interest to the insurer

with all the chances of recovery and indemnity (Transfer of Interest)
(Sec.146)
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. (Transfer Of Agency)(Sec.148)

If an insurer refuses to accept a valid abandonment, he is liable upon an

actual total loss, deducting form the amount any proceeds of the thing
insured which may have come to the hands of the insured. (Sec.154)
CO-INSURANCE
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. (Sec. 157)
When the property is insured for less than its value, the insured is
considered a co-insurer of the difference between the amount of insurance
and the value of the property.
Requisites:
1. The loss is partial;
2. The amount of insurance is less than the value of the property insured.
Rules:
1. Co-insurance applies only to marine insurance
2. Logically, there cannot be co-insurance in life insurance.
3. Co-insurance applies in fire insurance when expressly provided for by
the parties.
CO-INSURANCE
A percentage in the value of the
insured property which the insured
himself assumes to act as insurer to
the extent of the deficiency in the
insurance of the insured property. In
case of loss or damage, the insurer
will be liable only for such proportion
of the loss or damage as the amount
of the insurance bears to the
designated percentage of the full
value of the property insured. (Bar
Review Materials in Commercial Law,
Jorge Miravite, 2002 ed.)

REINSURANCE
Situation where the insurer
procures a 3rd party called the
reinsurer to insure him against
liability by reason of an original
insurance. Basically,
reinsurance is an insurance
against liability which the
original insurer may incur in
favor of the original insured.

XVII. FIRE INSURANCE

A contract by which the insurer for a consideration agrees to indemnify
the insured against loss of, or damage to, property by hostile fire, including
loss by lightning, windstorm, tornado or earthquake and other allied risks,

13 | P a g e

when such risks are covered by extension to fire insurance policies or

under separate 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
One that escapes from the place
where it was intended to burn and
ought to be.
Insurer is liable

FRIENDLY FIRE
One that burns in a place where it
was intended to burn and ought to
be
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;
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: workmens 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 insureds 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.

14 | P a g e

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 insurers liability
is based on contract; that of the insured is based on torts. Furthermore, the
insurers liability is limited by the amount of the insurance coverage (Pan
Malayan Insurance Corporation v. CA, 184 SCRA 54).
INTENTIONAL vs. ACCIDENTAL AS USED IN INSURANCE
POLICIES
1. Intentional Implies the exercise of the reasoning faculties,
consciousness and volition. Where a provision of the policy excludes
intentional injury, it is the intention of the person inflicting the injury that is
controlling. If the injuries suffered by the insured clearly resulted from the
intentional act of the third person, the insurer is relieve from liability as
stipulated. (Biagtan v. the Insular Life Assurance Co. Ltd., 44 SCRA 58,
1972)
2. Accidental That which happens by chance or fortuitously, without
intention or design, which is unexpected, unusual and unforeseen.
NO ACTION CLAUSE
A requirement in a policy of liability insurance which provides that suit
and final judgment be first obtained against the insured; that only
thereafter can the person injured recover on the policy. (Guingon vs. Del
Monte, 20 SCRA 1043)
XIX. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (CMVLI)
A species of compulsory insurance that provides for protection coverage
that will answer for legal liability for losses and damages for bodily injuries
or property damage that may be sustained by another arising from the use
and operation of motor vehicle by its owner.
Purpose: To give immediate financial assistance to victims of motor
vehicle accidents and/or their dependents, especially if they are poor
regardless of the financial capability of motor vehicle owners or operators
responsible for the accident sustained (Shafer v. Judge, RTC, 167 SCRA
386).
Claimants/victims may be a 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 vehicles 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
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

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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 owners
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).
C. Cooperation Clause
A clause which provides in essence that the insured shall give all such
information and assistance as the insurer may require, usually requiring
attendance at trials or hearings.
XX. SURETYSHIP
An agreement whereby a surety guarantees the performance by the
principal or obligor of an obligation or undertaking in favor of an obligee.
(Sec. 175)
It is essentially a credit accommodation.
It is considered an insurance contract if it is executed by the surety as a
vocation, and not incidentally. (Sec. 20
When the contract is primarily drawn up by 1 party, the benefit of doubt
goes to the other party (insured/obligee) in case of an ambiguity following
the rule in contracts of adhesion. Suretyship, especially in fidelity bonding,
is thus treated like non-life insurance in some respects.
Nature of liability of surety
1. Solidary;
2. Limited to the amount of the bond;
3. It is determined strictly by the terms of the contract of suretyship in
relation to the principal contract between the obligor and the obligee.
(Sec. 176)
SURETYSHIP
Accessory contract
3 parties: surety, obligor and oblige
Credit accommodation

PROPERTY INSURANCE
Principal contract
2 parties: insurer and insured
Contract of indemnity

Surety can recover from principal

Bond can be cancelled only with
consent of obligee, Commissioner
or court
Requires acceptance of obligee to
be valid
Risk-shifting device; premium paid
being in the nature of a service fee

Insurer has no such right; only right

of subrogation
May be cancelled unilaterally either
by insured or insurer on grounds
provided by law
No need of acceptance by any third
party
Risk-distributing device; premium
paid as a ratable contribution to a
common fund

XXI. LIFE INSURANCE

Insurance on human lives and insurance appertaining thereto or
connected therewith which includes every contract or pledge for the
payment of endowments or annuities. (Sec. 179)
Kinds: (Bar Review Materials in Commercial Law, Jorge Miravite, 2002
ed.)
1. Ordinary Life, General Life or Old Line Policy - Insured pays a fixed
premium every year until he dies. Surrender value after 3 years.
2. Group Life Essentially a single insurance contract that provides
coverage for many individuals. Examples: In favor of employees,
mortgage redemption insurance.
3. Limited Payment Policy insured pays premium for a limited period. If
he dies within the period, his beneficiary is paid; if he outlives the
period, he does not get anything.
4. Endowment Policy pays premium for specified period. If he outlives
the period, the face value of the policy is paid to him; if not, his
beneficiaries receive the benefit.
5. Term Insurance insurer pays once only, and he is insured for a
specified period. If he dies within the period, his beneficiaries benefits.
If he outlives the period, no person benefits from the insurance.
6. Industrial Life - life insurance entitling the insured to pay premiums
weekly, or where premiums are payable monthly or oftener.
Mortgage Redemption Insurance
A life insurance taken pursuant to a group mortgage redemption scheme
by the lender of money on the life of a mortgagor who, to secure the loan,
mortgages the house constructed from the use of the proceeds of the loan,
to the extent of the mortgage indebtedness such that if the mortgagor
dies, the proceeds of his life insurance will be used to pay for his
indebtedness to the lender assured and the deceaseds heirs will thereby
be relieved from paying the unpaid balance of the loan. (Great Pacific Life
Assurance Corp. vs. Court of Appeals, 316 SCRA 677)
LIABILITY OF INSURER IN CERTAIN CAUSES OF DEATH OF INSURED
1. Suicide
Insurer is liable in the following cases:

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1. If committed after two years from the date of the policys issue or
its last reinstatement;

2. If committed in a state of insanity regardless of the date of the

commission unless suicide is an excepted peril. (Sec. 180-A)

3. If committed after a shorter period provided in the policy
Any stipulation extending the 2-year period is null and void.
2. At the hands of the law (E.g. by legal execution)
It is one of the risks assumed by the insurer under a life insurance policy
in the absence of a valid policy exception. (Vance,p.572 cited in de Leon,
p. 107)
Note: Justice Vitug believes that death by suicide (if the insured is sane) or
at the hands of the law obviates against recovery as being more in
consonance with public policy and as being implicit under Section 87, ICP.
(Pandect of Commercial Law and Jurisprudence, 1997 ed. P. 191)
3. Killing by the beneficiary
GENERAL RULE: The interest of a beneficiary in a life insurance policy
shall be forfeited when the beneficiary is the principal accomplice or
accessory in willfully bringing about the death of the insured, in which
event, the nearest relative of the insured shall receive the proceeds of said
insurance if not otherwise disqualified. (Sec. 12)

EXCEPTIONS:
1. Accidental killing
2. Self-defense
3. Insanity of the beneficiary at the time he killed the insured
If the premiums paid came from conjugal funds, the proceeds are
considered conjugal. If the beneficiary is other than the insureds estate,
the source of premiums would not be relevant. (Del Val v. Del Val, 29 Phil
534)
The measure of indemnity in life or health insurance policy is the sum
fixed in the policy except when a creditor insures the life of his debtor.
(Sec. 183)
IS THE CONSENT OF THE BENEFICIARY NECESSARY TO THE
ASSIGNMENT OF A LIFE INSURANCE POLICY?
It depends. If the designation of the beneficiary is irrevocable, the
beneficiarys consent is essential because of his vested right. If the
designation is revocable, the policy may be assigned without such consent
because the beneficiary only has a mere expectancy to the proceeds. (The
Insurance Code of the Philippines Annotated, Hector de Leon, 2002 ed.)
Cash Surrender Value
As applied to a life insurance policy, it is the amount the insured in case
of default, after the payment of at least 3 full annual premiums, is entitled
to receive if he surrenders the policy and releases his claims upon it.

LIFE INSURANCE
Contract of investment not of
indemnity
Valued policy
May be transferred or assigned to
any person even if he has no
insurable interest
Consent of insurer is not essential
to validity of assignment
Contingency that is contemplated
is a certain event, the only
uncertainty being the time when it
will take place
A long-term contract and cannot
be cancelled by the insurer
Beneficiary is under no obligation
to prove actual financial loss

FIRE INSURANCE
Contract of indemnity
Open or valued policy
The insurable interest of the
transferee or assignee is essential
Consent of insurer must be secured
in the absence of waiver
Contingency insured against may or
may not occur
May be cancelled by either party
and is usually for a term of one year
Insured is required to submit proof
of his actual pecuniary loss as a
condition 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.
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).

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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

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