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Concept of Insurance
On August 15, 2013, RA 10607 was signed into
law. It is a restatement of the Insurance Code
[PD 612], with amendments.
While RA 10607 restated the whole law, most
of the amendments touch only the adminis-
trative portion of the Code, and very little on
the substantive portion.
Unless otherwise indicated, the section num-
bers pertain to RA 10607.
CONTRACT OF INSURANCE
A contract of insurance is an agreement
whereby one undertakes for a consideration to
indemnify another against loss, damage or li-
ability arising from an unknown or contingent
event.
A contract of suretyship shall be deemed to be
an insurance contract only if made by a surety
who or which, as such, is doing an insurance
business [Section 2(a)].
A contract of insurance involves public interest.
Thus, the business is regulated by the state
through the requirement of license or certifi-
cate of authority [White Gold Marine Services v.
Pioneer (2005)].
DEFINITION
Thus, a contract of insurance is:
(1) A contract of indemnity;
(2) Wherein one undertakes for a consideration;
(3) To indemnify another against loss, damage,
or liability;
(4) Arising from an unknown or contingent
event.
A contingent event is one that is not certain to
take place. An unknown event is one which is
certain to happen, but the time of its happen-
ing is not known. A past event may be a des-
ignated event only in cases where it has hap-
pened already but the parties do not know
about it, e.g., prior loss of a ship at sea (appli-
cable only to marine insurance).
FORM
A policy of insurance is different from the con-
tract of insurance. The policy is the formal
written instrument evidencing the contract of
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insurance entered into between the insured
and the insurer.
No policy, certificate or contract of insurance
shall be issued or delivered within the Philip-
pines unless in the form previously approved
by the Commissioner.
No application form shall be used with, and
no rider, clause, warranty or endorsement
shall be attached to, printed or stamped upon
such policy, certificate or contract unless the
form of such application, rider, clause, war-
ranty or endorsement has been approved by
the Commissioner [Section 232].
INSURANCE AND GAMBLING DIS-
TINGUISHED
A contract of insurance is a contract of indemni-
ty and is not a wagering or gambling contract. It
is based on contingency, but it is not a contract
of chance for profit. Unlike gambling, in insur-
ance contracts, one insured gains is not at the
expense of the another insured. Also, a gam-
bling contract tends to increase inequality of
fortune, while an insurance contract tends to
equalize fortune.
DOING OR TRANSACTING IN-
SURANCE BUSINESS
The term doing an insurance busi-
ness or transacting an insurance business in-
cludes:
(1) Making or proposing to make, as insurer, any
insurance contract;
(2) Making or proposing to make, as surety, any
contract of suretyship as a vocation and not
as merely incidental to any other legitimate
business or activity of the surety;
(3) Doing any kind of business, including a rein-
surance business, specifically recognized as
constituting the doing of an insurance busi-
ness within the meaning of the Insurance
Code;
(4) Doing or proposing to do any business in
substance equivalent to any of the foregoing
in a manner designed to evade the provisions
of the Insurance Code.
The fact that no profit is derived from the mak-
ing of insurance contracts, agreements or
transactions or that no separate or direct con-
sideration is received therefor, shall not be
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deemed conclusive to show that the making
thereof does not constitute the doing or trans-
acting of an insurance business (Section 2(b)).
General rule: An insurance business consists in
undertaking, for a consideration, to indemnify
another against loss, damage or liability arising
from an unknown or contingent event.
Exception: Although the business is not formally
designated as one of insurance and no profit is
derived or no separate or direct consideration is
received, it is deemed to be doing an insurance
business if it undertakes any of the activities in-
cluded in the term doing an insurance busi-
ness or transacting an insurance business.
Philippine Health Care Providers Inc. v. CIR
(2009) has stated that:
(1) Contracts of law firm with clients whereby in
consideration of periodical payments, the law
firm promises to represent such clients in all
suits for or against them are not insurance
contracts;
(2) A contract by which a corporation, in consid-
eration of a stipulated amount, agrees at its
own expense to defend a physician against
all suits for damages for malpractice is one
of insurance, and the corporation will be
deemed as engaged in the business of insur-
ance.
GOVERNING LAW
The Insurance Code primarily governs insur-
ance contracts, unless there is a special law
which specifically govern (e.g., insurance con-
tract under the RA 1161 or Social Security Act),
in which case, the Insurance Code governs
subsidiarily.
Matters not expressly provided for in the In-
surance Code and special laws are regulated
by the Civil Code.
BANCASSURANCE
RA 10607 introduced provisions governing
bancassurance.
The term bancassurance shall mean the
presentation and sale to bank customers by
an insurance company of its insurance prod-
ucts within the premises of the head office of
such bank duly licensed by the Bangko Sen-
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tral ng Pilipinas or any of its branches under
such rules and regulations which the Com-
missioner and the Bangko Sentral ng Pilipinas
may promulgate. To engage in bancassurance
arrangement, a bank is not required to have
equity ownership of the insurance company.
No insurance company shall enter into a
bancassurance arrangement unless it pos-
sesses all the requirements as may be pre-
scribed by the Commissioner and the Bangko
Sentral ng Pilipinas.
No insurance product, whether life or non-life,
shall be issued or delivered pursuant to a
Bancassurance arrangement, unless in the
form previously approved by the Commission-
er (Section 375).
Personnel tasked to present and sell insur-
ance products within the bank premises shall
be duly licensed by the Commissioner and
shall be subject to the rules and regulations of
this Act (Section 376).
This is introduced in RA 10607 amending the
Insurance Code.
PRE-NEED PLANS
Pre-need plans are contracts, agreements,
deeds or plans for the benefit of the
planholders which provide for the perfor-
mance of future services, payment of mone-
tary considerations or delivery of other bene-
fits at the time of actual need or agreed ma-
turity date, as specified therein, in exchange
for cash or installment amounts with or with-
out interest or insurance coverage and in-
cludes life, pension, education, interment and
other plans, instruments, contracts or deeds
[Section 4(b), RA 9829 (Pre-Need Code)].
Pre-need plans are not governed by the Insur-
ance Code but by the Pre-Need Code of the
Philippines. They are not considered as insur-
ance contracts because even pre-need plans
can be insured, thereby implying that the two
are not the same.
Pre-need plans are considered as securities
and used to be governed by the Securities
Regulation Code. They are not considered as
insurance contracts because it is not an insur-
ance for an unknown or contingent event but
an event certain happening at a certain time.
Nevertheless, the Insurance Commissioner
shall have the primary and exclusive power to
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adjudicate any and all claims involving pre-
need plans. If the amount of benefits does not
exceed P100,000, which decision shall be fi-
nal and executory [Sec. 58(a), Pre-Need Code].
Elements of an
Insurance Contract
IN GENERAL
(1) Subject matter in which the insured has an
insurable interest;
(2) Consideration which refers to the premium
payments based on probability of loss and
extent of liability;
(3) Object and Purpose which is the transfer and
distribution of risk of loss, damage or liability;
(4) Cause which refers to an event or peril in-
sured against;
(5) A meeting of minds of the parties upon all
the foregoing essentials.
SUBJECT MATTER
The insured must have an insurable interest in the
subject matter of the insurance contract.
Insurable interest is the interest which the law re-
quires the owner of an insurance policy to have in
the person or thing insured.
General rule: A person is deemed to have an
insurable interest in the subject matter insured
where he has a relation or connection with or
concern in it that he will derive pecuniary or fi-
nancial benefit or advantage from its preserva-
tion and will suffer pecuniary loss or damage
from its destruction, termination, or injury by the
happening of the event insured against [Lalican
v. Insular Life Ins. Co. (2009)].
Exception: The expectation of benefit from the
continued life of the person insured need not be
of a pecuniary nature.
CONSIDERATION
An insurance premium is the agreed price for
assuming and carrying the risk. It is the con-
sideration paid to the insurer for undertaking
to indemnify the insured against a designated
peril. It is based on probability of loss and ex-
tent of liability.
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Premiums are difference from assessments.
An assessment, in insurance law, is a sum
specifically levied by mutual insurance com-
panies or associations, upon a fixed and defi-
nite plan, to pay losses and expenses. While
premiums are levied and paid to meet antici-
pated loss, assessments are collected to meet
actual loss.
OBJECT AND PURPOSE
Insurance contracts serve to distribute the risk
of economic loss, damage or liability among as
many as possible of those who are subject to
the same kind of risk. By paying premiums
which inured to a general fund out of which
payment will be made for an economic loss of a
defined type, each member contributes to a
small degree toward compensation for losses
suffered by any member of the group.
CAUSE
Cause refers to an event or peril insured
against.
Peril is the contingent or unknown event
which may cause a loss. Its existence creates a
risk and its occurrence results in loss.
The event or peril insured against must be
such that its happening will:
(1) Damnify or cause loss to a person having
insurable interest; or
(2) Create liability against him.
The unknown event may be past or future.
Even if the proximate cause of the loss is a
fortuitous event, the insurer may still be liable
if it is the event or peril insured against [De
Leon, The Insurance Code of the Philippines
Annotated (2010)].
MEETING OF THE MINDS
The two parties to a contract of insurance whose
minds need to meet regarding the essential el-
ements are:
(1) The insurer or the party who assumes or ac-
cepts the risk of loss and undertakes for con-
sideration to indemnify the insured or to pay
hum a certain sum on the happening of the
event or peril insured against, and
(2) The insured or the person in whose favor the
contract is operative and whose loss is the
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occasion for the payment of the insurance
proceeds by the insurer
The insured is not always the person whom
the proceeds are paid. Such person is the
beneficiary.
Characteristics of an
Insurance Contract
IN GENERAL
An insurance contract is:
(1) Consensual;
(2) Voluntary;
(3) Aleatory;
(4) Executory and unilateral, but synallagmatic;
(5) Conditional;
(6) Contract of indemnity;
(7) Contract of adhesion;
(8) Personal contract;
(9) Property;
(10) Uberrimae fides contract (utmost good
faith).
CONSENSUAL
It is perfected by the meeting of the minds of
the parties. There must be concurrence of offer
and acceptance. Unless otherwise stipulated,
the policy is not essential to the existence of the
contract. It merely evidences the terms and
conditions thereof [Campos, Insurance (1983)].
VOLUNTARY
General rule: It is voluntary in the sense that it is
not compulsory and the parties are free to in-
corporate such terms and conditions they may
deem convenient provided they are not contrary
to law, morals, good customs, public order, or
public policy.
Exceptions: Insurance contracts particularly lia-
bility insurance, may be required by law in cer-
tain instances:
For motor vehicles [Sections 373-389];
For employees [Articles 168-184, Labor
Code];
As a condition to granting a license to conduct
business or calling affecting the public safety or
welfare [De Leon (2010)].
INSURANCE CODE MERCANTILE LAW
Also, there are insurance which may arise by
operation of law. Social insurance for members
of the Government Service Insurance System
(GSIS) and for the employees of the private sec-
tor covered by the Social Security System (SSS)
is established by law.
ALEATORY
It is aleatory because it depends upon some
contingent event. The obligation of the insurer
to pay depends on the happening of an event
which is uncertain, or though certain, is to occur
at an indeterminate time [Article 2010, Civil
Code]. However, it cannot be considered as
gambling, wagering, or a contract of chance
because the risk is created by the contract itself.
EXECUTORY AND UNILATERAL
BUT SYNALLAGMATIC
Once the insured pays the premium, the con-
tract already takes effect. After the payment
of premiums, the insurance imposes a unilat-
eral obligation on the insurer who promise to
indemnify in case of loss.
It is also synallagmatic and reciprocal such
that even if the contingent event does not oc-
cur, the insurer has still provided protection
against the risk. When the designated peril
does not happen, the insured nevertheless
gets the protection against such risk for the
period covered by the insurance contract.
CONDITIONAL
It is conditional because it is subject to condi-
tions, the principal of which is the happening of
the event insured against. However, many other
conditions are usually required (such as pay-
ments of premium or performance of other act)
as precedent to the right of the insured to claim
benefit under the insurance.
CONTRACT OF INDEMNITY (FOR
NON-LIFE INSURANCE)
The insured who has insurable interest over
the property is only entitled to recover the
amount of actual loss sustained. The burden is
upon him to establish the amount of such loss.
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General rule: This applies only to property insur-
ance. An insurance contingent on the life of a
person is not an indemnity contract because the
value of a life is immeasurable.
Exception: However, where the basis of the in-
surable interest of the policy owner on the life of
the insured is a commercial relationship (e.g.,
creditor-debtor, mortgagor/guarantor- mort-
gagee, supporter and supportee), then such
contract is an indemnity contract
CONTRACT OF ADHESION (FINE
PRINT RULE)
Insurance contracts are already presented to
the insured in its printed form on a take it or
leave it basis. What is needed only is the adhe-
sion of the insured for the contract to be made.
Such contracts of adhesion are valid. However,
ambiguity in them shall be interpreted liberally
in favor of the insured and strictly against the
insurer who prepared the same
PERSONAL CONTRACT
Each party takes into consideration the char-
acter, conduct and/or credit of the other and
in making of the contract, each is enjoined by
law to deal with the other in utmost good
faith [Campos (1983)].
The insured cannot assign, before the hap-
pening of the loss, his rights under a property
policy to others without the consent of the in-
surer [Sections 20, 58, and 83].
Property insurance is personal in the sense
that it is the damage to the personal interest
not the property that is being reimbursed.
PROPERTY (FOR LIFE INSUR-
ANCE)
Life insurance policies, unlike property insur-
ance, are generally assignable or transferrable
[Section 81] as they are in the nature of property
and do not represent a personal agreement be-
tween the insurer and the insured. They are
considered property in legal contemplation.
UBERRIMAE FIDES CONTRACT
Each party is required to deal with each other in
utmost good faith and disclose conditions af-
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fecting the risk, of which he is aware, or any ma-
terial fact which the applicant knows and those
which he ought to know. Violation of this duty
gives the aggrieved party the right to rescind
the contract. Where the aggrieved party is the
insured, the bad faith of the insurer will pre-
clude it from denying liability on the policy
based on breach of warranty [Campos (1983)].
Classes
MARINE INSURANCE
DEFINITION
Marine insurance is a type of transportation in-
surance which is concerned with the perils of
property in, or incidental to, transit as opposed
to property perils at a generally fixed location.
Marine insurance includes:
(1) Insurance against loss of or damage to:
(a) Vessels, craft, aircraft, vehicles, goods,
freights, cargoes, merchandise, effects,
disbursements, profits, moneys, securities,
choses in action, instruments of debts,
valuable papers, bottomry, and respond-
entia interests and all other kinds of prop-
erty and interests therein, in respect to,
appertaining to or in connection with any
and all risks or perils of navigation, transit
or transportation, or while being assem-
bled, packed, crated, baled, compressed
or similarly prepared for shipment or
while awaiting shipment, or during any
delays, storage, transhipment, or reship-
ment incident thereto, including war risks,
marine builders risks, and all personal
property floater risks;
(b) Person or property in connection with or
appertaining to a marine, inland marine,
transit or transportation insurance, in-
cluding liability for loss of or damage aris-
ing out of or in connection with the con-
struction, repair, operation, maintenance
or use of the subject matter of such insur-
ance (but not including life insurance or
surety bonds nor insurance against loss
by reason of bodily injury to any person
arising out of ownership, maintenance, or
use of automobiles);
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(c) Precious stones, jewels, jewelry, precious
metals, whether in course of transporta-
tion or otherwise; and
(d) Bridges, tunnels and other instrumentali-
ties of transportation and communication
(excluding buildings, their furniture and
furnishings, fixed contents and supplies
held in storage); piers, wharves, docks and
slips, and other aids to navigation and
transportation, including dry docks and
marine railways, dams and appurtenant
facilities for the control of waterways.
(2) Marine protection and indemnity insurance,
meaning insurance against, or against legal
liability of the insured for loss, damage, or
expense incident to ownership, operation,
chartering, maintenance, use, repair, or con-
struction of any vessel, craft or instrumentali-
ty in use of ocean or inland waterways, in-
cluding liability of the insured for personal
injury, illness or death or for loss of or dam-
age to the property of another person [Sec-
tion 101].
DIVISIONS
Marine insurance has two major divisions:
(1) Ocean marine insurance insures against risk
connected with navigation, to which a ship,
cargo, freightage, profits or other insurable
interest in movable property, may be ex-
posed during a certain voyage or a fixed peri-
od of time. Its scope includes:
(a) Ships or hulls;
(b) Goods or cargoes;
(c) Earnings such as freight, passage money,
commissions, or profits; and
(d) Liability (protection and indemnity insur-
ance).
(2) Inland marine insurance covers the land or
over the land transportation perils of proper-
ty shipped by railroads, motor trucks, air-
planes, and other means of transportation. It
also covers risks of lake, river or other inland
waterway transportation and other water-
borne perils outside those covered by ocean
marine insurance.
BOTTOMRY AND RESPONDENTIA
DISTINGUISHED
Bottomry loan is a loan that is obtained for the
value of the vessel on a voyage and the lender
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is repaid only if the vessel subject of the loan
arrives safely at its destination. The insurable
interest of a ship owner on its bottomed boat
is the difference between the amount of the
loan and the value of the boat. Thus, if the
amount of the loan does not cover the total
value of the boat, the owner can still insured
the boat.
Respondentia loan is a loan that is obtained
as security for the value of the cargo to be
transported and the lender is repaid only if
the cargo arrives safely at its destination.
RISKS
PERILS OF THE SEA
Ocean marine insurance protects ships at sea
and the cargo or freight on such ships from
standard perils of the sea or perils of naviga-
tion which includes casualties arising from
the violent action of the elements and does
not cover ordinary wear and tear or other
damage usually incident to the voyage. The
mere fact that an injury is due to violence of
some marine force does not necessarily bring
it within the protection of the policy if such
violence was not unusual or unexpected.
Perils of the sea or perils of navigation include
only those casualties due to the unusual vio-
lence or extraordinary causes connected with
navigation. It has been said to include only
such losses as are of extraordinary nature or
arise from some overwhelming power which
cannot be guarded against by the ordinary
exertion of human skill or prudence, as distin-
guished from the ordinary wear and tear of
the voyage and from injuries suffered by the
vessel in consequence of her not being un-
seaworthy [Sundiang and Aquino, Reviewer on
Commercial Law (2013)].
The phrase also extends to barratry which re-
fers to the willful and intentional act on the
part of the master or the crew, in pursuance of
some unlawful or fraudulent purpose, without
the consent of the owner, and to the prejudice
of his interest (e.g., burning the ship, unlaw-
fully selling the cargo).
No honest error of judgment or mere negli-
gence, unless criminally gross, can be barratry
[Roque v. IAC (1985)].
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PERILS OF THE SHIP
Perils of the ship are those which cause a loss
which in the ordinary course of events, results:
(1) From the ordinary, natural and inevitable ac-
tion of the sea;
(2) From ordinary wear and tear of the ship; and
(3) From the negligent failure of the ships own-
er to provide the vessel with the proper
equipment to convey the cargo under ordi-
nary conditions.
In the absence of stipulation, the risks insured
against are only perils of the sea [Go Tiaco y
Hermanos v. Union Ins. Society of Canton
(1919)].
However, in an all risk policy, all risks are cov-
ered unless expressly excepted. The burden
rests on the insurer to prove that the loss is
caused by a risk that is excluded [Filipino Mer-
chants Ins. Co. v. CA (1989)].
LOSS
Loss may be total or partial. Total loss may be
actual or constructive.
(1) Actual total loss is the irretrievable loss of the
thing or any damage which renders the thing
valueless to the owner for the purpose for
which he held it. It can be presumed from the
continued absence of the ship without being
heard of for a period of time depending on
the circumstances of the case.
(2) Constructive total loss or technical total
loss is one in which the loss, although not
actually total, is of such character that the
insured is entitled, if he thinks fit, to treat it
as total by abandonment.
As to when a constructive total loss exists, three
rules exist:
(1) English rule, which states that there is con-
structive total loss when the subject matter
of the insurance, while still existent in specie,
is so damaged as not to be worth, when re-
paired, the cost of the repairs;
(2) American rule, which states that there is con-
structive total loss when it is so damaged
that the costs of repairs would exceed one-
half of the value of the thing as acquired; al-
so known as the fifty percent rule;
(3) Philippine rule, which states that the insured
may not abandon the thing insured unless
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the loss or damage is more than three-
fourths of its value.
Thus, under Section 141, a person insured by a
contract of marine insurance may abandon the
thing insured, or any particular portion thereof
separately valued by the policy, or otherwise
separately insured, and recover for a total loss
thereof, when the cause of the loss is a peril in-
sured against:
(1) If more than three-fourths thereof in value is
actually lost, or would have to be expended
to recover it from the peril;
(2) If it is injured to such an extent as to reduce
its value more than three-fourths;
(3) If the thing insured is a ship, and the con-
templated voyage cannot be lawfully per-
formed without incurring either an expense
to the insured of more than three-fourths the
value of the thing abandoned or a risk which
a prudent man would not take under the cir-
cumstances; or
(4) If the thing insured, being cargo or freight-
age, and the voyage cannot be performed,
nor another ship procured by the master,
within a reasonable time and with reasona-
ble diligence, to forward the cargo, without
incurring either an expense to the insured of
more than three-fourths the value of the thin
abandoned or a risk which a prudent man
would not take under the circumstances. But
freightage cannot in any case be abandoned
unless the ship is also abandoned.
ABANDONMENT
DEFINITION
Abandonment, in marine insurance, is the act of
the insured by which, after a constructive total
loss, he declares the relinquishment to the in-
surer of his interest in the thing insured [Section
140].
CONDITIONS
Aside from the requirement under Section 141
already mentioned:
(1) An abandonment must be neither partial nor
conditional [Section 142];
(2) An abandonment must be made within a
reasonable time after receipt of reliable in-
formation of the loss, but where the infor-
mation is of a doubtful character, the insured
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is entitled to a reasonable time to make in-
quiry [Section 142];
(3) Abandonment is made by giving notice
thereof to the insurer, which may be done
orally, or in writing: Provided, That if the no-
tice be done orally, a written notice of such
abandonment shall be submitted within sev-
en days from such oral notice [Section 145];
(4) Abandonment must be absolute and total.
No notice of abandonment is required for re-
covery of loss in cases of actual total loss.
Where the information upon which an aban-
donment has been made proves incorrect, or
the thing insured was so far restored when the
abandonment was made that there was in
fact no total loss, the abandonment becomes
ineffectual.
CHARACTERISTICS
Thus, a valid abandonment has the following
characteristics:
(1) There must be an actual relinquishment by
the person insured of his interest in the thing
insured;
(2) There must be a constructive total loss;
(3) The abandonment be neither partial nor
conditional;
(4) It must be made within a reasonable time
after receipt of reliable information of the
loss;
(5) It must be factual;
(6) It must be made by giving notice thereof to
the insurer which may be done orally or in
writing; and
(7) The notice of abandonment must be explicit
and must specify the particular cause of the
abandonment.
EFFECTS
(1) An abandonment is equivalent to a transfer
by the insured of his interest to the insurer,
with all the chances of recovery and indemni-
ty [Section 148];
(2) If a marine insurer pays for a loss as if it were
an actual total loss, he is entitled to whatever
may remain of the thing insured, or its pro-
ceeds or salvage, as if there had been a for-
mal abandonment [Section 149];
(3) Upon an abandonment, acts done in good
faith by those who were agents of the insured
in respect to the thing insured, subsequent to
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the loss, are at the risk of the insurer, and for
his benefit [Section 150].
AVERAGE
Average is defined as the extraordinary or acci-
dental expense incurred during the voyage for
the preservation of the vessel, cargo or both and
all the damages to the vessel and cargo from
the time it is loaded and the voyage com-
menced until it ends and the cargo is unloaded.
There are two kinds of averages:
(1) Gross or general averages; and
(2) Simple or particular averages.
Gross averages include damages and expenses
which are deliberately caused by the master of
the vessel or upon his authority, in order to save
the vessel, her cargo, or both at the same time
from a real and known risk. This must be borne
equally by all of the interests concerned in the
venture.
To claim general average contributions, the
requisites are:
(1) There must be a common danger to the ves-
sel or cargo;
(2) Part of the vessel or cargo was sacrificed de-
liberately;
(3) The sacrifice must be for the common safety
or for the benefit of all;
(4) It must be made by the master or upon his
authority;
(5) It must not be caused by any fault of the par-
ty asking contribution;
(6) It must be successful (i.e., resulted in the
saving of the vessel and/or cargo)
(7) It must be necessary.
Particular averages include damages and ex-
penses caused to the vessel or her cargo, which
have not inured to the common benefit and
profit of all the persons interested in the vessel
and her cargo. A particular average loss is suf-
fered by and borne alone by the owner of the
cargo or of the vessel, as the case must be.
FIRE INSURANCE
DEFINITION
Fire insurance includes insurance against loss
by fire, lightning, windstorm, tornado or
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earthquake and other allied risks, when such
risks are covered by extension to fire insurance
policies or under separate policies [Section
169].
A fire insurance is a contract of indemnity by
which the insurer, for a stipulated premium,
agrees to indemnify the insured against loss
of, or damage to, a property caused by hostile
fire.
Fire or other so-called allied risks enumer-
ated above must be the proximate cause of
the damage or loss.
Fire is oxidation which is so rapid as to pro-
duce either a flame or a glow. Spontaneous
combustion is usually rapid oxidation. Fire is
always caused by combustion, but combus-
tion does not always cause fire.
The presence of heat, steam, or even smoke is
evidence of fire, but taken by itself will not
prove the existence of fire.
Fire cannot be considered a natural disaster
or calamity since it almost always arises from
some acts of man or by human means. It can-
not be an act of God unless caused by light-
ning or a natural disaster or casualty not at-
tributable to human agency [Phil. Home As-
surance Corp. v. CA (1996)].
RISKS
Hostile fire is one that escapes from the place
where it was intended to burn and ought to
be, or one which remains completely within its
proper place but because of the unsuitable
materials used to light it, it becomes inherent-
ly dangerous and uncontrollable. This kind of
fire will make the insurer liable.
Friendly fire is one that burns in a place where
it is intended to burn and ought to be like fire
burning in a stove or a lamp.
ALTERATIONS IN USE OR CONDI-
TION
(1) An alteration in the use or condition of a
thing insured from that to which it is limited
by the policy made without the consent of
the insurer, by means within the control of
the insured, and increasing the risks, entitles
an insurer to rescind a contract of fire insur-
ance [Section 170].
(2) An alteration in the use or condition of a
thing insured from that to which it is limited
PAGE 9
MERCANTILE LAW
by the policy, which does not increase the
risk, does not affect a contract of fire insur-
ance [Section 171].
(3) A contract of fire insurance is not affected by
any act of the insured subsequent to the exe-
cution of the policy, which does not violate its
provisions, even though it increases the risk
and is the cause of the loss [Section 172].
Thus, in order that the insurer may rescind a
contract of fire insurance for any alteration
made in the use or condition of the thing in-
sured, the following requisites must be present:
(1) The use or condition of the thing is specifical-
ly 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; and
(5) The alteration increased the risk.
Every contract of insurance is made with refer-
ence to the conditions surrounding the subject
matter of the risk. Thus, there is an implied
promise or undertaking on the part of the in-
sured that he will not change the premises or
the character of the business carried there so as
to increase the risk of loss by fire.
B.4. MEASURE OF INDEMNITY
(1) In an open policy, only the expense necessary
to replace the thing lost or injured in the
condition it was at the time of the injury will
be paid;
(2) In a valued policy, the parties are bound by
the valuation, in the absence of fraud or mis-
take, similar to marine insurance.
In the absence of express valuation in a fire
insurance policy, the insured is only entitled to
recover the amount of actual loss sustained
and the burden of proof is upon him to estab-
lish the amount of such loss by preponder-
ance of evidence.
Where the face value of the policy is less than
the agreed valuation, then even in case of to-
tal loss, the insured can only recover up to the
policys face value, which is always the maxi-
UP LAW BOC INSURANCE CODE
mum limit of the insurers liability [Tan Chuco
v. Yorkshire Fire & Life Ins. Co. (1909)].
In an open policy, the actual loss, as deter-
mined, will represent the total indemnity due
the insured except only that the total indem-
nity shall not exceed the total value of the
policy [Devt. Ins. Corp. v. IAC (1986)].
CASUALTY INSURANCE
DEFINITION
Casualty insurance is insurance covering loss
or liability arising from accident or mishap,
excluding certain types of loss which by law or
custom are considered as falling exclusively
within the scope of other types of insurance
such as fire or marine. It includes, but is not
limited to, employers liability insurance, mo-
tor vehicle liability insurance, plate glass in-
surance, burglary and theft insurance, per-
sonal accident and health insurance as writ-
ten by non-life insurance companies, and oth-
er substantially similar kinds of insurance
[Section 176].
Casualty insurance includes all forms of in-
surance against loss or liability arising from
accident or mishap excluding certain types of
loss or liability which are not within the scope
of other types of insurance such as fire, ma-
rine, suretyship and life. It includes, but is not
limited to, employers liability insurance,
workmens compensation insurance, public li-
ability insurance, motor vehicle liability insur-
ance, plate glass insurance, burglary and theft
insurance, personal accident and health in-
surance as written by non-life insurance com-
panies, and other substantially similar kinds
of insurance (e.g., robbery and theft insur-
ance).
It is governed by the general provisions appli-
cable to all types of insurance plus stipula-
tions in the insurance contract
INTENTIONAL AND ACCIDENTAL IN-
JURY DISTINGUISHED
Intentional implies the exercise of the rea-
soning faculties, consciousness and volition.
Where a provision of the policy excludes in-
tentional injury, it is the intention of the per-
son inflicting the injury that is controlling. If
the injuries suffered by the insured clearly re-
PAGE 10
MERCANTILE LAW
sulted from the intentional act of the third
person, the insurer is relieved from liability as
stipulated.
Accidental means that which happens by
chance or fortuitously, without intention or
design, which is unexpected, unusual and un-
foreseen. The terms do not, without qualifica-
tion, exclude events resulting in damage due
to fault, recklessness or negligence of third
parties. The concept is not necessarily synon-
ymous with no fault. It may be utilized simp-
ly to distinguish intentional or malicious acts
from negligent or careless acts of man.
DIVISIONS
Casualty insurance has two general divisions:
liability and indemnity insurance.
LIABILITY INSURANCE
Under policies of this type, the insurer assumes
the obligation to pay the third party in whose
favor the liability of the insured arises. The lia-
bility of the insurer attaches as soon as the lia-
bility of the insured to the third party is estab-
lished. It covers liability incurred from quasi-
delict or criminal negligence but cannot cover
deliberate criminal acts.
INDEMNITY INSURANCE
Under this kind of insurance, no action will lie
against the insurer unless brought by the in-
sured for loss actually sustained and paid by
him. Liability of the insurer attaches only after
the insured has paid his liability to the third par-
ty.
NO ACTION CLAUSE
A no action clause is 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 per-
son injured recover on the policy [Guingon v.
Del Monte (1967)].
But, the no-action clause cannot prevail over
the Rules of Court provisions which are aimed
at avoiding multiplicity of suits. Parties (the
insured and the insurer) may be joined as de-
fendants in a case commenced by the third
party claiming under a liability insurance, as
the right to relief in respect to the same trans-
UP LAW BOC INSURANCE CODE
actions is alleged to exist [see Section 5, Rule 2
and Section 6, Rule 3].
SURETYSHIP
A contract of suretyship is an agreement
whereby a party called the surety guarantees
the performance by another party called the
principal or obligor of an obligation or under-
taking in favor of a third party called the
oblige [Section 175].
It is an agreement whereby a surety guaran-
tees the performance or undertakes to an-
swer, under specified terms and conditions,
for the debt, default or miscarriage of the
principal or obligor, such as failure to perform,
or breach of trust, negligence and the like, in
favor of a third party.
It shall be deemed as insurance contract if the
suretys main business is that of suretyship,
and not where the contract is merely inci-
dental to any other legitimate business or ac-
tivity of the surety.
The contract of a surety is evidenced by a writ-
ing called surety bond which is essentially a
promise to guarantee the obligation of the
obligor. In turn, the obligor executes an in-
demnity agreement in favor of the insurer.
It is an accessory contract unlike a contract of
insurance which is the principal contract itself.
The liability of the surety or sureties under a
bond is joint and several, or solidary. This
means that upon the default of the principal
obligor, the surety becomes primarily liable.
Unlike a guarantor, a surety is not entitled to
the benefit of exhaustion of the principal obli-
gors assets and assumes a regular party to
the undertaking.
It is limited or fixed to the amount of the
bond.
What is unique to a contract of suretyship is
that when the obligee accepts the bond, the
bond becomes valid and enforceable whether
or not the premium has been paid by the obli-
gor unlike in an insurance contract where
payment of premium is necessary for the con-
tract to be valid. If the obligee has not yet ac-
cepted, then payment of premium is still nec-
essary for the contract of suretyship to be val-
id.
PAGE 11
MERCANTILE LAW
LIFE INSURANCE
DEFINITION
Life insurance is insurance on human lives
and insurance appertaining thereto or con-
nected therewith.
Every contract or undertaking for the payment
of annuities including contracts for the pay-
ment of lump sums under a retirement pro-
gram where a life insurance company manag-
es or acts as a trustee for such retirement
program shall be considered a life insurance
contract for purposes of the Insurance Code
[Section 181].
An insurance upon life may be made payable
on the death of the person, or on his surviving
a specified period, or otherwise contingently
on the continuance or cessation of life.
Every contract or pledge for the payment of
endowments or annuities shall be considered
a life insurance contract for purposes of the
Insurance Code [Section 182].
TYPES
INDIVIDUAL LIFE
It is an insurance on human lives and insurance
appertaining thereto or connected therewith. It
may be made payable on the death of the per-
son, or on his surviving a specified period, or
otherwise contingently on the continuation or
cessation of life
GROUP LIFE
It is a blanket policy covering a number of indi-
viduals who are usually a cohesive group (e.g.,
employees of a company) and subjected to a
common risk. No medical examination is usually
required of each person insured (in contrast to
individual life insurance). Group insurance co-
vers a number of persons in a single contract.
INDUSTRIAL LIFE
Industrial life insurance is that form of life insur-
ance under which the premiums are payable
either monthly or oftener, if the face amount of
insurance provided in any policy is not more
than 500 times that of the current statutory
minimum daily wage in the City of Manila, and if
the words industrial policy are printed upon the
policy as part of the descriptive matter [Section
235].
UP LAW BOC INSURANCE CODE
MICROINSURANCE
Microinsurance is a financial product or service
that meets the risk protection needs of the poor,
where:
(1) The amount of contributions, premiums, fees
or charges, computed on a daily basis, does
not exceed 7.5% of the current daily mini-
mum wage rate for nonagricultural workers
in Metro Manila; and
(2) The maximum sum of guaranteed benefits is
not more than 1,000 times of the said cur-
rent daily minimum wage rate [Section 187].
No insurance company or mutual benefit asso-
ciation shall engage in the business of Microin-
surance unless it possesses all the requirements
as may be prescribed by the Commissioner, who
shall issue such rules and regulations governing
microinsurance [Section 188].
EXAMPLES OF LIFE INSURANCE POL-
ICIES
(1) Ordinary or whole life policy, where the
insurer agrees to pay the face value of the
policy upon the death of the insured;
(2) Limited payment plan, where the insured
agrees to pay premiums only for a specified
number of years. If he survives such period,
he stops paying any further premium, and
when he dies, the insurer pays the proceeds
to his beneficiary;
(3) Term plan, where the insurers liability arises
only upon the death of the insured within the
agreed term or period. If the insured survives,
the contract terminates and the insurer is not
liable;
(4) Pure endowment policy, where the insurer
pays the insured if the insured survives a
specified period. If the insured dies within the
period, the insurer is released from liability
and unless the contract otherwise provides,
need not reimburse any part of the
premiums paid;
(5) Endowment policy, where the insured is paid
the face value of the policy if he outlives the
designated period. If he dies within said
period, the insurer pays the proceeds to the
beneficiary. This is a combination of term
policy and pure endowment policy.
PAGE 12
MERCANTILE LAW
RISKS
DEATH OR SURVIVAL
It may be made payable on the death of the
person, or on his surviving a specified period,
or otherwise contingently on the continuation
or cessation of life [Campos (1983)].
Death of the insured must be proven by the
beneficiary before the insurer can be made to
pay.
SUICIDE
Insurer is liable in the following cases:
(1) If committed after two years from the date of
the policys issue or its last reinstatement.
Any stipulation extending the 2-year period is
void;
(2) If committed in a state of insanity regardless
of the date of the commission unless suicide
is an excepted peril;
(3) If committed after a shorter period provided
in the policy.
Since suicide is contrary to the laws of nature
and the ordinary rules of conduct, it is never
presumed. The burden of proving lies with the
insurer who seeks to avoid liability under a life
policy excepting it from coverage [Campos
(1983)].
DEATH AT THE HANDS OF THE LAW
Death at the hands of the law (e.g., legal
execution) is one of the risks assumed by the
insurer under a life insurance policy in the
absence of a valid policy exception [Vance on
Insurance (1951)].
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 acces-
sory in willfully bringing about the death of the
insured. In such event, the other beneficiaries so
named shall receive their share and divide
among them the forfeited share of the guilty
beneficiary. In the absence of other beneficiar-
ies, proceeds shall be paid according to the pol-
icy contract, and if silent, it shall be paid to the
estate of the insured [Section 12)]
Exceptions:
(1) Accidental killing;
UP LAW BOC INSURANCE CODE
(2) Self-defense;
(3) Insanity of the beneficiary at the time he
killed the insured;
(4) Negligence.
Note: Conviction of the beneficiary is necessary
before his interest in the insurance policy is for-
feited in favor of the others indicated in Section
12.
COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE
Compulsory motor vehicle liability insurance is
a policy of insurance or guaranty in cash or
surety bond to indemnify the death, bodily in-
jury, and/or damage to property of a third-
party or passenger, as the case may be, aris-
ing from the use of a motor vehicle [Section
387].
It is a requisite for registration or renewal of
registration of a motor vehicle by every land
transportation operator or owner [Section
390]. It is the only compulsory insurance un-
der the Insurance Code.
It is a species of compulsory insurance that
provides for protection coverage that will an-
swer 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. It applies to all vehicles whether public
or private vehicles.
To the extent that motor vehicle insurance is
compulsory, it must be a liability policy, and
the provision making it merely an indemnity
insurance contract cannot have any effect
[Campos (1983)].
The insurers liability is direct and primary so
the insurer need not wait for final judgment in
the criminal case to be liable. Its purpose is to
give immediate financial assistance to victims
of motor vehicle accidents and/or their de-
pendents, especially if they are poor, regard-
less of the financial capability of motor vehicle
owners or operators responsible for the acci-
dent sustained [Shafer v. Judge, RTC (1988)].
The claimants/victims may be a passenger or
a third party. The insured may be the party at
fault as against claims of third parties (third
party liability) or the victim of the contingent
event.
PAGE 13
MERCANTILE LAW
The following clauses are relevant to compulso-
ry motor vehicle liability insurance:
(1) Authorized driver clause is a stipulation in a
motor vehicle insurance which provides that
the driver, other than the insured owner,
must be duly licensed to drive the motor ve-
hicle, otherwise the insurer is excused from
liability;
(2) Theft clause is a stipulation including theft
as one of the risks insured against. If there is
such a provision and the vehicle was unlaw-
fully taken, the insurer is liable under the
theft clause and the authorized driver clause
does not apply. The insured can recover even
if the thief has no drivers license.
Insurable Interest
IN GENERAL
In general, an insurable interest is that interest
which a person is deemed to have in the sub-
ject matter insured, where he has a relation or
connection with or concern in it, such that the
person will derive pecuniary benefit or ad-
vantage from the preservation of the subject
matter insured and will suffer pecuniary loss
or damage from its destruction, termination,
or injury by the happening of the event in-
sured against. The existence of an insurable
interest gives a person the legal right to in-
sure the subject matter of the policy of insur-
ance [Lalican v. Insular Life Ins. (2009)].
An insurable interest is one of the most basic
and essential requirements in an insurance
contract. As such, it may NOT be waived by
stipulation. Absence of insurable interest ren-
ders the insurance contract void.
The insurable interest need not always be pe-
cuniary in nature.
Ratio:
(1) As a deterrence to the insured. A policy issued
to a person without interest is a mere wager
policy or contract and is void for illegality. A
wager policy is obviously contrary to public
interest. There is a moral hazard in removing
insurable interest as a requirement for the
validity of an insurance policy in that:
(a) It allows the insured to have an interest in
the destruction of the subject matter ra-
UP LAW BOC INSURANCE CODE
ther than in its preservation. [Myer v.
Grand Lodge]
(b) It affords a temptation or an inducement
to the insured, having nothing to lose and
everything to gain, to bring to pass the
event upon happening of which the insur-
ance becomes payable. [White v. Equitable
Nuptial Benefit Union]
(2) As a measure of limit of recovery. The insura-
ble interest is the measure of the upper limit
of his provable loss under the contract.
Sound public policy requires that insurance
should not provide the insured means of
making a net profit from the happening of
the event insured against.
WHEN INSURABLE INTEREST
SHOULD EXIST
Policy Insurable interest required
Effectivity
Intervening Occurrence
of insur-
period of loss
ance
Life or
health
Property
Insurable interest over life/health may be lost
after the insurance takes effect as long as it ex-
ists at the time the insurance takes effect. On
the other hand insurable interest property need
not exist during the intervening period or from
the time between it the policy takes effect and
the loss occurs. The alienation of insured prop-
erty will not defeat a recovery if the insured has
subsequently reacquired the property and pos-
sesses an insurable interest at the time of loss
[Womble v. Dubuque Fire &Marine Ins. Co.].
CHANGE OF INTEREST
Change of interest means the absolute transfer
of the property insured.
General rule: A change of interest in the thing
insured does not transfer the policy, but sus-
pends the insurance to an equivalent extent
until the interest in the thing and the interest in
the insurance policy are vested in the same per-
son. Thus, the contract is not rendered void but
is merely suspended.
PAGE 14
MERCANTILE LAW
Exceptions:
(1) Life, health, and accident insurance;
(2) A change of interest in the thing insured af-
ter the occurrence of an injury which results
in a loss does not affect the policy;
(3) A change in the interest in one or more of
several things, separately insured by one pol-
icy, such as a conveyance of one or more
things, does not affect the policy with respect
to the others not so conveyed;
(4) A change of interest by will or succession on
the death of the insured. The death of the in-
sured does not avoid insurance policy. It does
not affect the policy except his interest pass-
es to his heir or legal representative who may
continue the insurance policy on the property
by continuing paying premiums;
(5) A transfer of interest by one of several part-
ners, joint owners, or owners in common,
who are jointly insured, to the others. This
does not avoid the insurance. It will avoid the
policy only as to the selling partners or co-
owners but not as to others. The rule applies
even though it has been agreed that the in-
surance cease upon alienation of the thing.
(6) Automatic transfers of interest in cases in
which the policy is so framed that it will inure
to the benefit of whosoever may become the
owner of the interest insured during the cir-
cumstance of the risk. It is an exception to the
general rule that upon maturity, the pro-
ceeds of a policy shall be given exclusively to
the proper interest if the person in whose
name or for whose benefit it is made.
(7) An express prohibition against alienation in
the policy [Article 1306, Civil Code], in which
case alienation will not merely suspend the
contract but avoid it entirely.
IN LIFE/HEALTH INSURANCE
Every person has an insurable interest in the life
and health:
(1) Of himself, of his spouse and of his children;
(2) Of any person on whom he depends wholly
or in part for education or support, or in
whom he has a pecuniary interest;
(3) Of any person under a legal obligation to
him for the payment of money, or respecting
property or services, of which death or illness
might delay or prevent the performance; and
(4) Of any person upon whose life any estate or
interest vested in him depends [Section 10].
UP LAW BOC INSURANCE CODE
Unless the interest of a person insured is sus-
ceptible of exact pecuniary measurement, the
measure of indemnity under a policy of insur-
ance upon life or health is the sum fixed in the
policy.
Life insurance policies may be divided into two
general classes:
(1) Insurance upon ones life;
(2) Insurance upon life of another.
IN LIFE INSURANCE
INTEREST IN ONES OWN LIFE
Cestui que vie is the insured himself. The in-
sured can designate anyone to be the benefi-
ciary of the policy.
Each has unlimited interest in his own life,
whether the insurance is for the benefit of
himself or another.
The beneficiary designated need not have any
interest in the life of the insured when person
takes out policy on his own life. But if a person
obtains a policy on the life of another and
names himself as the beneficiary, he must
have insurable interest therein.
INTEREST IN LIFE OF ANOTHER
In life insurance, unless based on commercial
relationship, the policy owner does not neces-
sarily have pecuniary interest on the life of
the cestui que vie. Mere relationship is a suffi-
cient interest to be insured.
The insurable interest must be based on mor-
al and legal grounds. Such interest exists
whenever the insured has a responsible ex-
pectation of deriving benefit from the contin-
uation of the life of the other person or of suf-
fering detriment through its termination.
There is no insurable interest in the life of an
illegitimate spouse.
A creditor may take out insurance on the life
of his debtor but his insurable interest is only
up to the amount of the debt.
An assignee of the insurance contract is not
required to have insurable interest in the life
of the insured, for to require such interest in
him is to diminish the investment value of the
contract to the owner. Note, however, that as-
signment is different from a change in the
designated beneficiary.
PAGE 15
MERCANTILE LAW
When the beneficiary is the principal, accom-
plice or accessory in willfully bringing about
the death of the insured, interest of benefi-
ciary in life insurance policy is forfeited.
BENEFICIARY
A beneficiary is the person who is named or des-
ignated in a contract of life, health, or accident
insurance as the one who is to receive the pro-
ceeds or benefits which become payable, ac-
cording to the terms of the contract, if the in-
sured risk occurs.
General rule: A person may designate a benefi-
ciary, irrespective of the beneficiarys lack of in-
surable interest, provided he acts in good faith
and without intent to make the transaction
merely a cover for a forbidden wagering con-
tract [De Leon (2010)].
Exceptions: Any person who is forbidden from
receiving any donation under Article 739, Civil
Code cannot be named beneficiary of a life in-
surance policy by the person who cannot make
any donation to him [Article 2012, Civil Code].
Article 739 provides that the following donations
are void:
(1) Those made between persons who were
guilty of adultery or concubinage at the time
of the donation;
(2) Those made between persons found guilty of
the same criminal offense, in consideration
thereof;
(3) Those made to a public officer or his wife,
descendants and ascendants, by reason of
his office.
The insured shall have the right to change the
beneficiary he designated in the policy, unless
he has expressly waived this right in said poli-
cy.
In general, the policy owner can change the
beneficiary without the consent of such bene-
ficiary. However, when this right to change is
expressly waived, the consent of the benefi-
ciary is necessary. This means that despite the
waiver, he can still change the beneficiary
provided he obtained the beneficiarys con-
sent.
UP LAW BOC INSURANCE CODE
INTEREST IN HEALTH INSURANCE
General rule: Interest in the life or health of a
person must exist when the insurance takes ef-
fect (at inception), but need not exist thereafter
or when the loss occurs.
Exceptions:
(1) In the case of a creditors insurance taken on
the life of the debtor, insurable interest dis-
appears once the debt has been paid. At this
point, the creditor/insured can no longer re-
cover on the policy;
(2) In the case of a companys insurance taken
on the life of an employee, insurable interest
disappears once the employee leaves the
company, in which case, the company can no
longer recover on the policy.
TRANSFER OF POLICY
Interest can be transferred even without the
notice to the insurer of such transfer or be-
quest, unless there is a stipulation to the con-
trary.
There is no right of subrogation in life insur-
ance, because it is not a contract of indemnity.
IN PROPERTY INSURANCE
An insurable interest in property may consist in:
(1) An existing interest;
(2) An inchoate interest founded on an existing
interest; or
(3) An expectancy, coupled with an existing in-
terest in that out of which the expectancy
arises [Section 14].
The insurable interest may be in the property
itself (e.g., ownership), or any relation thereto
(e.g., interest of a trustee or a commission
agent), or liability in respect thereof (e.g., in-
terest of a carrier or depository of goods). The
relation of the insured to the property is such
that he will be benefited by its continued ex-
istence or will suffer a direct pecuniary loss by
its destruction.
An existing interest may be a legal title or eq-
uitable title. Examples of those having exist-
ing interest are owners as regards their prop-
erties, trustees in the case of the seller of
property not yet delivered, mortgagors over
the property mortgaged, and lessor, lessee
and sub-lessee over the property leased.
PAGE 16
MERCANTILE LAW
An inchoate interest must be founded on exist-
ing interests. It exists but is incomplete or un-
ripe until the happening of an event. Exam-
ples of inchoate interests are the interest of
stockholders with respect to dividends in case
of profits and shares in the assets, and the in-
terest of a partner in the properties belonging
to the partnership.
An expectancy must be coupled with an exist-
ing interest out of which the expectancy aris-
es. For example, a farmer who planted crops
has insurable interest over his harvest which
can be expected.
A mere contingent or expectant interest in
anything, not founded on an actual right to
the thing, nor upon any valid contract for it, is
not insurable.
A mere hope or expectation of benefit which
may be frustrated by the happening of some
event uncoupled with any present legal right
will not support a contract of insurance. A son
has no insurable interest over the property of
his father because such is just a mere expec-
tancy and has no legal basis before he inherits
such property.
Insurable interest in property may be based
on a perfected contract of sale, vesting an eq-
uitable title even before delivery of the goods
[Filipino Merchants Ins. Co. v. CA (1989)].
When the seller retains ownership only to in-
sure that the buyer will pay its debt, the risk of
loss is borne by the buyer. Insurable interest in
property does not imply a property interest in,
or a lien upon, or possession of the subject
matter of the insurance, and neither owner-
ship nor a beneficial interest is requisite to the
existence of such an interest. Anyone has an
insurable interest in property who derives a
benefit from its existence or would suffer loss
from its destruction [Gaisano Cagayan Ins. v.
Ins. Co. of North America, (2006)].
TIME OF EXISTENCE
General rule: Interest in property insured must
exist both at inception and at time of loss, but
not in the intervening period.
Exceptions:
(1) A change in interest over the thing insured
after the loss contemplated. The insured may
UP LAW BOC INSURANCE CODE MERCANTILE LAW

sell the remains without prejudice to his right INTEREST IN LIFE AND PROPERTY
to recover; DISTINGUISHED
(2) A change of interest in one or more several
Life Property
distinct things, separately insured by one
policy. This does not avoid the insurance as Extent
to the others; Limited to actual Unlimited (save in
(3) A change in interest by will or succession value of the interest life insurance effect-
upon the death of the insured; thereon ed by a creditor on
(4) A transfer of interest by one of several the life of the debtor
partners, joint owners, or owners in common amount of debt
who are jointly insured. The acquiring co- only)
owner has the same interest; his interest
merely increases upon acquiring other co- Existence
owners interest. Must exist when the Must exist at the
insurance takes ef- time the insurance
TRANSFER OF POLICY fect and when the takes effect, BUT
Interest cannot be transferred without the loss occurs, BUT need not exist there-
insurers consent, because the insurer has ap- need not exist in the after
proved the policy based on the personal meantime
qualifications and insurable interest of the in- Expectation of benefit to be derived
sured.
Must have legal ba- Need not have legal
When there is an express prohibition against
sis basis
alienation in the policy, and there is aliena-
tion, the contract of insurance is not merely Interest of beneficiary
suspended but avoided. Must have insurable Need not have in-
interest over the surable interest over
MEASURE OF INDEMNITY thing insured the life of the in-
Being a contract of indemnity, the measure of sured if the insured
insurable interest in property is the extent to himself secured the
which the insured might be damnified by the policy. But if the
loss of injury thereof. The insured cannot re- insurance was ob-
cover a greater value than that of his actual tained by the benefi-
loss because it would be a wagering policy ciary, the latter must
contrary to public policy and void. have insurable inter-
Thus, a mortgagor has an insurable interest est over the life of
equal to the value of the mortgaged property the insured (Sundi-
and a mortgagee, only to the extent of the ang and Aquino
credit secured by the mortgage. (2013))

PAGE 17
UP LAW BOC INSURANCE CODE
DOUBLE AND OVER INSUR-
ANCE; REINSURANCE
DOUBLE INSURANCE
Double insurance exists where the same person
is insured by several insurers separately in re-
spect to the same subject and interest [Section
95].
Requisites:
(1) The same person is insured;
(2) Two or more insurers insuring separately;
(3) The same subject matter;
(4) The same interest insured; and
(5) The same risk or peril insured against
Double insurance is not prohibited under the
law, unless the policy contains a stipulation to
the contrary. Usually, insurance policy con-
tains other insurance clause which requires
disclosure of other existing insurance policy.
In such case, non-disclosure will avoid the
policy. Such clause is intended to prevent over
insurance and thus avert the perpetration of
fraud.
If over-insured, then the insurers will pay pro-
rata (or whatever is stated in contract) in case
of loss.
Nonetheless, under Section 64(f), an insurer
may cancel an insurance policy, other than
life, based on a [d]iscovery of other insurance
coverage that makes the total insurance in
excess of the value of the property insured
subject to the requirement of prior notice.
Also, under Section 83, [i]n case of an over
insurance by several insurers other than life,
the insured is entitled to a ratable return of
the premium, proportioned to the amount by
which the aggregate sum insured in all the
policies exceeds the insurable value of the
thing at risk.
RULES FOR PAYMENT
Section 96 enunciates the principle of contribu-
tion which requires each insurer to contribute
RATABLY to the loss or damage considering
that the several insurances cover the same sub-
ject matter and interest against the same peril.
If the loss is greater than the sum total of all the
PAGE 18
MERCANTILE LAW
policies issued, each insurer is liable for the
amount of his policy.
DOUBLE AND OVER INSURANCE
DISTINGUISHED
Double insurance Over insurance
Amount of insurance Amount of insurance
may or may not exceed exceeds the value of the
the value of the in- insureds insurable in-
sureds insurable inter- terest
est
There are always sev- There may be one or
eral insurers more insurers
REINSURANCE
A contract of reinsurance is one by which an
insurer procures a third person to insure him
against loss or liability by reason of such orig-
inal insurance [Section 97].
Reinsurance is a contract of indemnity. It has
been referred to as an insurance of an insur-
ance. There is no relationship between the
reinsurer of the reinsurance contract and the
insured under the original insurance contract.
ORIGINAL INSURANCE CONTRACT AND RE-
INSURANCE CONTRACT DISTINGUISHED
The original insurance contract is separate and
distinct from the reinsurance contract. Insur-
ance contract is independent from the reinsur-
ance contract. Insurance contract covers in-
demnity against damages. Reinsurance covers
indemnity against liability.
REINSURANCE TREATY AND POLICY DIS-
TINGUISHED
A reinsurance treaty is 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 [De Leon (2010)].
A reinsurance policy is a contract of indemnity
one insurer makes with another to protect the
first insurer from a risk it has already as-
sumed.
Reinsurance treaties and reinsurance policies
are not synonymous. Treaties are contracts for
insurance; policies are contracts of insurance
[Philamlife v. Auditor General (1958)].
UP LAW BOC INSURANCE CODE
DOUBLE INSURANCE AND REIN-
SURANCE DISTINGUISHED
Double insurance Reinsurance
Same interest Different interest
Insurer remains as the Insurer becomes the
insurer insured in relation to
the reinsurer
Insured is a party in The original insured is
interest in the insur- not a party in the rein-
ance contracts surance contract
Property is the subject The original insurer's
matter risk is the subject mat-
ter
Insured has to give his Insureds consent is not
consent necessary
MULTIPLE OR SEVERAL INTER-
ESTS ON SAME PROPERTY
The Insurance Code recognizes that both the
mortgagor and mortgagee have each sepa-
rate and distinct insurable interest in the
mortgaged property and that they may take
out separate policies with the same or differ-
ent insurance companies. Consequently, in-
surance taken by one on his own name only
does not inure to the benefit of the other.
The mortgagor may insure the mortgaged
property in its full value but the mortgagee
can insure it only in the extent of the debt se-
cured.
When a mortgagee insures his own interest in
the mortgaged property without reference to
the right of the mortgagor, mortgagee is enti-
tled to the proceeds of the policy in case of
loss to the extent of his credit.
(1) If the proceeds are more than the total
amount of credit, then mortgagor has no
right to the balance. If the proceeds are
equal to the credit, then insurer is subro-
gated to the mortgagees rights and mort-
gagee can no longer recover the mortgag-
ors indebtedness.
(2) If the proceeds are less than the credit,
then the mortgagee may recover from the
mortgagor the deficiency. Upon payment,
the insurer is subrogated to the rights of
PAGE 19
MERCANTILE LAW
the mortgagee against the mortgagor to
the extent of the amount paid.
When a mortgagor takes out an insurance for
his own benefit, he can only recover from the
insurer but the mortgagee has a lien on the
proceeds by virtue of the mortgage. A mort-
gagor can make the proceeds payable to or
assigned to the mortgagee.
OPEN LOSS PAYABLE MORTGAGE
CLAUSE
An open loss payable clause simply states
that the proceeds of the insurance contract is
payable to the mortgagee as beneficiary.
The contract, however, is procured by the
mortgagor for his interest in the property. He
is the party to the contract, not the mortga-
gee.
The acts 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 said mortgagee.
UNION MORTGAGE OR STANDARD
MORTGAGE CLAUSE
This clause is similar to an open loss payable
clause, except that it is stipulated that the
acts of the mortgagor cannot invalidate the
insurance, provided that if the mortgagor fails
to pay the premiums due, the mortgagee
shall, on demand, pay said premiums.
When a mortgagee insured his own interest
and a loss occurs, he is entitled to recover on
the insurance. However, he may no longer
claim against the mortgagor, for his claim is
discharged up to the amount the insurer has
paid him [Palileo v. Cosio (1955)].
Perfection of the
Insurance Contract
OFFER AND ACCEPTANCE/
CONSENSUAL
An insurance contract is consensual. It is
therefore perfected by mere consent. Consent
is manifested by the meeting of the offer and
UP LAW BOC INSURANCE CODE
the acceptance upon the object or the cause
which are to constitute the contract.
There is an offer when the insured submits an
application to the insurer. There is acceptance
when the insurer approves the application.
The insurance contract becomes effective up-
on payment of first premium, provided there
has been an approval of the application.
A contract of insurance must be assented to
by both parties, either in person or through
their agents and so long as an application for
insurance has not been either accepted or re-
jected, it is merely a proposal or an offer to
make a contract [Perez v. CA (2000)].
Also, according to Enriquez v. Sun Life Assur-
ance Co. (1920):
(1) Submission of application, even with pre-
mium payment is a mere offer on the part
of the applicant, and does not bind the in-
surer;
(2) An insurance contract is also not perfected
where the applicant dies before the ap-
proval of his application or it does not ap-
pear that the acceptance of the application
ever came to the knowledge of the appli-
cant;
(3) An acceptance made by letter shall not
bind the person making the offer except
from the time it came to his knowledge.
The parties may impose additional conditions
precedent to the validity of the policy as a
contract as they see fit. Usually, it is stipulated
in the application that contract shall not be-
come binding until the policy is delivered and
the first premium is paid [De Leon (2010)].
DELAY IN ACCEPTANCE
Delay in acting on the application does not
constitute acceptance even though the in-
sured has forwarded his first premium with his
application [Perez v. CA (2000)].
When there is delay in acceptance due to the
negligence of the insurance company which
takes unreasonably long time before the ap-
plication is processed and the applicant dies,
the contract is not perfected. In this case, the
insurer can be liable for damages in accord-
ance with the tort theory. The insurance
business is imbued with public interest, thus it
is the duty of the insurer to act with reasonable
PAGE 20
MERCANTILE LAW
promptness in acting on applications submit-
ted to it.
The measure of damage is the face value of
the policy. In life insurance, the proceeds will
inure to the insureds estate and not to the
beneficiary.
The insurer is liable under the policy because
its delay in formally accepting/denying the
application and payment of premium is taken
as an implied acceptance.
DELIVERY OF POLICY
Delivery is the act of putting the insurance
policy (the physical document) into the pos-
session of the insured. The delivery can be a
proof of the acceptance of the insurer of the
offer of the insured. It is not, however, a pre-
requisite of a valid contract of insurance. Ac-
tual manual delivery is not necessary for the
validity of the contract. Constructive delivery
may be sufficient. The contract may be com-
pleted without delivery depending on the in-
tention of the parties.
Actual delivery to the insured is not essential
to give the policy binding effect as long as the
insured has complied with every condition re-
quired of him [New York Life Ins. Co. v. Bab-
cock (1898)].
There are conflicting views as to whether de-
livery to the agent of the insurance company
can be considered delivery to the insured.
In Bradley v. New York Life Ins. (1921), the agent
of the insurance company is not the agent of
the insured. Thus delivery to the agent cannot
be considered delivery to the insured.
PREMIUM PAYMENT
An insurance premium is the agreed price for
assuming and carrying the risk, that is, the con-
sideration paid an insurer for undertaking to
indemnify the insured against the specified per-
il.
General rule: No insurance policy issued or re-
newal is valid and binding until actual payment
of the premium [Section 77]. Any agreement to
the contrary is void.
Exceptions:
(1) In case of life and industrial life whenever the
grace period provision applies (Section 77);
UP LAW BOC INSURANCE CODE
(2) Where there is an acknowledgment in the
contract or policy of insurance that the
premium has already been paid;
(3) Where there is an agreement to grant the
insured credit extension for the payment of
the premium despite full awareness of grace
period proided by law [UCPB v. Masagana
Telemart (2001)];
(4) Where there is an agreement allowing the
insured to pay premium in installment and
partial payment has been made at the time
of the loss [Makati Tuscany v. CA (1992)];
(5) Where the parties are barred by estoppel
[UCPB v. Masagana Telemart (2001)].
AUTHORITY OF AGENT TO RECEIVE
PREMIUM
Where an insurer authorizes an insurance
agent or broker to deliver a policy to the in-
sured, it is deemed to have authorized said
agent to receive the premium in its behalf.
The insurer is bound by its agents acknowl-
edgement of receipt of payment of premium
[American Home Assurance Co. v. Chua
(1999)].
PAYMENT BY POST-DATED CHECK
The payment of premium by a postdated
check at a stated maturity subsequent to the
loss is insufficient to put the insurance into ef-
fect.
But payment by a check bearing a date prior
to the loss, assuming availability of funds,
would be sufficient, even if it remains unen-
cashed at the time of the loss. The subse-
quent effects of encashment would retroact to
the date of the instrument and its acceptance
by the creditor [Vitug, Commercial Laws and
Jurisprudence (2006)].
NON-PAYMENT OF PREMIUM
(1) Non-payment of first premium, unless
waived, prevents the contract from becoming
binding notwithstanding the acceptance of
the application nor the issuance of the policy.
(2) Non-payment of subsequent premiums does
not affect the validity of the contracts unless,
by express stipulation, it is provided that the
policy shall in that event be suspended or
shall lapse. In case of individual life insur-
ance, the policy holder is entitled a grace pe-
PAGE 21
MERCANTILE LAW
riod of either 30 days or one month within
which payment of any premium after the first
may be made. In cases of industrial life in-
surance, the grace period is four weeks, and
where premiums are paid monthly, either 30
days or one month.
EXCUSES FOR NON-PAYMENT
(1) Fortuitous events which render payment by
the insured wholly impossible will not prevent
forfeiture of the policy when the premium re-
mains unpaid. In other words, it is not an ex-
cuse.
(2) Non-payment of premiums occasioned by
war causes an insurance to be not merely
suspended, but is completely abrogated. It
would be unjust to allow the insurer to retain
the reserve value of the policy, which is the
excess of the premiums paid over the actual
risk carried during the years when the policy
had been in force in time of war [Constantino
v. Asia Life Ins. Co. (1950)].
NON-DEFAULT OPTIONS IN
LIFE INSURANCE
The law requires that in case of life or endow-
ment insurance, the policy shall contain a provi-
sion specifying the options to which the policy
holder is entitled in the event of default in a
premium payment after three full annual pre-
miums shall have been paid [Sec 227(f)].
CASH SURRENDER VALUE (CSV)
It is the amount that the insured is entitled to
receive if he surrenders the policy and releases his
claims upon it. The right to CSV accrues only af-
ter three full annual premium payments. The In-
sured is given the right to claim the amount less
than the reserve, reduced by surrender charge.
The cash value or cash surrender value is an
amount which the insurance company holds
in trust for the insured to be delivered to him
upon demand. When the companys credit for
advances is paid out of the cash value or cash
surrender value, that value and the companys
liability is diminished [Manufacturers Life Ins.
v. Meer (1951)].
Ratio: The premium is uniform throughout a life-
time, but the risk is varied (i.e., higher risk when old-
er, lower when young). Thus, the cost of protection
UP LAW BOC INSURANCE CODE
is more expensive during the early years of the poli-
cy.
ALTERNATIVE TO CSV
(1) Extended insurance/term insurance, where the
insured, after having paid three full annual pre-
miums, is given the right to have the policy con-
tinued in force from date of default for a time ei-
ther stated or equal to the amount of the CSV,
taken as a single premium. The face value of the
policy remains the same but only within the
term. It is also called term insurance where
CSV is taken as a single premium (no further
payments) to extend the policy for a fixed period
of time. Reinstatement is allowed if made within
the term purchased; no reinstatement after the
lapse of the term purchased
(2) Paid-up insurance, where, after the insurance is
paid-up, the insured who has paid three full
annual premiums is given the right, upon de-
fault, to have the policy continued from the date
of default for the whole period of insurance
without further payment of premiums. It is also
called reduced paid-up because in effect the
policy, terms and conditions are the same but
the face value is reduced to the paid-up value.
(3) Automatic premium loan (APL), where, upon
default, the insurer lends/advances to the in-
sured without any need of application on his
part, amount necessary to pay overdue premi-
um, but not to exceed the CSV of the policy. It
only applies if requested in writing by the in-
sured either in the application or at any time be-
fore expiration of the grace period. In effect, the
insurance policy continues in force for a period
covered by the payment. After the period, if in-
sured still does not resume paying his premi-
ums, policy lapses, unless CSV still remains. If
there is still CSV, APL continues until CSV is ex-
hausted. This is beneficial for the insured be-
cause it continues the contract and all its fea-
tures with full force and effect.
REINSTATEMENT OF A LAPSED
LIFE INSURANCE POLICY
Reinstatement of a lapsed life insurance policy
is not a non-default option. It does not create a
new contract, but merely revives the original
policy so insurer cannot require a higher premi-
um than the amount stipulated in the contract.
PAGE 22
MERCANTILE LAW
It does not apply to group/industrial life insur-
ance.
Requisites:
(1) It must be exercised within three years from
date of default;
(2) The insured must present evidence of insur-
ability satisfactory to the insurer;
(3) He must pay all back premiums and all in-
debtedness to the insurer
(4) The CSV must not have been duly paid to the
insured nor the extension period expired;
(5) The application must be filed during the in-
sureds lifetime [Andres v. Crown Life Ins.
(1958)].
REFUND OF PREMIUMS
Return of premiums can be made in the following
cases:
(1) If the thing insured was never exposed to the
risks insured against, the whole premium
should be refunded;
(2) When the contract is voidable due to the
fraud or misrepresentation of insurer or his
agent, the whole premium should be
refunded
(3) When by any default of the insured other
than actual fraud, the insurer never incurred
any liability under the policy, the whole
premium should be refunded;
(4) When the contract is voidable because of the
existence of facts of which the insured was
ignorant without his fault, the whole
premium should be refunded;
(5) Where the insurance is for a definite period
and the insured surrenders his policy, the
portion of the premium that corresponds to
the unexpired time at a pro rata rate, unless a
short period rate has been agreed upon and
appears on the face of the policy should be
return;
(6) When there is over-insurance by several
insurers, the return premiums should be
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing at
risk;
(7) When rescission is granted due to the
insurers breach of contract.
UP LAW BOC INSURANCE CODE
Rescission of Insurance
Contracts
CONCEALMENT
A neglect to communicate that which a party
knows and ought to communicate, is called a
concealment [Section 26].
A concealment whether intentional or unin-
tentional entitles the injured party to rescind a
contract of insurance [Section 27].
Requisites:
(1) A party knows a fact which he neglects to
communicate or disclose to the other;
(2) Such party concealing is duty bound to
disclose such fact to the other;
(3) Such party concealing makes no warranty of
the fact concealed;
(4) The other party has not the means of
ascertaining the fact concealed;
(5) The fact concealed is material.
Concealment may be committed by either the
insurer or the insured [Qua Chee Gan v. Law Un-
ion & Rock Ins. Co. (1955); Fieldmens Ins. Co. v.
Vda. de Songco (1968)].
PROOF OF FRAUD IN CONCEALMENT
General rule: Fraud need not be proven in order
to prove concealment. Good faith is not a de-
fense.
Exception: When the concealment is made by
the insured in relation to the falsity of a warran-
ty, the non-disclosure must be intentional and
fraudulent in order that the contract may be
rescinded.
TEST OF MATERIALITY
Materiality is determined not by the event, but
solely by the probable and reasonable influ-
ence of the fact upon the party to whom the
communication is due, in forming his estimate
of the disadvantages of the proposed con-
tract, or in making his inquiries [Section 31].
PAGE 23
MERCANTILE LAW
The test is in the effect which the knowledge
of the fact in question would have on the con-
tract. It need not increase the risk or contrib-
ute to any loss or damage suffered. It is suffi-
cient if the knowledge of it would influence
the party in making the contract (De Leon
(2010)).
EFFECTS
General rule: Concealment vitiates the contract
and entitles the insurer to rescind, even if the
death or loss is due to a cause not related to the
concealed matter.
Exceptions:
(1) Incontestability clause, which clause
stipulates that the policy shall be
incontestable after a stated period. The
incontestability clause is a mandatory
provision in life policies. The policy must be
payable on the death of the insured and has
been in force during the lifetime of the
insured for at least two years from its date of
issue or of its last reinstatement;
(2) Concealment after the contract has become
effective, because concealment must take
place at the time the contract is entered into
in order that the policy may be avoided.
Information obtained after the perfection of
the contract is no longer necessary to be
disclosed by the insured, even if the policy
has not been issued.
(3) Waiver or estoppel;
(4) Marine insurance, where concealment of the
following matters does not vitiate the entire
contract, but merely exonerates the insurer
from a loss resulting from the risk concealed:
(a) The national character of the insured;
(b) The liability of the thing insured to
capture and detention;
(c) The liability to seizure from breach of
foreign laws of trade;
(d) The want of necessary documents; and
(e) The use of false and simulated papers
[Section 112].
UP LAW BOC INSURANCE CODE
CONCEALMENT IN MARINE AND
ORDINARY PRIVATE INSURANCE
DISTINGUISHED
Marine Ordinary
insurance insurance
Required disclosure
Exact and whole truth Substantial truth
Effect of concealment
Concealment of the Any kind of conceal-
matters specified in ment will make the
Section 112 will not en- insurer not liable.
tirely avoid the contract
but will merely exoner-
ate the insurer from
losses resulting from
the risk concealed
CONCEALMENT IN NON-MEDICAL
INSURANCE
The waiver of medical examination in a non-
medical insurance contract renders even more
material the information required of the ap-
plicant concerning the previous conditions of
health and diseases suffered. The fact that
the matter concealed had no bearing on the
cause of death is not important because it is
well settled that the insured need not die of
the disease he had failed to disclose to the in-
surer. It is sufficient that his nondisclosure
misled the insurer in forming his estimates of
the risks of the proposed policy or in making
inquiries [Sunlife v. Sps. Bacani (1995)].
Where matters of opinion or judgment are
called for, answers made in good faith and
without intent to deceive will not avoid the
policy even though they are untrue. Reason:
The insurer cannot simply rely on those
statements. He must make further inquiry
[Philamcare Health Systems v. CA (2002)].
MATTERS WHICH MUST BE DIS-
CLOSED EVEN IN THE ABSENCE OF
INQUIRY
Each party to a contract of insurance must
communicate to the other, in good faith, all
facts within his knowledge which are material
to the contract and as to which he makes no
warranty, and which the other has not the
PAGE 24
MERCANTILE LAW
means of ascertaining [Section 28].
Note: If the applicant is aware of the existence
of some circumstance which he knows would
influence the insurer in acting upon his applica-
tion, good faith requires him to disclose that
circumstance, though unasked [Vance (1951)].
The fact of being a mongoloid is a material
fact that needs to be disclosed [Great Pacific
Life v. CA (1979)].
Mere possibility of previous hypertension is
not enough to establish concealment [Great
Pacific Life (1999)].
MATTERS WHICH NEED NOT BE DIS-
CLOSED
(1) Matters already known to the insurer [Section
30(a));
(2) Matters which each party are bound to know
[Section 30(b) and Section 32];
(3) Matters of which the insurer waives
communication [Section 30(c) and Section
33];
(4) Matters which prove or tend to prove the
existence of a risk excluded by a warranty
and which are not otherwise material
[Section 30(d)];
(5) Matters which relate to a risk excepted in the
policy, and which are not otherwise material
[Section 30(e)];
(6) Information of the nature or amount of the
interest of one insured unless if inquired
upon by the insurer, except if required by
Section 51 [Section 34]
(7) Matters of opinion [Section 35].
Each party to a contract of insurance is bound to
know all the general causes which are open to
his inquiry, equally with that of the other, and
which may affect the political or material perils
contemplated; and all general usages of trade
[Section 32].
MISREPRESENTATION/
OMISSIONS
A representation is to be deemed false when
the facts fail to correspond with its assertions
or stipulations [Section 44].
UP LAW BOC INSURANCE CODE
If a representation is false in a material point,
whether affirmative or promissory, the injured
party is entitled to rescind the contract from
the time when the representation becomes
false [Section 45].
There is false representation if the matter is
true at the time it was made/represented but
false at the time the contract takes effect
[Section 44]. Corollarily, there is no false
representation if the matter is true at the time
the contract takes effect although false at the
time it was made/represented.
A representation must be presumed to refer
to the date on which the contract goes into
effect [Section 42]. Thus, a representation may
be altered or withdrawn before the insurance
is effected but not afterwards [Section 41].
Representations are factual statements made
by the insured at the time of, or prior to, the
issuance of the policy, which give information
to the insurer and induce him to enter into the
insurance contract.
KINDS OF REPRESENTATIONS
(1) Affirmative, which refers to any allegation as
to the existence or non-existence of a fact
when the contract begins.
(2) Promissory, which is any promise to be
fulfilled after the contract has come into
existence; or any statement concerning what
is to happen during the existence of the
insurance [Section 39]. A promissory
representation is substantially a condition or
warranty [De Leon (2010)].
(3) Oral or written [Section 36].
Requisites:
(1) The insured stated a fact which is untrue;
(2) 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;
(3) Such fact in either case is material to the risk.
Like in concealment, fraud or intent is not es-
sential to entitle the insurer to rescind on the
ground of misrepresentation [Section 45].
PAGE 25
MERCANTILE LAW
TEST OF MATERIALITY
The materiality of a representation is deter-
mined by the same rules as the materiality of a
concealment [Section 46].
EFFECTS
General rule: The injured party is entitled to re-
scind from the time when the representation
becomes false [Section 45].
Exceptions:
(1) Incontestability clause;
(2) Misrepresentation after contract takes effect;
(3) Waiver, made by acceptance of insurer of
premium payments despite knowledge of the
ground for rescission [Section 45];
(4) A representation of the expectation, belief,
opinion, or judgment of the insured,
although false, and even if material to the
risk [Philamcare Health Systems, Inc. v. CA
(2002)];
(5) Representation by insured based on
information obtained from third persons (not
his agent), provided the insured:
(a) Has no personal knowledge of the facts;
(b) Believes them to be true; and
(c) Explains to the insurer that he does so on
the information of others.
A representation cannot qualify an express
provision or an express warranty of insurance
[Section 40] because a representation is not
part of the contract but only a collateral
inducement to it. However, it may qualify as
an implied warranty.
There is fraud and misrepresentation when
another person takes the place of the insured
in the medical examination [Eguaras v. Great
Eastern (1916)].
The insurer is not entitled to rescission for
misrepresentation of age if the birth date on
the policy leads to the conclusion that the
insured is beyond the age covered and yet
insurer continued to accept payment and had
issued the policy. Insurer is deemed estopped
[Edillon v. Manila Bankers Life (1982)].
UP LAW BOC INSURANCE CODE MERCANTILE LAW

Marine Ordinary implied warranty not to alter the circum-

insurance insurance stances of the thing insured);
(3) Affirmative warranty, which asserts the exist-
Who may commit ence of a fact or condition at the time it is
May be committed by Committed only by in- made;
either insured or insur- sured. (4) Promissory warranty or executory warranty,
er which is one where the insured stipulates
Act involved that certain facts or conditions pertaining to
the risk shall exist or that certain things with
Passive form Active form reference thereto shall be done or omitted. It
Insured withholds in- Insured makes errone- is in the nature of a condition subsequent
formation of material ous statements of facts [Sections 72 and 73].
facts from the insurer; with the intent of in-
he maintains silence ducing the insurer to EFFECT
when he ought to enter into the insur- MATERIAL WARRANTY
speak ance contract General rule: Violation of a material warranty, or
Materiality other material provision of the policy, on the
part of either the insured or insurer, entitles the
Determined by the same rules other to rescind [Section 74].
Effect
Breach of a material warranty may either be:
Same effects on the part of the insured; insurer (1) Without fraud, in which case, the insurer will
has right to rescind be exonerated from the time it occurs. If
Injured party is entitled to rescind a contract of made during the inception, it will prevent the
insurance on ground of concealment or false policy from taking effect [Section 76].
representation, whether intentional or not. (2) With fraud, in which case, the policy is
avoided ab initio.
BREACH OF WARRANTIES Exceptions:
Warranty is a statement or promise by the (1) Loss occurs before the time of performance of
insured set forth in the policy itself or incorpo- the warranty [Section 73];
rated in it by proper reference, the untruth or (2) The performance becomes unlawful [Section
nonfulfillment of which in any respect and 73];
without reference to whether the insurer was (3) The performance becomes impossible
in fact prejudiced by such untruth or non- [Section 73];
fulfilment, renders the policy voidable by the (4) Waiver or estoppel.
insurer [Vance (1951)].
A warranty may also be made by the insurer. IMMATERIAL WARRANTY
A warranty may relate to the past, the pre- General rule: Breach of an immaterial provision
sent, the future, or to all of these [Section 68]. does not avoid the policy [Section 75].
No particular form of words is necessary to
create a warranty [Section 69]. Exception: Breach of an immaterial provision
avoids the policy when the parties stipulate that
KINDS OF WARRANTIES violation of a particular provision, though imma-
(1) Express warranty, which is an agreement con- terial, shall avoid the policy. In effect, the parties
tained in the policy or clearly incorporated converted the immaterial provision into a mate-
therein as part thereof; rial one [Sundiang and Aquino (2013)].
(2) Implied warranty, which is deemed included
in the contract although not expressly men- A condition in the policy which requires insured
tioned (e.g., implied warranty of seaworthi- to disclose to the insurer of any insurance that, if
ness of the vessel in marine insurance and violated by the insured, would ipso facto avoid
the contract [Pioneer v. Yap (1974)].

PAGE 26
UP LAW BOC INSURANCE CODE MERCANTILE LAW

Insurer is barred by waiver (or estoppel) to claim CAUSES OF LOSS

violation of the so-called hydrants warranty (1) Remote cause is an event preceding another
when, despite knowing fully that only 2 fire hy- in a causal chain, but separated from it by
drants existed (out of the 11 hydrants required), other events;
it still issued the insurance policies and received (2) Proximate cause is that cause, which, in
the premiums [Qua Chee Gan v. Law Union natural and continuous sequence, unbroken
(1955)]. by any efficient intervening cause, produces
the injury, and without which the result
Warranty Representation would not have occurred [Vda. De Bataclan
v. Medina (1957)].
Nature (3) Immediate cause is the cause, not the proxi-
Part of the contract Mere collateral in- mate cause, which immediately precedes the
ducement loss.
Form
LIABILITY FOR LOSS
Written on the policy, May be written in the Loss for which the Loss for which the
actually or by reference policy or may be oral insurer is liable insurer is liable
Materiality Loss the proximate Loss the proximate
Presumed material Must be proved to be cause of which is the cause of which is the
material peril insured against peril insured against
Compliance [Section 86] [Section 86]

Must be strictly com- Requires only substan- Loss the immediate Loss the immediate
plied with tial truth and compli- cause of which is the cause of which is the
ance peril insured against peril insured against
except where the prox- except where the prox-
Applicability of incontestability clause imate cause is an ex- imate cause is an ex-
Does not apply Applies cepted peril cepted peril
Loss through negli- Loss through negli-
gence of insured except gence of insured except
Claims Settlement and where there was gross
negligence amounting
where there was gross
negligence amounting
Subrogation to willful acts to willful acts
Loss caused by efforts
to rescue the thing
CONCEPT OF LOSS from peril insured
Loss in insurance law embraces injury or dam-
against if, during the
age [Bonifacio Bros. v. Mora (1967)].
course of the rescue,
the thing is exposed to
Requisites: Recovery upon a loss requires that:
a peril not insured
(1) The insured must have insurable interest in
against, which perma-
the subject matter;
nently deprives the in-
(2) The interest is covered by the policy;
sured of its possession
(3) There be a loss; and
in whole or in part [Sec-
(4) The loss must be one for which the insurer is
tion 87]
liable;
(5) Notice and proof of loss must be given if
policy is fire insurance or when the same is
stipulated in the policy.

PAGE 27
UP LAW BOC INSURANCE CODE
NOTICE AND PROOF OF LOSS
NOTICE OF LOSS
This refers to the formal notice given the insurer
by the insured or claimant under a policy of the
occurrence of the loss insured against.
PURPOSE
Its purpose is to apprise the insurance
company so that it may make proper
investigation and take such action as may be
necessary to protect its interest.
In fire insurance, an insurer is exonerated, if
notice thereof be not given to him by an
insured, or some person entitled to the benefit
of the insurance, without unnecessary delay
[Section 90].
In other types of insurance, failure to give
notice will not exonerate the insurer, unless
there is a stipulation in the policy requiring
the insured to do so.
However, it has been held that formal notice
of loss is not necessary if insurer has actual
notice of loss.
FORM
In the absence of any stipulation in the policy,
notice may be given orally or in writing.
The notice of loss may be in the form of an
informal or provisional claim containing a
minimum of information as distinguished
from a formal claim which contains the full
details of the loss, computations of the
amounts claimed, and supporting evidence,
together with a demand or request for
payment [De Leon (2010)].
PROOF OF LOSS
It is the formal evidence given to the insurance
company by the insured or claimant, under a
policy, of: the occurrence of the loss, the
particulars thereof, and the data necessary to
enable the company to determine its liability
and the amount.
PURPOSE
Its purpose is to give the insurer information
by which he may determine the extent of his
liability but also; to afford him a means of
PAGE 28
MERCANTILE LAW
detecting any fraud that may have been
practiced upon him, and to operate as a check
upon extravagant claims.
Like a notice of loss, in the absence of any
stipulation in the policy, proof may be given
orally or in writing.
The insured is not bound to give such proof as
would be necessary in a court of justice; but it
is sufficient for him to give the best evidence
which he has in his power at the time [Section
91].
RULES FOR RECOVERY
General rule: Timely compliance with the notice
and proof of loss is a condition precedent to the
right to recover if the policy is fire insurance, or
when the same is stipulated in the policy.
Exceptions:
(1) For both notice and proof of loss, waiver:
(a) Defects in a notice or proof of loss may be
waived when such defects, which the in-
sured might remedy, are not specified,
without unnecessary delay, to him as
ground of objection by the insurer (Section
92);
(b) Delay in presentation to an insurer of no-
tice or proof of loss is waived if caused by
any act of his, or if he omits to take objec-
tion promptly and specifically upon that
ground;
(2) For notice of loss, a formal notice of loss is
not necessary if insurer has actual notice of
loss.
GUIDELINES ON CLAIMS SET-
TLEMENT
Claims settlement is the indemnification of
the loss suffered by the insured. The claimant
may be the insured or reinsured, the insurer
who is entitled to subrogation, or a third party
who has a claim against the insured
Where a policy gives the insurer the control of
the decision to settle claim or litigate it, the
insurer nevertheless is required to observe a
certain measure of consideration for the inter-
est of the insured.
UP LAW BOC INSURANCE CODE MERCANTILE LAW

Claims Life insurance Non-life insurance

Maturity Either: (1) Upon happening of event insured
(1) Upon death of the person insured; against; and
(2) Upon his surviving a specific period; (2) Event must occur within the period
or specified in policy, otherwise insurer
(3) Otherwise contingently on the has no liability
continuance or cessation of life
(Section 180)
Delivery General rule: The proceeds should be (1) Within 30 days after:
of proceeds delivered immediately upon maturity of (a) Proof of loss is received by insurer;
policy. and
(b) Ascertainment of loss or damage
Exceptions: is made either by agreement
(1) If payable in installments or as an an- between the insured and insurer or
nuity, when such installments or an- by arbitration
nuities become due; (2) If ascertainment is not made within
(2) If maturity is upon death, within 60 60 days after such receipt by insurer
days after presentation of claim and of proof of loss, then loss or damage
filing of proof of death of insured. shall be paid within 90 days after
such receipt.
Effect of refusal or (1) This entitles the beneficiary to collect interest on the proceeds of policy for the
failure to pay claim duration of the delay at rate of twice the ceiling prescribed by the monetary
within time prescribed board (unless refusal to pay is based on ground that claim is fraudulent)
(2) In case damages are awarded, this includes attorneys fees and other
expenses incurred due to delay (plus the interest)

In case of litigation, it is the duty of the
Commissioner or the Court to determine
whether the claim has been unreasonably
denied or withheld.
Failure to pay any such claim within the time
prescribed shall be considered prima facie ev-
idence of unreasonable delay in payment.
UNFAIR CLAIMS SETTLEMENT;
SANCTIONS
No insurance company doing business in the
Philippines shall refuse, without just cause, to
pay or settle claims arising under coverages
provided by its policies, nor shall any such
company engage in unfair claim settlement
practices.
Any of the following acts by an insurance
company, if committed without just cause and
performed with such frequency as to indicate a
general business practice, shall constitute un-
fair claim settlement practices:
(1) Knowingly misrepresenting to claimants per-
tinent facts or policy provisions relating to
coverage at issue;
(2) Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies;
(3) Failing to adopt and implement reasonable
standards for the prompt investigation of
claims arising under its policies;
(4) Not attempting in good faith to effectuate
prompt, fair and equitable settlement of
claims submitted in which liability has be-
come reasonably clear; or
(5) Compelling policyholders to institute suits to
recover amounts due under its policies by of-
fering without justifiable reason substantially
less than the amounts ultimately recovered
in suits brought by them.
Evidence as to numbers and types of valid and
justifiable complaints to the Commissioner
against an insurance company, and the
Commissioners complaint experience with
other insurance companies writing similar

PAGE 29
UP LAW BOC INSURANCE CODE
lines of insurance shall be admissible in evi-
dence in an administrative or judicial proceed-
ing for the purpose of determining whether
unfair claim settlement practices have been
committed.
If it is found, after notice and an opportunity
to be heard, that an insurance company has
violated this section, each instance of non-
compliance may be treated as a separate vio-
lation and shall be considered sufficient cause
for the suspension or revocation of the com-
panys certificate of authority [Section 247].
PRESCRIPTION OF ACTION
In the absence of an express stipulation in the
policy, it being based on a written contract,
the action prescribes in ten years [Article 1144,
Civil Code].
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
[Section 63].
In motor vehicle insurance, action prescribes
in one year.
The cause of action accrues from the rejection
of the claim of the insured and not from the
time of loss. A stipulation stating that the
prescriptive period for filing an action is one
year from the happening of loss is void. In
such cases, since the stipulation is void and it
is upon a written contract, the time limit is ten
years from the time the cause of action
accrues.
Prescription is essential for the prompt
settlement of claims as it demands for suits to
be brought while the evidence as to the origin
and cause of the loss or destruction has not
yet disappeared.
SUBROGATION
Subrogation is a process of legal substitution.
The insurer, after paying the amount covered
by the insurance policy, steps into the shoes of
the insured and avails himself of the latter's
rights that exist against the wrongdoer at the
time of loss.
The insurer becomes entitled to recover from
the wrongdoer the amount of the loss it may
have paid to the insured.
Note: Subrogation applies only to property
insurance and non-life insurance.
PAGE 30
MERCANTILE LAW
RIGHTS TRANSFERRED
The rights to which the subrogee succeeds are
the same as, but not greater than, those of
the person for whom he is substituted.
The subrogee-insurer cannot acquire any
claim, security, or remedy the subrogor did
not have. In other words, a subrogee cannot
succeed to a right not possessed by the
subrogor. A subrogee can recover only if the
insured likewise could have recovered
[Sulpicio Lines, Inc. v. First Lepanto-Taisho Ins.
Corp. (2005); Lorenzo Shipping Corp. v. Chubb
and Sons, Inc. (2004)].
The insured can no longer recover from the
offended party what was paid to him by the
insurer but he can recover any deficiency if the
damages suffered are more than what was
paid. The deficiency is not covered by the right
of subrogation.
The insurer must present the policy as
evidence to determine the extent of its
coverage [Wallen Phil. Shipping v. Prudential
Guarantee (2003)].
WHEN THERE IS NO RIGHT OF SUBROGA-
TION
(1) Where the insured by his own act releases the
wrongdoer or third party liable for the loss or
damage;
(2) 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;
(3) Where the insurer pays the insured for a loss or
risk not covered by the policy [Pan Malayan Ins.
Co. v. CA (1997)];
(4) In life insurance;
(5) For recovery of loss in excess of insurance
coverage [De Leon (2010)].
Since the insurer can be subrogated to only
such rights as the insured may have, should the
insured, after receiving payment from the insur-
er, release the wrongdoer who caused the loss,
the insurer loses his rights against the latter.
But in such a case, the insurer will be entitled to
recover from the insured whatever it has paid to
the latter, unless the release was made with the
consent of the insurer [Manila Mahogany v. CA
(1987)].
UP LAW BOC INSURANCE CODE
Insurance Commissioner
JURISDICTION AND ADJUDICA-
TORY POWERS
The Insurance Commissioner has the power to
adjudicate disputes relating to an insurance
companys liability to an insured under a policy.
A complaint or claim filed with such official is
considered an action or suit the filing of
which would have the effect of tolling the sus-
pending the running of the prescriptive period.
(1) Concurrent jurisdiction (with regular civil
courts) over cases where any single claim
does not exceed P5,000,000 involving liabil-
ity arising from:
(a) Insurance contract;
(b) Contract of suretyship;
(c) Reinsurance contract;
(d) Membership certificate issued by mem-
bers of mutual benefit association [Sec-
tion 439];
(2) Primary and exclusive jurisdiction over
claims for benefits involving pre-need plans
where the amount of benefits does not ex-
ceed P100,000 [Sec. 55, Pre-Need Code].
For the purpose of proceeding under its adjudi-
catory powers under the Insurance Code, the
Commissioner or any officer thereof designated
by him, is empowered to administer oaths and
affirmation, subpoena witnesses, compel their
attendance, take evidence and require the pro-
duction of any books, papers, documents or
contracts or other records which are relevant or
material to the inquiry [Section 439].
Note: However, the Insurance Commission has
no jurisdiction to decide the legality of a con-
tract of agency entered into between an insur-
ance company and its agent. The same is not
covered by the term doing or transacting insur-
ance business under Section 2, neither is it cov-
ered by Section 439, which grants the Commis-
sioner adjudicatory powers [Sundiang and Aqui-
no (2013)].
REVOCATION OF CERTIFICATE
OF AUTHORITY
The Certificate of Authority issued to the do-
mestic or foreign company by the Commission
PAGE 31
MERCANTILE LAW
may be revoked or suspended by the Insurance
Commissioner for any of the following grounds
[Section 254]:
(1) The company is in an unsound condition;
(2) That it has failed to comply with the provi-
sions of law or regulations obligatory upon it;
(3) That its condition or method of business is
such as to render its proceedings hazardous
to the public or its policyholders;
(4) That its paid-up capital stock, in the case of
a domestic stock corporation, or its available
cash assets, in the case of a domestic mutual
company, or its security deposits, in the case
of a foreign company, is impaired or defi-
cient;
(5) That the margin of solvency required of such
company is deficient.
The Commissioner is authorized to suspend or
revoke all certificates of authority granted to
such insurance company, its officers and
agents, and no new business shall thereafter
be done by such company or for such compa-
ny by its agents in the Philippines while such
suspension, revocation, or disability continues
or until its authority to do business is restored
by the Commissioner.
Before restoring such authority, the Commis-
sioner shall require the company concerned to
submit to him a business plan showing the
companys estimated receipts and disburse-
ments, as well as the basis therefor, for the
next succeeding three years.
LIQUIDATION OF INSURANCE
COMPANY
If the company is determined by the Commis-
sioner to be insolvent or cannot resume busi-
ness, he shall, if public interest requires, order
its liquidation [Section 256].
This should be distinguished from a situation
where a conservator is appointed when the
Commissioner finds that a company is in a
state of continuing inability or unwillingness
to maintain a condition of solvency or liquidity
adequate to protect the policyholders and
creditors. The conservator will take charge of
the management of the insurance company
[Section 255].