1-2 Marine Insurance

"Section 101. Marine Insurance includes:

"(a) Insurance against loss of or damage to:

"(1) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects,
disbursements, profits, moneys, securities, choses in action, instruments of debts,
valuable papers, bottomry, and respondentia interests and all other kinds of property and
interests therein, in respect to, appertaining to or in connection with any and all risks or
perils of navigation, transit or transportation, or while being assembled, packed, crated,
baled, compressed or similarly prepared for shipment or while awaiting shipment, or
during any delays, storage, transhipment, or reshipment incident thereto, including war
risks, marine builders risks, and all personal property floater risks;

"(2) Person or property in connection with or appertaining to a marine, inland marine,

transit or transportation insurance, including liability for loss of or damage arising out of
or in connection with the construction, repair, operation, maintenance or use of the
subject matter of such insurance (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);

"(3) Precious stones, jewels, jewelry, precious metals, whether in course of

transportation or otherwise; and

"(4) Bridges, tunnels and other instrumentalities 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.

"(b) Marine protection and indemnity insurance, meaning insurance against, or against
legal liability of the insured for loss, damage, or expense incident to ownership,
operation, chartering, maintenance, use, repair, or construction of any vessel, craft or
instrumentality in use of ocean or inland waterways, including liability of the insured for
personal injury, illness or death or for loss of or damage to the property of another
person.

Q: What is marine insurance?

A: Insurance against risks connected with navigation, to which a ship, cargo,
freightage, profits or other insurable interest in movable property, may be
exposed during a certain voyage or fixed period of time.

Q: What vessels are contemplated in marine insurance?

A: Those used, or at least, intended for navigation. E.g., one for shipping,
chartering, voyage and the like. Vessels which are used as museums or those
that are stationary are not entitled to be insured under this a marine insurance.
Q: What does marine insurance include?
A: Marine insurance includes:

1. Insurance against loss or damage to:

a. Vessels, goods, freight, cargo, merchandise, profits, money, valuable

papers, bottomry and respondentia, and interest in respect to all risks or
perils of navigation;

b. Persons or property in connection with marine insurance;

c. Precious stones, jewels, jewelry and precious metals whether in the

course of transportation or otherwise; and

d. Bridges, tunnels, piers, docks and other aids to navigation and

transportation (Sec. 99)

Note: Cargo can be the subject of marine insurance, and once it is entered into,
the implied warranty of seaworthiness immediately attaches to whoever is
insuring the cargo, whether he be the ship owner or not. (Roque v. IAC, G.R. No.
L 66935, Nov. 11, 1985)

2. Marine protection and Indemnity insurance which means insurance against,

or against legal liability of the insured for loss, damage, or expense incident to
ownership, operation, chartering, maintenance, use, repair, or construction of any
vessel, craft or instrumentality in use of ocean or inland waterways, including
liability of the insured for personal injury, illness or death or for loss of or damage
to the property of another person. (Sec. 99)

Q: What are the two major divisions of Marine

insurance?
1. Ocean marine insurance covers primarily sea perils of ships and cargoes.
Scope: GELS a. Goods or cargoes

b. Earnings such as freight, passage money

c. Liability incurred by reason of maritime perils

d. Ships or hulls

2. Inland marine insurance covers primarily the land or over the land (but
sometimes water) transportation perils of property shipped by railroads, motor
trucks, airplanes, and other means of transportation. It also covers risks of lake,
river, or the other inland waterway transportation and other waterborne perils
outside of those risks that fall definitely within the ocean marine category.
Classes: Pt BFF

a. Property in Transit Provides protection to the property frequently exposed to

loss while it is being transported from one location to another.

b. Bailee liability Insurance for those who have temporary custody of the
goods.

c. Fixed transportation property They are so insured because they are held to
be an essential part of transportation system such as bridges, tunnels, etc.

d. Floater Provides insurance to follow the insured property wherever it may be

located subject always to the territorial limits of the contract.

Q: What does the phrase perils of the sea or perils of

navigation mean?
A: It includes only those casualties due to the unusual violence or extraordinary
action of wind and wave, or to other extraordinary causes connected with
navigation.

Q: What does perils of the ship mean?

A: It is a loss which, in the ordinary course of events, results from:

1. The natural and inevitable action of the sea

2. The ordinary wear and tear of the ship

3. The negligent failure of the ships owner to provide the vessel with proper
equipment to convey the cargo under ordinary conditions.

Q: Is rusting of steel pipes a peril of the sea?

Rusting of steel pipes in the course of a voyage is a peril of the sea in view of the toll on
the cargo of wind, water and salt conditions. -Cathay Ins., vs Court of Appeals 151
SCRA 710

Q: Does an insurer undertake to insure against perils of

the ship?
A: GR: No.

XPN: In the absence of any stipulation to the contrary, the insurer does not
undertake to insure against perils of the ship. The purpose of an ocean marine
policy is to secure an indemnity against accidents which may happen not against
event which must happen.

Are perils of the ship ordinarily covered by marine

insurance?
Unless otherwise stated in the policy, loss due to perils of the ship is not within the coverage
of marine insurance. A marine policy in the usual form, therefore, includes only perils of
the sea and not perils of the ship, and accordingly, a marine insurer upon a policy in the
usual form is not liable for a loss caused by a peril of the ship.

1 A marine insurance policy on a cargo states that

the insurer shall be liable for losses incident to perils
of the sea. During the voyage, seawater entered the
compartment where the cargo was stored due to the
defective drainpipe of the ship. The insured filed an
action on the policy for recovery of the damages caused
to the cargo. May the insured recover damages?
A: No. The proximate cause of the damage to the cargo insured was the
defective drainpipe of the ship. This is peril of the ship, and not peril of the sea.
The defect in the drainpipe was the result of the ordinary use of the ship. To
recover under a marine insurance policy, the proximate cause of the loss or
damage must be peril of the sea. (1998 Bar Question) Go Tioco y Hnos. vs
Union Ins. Society of Canton 40 Phil. 40

Insured improperly loaded logs covered by marine

insurance on board a barge. The barge sank due to
improper loading of the logs and leaks because the
barge was not provided with necessary cover or
tarpaulin so that ordinary splash of sea waves brought
more water inside the barge. Was the cause of the
damage a peril of the sea for which the insurer could be
made liable?
The cause of the loss was a peril of the ship; therefore, the insurer was not liable. A loss
which, in the ordinary course of events, results from the natural and inevitable action of
the sea, from the ordinary wear and tear of the ship, or from the negligent failure of the
ships owners to provide the vessel with proper equipment to convey the cargo under
ordinary conditions, is not peril of the sea. (Roque vs. IAC)

Q: Who must check the seaworthiness of the vessel in

marine insurance?
Since the law provides for an implied warranty of seaworthiness in every contract of
ordinary marine insurance, it becomes the obligation of a cargo owner or insured to look
for a reliable common carrier which keeps its vessels in seaworthy condition. The
insured may have no control over the vessel but has full control in the choice of the
common carrier that will transport his goods. (Roque vs. IAC)

What is an all risks marine insurance policy? Cite the

exceptions.
GR: It is that which insures against all causes of conceivable loss or damage.

XPN:

1. As otherwise excluded in the policy; or

2. Due to fraud or intentional misconduct on the part of the insured. (Choa

Tiek v. CA, G.R. No. 84507, Mar. 15, 1990) This type of policy grants
greater protection than that afforded by the perils clause.

2 What perils are included in an All risks Policy in

marine insurance?
A marine insurance policy providing that the insurance was against all risks must be
construed as creating a special insurance and extending to other risks than are usually
contemplated, and covers all losses except such as may arise from the fraud of the
insured, intentional misconduct on the part of the insured or, otherwise, excluded in the
policy. It covers all losses during the voyage whether arising from a marine peril or not,
including pilferage losses during war. (Filipino Merchant Ins., Co. vs. CA; Choa Tiek Eng
vs CA)

Insured imported lactose crystals which he insured

against all risks. Upon arrival of the cargo in Manila, out
of 600 bags, 403 were in bad order due to spillage. The
insured filed a claim with the insurer which refused to
pay on the ground that the cause of the damage was not
a peril of the sea but a peril of the ship . Insurer further
claimed that a loss under an insurance against all
risks will be covered by the policy only if caused by
fortuitous event which did not occur in this case. Was
the contention of the insurer correct? HELD:
No. An insurance against all risks covers all losses during the voyage
whether arising from a marine peril or not, including pilferage losses during war. The
insurer can avoid coverage only upon demonstrating that a specific provision expressly
excludes the loss by pilferage from coverage, otherwise, the insurer liable. -Choa Tiek
Eng vs CA
The insured cargo was loaded on a vessel that was
arrested and detained at an intermediate port by civil
authorities because of a lawsuit on a question of
ownership and possession of the ship. As a result, the
insured cargo had to be sold at a loss because of its
perishable nature. The policy included among the risks
covered seizure, arrest, restraint or detainment. The
insurer refused to pay the loss on the ground that the
arrests covered by the policy were those arising from
political or executive acts, and the arrest of the vessel
by judicial authorities was excluded.
Was the contention of the insurer correct?
HELD:
Wrong. If the risk of arrest occasioned by ordinary judicial process was expressly
indicated as an exception in the policies, there would have been no controversy with
respect to the interpretation of the subject clauses. Exceptions to the general coverage
are construed most strongly against the insurer. Since the term arrest did not exclude
an arrest ordered by judicial authorities, then the policy must be construed so as to
include the same within the coverage. -Malayan Ins. Corp. vs. CA

3 Who has the burden of proof in an all risks marine

insurance policy?
A: The insured under an "all risks insurance policy" has the initial burden of
proving that the cargo was in good condition when the policy attached and that
the cargo was damaged when unloaded from the vessel; thereafter, the burden
then shifts to the insurer to show the exception to the coverage.

INSURABLE INTEREST

"Section 102. The owner of a ship has in all cases an insurable interest in it, even when
it has been chartered by one who covenants to pay him its value in case of loss:
Provided, That in this case the insurer shall be liable for only that part of the loss which
the insured cannot recover from the charterer.

"Section 103. The insurable interest of the owner of the ship hypothecated by bottomry is
only the excess of its value over the amount secured by bottomry.
"Section 104. Freightage, in the sense of a policy of marine insurance, signifies all the
benefits derived by the owner, either from the chartering of the ship or its employment
for the carriage of his own goods or those of others.

"Section 105. The owner of a ship has an insurable interest in expected freightage which
according to the ordinary and probable course of things he would have earned but for
the intervention of a peril insured against or other peril incident to the voyage.

"Section 106. The interest mentioned in the last section exists, in case of a charter party,
when the ship has broken ground on the chartered voyage. If a price is to be paid for the
carriage of goods it exists when they are actually on board, or there is some contract for
putting them on board, and both ship and goods are ready for the specified voyage.

"Section 107. One who has an interest in the thing from which profits are expected to
proceed has an insurable interest in the profits.

"Section 108. The charterer of a ship has an insurable interest in it, to the extent that he
is liable to be damnified by its loss.

4 What is the extent of the insurable interest of the

owner of the ship that is covered by a charter party?
The owner of a ship has in all cases an insurable interest in it, even when it has been
chartered by one who covenants to pay him its value in case of loss; provided, that in
this case, the insurer shall be liable for only that part of the loss which the insured cannot
recover from the charterer. (Sec. 100).

Q: What is the extent of the insurable interest of the

following?
A:

1. Shipowner a. Over the vessel to the extent of its value, except that if
chartered, the insurance is only up to the amount not recoverable from the
charterer. (Sec. 100)

b. If hypothecated by a bottomry loan, the insurable interest is only up to the

excess of the values of the vessel over the loan. (Sec. 101)

c. He also has an insurable interest on expected freightage. (Sec. 103)

2. Cargo owner over the cargo and expected profits. (Sec. 105)

3. Charterer over the amount he is liable to the ship owner, if the ship is lost or
damaged during the voyage (Sec. 106).

4. Creditor/lender amount of the loan

5 What is the risk insured against in marine

insurance? Is there an exception?

GR: Only perils of the sea is insured against.

XPN: Unless perils of the ship are covered by an all risks policy.

Q: What are the distinctions between perils of the sea

and perils of the ship?

A: PERILS OF THE SEA

Includes only those casualties due to the:

1. Unusual violence; or

2. Extraordinary action of wind and wave; or

3. Other extraordinary causes connected with navigation.

PERILS OF THE SHIP

A loss which in the ordinary course of events, results from the:

1. Natural and inevitable action of the sea;

2. Ordinary wear and tear of the ship; or

3. Negligent failure of the ships owner to provide the vessel with proper
equipment to convey the cargo under ordinary conditions.

Q: What is a loan on bottomry or respondentia?

A: It is one which is payable only if the vessel given as security for the loan
completes in safety the contemplated voyage.

Art.719,Code of Commerce
A loan in which under any condition whatever, the repayment of the sum loaned, and of
the premium stipulated, depends upon the safe arrival in port of the goods on which it is
made or of the price they may receive in case of accident.
It is a loan on bottomry when the security is a vessel, and respondentia when the security
is cargo.

What is the insurable interest of the owner of a ship hypothecated by

bottom?

Only the excess of its value over the amount secured by bottomry is lost. (Sec. 101).
The reason is that when the vessel hypothecated by bottomry is lost, the owner need not
pay the loan on bottomry and, therefore, he is benefited to the extent of the amount of
the loan obtained and actually the loss he suffers is only the difference between the
actual value of the vessel and the loan on bottomry.

Does the lender have insurable interest over the vessel

hypothecated by bottomry?
Yes, to the extent of the amount of the loan granted for the reason that the loss of the
vessel or cargo hypothecated by way of bottomry or respondentia produces the
extinguishment of the loan and therefore, the lender stands to suffer by the loss of the
vessel or cargo. -Cassa Maritime v Phoenix Ins. Co.

Distinguish concealment in marine insurance from

concealment in other insurance.
In ordinary insurance, opinion or belief of a third person or the own judgment of the
insured is not material and need not be communicated (Sec. 35), while in marine
insurance information of the belief or expectation of a third person in reference to a
material fact, is material and must be communicated to the other party (Sec. 108);
In ordinary insurance, causal connection between the fact concealed and the cause of
the loss is not necessary to entitle the other party to rescind the contract. (Henson vs
Phil. Am. Life Ins., Co., 56 O.G. 7328; Sec. 31)., while in marine insurance, concealment
of any of the matters mentioned in Sec. 110 exonerates the insurer only if the loss
resulted the risk concealed.

Q: What is freightage?
A: It is the benefit which is to accrue to the owner of the vessel from its use in the
voyage contemplated or benefit derived from the employment of the ship.

Q: Where is freightage derived from?

1. The chartering of the ship

2. Its employment for the carriage of his own goods

3. Its employment for the carriage of goods of others. (Sec. 102)

Q: When does insurable interest in expected freightage

in a charter party exist?
A: It exists when the insured has an inchoate right to freight, that is, he must be
in such position with regard to freight that nothing could prevent him from
ultimately having a perfect right to it but the intervention of the perils insured
against.

Q: When does inchoate right to freight exists? A:

1. Where freight is the price to be paid for the hire of the ship under a charter
party, the ship owner has an inchoate right to freight as soon as there is
 an inception of performance by the ship under the charter party.

2. As soon as the goods are actually put on board and where part of the
goods has been loaded and the balance is ready, there is an insurable
interest in the whole freight.

3. Where the ship owner has made a binding contract for freight and the ship
is in readiness to receive the goods, he has an insurable interest.

Q: When is insurable interest in expected freightage in a

charter party non existent?
A:

1. Where there is no contract and no part of the goods expected to be carried are
on board, there is no insurable interest in freight although there are goods ready
for shipment or the master is provided with funds for the purpose of purchasing a
cargo.

2. Where the vessel is a mere seeking ship or a vessel looking for cargo to be
transported, the owner has no insurable interest in freight to be earned on goods
not loaded.

Q: What are special marine insurance contracts and

clauses?
A:

1. All risks policy insurance against all causes of conceivable loss or

damage, except:

a. Excluded risk stipulated in the policy, or

b. due to fraud or intentional misconduct on the part of the insured (Chao

Tiek Seng v. CA, GR. No. 84507, Mar. 15, 1990)

The insured has the initial burden of proving that the cargo was in good
condition when the policy attached and that the cargo was damaged when
unloaded from the vessel; thereafter, the burden shifts to the insurer to
show the exception to the coverage.

1. Barratry clause a clause which provides that there can be no recovery

on the policy in case of any willful misconduct on the part of the master or
crew in pursuance of some unlawful or fraudulent purpose without the
consent of the owner and to the prejudice of owners interest. It requires
an intentional and willful act in its commission. No honest error or
 judgment or mere negligence, unless criminally gross, can be barratry.
(Roque v. IAC, G.R. No. L 66935, Nov. 11, 1985)

2. Inchamaree clause a clause which makes the insurer liable for loss or
damage to the hull or machinery arising from the:

a. Negligence of the captain, engineers, etc.

b. Explosion, breakage of shafts; and

c. Latent defect of machinery or hull. (Thames and Mersey Marine

Insurance Co v. Hamilton Fraser and Co [1887] 12 AC 484)

4. Sue and labor clause a clause under which the insurer may become liable
to pay the insured in addition to the loss actually suffered, such expenses as he
may have incurred in his efforts to protect the property against a peril for which
the insurer would have been liable (Sec. 163)

Note: Such clause constitutes an exception to the principle that an insurance

contract is one of indemnity (where the insurer promises to make good only the
loss of the insured) since the insurer is liable to pay additional expenses for the
protection of the property against an insured peril.

Q: What is concealment in marine insurance?

A: It is the failure to disclose any material fact or circumstance which in fact or
law is within, or which ought to be within the knowledge of one party and of which
the other has no actual or presumptive knowledge.

"CONCEALMENT

"Section 109. In marine insurance, each party is bound to communicate, in addition to

what is required by Section 28, all the information which he possesses, material to the
risk, except such as is mentioned in Section 30, and to state the exact and whole truth in
relation to all matters that he represents, or upon inquiry discloses or assumes to
disclose.

"Section 110. In marine insurance, information of the belief or expectation of a third

person, in reference to a material fact, is material.

"Section 111. A person insured by a contract of marine insurance is presumed to have

knowledge, at the time of insuring, of a prior loss, if the information might possibly have
reached him in the usual mode of transmission and at the usual rate of communication.

"Section 112. A concealment in a marine insurance, in respect to any 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.

Q: Is information of the belief or expectation of a third

person, in reference to a material fact, material?
A: Yes. Thus, there is concealment where the insured at the time of application
for insurance did not disclose the opinion of marine experts who inspected the
vessel insured that it was unseaworthy. (Sec. 109)

Q: When is the insured presumed to have knowledge of

a prior loss in marine insurance?
A: The insured is presumed to have knowledge of a prior loss at the time of
insuring, if the information might possibly have reached him in the usual mode of
transmission and at the usual rate of communication. (Sec. 111)

Q: What matters, when concealed, do not vitiate the

entire insurance contract, but merely exonerates the
insurer from a loss resulting from the risk concealed?
A:

1. National character of the insured

2. The liability of the thing insured to capture and detention

3. The liability to seizure from breach of foreign laws of trade

4. The want of necessary documents

5. The use of false and simulated papers. (Sec. 112)

Q: What are the distinctions on concealment in marine

insurance and other property insurance?
MIThe information or the belief or expectation of 3rd persons in reference to a
material fact is material and must be communicated.

The concealment of any fact in relation to any of the matters stated in Sec. 110
does not vitiate the entire contract but merely exonerates the insurer from a risk
resulting from the fact concealed.
OPIThe information or belief of a 3rd party is not material and need not be
communicated, unless it proceeds from an agent of the insured whose duty is to
give information.

Concealment of any material fact will vitiate the entire contract, whether or not
the loss results from the risk concealed.

Marine insurance was secured upon goods on board a

ship which departed from Tokyo to Manila, without any
disclosure to the insurer of the fact that the ship had
been reported at Singapore as seen at sea, deep in
water and leaky. This report turned out to be wrong
because the ship was at no time during the voyage leaky
or in trouble but was lost thru another insured risk. The
insurer refuses to pay the insured, claiming
concealment. The insured counters that the fact not
disclosed was erroneous and did not increase the risk
and therefore immaterial. Decide the dispute with
reasons.
The insured cannot recover because of concealment of a material matter.
The failure of the insured to reveal to the insurer a matter within his knowledge that the
ship had been reported at Singapore as seen, deep in water and leaky, is a concealment
of a material matter, even though this report turned out later on to be erroneous.

What is the effect of false representation by the

insured?
A: Any misrepresentation of a material fact made with fraudulent intent avoids
the policy. If the misrepresentation is not intentional or fraudulent but the fact
misrepresented is material to the risk, the insurer may rescind the contract from
the time representation becomes false. (Sec. 111)

"REPRESENTATION

"Section 113. If a representation by a person insured by a contract of marine insurance,

is intentionally false in any material respect, or in respect of any fact on which the
character and nature of the risk depends, the insurer may rescind the entire contract.

"Section 114. The eventual falsity of a representation as to expectation does not, in the
absence of fraud, avoid a contract of marine insurance.

Q: When may misrepresentation entitle the insurer to

rescind a contract of marine insurance?
If a representation by a person insured by a contract of marine insurance is intentionally
false in any material respect, or in respect of any fact on which the character and nature
of the risk depends, the insurer may rescind the entire contract. (Sec. 11).

What is the distinction between promissory

representation and representation of expectation?
A:

PROMISSORY REP

It 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

REPRESENTATION OF EXPECTATION

It is a statement of future facts or events which are in their nature contingent and
which the insurer is bound to know that the insured could not have intended to
state as known facts, but as intentions or expectations merely.

Q: What is the effect of falsity as to expectation?

A: Representations of expectation or intention, unless made with fraudulent intent, their
failure of fulfillment is not ground for rescission. (Sec. 113)

"IMPLIED WARRANTIES

"Section 115. In every marine insurance upon a ship or freight, or freightage, or upon
any thing which is the subject of marine insurance, a warranty is implied that the ship is
seaworthy.

"Section 116. A ship is seaworthy when reasonably fit to perform the service and to
encounter the ordinary perils of the voyage contemplated by the parties to the policy.

"Section 117. An implied warranty of seaworthiness is complied with if the ship be

seaworthy at the time of the commencement of the risk, except in the following cases:

"(a) When the insurance is made for a specified length of time, the implied warranty is
not complied with unless the ship be seaworthy at the commencement of every voyage it
undertakes during that time;

"(b) When the insurance is upon the cargo which, by the terms of the policy, description
of the voyage, or established custom of the trade, is to be transhipped at an intermediate
port, the implied warranty is not complied with unless each vessel upon which the cargo
is shipped, or transhipped, be seaworthy at the commencement of each particular
voyage.

"Section 118. A warranty of seaworthiness extends not only to the condition of the
structure of the ship itself, but requires that it be properly laden, and provided with a
competent master, a sufficient number of competent officers and seamen, and the
requisite appurtenances and equipment, such as ballasts, cables and anchors, cordage
and sails, food, water, fuel and lights, and other necessary or proper stores and
implements for the voyage.

"Section 119. Where different portions of the voyage contemplated by a policy differ in
respect to the things requisite to make the ship seaworthy therefor, a warranty of
seaworthiness is complied with if, at the commencement of each portion, the ship is
seaworthy with reference to that portion.

"Section 120. When the ship becomes unseaworthy during the voyage to which an
insurance relates, an unreasonable delay in repairing the defect exonerates the insurer
on ship or shipowners interest from liability from any loss arising therefrom.

"Section 121. A ship which is seaworthy for the purpose of an insurance upon the ship
may, nevertheless, by reason of being unfitted to receive the cargo, be unseaworthy for
the purpose of insurance upon the cargo.

"Section 122. Where the nationality or neutrality of a ship or cargo is expressly

warranted, it is implied that the ship will carry the requisite documents to show such
nationality or neutrality and that it will not carry any documents which cast reasonable
suspicion thereon.

Q: What is warranty in marine insurance?

A: It is a stipulation, either express or implied, forming part of the policy as to
some fact, condition or circumstance relating to the risk.

Q: What are the implied warranties in marine insurance?

1. Seaworthiness. (Sec. 115)

2. Non deviation from the agreed voyage. (Secs. 123, 124, 125) 3. Non
engagement from illegal venture.

4. Warranty of neutrality the ship will carry neutrality of the ship or cargo
where such nationality or neutrality is expressly warranted. (Sec. 120)

5. Presence of insurable interest

Q: What is seaworthiness?
A: It is a relative term depending upon the nature of the ship, voyage, service
and goods denoting in general, a ships fitness to perform the service and to
encounter the ordinary perils of the voyage, contemplated by the parties to the
policy. (Sec. 114)

A ship is seaworthy, when reasonable fit to perform the services, and to encounter the
ordinary perils of the voyage contemplated by the parties to the policy. (Sec. 114).

Q: What is the effect of violation of the implied warranty

of seaworthiness?
Whenever the vessel is unseaworthy, the insurer will not be liable for a loss occasioned
thereby whether such fact was known or unknown to the insured. -Richelieu & O. Nav. v.
Boston M. Ins. Co.

6 The insured loaded on board a vessel 7,500 cases of

soft drink bottles to be transported from Zamboanga to
Cebu City. Said cargo was covered by marine insurance.
The vessel was top-heavy as 2,500 cases of soft drink
bottles were improperly stowed on deck. The inordinate
loading of cargo on deck resulted in the decrease of the
vessels metacentric height, thus, making it unstable.
As a result, the vessel sank bringing down the entire
cargo. The insurer refused to pay on the ground that the
vessel was unseaworthy for purposes of carrying its
cargo. The insured on the other hand, claimed that he
had no control as to how his cargo would be loaded on
the vessel. Was the insurer liable?
Insurer not liable. In every marine insurance, the insured impliedly warrants to the
insurer that the vessel is seaworthy and such warranty is as much a term of the contract
as if expressly written on the face of the policy.
It is the obligation of the cargo owner who insures his cargo to look for a reliable
common carrier which keeps its vessel; he has full control in the selection of the
common carrier that will transport his goods. Hence, the insurer can not be made liable
unless there is a waiver of seaworthiness of the vessel. -Phil. American General Ins. Co.
vs. CA

When must the vessel be seaworthy?

A: GR: The warranty of seaworthiness is complied with if the ship be seaworthy
at the time of the commencement of the risk. (Sec. 115) There is no implied
warranty that the vessel will remain in seaworthy condition throughout the life of
the policy.

XPN:

1. In the case of time policy the ship must be seaworthy at the

commencement of every voyage she may undertake. (Sec. 115 [a])

2. In the case of cargo policy each vessel upon which cargo is shipped or
transshipped must be seaworthy at the commencement of each particular
voyage. (Sec. 115 [b])

3. In the case of voyage policy contemplating a voyage in different stages

the ship must be seaworthy at the commencement of each portion. (Sec.
117)

Q: What is the effect of the admission of

seaworthiness by the insurer?
A: If the policy provides that the seaworthiness of the vessel as between insured
and insurer is admitted, the issue of seaworthiness cannot be raised by the
insurer without showing concealment or misrepresentation by the insured. (Phil.
American General Insurance Co. v. CA, G.R. No. 116940, June 11, 1997)

Q: Will the policy be avoided if the vessel becomes

unseaworthy after the commencement of the voyage?
As a general rule, seaworthiness of the vessel is necessary only at the commencement
of the risk, and therefore, the insured does not warrant that the ship will be seaworthy
during the entire voyage or throughout the life of the policy. Accordingly, if a vessel is
seaworthy at the inception of the voyage, subsequent unseaworthiness does not avoid
the policy. (9 Couch 2d., 242).

What does the admission of seaworthiness by the

insurer mean?
A: It may mean: 1. That the warranty of seaworthiness is to be taken as fulfilled;
or 2. That the risk of unseaworthiness is assumed by the insurer. (Philippine
American General Insurance Co., Inc. v CA, GR No. 116940. June 11, 1997)

Q: May a vessel be seaworthy for the purpose of

insurance upon the ship and yet unseaworthy for the
purpose of insurance upon cargo?
"Section 121. A ship which is seaworthy for the purpose of an insurance upon the ship
may, nevertheless, by reason of being unfitted to receive the cargo, be unseaworthy for
the purpose of insurance upon the cargo.

What must be done if the ship becomes unseaworthy

during the voyage?
"Section 120. When the ship becomes unseaworthy during the voyage to which an
insurance relates, an unreasonable delay in repairing the defect exonerates the insurer
on ship or shipowners interest from liability from any loss arising therefrom.

What is the effect if unseaworthiness is unknown to the

owner of the cargo?
A: It is immaterial in ordinary marine insurance and may not be used by him as a
defense in order to recover on the marine insurance policy. It becomes the
obligation of a cargo owner to look for a reliable common carrier, which keeps its
vessels in seaworthy conditions. The shipper may have no control over the
vessel but he has control in the choice of the common carrier that will transport
his goods. (Roque v. IAC, G.R. No. L 66935, Nov. 11, 1985)

Q: What is the scope of the seaworthiness of a vessel?

A: A warranty of seaworthiness extends not only to the condition of the structure
of the ship itself, but requires that it be properly laden, and provided with a
competent master, a sufficient number of competent officers and seamen, and
the requisite appurtenances and equipment, such as ballasts, cables and
anchors, cordage and sails, food, water, fuel and lights, and other necessary or
proper stores and implements for the voyage. (Sec. 116)

THE VOYAGE AND DEVIATION

"Section 123. When the voyage contemplated by a marine insurance policy is described
by the places of beginning and ending, the voyage insured is one which conforms to the
course of sailing fixed by mercantile usage between those places.

"Section 124. If the course of sailing is not fixed by mercantile usage, the voyage insured
by a marine insurance policy is that way between the places specified, which to a master
of ordinary skill and discretion, would mean the most natural, direct and advantageous.

"Section 125. Deviation is a departure from the course of the voyage insured, mentioned
in the last two (2) sections, or an unreasonable delay in pursuing the voyage or the
commencement of an entirely different voyage.

"Section 126. A deviation is proper:

"(a) When caused by circumstances over which neither the master nor the owner of the
ship has any control;

"(b) When necessary to comply with a warranty, or to avoid a peril, whether or not the
peril is insured against;

"(c) When made in good faith, and upon reasonable grounds of belief in its necessity to
avoid a peril; or

"(d) When made in good faith, for the purpose of saving human life or relieving another
vessel in distress.

"Section 127. Every deviation not specified in the last section is improper.

"Section 128. An insurer is not liable for any loss happening to the thing insured
subsequent to an improper deviation.

Q. What is the course of the voyage insured?

"Section 123. When the voyage contemplated by a marine insurance policy is described
by the places of beginning and ending, the voyage insured is one which conforms to the
course of sailing fixed by mercantile usage between those places.

"Section 124. If the course of sailing is not fixed by mercantile usage, the voyage insured
by a marine insurance policy is that way between the places specified, which to a master
of ordinary skill and discretion, would mean the most natural, direct and advantageous.

What is deviation in marine insurance policy?

A: Deviation is a departure of the vessel from the course of the voyage, or an
unreasonable delay in pursuing the voyage, or the commencement of an entirely
new voyage. (Sec. 123)

Q: What is the effect of improper deviation?

An insurer is not liable for any loss happening to a thing insured subsequent to an
improper deviation (Sec. 126), even if the risk has not increased or even it has been
apparently diminished.

What are the four cases of deviation in marine

insurance?
1. Departure from the course of sailing fixed by mercantile usage between the
places of beginning and ending specified in the policy. (Sec. 121)

2. Departure from the most natural, direct, and advantageous route between the
places specified if the course of sailing is not fixed by mercantile usage. (Sec.
122)

3. Unreasonable delay in pursuing the voyage. (Sec. 123)

 4. The commencement of an entirely different voyage.

Q: What are the two kinds of deviation? A:

1. Proper This will not vitiate a policy of marine insurance because
deviation is considered justified or caused by actual necessity which is
equal in importance to such deviation. (Sec. 124)

2. Improper The insurer becomes immediately absolved from further

liability under the policy for losses occurring subsequent to the deviation
because deviation is considered to be without just cause. Every deviation
not specified in Sec.124 is improper. (Sec. 125)

Q: What is the additional liability of the insurer of goods

referred to in the reshipment of cargo?
A: The marine insurer is bound for:

1. Damages

2. Expenses of discharging

3. Storage

4. Shipment

5. Extra freightage

6. All other expenses incurred in saving cargo reshipped. (Sec. 134)

Note: The liability of the insurer cannot exceed the amount of the insurance.

Vessel A and its cargoes were insured by its owner with

X Ins. Co. against perils of the sea and those caused by
typhoon, earthquake, theft and acts of pirates and other
similar perils. While the vessel was on its way to
Singapore to deliver the goods that were shipped from
Manila, the captain of the vessel changed its route
because of the information that it received from the
Coast Guard that an earthquake occurred along the
agreed route making it dangerous to travel in the area.
The vessel and its cargoes were later destroyed by
pirates. X Ins. later denied the claim of the shipowner on
the insurance policy on the ground that although the
loss was directly caused by a peril insured against there
was improper deviation because there was really no
earthquake along the agreed route. Is the insurer
correct?
No. There was no unlawful deviation because there was reasonable ground for the
captain in good faith to conclude that there was valid ground to change the course of the
voyage. The captain relied on the information given to him by the Coast Guard, hence, it
was reasonable for him to believe that it was necessary to avoid peril.

LOSS
"Section 129. A loss may be either total or partial.

"Section 130. Every loss which is not total is partial.

"Section 131. A total loss may be either actual or constructive.

"Section 132. An actual total loss is caused by:

"(a) A total destruction of the thing insured;

"(b) The irretrievable loss of the thing by sinking, or by being broken up;

"(c) Any damage to the thing which renders it valueless to the owner for the purpose for
which he held it; or

"(d) Any other event which effectively deprives the owner of the possession, at the port
of destination, of the thing insured.

"Section 133. A constructive total loss is one which gives to a person insured a right to
abandon, under Section 141.

"Section 134. An actual loss may be presumed from the continued absence of a ship
without being heard of. The length of time which is sufficient to raise this presumption
depends on the circumstances of the case.

"Section 135. When a ship is prevented, at an intermediate port, from completing the
voyage, by the perils insured against, the liability of a marine insurer on the cargo
continues after they are thus reshipped.

"Nothing in this section shall prevent an insurer from requiring an additional premium if
the hazard be increased by this extension of liability.

"Section 136. In addition to the liability mentioned in the last section, a marine insurer is
bound for damages, expenses of discharging, storage, reshipment, extra freightage, and
all other expenses incurred in saving cargo reshipped pursuant to the last section, up to
the amount insured.
"Nothing in this or in the preceding section shall render a marine insurer liable for any
amount in excess of the insured value or, if there be none, of the insurable value.

"Section 137. Upon an actual total loss, a person insured is entitled to payment without
notice of abandonment.

"Section 138. Where it has been agreed that an insurance upon a particular thing, or
class of things, shall be free from particular average, a marine insurer is not liable for
any particular average loss not depriving the insured of the possession, at the port of
destination, of the whole of such thing, or class of things, even though it becomes
entirely worthless; but such insurer is liable for his proportion of all general average loss
assessed upon the thing insured.

"Section 139. An insurance confined in terms to an actual loss does not cover a
constructive total loss, but covers any loss, which necessarily results in depriving the
insured of the possession, at the port of destination, of the entire thing insured.

Q: What are the two kinds of total loss? A:

1. Actual total loss

2. Constructive total loss

Q: What are the distinctions between the two?

ACTUAL TOTAL LOSS

It exists when the subject matter of the insurance is wholly destroyed or lost or
when it is so damaged as no longer to exist in its original character.

The right of the insured to claim the whole insurance is absolute. No need to give
notice of abandonment. (Sec. 135)

CONSTRUCTIVE TOTAL LOSS

It is one which the loss, although not actually total, is of such a character that the
insured is entitled, if he thinks fit, to treat it as total by abandonment. (Sec. 131)

Abandonment by the insured is necessary in order to recover for a total loss

(Sec. 138) in the absence of any provision to the contrary in the policy.

Q: What constitutes actual total loss?

1. A total destruction of the thing insured

2. The irretrievable loss of the thing by sinking, or by being broken up

3. Any damage to the thing which renders it valueless to the owner for the
 purpose for which he held it; or

4. Any other event which effectively deprives the owner of the possession, at
the port of destination, of the thing insured. (Sec. 130)

Note: Complete physical destruction is not essential to constitute actual total

loss.

Q: What is constructive total loss?

1. Actual loss of more than 34 of the value of the object

2. Damage reducing value by more than 34 of the value of the vessel and of
cargo; and

3. Expense of transshipment exceeds 34 of the value of the cargo. (Sec.

131)

Q: When is actual loss presumed?

A: It may be presumed from the continued absence of a ship without being heard
of. The length of time which is sufficient to raise his presumption depends on the
circumstances of the case. (Sec. 132)

Q: In an insurance upon cargo, what is the liability of the

insurer in case of reshipment?
A: If the original ship be disabled, and the master, acting with a wise discretion,
as the agent of the merchant and the ship owners, forwards the cargo in another
ship, such necessary and justifiable change of ship will not discharge the
underwriter on the goods from liability for any loss which may take place on
goods subsequently to such reshipment. (Sec. 133) The insurer may, however,
require additional premium if the hazard be increased by his extension of liability.

Was there an actual total loss where a shipment of rice

seeds or play became wet and the seeds started to
germinate or sprout?
There was actual total loss as the palay was rendered valueless to the owner. Where a
cargo by the process of decomposition or other chemical agency no longer remains the
same kind of thing as before, an actual total loss has been suffered. - Pan Malayan Ins.
Corp.

What is constructive total loss or technical total loss?

A constructive total loss is actually a partial loss. However, by making an abandonment
in the cases provided by law, the loss is thereby converted to a total loss.

How is constructive total loss determined where the

cargo insured under one policy are loaded on different
vessels?
In case the contract of marine insurance covers a single shipment under one policy and
one premium, the contract of insurance is one and indivisible, and the fact that the
subject matter of insurance is loaded on board different vessels will not alter the
situation. In such case, the constructive total loss will be determined loaded on one
vessel alone. - Oriental Assurance Corp. vs. CA

What are the kinds of averages?

Simple or particular average
includes all expenses and damages caused to the vessel or to her cargo which have
not inured to the common benefit and profit of all the persons interested in the vessel
and her cargo (Sec. 809, Code of Commerce); or
General or gross average
includes all the damages and expenses which are deliberately caused in order to save
the vessel, its cargo, or both at the same time, from real and known risk. (Sec. 811,
Code of Commerce).

Must formal requirements be complied with to entitle a

party to contribution arising from general or gross
averages?
The right to contribution arising from a general or gross average could not be claimed
unless the formal requirements of the law are complied with. (Art. 811, Code of
Commerce).

In order to incur the expenses and cause the damage corresponding to gross average,
there must be a resolution of the captain, adopted after deliberation with the sailing mate
and other officers of the vessels, and after hearing the persons interested in the cargo
who may by present. The said resolution must be entered I the log book. (Secs. 813
[par. 1], 814 [par. 1].

A Company loaded its vessel with various cargoes

which were insured. While the vessel was off Okinawa,
Japan, a small flame was detected on the acetylene
cylinder located near the engine room. The acetylene
cylinder exploded causing the death and injuries to the
crew and instantly setting fire to the vessel. The master
and the crew abandoned the ship. The cargoes which
were saved were loaded on another vessel for delivery
to their ports of destination. The formal requirements of
a general or gross average were not met.
Should the owners of the cargoes saved or their
insurance contribute to the general average?
HELD: NO.
Since the formalities of the law were not complied with, there was no right to claim
contribution for a general or gross average loss.

What are the effects of a stipulation that the marine

insurance shall be free from particular average?
If the damage to the thing insured is a particular average, the insurer shall not be liable
unless the loss suffered is total, i.e., the insured is deprived of the whole of such thing;

If the damage to the thing insured is a general average, the insurer shall be liable
whether the loss is partial or total or for the contribution of the insured for his proportion
of all general average losses assessed upon the thing insured which was saved. (Secs.
136, 164 and 165).

A marine insurance covered a shipment by sea from

Cebu to Tacloban of 1,000 bags of cement against total
loss only. The sacks were loaded in two lighters, the
first with 600 bags and the second with 400 bags.
Because of rough seas, damage was caused to the
second lighter resulting in the loss of 325 out of 400
bags. The owner of the shipment filed claims against the
insurance company on the ground of constructive total
loss inasmuch as more than three-fourths of the value
of the cement has been lost in one of the lighters. Is the
insurance company liable under its policy?
No. As the policy taken is an insurance for total loss only, there can be no recovery on
the ground of constructive total loss. The insured shipment of 1,000 bags of cement,
although carried in two barges, was insured under one policy only. As a constructive loss
would involve a loss at least 3/4, the loss of 325 out of 1,000 bags would not be a
constructive total loss. Hence, there can be no recovery by the insured for constructive
total loss.
An inter island vessel, insured for P2M against total
constructive total loss, sank in 150 feet of water in one
mile off Basey during typhoon. After the typhoon, the
ship owner gave written notice of abandonment of his
interest in the entire sunken ship to the insurance
company. Refusing to accept the offer of abandonment,
the insurer hired divers to re-float the vessel at a total
cost of P40K. Because the refloated vessel needed
repair, the insurer issued invitations of bid for repairs.
Several firms submitted separate sealed bids ranging
from P1.2M to P1.3M for the complete refurbishing
and/or restoration of the vessel to its original condition.
On the basis of the following facts, the insurance
company rejected the claim of the ship owner for
payment of total loss on the ground that there was no
constructive total loss.
a. Was the notice of abandonment given by the
owner property made?
b. Is the position of the insurance company as to
the absence of constructive total loss well-taken?
c. Assuming that the ship owner failed to give the
proper notice of abandonment, may he still recover from
the insurer? If so, what amount can be recovered? (1982
Bar)
a. Although the sinking of a vessel generally amounts to a total loss, however, in
many instances, the vessel may be easily salvaged as in the problem at bar where the
sinking is just one mile from Basey, and in 150 feet of water one. This, for the owner is
not a total actual loss, but could amount to a total constructive loss.
The notice of abandonment given by the owner on his assumption that the loss
was a total constructive loss, being a unilateral act of the shipowner, was properly made.
b. The position of the insurance company is well-taken. The circumstances of the
sinking (one mile from Basey, and in 150 feet of water) making its refloating and repair
easy, can prevent the loss from being a total actual loss. Perils of the sea extend only
to losses caused by sea damage, or by violence of the elements, and does not embrace
all losses. And the loss, not being a total actual loss, abandonment by the owner will
only be proper if the total constructivee loss amounts to 3/4 or more of the value of the
vessel.
The expenses for refloating (P40,000) and refurbishing (1.3M) do not amount to
3/4 or more of the value of the ship. Hence, claiming for total constructive loss is not
proper.
c. If the ship owner failed to give the proper notice of abandonment, he can still
recover for partial loss. If, as the problem states, P40,000 was spent for refloating and
P1.2 to P1.3M would be the expense for refurbishing and/or restoring the vessel to its
original condition, these amounts are recoverable from the insurance company as the
actual partial loss of the insured without abandonment of the vessel.

Assume that your firm is engaged in the commercial

transportation of coconut oil produced exclusively in
Samar. Briefly explain with reasons: If a vessel of your
firm is insured and is damaged partially by a typhoon at
sea, may your from recover the full amount of the
insurance? Why? (1973 Bar)
If the vessel is insured and is partially damaged by a typhoon at sea, the full
amount of the insurance is recoverable if the partial damage amounts to a constructive
total loss, and my firm abandons the vessel to the insurer.

ABANDONMENT
"Section 140. Abandonment, in marine insurance, is the act of the insured by which,
after a constructive total loss, he declares the relinquishment to the insurer of his interest
in the thing insured.

"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 insured against:

"(a) If more than three-fourths () thereof in value is actually lost, or would have to be
expended to recover it from the peril;

"(b) If it is injured to such an extent as to reduce its value more than three-fourths ();

"(c) If the thing insured is a ship, and the contemplated voyage cannot be lawfully
performed 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 circumstances; or

"(d) If the thing insured, being cargo or freightage, and the voyage cannot be performed,
nor another ship procured by the master, within a reasonable time and with reasonable
diligence, to forward the cargo, without incurring the like expense or risk mentioned in
the preceding subparagraph. But freightage cannot in any case be abandoned unless
the ship is also abandoned.

"Section 142. An abandonment must be neither partial nor conditional.

"Section 143. An abandonment must be made within a reasonable time after receipt of
reliable information of the loss, but where the information is of a doubtful character, the
insured is entitled to a reasonable time to make inquiry.

"Section 144. Where the information upon which an abandonment has been made
proves incorrect, or the thing insured was so far restored when the abandonment was
made that there was then in fact no total loss, the abandonment becomes ineffectual.

"Section 145. Abandonment is made by giving notice thereof to the insurer, which may
be done orally, or in writing: Provided, That if the notice be done orally, a written notice
of such abandonment shall be submitted within seven (7) days from such oral notice.

"Section 146. A notice of abandonment must be explicit, and must specify the particular
cause of the abandonment, but need state only enough to show that there is probable
cause therefor, and need not be accompanied with proof of interest or of loss.

"Section 147. An abandonment can be sustained only upon the cause specified in the
notice thereof.

"Section 148. An abandonment is equivalent to a transfer by the insured of his interest to

the insurer, with all the chances of recovery and indemnity.

"Section 149. 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 proceeds or salvage, as if
there had been a formal abandonment.

"Section 150. Upon an abandonment, acts done in good faith by those who were agents
of the insured in respect to the thing insured, subsequent to the loss, are at the risk of
the insurer, and for his benefit.

"Section 151. Where notice of abandonment is properly given, the rights of the insured
are not prejudiced by the fact that the insurer refuses to accept the abandonment.

"Section 152. The acceptance of an abandonment may be either express or implied from
the conduct of the insurer. The mere silence of the insurer for an unreasonable length of
time after notice shall be construed as an acceptance.

"Section 153. The acceptance of an abandonment, whether express or implied, is

conclusive upon the parties, and admits the loss and the sufficiency of the
abandonment.

"Section 154. An abandonment once made and accepted is irrevocable, unless the
ground upon which it was made proves to be unfounded.

"Section 155. On an accepted abandonment of a ship, freightage earned previous to the

loss belongs to the insurer of said freightage; but freightage subsequently earned
belongs to the insurer of the ship.

"Section 156. If an insurer refuses to accept a valid abandonment, he is liable as upon

an actual total loss, deducting from the amount any proceeds of the thing insured which
may have come to the hands of the insured.
"Section 157. If a person insured omits to abandon, he may nevertheless recover his
actual loss.

Q: What is abandonment in marine insurance?

"Section 140. Abandonment, in marine insurance, is the act of the insured by
which, after a constructive total loss, he declares the relinquishment to the insurer
of his interest in the thing insured.

Q: What are the requisites for the validity of

abandonment?
1. There must be an actual relinquishment by the person insured of his
interest in the thing insured. (Sec. 138)

2. There must be a constructive total loss. (Sec. 139)

3. The abandonment must neither be partial nor conditional. (Sec. 140)

4. It must be made within a reasonable time after receipt of reliable

information of the los.s (Sec. 141)

5. It must be factual. (Sec. 142)

6. It must be made by giving notice thereof to the insurer which may be done
orally or in writing. (Sec. 143)

7. The notice of abandonment must be explicit and must specify the

particular cause of abandonment. (Sec. 144)

Q: What is the form of notice of abandonment?

A: Abandonment may be done orally, or in writing; Provided that if the notice be
done orally a written notice of such abandonment shall be submitted within 7
days from such oral notice. (Sec. 143)

Q: What is the effect of a valid abandonment?

A: It is equivalent to a transfer by the insured of his interest, to the insurer, with
all the chances of recovery and indemnity. The insurer becomes entitled to all the
rights which the insured possessed in the thing insured. (Sec. 146)

Q: What are the effects of abandonment?

1. a partial loss becomes a total loss. (Sec. 131.);
2. insured is surrendering to the insurer whatever is left of the property insured,
and resorting to the policy for indemnity; and 3. insurer then becomes the
owner of whatever may remain of the insured thing and the insured may recover a total
loss. (Sec. 139).
What are the forms of acceptance of abandonment?
A:

1. Express

2. Implied from the conduct of the insurer

3. Mere silence of the insurer for unreasonable length of time after notice.
(Sec. 150)

Q: What are the grounds of abandonment?

1. If the thing insured a ship and the contemplated voyage cannot be lawfully
performed without an expense to the insured of more than 34 of the value of the thing
abandoned;
2. If the thing insured, is a ship and the contemplated voyage cannot be lawfully
performed without incurring risk which a prudent man would not take under the
circumstances;
3. If the thing insured, being cargo or freightage, and the voyage cannot be
performed nor another ship procured by the master, within reasonable time and with
reasonable diligence, to forward the cargo, without incurring an expense of more than
34 of the value of the thing or without incurring a risk which a prudent man would not
under take under the circumstances.

What may be recovered by the insured when

abandonment is properly made?
"Section 148. An abandonment is equivalent to a transfer by the insured of his interest to
the insurer, with all the chances of recovery and indemnity.
"Section 157. If a person insured omits to abandon, he may nevertheless recover his
actual loss.

When abandonment is properly made, the insured may recover a total loss, and the
insurer acquires all the interests of the insured in the thing with all chances of recovery
and indemnity.
But if the insured omits to abandon, he may recover only his actual loss. (Secs. 148 and
157).

When may the insured, by a contract of marine

insurance, abandon the thing insured?
"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 insured against:
"(a) If more than three-fourths () thereof in value is actually lost, or would have to be
expended to recover it from the peril;

"(b) If it is injured to such an extent as to reduce its value more than three-fourths ();

"(c) If the thing insured is a ship, and the contemplated voyage cannot be lawfully
performed 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 circumstances; or

"(d) If the thing insured, being cargo or freightage, and the voyage cannot be performed,
nor another ship procured by the master, within a reasonable time and with reasonable
diligence, to forward the cargo, without incurring the like expense or risk mentioned in
the preceding subparagraph. But freightage cannot in any case be abandoned unless
the ship is also abandoned.

Note: Freightage cannot in any case be abandoned, unless the ship is also
abandoned.

Q: What is the three fourth rule?

A: What is contemplated as 34 under the law must be more than 34. When what
was lost was exactly 34, the rule cannot be applied.

Q: An insurance company issued a marine insurance

policy covering a shipment by sea from Mindoro to
Batangas of 1,000 pieces of Mindoro garden stones
against total loss only. The stones were loaded in two
lighters, the first with 600 pieces and the second with
400 pieces. Because of rough seas, damage was caused
the second lighter resulting in the loss of 325 out of the
400 pieces. The owner of the shipment filed claims
against the insurance company on the ground of
constructive total loss inasmuch as more than 34 of the
value of the stones had been lost in one of the lighters.
Is the insurance company liable under its policy? Why?
A: The insurance company is not liable under its policy covering against total
loss only the shipment of 1,000 pieces of Mindoro garden stones. There is no
constructive total loss that can be claimed since the 34 rule is to be computed on
the total 1,000 pieces of Mindoro garden stones covered by the single policy
coverage. (1992 Bar Question)

Q: What are the effects of acceptance of abandonment?

1. The insurer becomes at once liable for the whole amount of the insurance
and also becomes entitled to all rights which insured possessed in the thing
insured. (Sec. 146)

2. It fixes the rights of the parties; whether express or implied, is conclusive

upon them, and irrevocable. (Sec. 152)

3. It stops the insurer to rely on any insufficiency in the form, time, or right, of
abandonment. Whether the insured has a right to abandon is immaterial where
the abandonment is accepted and there is no fraud.

4. On accepted abandonment of a ship, the freightage earned subsequent to

the loss belongs to the insurer of the ship. But freightage earned previously
belongs to the insurer of said freightage who is subrogated to the rights of the
insured up to the time of the loss. (Sec. 153)

XPN: Where the ground upon which it was made proves to be unfounded. (Sec.
152) Under Sec. 145, abandonment can be sustained only upon the ground
specified in the notice thereof.

Q: What is the effect of the insurers refusal to accept a

valid abandonment?
A: If the insurer declines to accept a proper abandonment, he is liable as upon
an actual total loss less any proceeds the insured may have received on account
of the damaged property as when the insured succeeds in selling the property as
damaged (Sec. 154). If the abandonment was improper, the insured may
nevertheless recover to the extent of the damage proved.

Q: What is the effect of insureds failure to make

abandonment?
A: The insured has an election to abandon or not, and cannot be compelled to
abandon although abandonment is proper. If the insured fails to abandon, he
may nevertheless recover his actual loss (Sec. 155).

Q: When does co insurance exist?

A: There is co insurance if the value of the insureds interest exceeds the
amount of insurance; he is considered the co insurer for an amount determined
by the difference between the insurance taken out and the value of the property.

A marine insurer is liable upon a partial loss only for such proportion of the
amount insured by him as the loss bears to the value of the whole interest of the
insured in the property insured (Sec. 157).

Note: Co insurance applies only to marine insurance. Logically, there cannot be

co insurance in life insurance. But co insurance applies in fire insurance only
when expressly stipulated by the parties.

Q: What are the requisites for co insurance? A: There

is co insurance when the following requisites concur:
1. The amount of insurance is less than the insureds insurable interest;

2. The loss is partial.

MEASURE OF INDEMNITY
"Section 158. A valuation in a policy of marine insurance is conclusive between the
parties thereto in the adjustment of either a partial or total loss, if the insured has some
interest at risk, and there is no fraud on his part; except that when a thing has been
hypothecated by bottomry or respondentia, before its insurance, and without the
knowledge of the person actually procuring the insurance, he may show the real value.
But a valuation fraudulent in fact, entitles the insurer to rescind the contract.

"Section 159. A marine insurer is liable upon a partial loss, only for such proportion of
the amount insured by him as the loss bears to the value of the whole interest of the
insured in the property insured.

"Section 160. Where profits are separately insured in a contract of marine insurance, the
insured is entitled to recover, in case of loss, a proportion of such profits equivalent to
the proportion which the value of the property lost bears to the value of the whole.

"Section 161. In case of a valued policy of marine insurance on freightage or cargo, if a

part only of the subject is exposed to risk, the valuation applies only in proportion to such
part.

"Section 162. When profits are valued and insured by a contract of marine insurance, a
loss of them is conclusively presumed from a loss of the property out of which they are
expected to arise, and the valuation fixes their amount.

"Section 163. In estimating a loss under an open policy of marine insurance the following
rules are to be observed:

"(a) The value of a ship is its value at the beginning of the risk, including all articles or
charges which add to its permanent value or which are necessary to prepare it for the
voyage insured;

"(b) The value of the cargo is its actual cost to the insured, when laden on board, or
where the cost cannot be ascertained, its market value at the time and place of lading,
adding the charges incurred in purchasing and placing it on board, but without reference
to any loss incurred in raising money for its purchase, or to any drawback on its
exportation, or to the fluctuation of the market at the port of destination, or to expenses
incurred on the way or on arrival;

"(c) The value of freightage is the gross freightage, exclusive of primage, without
reference to the cost of earning it; and

"(d) The cost of insurance is in each case to be added to the value thus estimated.

"Section 164. If cargo insured against partial loss arrives at the port of destination in a
damaged condition, the loss of the insured is deemed to be the same proportion of the
value which the market price at that port, of the thing so damaged, bears to the market
price it would have brought if sound.

"Section 165. A marine insurer is liable for all the expenses attendant upon a loss which
forces the ship into port to be repaired; and where it is stipulated in the policy that the
insured shall labor for the recovery of the property, the insurer is liable for the expense
incurred thereby, such expense, in either case, being in addition to a total loss, if that
afterwards occurs.

"Section 166. A marine insurer is liable for a loss falling upon the insured, through a
contribution in respect to the thing insured, required to be made by him towards a
general average loss called for by a peril insured against: Provided, That the liability of
the insurer shall be limited to the proportion of contribution attaching to his policy value
where this is less than the contributing value of the thing insured.

"Section 167. When a person insured by a contract of marine insurance has a demand
against others for contribution, he may claim the whole loss from the insurer,
subrogating him to his own right to contribution. But no such claim can be made upon
the insurer after the separation of the interests liable to contribution, nor when the
insured, having the right and opportunity to enforce contribution from others, has
neglected or waived the exercise of that right.

"Section 168. In the case of a partial loss of ship or its equipment, the old materials are
to be applied towards payment for the new. Unless otherwise stipulated in the policy, a
marine insurer is liable for only two-thirds (2/3) of the remaining cost of repairs after such
deduction, except that anchors must be paid in full.

What is the effect of valuation in a policy of marine

insurance?
A valuation in a policy of marine insurance is conclusive between the parties thereto in
the adjustment of either a partial or total loss, provided:
(a) the insured has some interest at the risk and
(b) there is no fraud on his part. In such case, the insured does not have to prove the
value of the thing insured at the time of the loss except when it has been hypothecated
by bottomry or respondentia before its insurance, and without the knowledge of the
person actually procuring the insurance, in which case the real value thereof must be
shown. (Sec. 158)

"Section 158. A valuation in a policy of marine insurance is conclusive between the

parties thereto in the adjustment of either a partial or total loss, if the insured has some
interest at risk, and there is no fraud on his part; except that when a thing has been
hypothecated by bottomry or respondentia, before its insurance, and without the
knowledge of the person actually procuring the insurance, he may show the real value.
But a valuation fraudulent in fact, entitles the insurer to rescind the contract.

What is the effect of Overvaluation?

If overvaluation is fraudulent, it entirely avoids the insurance whether done at the time of
making the contract or at the time of submitting proof of loss.

But the mere fact of overvaluation, even though great, is not alone sufficient proof of
fraud. (Co Teng vs Goodyear Ins. Co.)

It must be alleged and clearly proved by the insurer that the insured, in overvaluing his
property, did so knowingly and with fraudulent intent.

Overvaluation may be due to a perfectly honest, though mistaken, estimate as to the real
value of the property insured. (Vance on Insurance, 3ed., Hornbook Series, pp.838-839)

Measure of indemnity:

a. Valued policy the parties are bound by the valuation, if the insured had
some interest at risk and there is no fraud (Sec. 156)

b. Open policy the following rules shall apply in estimating a loss:

i. value of the ship value at the beginning of the risk

ii. value of the cargo actual cost when laden on board or market value at
the time and place of lading

iii. value of freightage gross freightage exclusive of primage

iv. cost of insurance in each case to be added to the estimated value (Sec.
161)

Q: What is the Formula to determine the amount

recoverable?
(Partial) Loss/Value of thing Insured

X Amount of Insurance = Amount of recovery

Illustration:

If a vessel valued at P1M is insured for only P800, 000 and is damaged to the
extent of P400, 000, the insurer will be required to pay only 80% of the loss
suffered, or P320,000; the other 20% or P80,000 being borne by the insured
himself.
P400,000 or 2/5 X P800,000 / P1M

= P320, 000

The insured is considered a co insurer as to the uninsured portion of P200,000.

Note: If the loss is total, the insurer is liable for the full amount of P800,000. On
the other hand, if the property is insured to its full value, the insured is entitled to
recover the full amount of the partial loss of P400,000.

Q: In case of loss, what is the insured entitled to recover

if profits to be realized are separately insured?
A: If profits to be realized are separately insured from the vessel or cargo, the
insured is entitled to recover, in case of loss, such proportion of the profits as the
value of the property lost bears to the value of the whole property. (Sec. 158)

Q: When is the loss of profits conclusively presumed?

A: When profits are valued and insured by a contract of marine insurance, a loss
of them is conclusively presumed from a loss of the property out of which they
were expected to arise, and the valuation fixes their amount. (Sec. 160)

Q: What are the rules for estimating loss under an open

policy of marine insurance?
1. Value of the ship In ascertaining the value of the vessel, the value is to
be taken as of the commencement of the risk and not its value at the time
she was built;

2. Value of cargo The value of the cargo is its actual cost to the insured,
when laden on board, or where that cost cannot be ascertained, its market
value at the time and place of lading it on board, but without reference to
any loss incurred in raising money for its purchase, or to any drawback on
its exportation, or to the fluctuation of the market at the port of destination,
or to expenses incurred on the way or on arrival;

3. Value of freightage the gross freightage, exclusive of primage, without

reference to the cost of earning;

Note: Primage is a compensation paid to the captain after a successful voyage.

4. Cost of insurance It is always added in calculating the value of the ship,

cargo, or freightage or other subject matter in an open policy. (Sec. 161)

Q: What does the phrase port of refuge expenses

mean?
A: These are the additional expenses incurred in repairing the damages suffered
by a vessel because of the perils insured against as well as those incurred for
saving the vessel from such perils, such as the expense of launching or raising
the vessel or of towing or navigating it into port for her safety. These are items to
be borne by the insurer in addition to a total loss if that afterwards takes place.
(Sec. 163)

Q: What are the rights of the insured in case of general

average?
GR: The insurer is liable for any general average loss (Sec. 136) where it
is payable or has been paid by the insured in consequence of a peril
insured against.

The insured may either hold the insurer directly liable for the whole of the insured
value of the property sacrificed for the general benefit, subrogating him to his
own right of contribution or demand contribution from the other interested parties
as soon as the vessel arrives at her destination (Sec. 135).

XPN: There can be no recovery for general average loss against the insurer:

1. After the separation of the interests liable to contribution, that is to say,

after the cargo liable for contribution has been removed from the vessel;
or

2. When the insured has neglected or waived his right to contribution.

Note: General average is a principle of law whereby, when it is decided
by the master of a vessel, acting for all the interest concerned to sacrifice
a part of a venture exposed to a common and imminent peril in order to
save the rest, the interests so saved are compelled to contribute ratably or
proportionately to the owner of the interest sacrificed, so that the cost of
the sacrifice shall fall equally upon all. (Hector S. De Leon, The Law on
Insurance, 2003)

Q: What is Free From Particular Average Clause (FPA

Clause)?
A: A clause agreed upon in a policy of marine insurance in which it is stated that
the insurer shall not be liable for a particular average.

The insurer is liable only for general average and not for particular average
unless such particular average loss as the effect of depriving the insured of the
possession at the port of destination of the whole of the thing insured. (Sec. 136)

Q: What is the limit as to liability of insurer?

A: The liability of the insurer for any general average loss is limited to the
proportion of contribution attaching to his policy value where this is less than the
contributing value of the thing insured. (Sec. 164)
2 Fire Insurance
"Section 169. As used in this Code, the term fire insurance shall include insurance
against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks,
when such risks are covered by extension to fire insurance policies or under separate
policies.

"Section 170. 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 insurance.

"Section 171. An alteration in the use or condition of a thing insured from that to which it
is limited by the policy, which does not increase the risk, does not affect a contract of fire
insurance.

"Section 172. A contract of fire insurance is not affected by any act of the insured
subsequent to the execution of the policy, which does not violate its provisions, even
though it increases the risk and is the cause of the loss.

"Section 173. If there is no valuation in the policy, the measure of indemnity in an

insurance against fire is the expense it would be to the insured at the time of the
commencement of the fire to replace the thing lost or injured in the condition in which it
was at the time of the injury; but if there is a valuation in a policy of fire insurance, the
effect shall be the same as in a policy of marine insurance.

"Section 174. Whenever the insured desires to have a valuation named in his policy,
insuring any building or structure against fire, he may require such building or structure
to be examined by an independent appraiser and the value of the insureds interest
therein may then be fixed as between the insurer and the insured. The cost of such
examination shall be paid for by the insured. A clause shall be inserted in such policy
stating substantially that the value of the insureds interest in such building or structure
has been thus fixed. In the absence of any change increasing the risk without the
consent of the insurer or of fraud on the part of the insured, then in case of a total loss
under such policy, the whole amount so insured upon the insureds interest in such
building or structure, as stated in the policy upon which the insurers have received a
premium, shall be paid, and in case of a partial loss the full amount of the partial loss
shall be so paid, and in case there are two (2) or more policies covering the insureds
interest therein, each policy shall contribute pro rata to the payment of such whole or
partial loss. But in no case shall the insurer be required to pay more than the amount
thus stated in such policy. This section shall not prevent the parties from stipulating in
such policies concerning the repairing, rebuilding or replacing of buildings or structures
wholly or partially damaged or destroyed.

"Section 175. No policy of fire insurance shall be pledged, hypothecated, or transferred

to any person, firm or company who acts as agent for or otherwise represents the
issuing company, and any such pledge, hypothecation, or transfer hereafter made shall
be void and of no effect insofar as it may affect other creditors of the insured.

1 For what kind of fire is the insurer liable in fire

insurance? Discuss your answer.
Canson vs Phoenix Ins. Co.., 110 Ga. 583, 35 S.F. 775, 78 Am. SR. 124
The insured is entitled to recover the loss suffered where the cause of the damage is a
hostile fire, that is, one which burns at a place where it is not intended to be, or breaks
out fromwhere the fire caused the loss is a friendly fire, that is, one which is confined
within the place where it was intended to be and employed for the ordinary purpose of
lighting, heating or manufactured, recovery cannot be had for loss or damaged caused
thereby.

What is fire insurance?

A: It is a contract of indemnity by which the insurer, for a consideration, agrees to
indemnify the insured against loss of or damage by fire, lightning, windstorm,
tornado or earthquake and other allied risks, when such risks are covered by
extension to fire insurance policies or under separate policies. (Sec. 167)

Note: The liability of an insurer is to pay for direct loss only. The insurer may be
liable to pay for consequential losses if covered by extension to such fire policies
or insured under separate policy

2 Y Ins. Co. insured Xs house, against all direct loss

and damage by fire. X lived in a house heated by a
furnace. His servant built a fire in the furnace using
material that was highly flammable. The furnace fire
caused intense heat and great volume of smoke and
soot that damaged the furnishings in the rooms of X.
When X tried to collect on the policy, Y Ins. refused to
pay contending that the damage is not covered by the
policy where the fire is confined within the furnace.
Decide. (1989 Bar)
Y Ins. would not be liable. The coverage of the policy is direct loss or damage by
fire. This presupposes that the insured building or a part of it was burned by fire. There
was no such fire. The damage to room furnishings due to smoke and soot from the
furnace is not within the contemplation of the fire insurance contract.
What is hostile fire?
One which burns at a place where it is not intended to be, or breaks out from

where the fire caused the loss is a friendly fire, that is, one which is confined within the
place where it was intended to be and employed for the ordinary purpose of lighting,
heating or manufactured, recovery cannot be had for loss or damaged caused thereby.

Cite instances when there is prima facie evidence of

arson?
If the building or property is insured for substantially more than its actual value at the
time of the issuance of the policy;

If during the lifetime of the corresponding fire insurance policy more than two fires have
occurred in the same or other premises owned or under the control of the offender and/
or insured;

If shortly before the fire, a substantial portion of the effects insured on a building or
property had been withdrawn from the premises except in the ordinary course of
business; and

If a demand for money or other valuable consideration was made before the fire in
exchange for the desistance of the offender or for the safety of the person or property of
the victim.

When does alteration in the thing insured entitle the

insurer to rescind?
A: In order that the insurer may rescind a contract of fire insurance for any
alteration made in the use or condition of the thing insured, the following
requisites must be present:

1. The use or condition of the thing is specially 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 increases the risk.

Note: A contract of fire insurance is not affected by any act of the insured
subsequent to the execution of the policy, which does not violate its provisions
even though it increases the risk and is the cause of the loss. (Sec. 170)

3 What is the effect of alteration in the use or

condition of the thing insured? What are its requisites?
"Section 170. 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 insurance.

What are the requisites for rescission in case of

alteration?
Alteration in the use or condition of the thing insured will entitle the insurer to rescind the
contract of insurance provided the following requisites are present, to wit:
(a) there must be a violation of the provisions of the policy; (b) the alteration
was made without the consent of the
insurer;
(c) the alteration was made by means within the control of the insured; and
(d) the alteration increased the risk of loss. (Secs. 168 and 169).

4 Is the increase in the risk of loss alone sufficient to

entitle the insurer to rescind the contract of insurance?
No. There must be a corresponding violation of the provision of the policy otherwise
there is no right to rescind the policy.
"Section 172. A contract of fire insurance is not affected by any act of the insured
subsequent to the execution of the policy, which does not violate its provisions, even
though it increases the risk and is the cause of the loss.

Must alteration in the use or condition of the thing

insured increase the risk of loss? Why?
The alteration in the use or condition of the thing insured in violation of the provision of
the policy must increase the risk of loss, otherwise, the policy is not affected thereby.

However, although increase in the risk of loss, as a rule is necessary, when the policy
provides that a violation of specified provisions shall avoid it, increase in the risk of loss
is not necessary to enable the insurer to escape liability. (Sec. 75) Young vs. Midland
Textile Ins. Co.

Must alteration be within the control of the insured?

An alteration in the use or condition of the thing insured must be by means within the
control of the insured so as to entitle the insurer to rescind the contract. Thus, where the
alterations were made by a tenant of the insured without the consent of the insured, the
policy was not thereby avoided. (Nebraska & I. Ins., Co. vs Christienson, 45 N.W. 924,
29 Neb. 572). But a material alteration made by a tenant with the knowledge of the
insured will forfeit the policy. (Lyman vs State Mut. Fire Ins., Co., 14 Allen 329).

What are the distinctions of ocean marine and fire

policies?
OCEAN MARINE

A policy of insurance on a vessel engaged in navigation is a contract of marine

insurance although it insures against fire risks only.

FIRE INSURANCE

Where the hazard is fire alone and the subject is an unfinished vessel, never
afloat for a voyage, the contract to insure is a fire risk, especially in the absence
of an express agreement that it shall have the incidents of marine policy, or
where it insures materials in a shipyard for use in constructing vessels.

Also where a policy insures against fire, a vessel while moored and in use as a
hospital

Q: Why is the distinction between marine and fire

insurance important?
A:

1. In marine insurance, the rules on constructive total loss (Secs. 131, 139)
and abandonment (Sec. 138) apply but not in fire insurance;

2. In case of partial loss of a thing insured for less than its actual value, the
insured in a marine policy is a co insurer of the uninsured portion (Sec.
157), while the insured may only become a co insurer in fire insurance if
expressly agreed upon by the parties. (Sec. 172)

Q: What is the measure of indemnity in open and valued

policies in fire insurance?

In case of open or unvalued policy, the measure of indemnity in fire insurance is the
expense it would be to the injured to replace the thing lost or insured in the condition in
which it was not at the time of the injury. (Sec. 171).

In case of valued policy, the valuation agreed upon shall be conclusive between the
parties in the adjustment of the loss. (Sec. 156).

OPEN POLICIES

The expense necessary to replace the thing lost or injured in the condition it was
at the time of the injury.

VALUED POLICIES

The parties are bound by the valuation, in the absence of fraud.

What is a co insurance?
Co-insurance is a form of insurance in which the person who insures the
property for less than the entire value is understood to be his own insurer for the
difference which exists between the true value of the property and the amount of
insurance. (44 C.J.S.).

Q: In what kind of insurance does co-insurance exist?

In marine insurance, there is always co- insurance (Sec. 157) while in fire insurance,
there is no co-insurance unless expressly stipulated in the policy. (Secs. 171 and 172).

In life insurance there is no co-insurance since the measure of indemnity under a policy
of insurance upon life or health is the sum fixed in the policy. (Sec. 183).

5 What is the effect of co-insurance?

Whenever co-insurance exists, the insurer is liable upon a partial loss only for such
portion of the amount insured by him as the loss bears to the value of the whole interest
of the insured in the property insured. (Sec. 157). It results in a proportionate division of
risk between the insured and the insurer with the following formula:

Loss/Value x Insurance = Liability of Insurer

Who has the burden of proving under-insurance so that

the principle of co-insurance will apply?
Development Insurance Corp. vs IAC 143 SCRA 62
In order that the principle of co-insurance can apply, the insurer must prove that the
value of the property insured is more than the amount of the policy obtained or stated,
otherwise, the property must be under- insured. In case the insurer should fail to do so,
there can not be any pro rata sharing of the loss under the policy can not exceed the
face value of the policy.
6

The insurer is liable for P508, 867 since that amount was proven to be actual loss
suffered by the insured. Co-insurance can not apply as the insurer failed to prove that
the amount of insurance taken was less than the value of the thing insured and there, a
pro rata sharing of the loss can not apply. Development Ins. Corp. vs. IAC

What is a co insurance clause?

A: It is that which requires the insured to maintain insurance to an amount equal
to the value or specified percentage of the value of the insured property under
penalty of becoming co insurer to the extent of such deficiency.

Note: The insured is not a co insurer under fire policies in the absence of
stipulation.

Q: What is a fall of building clause?

A: It is that which provides, in a fire insurance policy, that if the building or any
part thereof falls, except as a result of fire, all insurance by the policy shall
immediately cease.

Q: What is an option to rebuild clause?

A: It gives the insurer the option to rebuild the destroyed property instead of
paying the indemnity. This clause serves to protect the insurer against unfair
appraisals friendly to the insured. (Sec. 172)

3 Casualty Insurance
"Section 176. 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, motor vehicle
liability insurance, plate glass insurance, burglary and theft insurance, personal accident
and health insurance as written by non-life insurance companies, and other substantially
similar kinds of insurance.

Q: What is casualty insurance?

A: It is that which covers loss or liability arising from accident or mishap,
excluding those falling under types of insurance as fire or marine. (Sec. 176)

What are the two divisions of casualty insurance?

Explain.
1. Accident or Insurance against specified perils which may affect the person
and/or property of the insured.

E.g. personal accident, robbery/theft insurance

2. Third party liability insurance Insurance against specified perils which may
give rise to liability on the part of the insured of claims for injuries or damage to
property of others.

Q: What are some rules on third party liability

insurance?
 1. Insurable interest is based on the interest of the insured in the safety of
the persons, and their property, who may maintain an action against him
in case of their injury or destruction respectively.

2. In a third party liability (TPL) insurance contract, the insurer assumes the
obligation by paying the injured third party to whom the insured is liable.
Prior payment by the insured to the third person is not necessary in order
that the obligation may arise. The moment the insured becomes liable to
third persons, the insured acquires an interest in the insurance contract
which may be garnished like any other credit.

3. In burglary, robbery and theft insurance, the opportunity to defraud the

insurer (moral hazard) is so great that insurer have found it necessary to
fill up the policies with many restrictions designed to reduce the hazard.
Persons frequently excluded are those in the insureds service and
employment. The purpose of the exception is to guard against liability
should theft be committed by one having unrestricted access to the
property.

4. Right of third party injured to sue the insurer of party at fault depends on
whether the contract of insurance is intended to benefit third persons also or only
the insured

Q: When does the injured person have the right to sue

insurer of the party at fault?
1. Indemnity against third party liability injured third party can directly sue the
insurer.

Purpose: To protect injured person against the insolvency of the insured who
causes such injury.

2. Indemnity against actual loss or payment third party has no cause of action
against the insurer. The third persons recourse is limited to the insured alone.
The contract is solely for the insurer to reimburse the insured for liability actually
satisfied by him.

Note: The insurer is not solidarily liable with the insured. The insurers liability is
based on contract; that of the insured is based on torts. Furthermore, the
insurers liability is limited by the amount of the insurance coverage.

1 A boxer who is a holder of an accident insurance

policy, died in a boxing match after being knocked out
by the opponent. Can his father who is a beneficiary
under said insurance policy successfully claim
indemnity from the insurance company?
A: Yes. Clearly, the proximate cause of death was the boxing contest. Death
sustained in a boxing contest is an accident. (De la Cruz v. Capital Insurance &
Surety Co., G.R. No. L 21574, June 30, 1966) (1990 Bar Question)

Q: Sun Moon Insurance issued a Personal Accident

Policy to Henry Dy with a face value of P500,000. A
provision in the policy states that the company shall
not be liable in respect of bodily injury consequent
upon the insured person attempting to commit suicide
or willfully exposing himself to needless peril except in
an attempt to save human life. Six months later Henry
Dy died of a bullet wound in his head. Investigation
showed that one evening Henry was in a happy mood
although he was not drunk.
He was playing with his handgun from which he had previously removed
its magazine. He pointed the gun at his sister who got scared. He assured
her it was not loaded. He then pointed the gun at his temple and pulled the
trigger. The gun fired and Henry slumped on the floor.

Henrys wife Beverly, as the designated beneficiary, sought to collect under

the policy. Sun Moon Insurance rejected her claim on the ground that the
death of Henry was not accidental. Beverly sued the insurer. Decide and
Discuss fully.

A: Beverly can recover the proceeds of the policy from the insurer. The death of
the insured was not due to suicide or willful exposure to needless peril which are
excepted risks. The insureds act was purely an act of negligence which is
covered by the policy and for which the insured got the insurance for his
protection. In fact, he removed the magazine from the gun and when he pointed
the gun to his temple he did so because he thought that it was safe for him to do
so. He did so to assure his sister that the gun was harmless. There is none in the
policy that would relieve the insurer of liability for the death of the insured since
the death was an accident. (1995 Bar Question)

Q: What is liability insurance?

A: It has been said to be a contract of indemnity for the benefit of the insured and
those in privity with him, or those to whom the law upon the grounds of public
policy extends the indemnity against liability.

Q: Whats the difference between the liability of the

insurer and that of the insured in case for indemnity
against third person liability?

INSURER

The liability is direct but the insurer cannot be held solidarily liable with the
insured and other parties at fault.

Liability is based on contract

The third party liability is only up to the extent of the insurance policy and that
required by law

INSURED

Liability is direct and can be held liable with all the parties at fault.

Liability is based on tort.

The liability extends to the amount of actual and other damages. (Heirs of
George Y. Poe v. Malayan Insurance Company, Inc. G.R. No. 156302, Apr. 7,
2009)

2 In liability insurance, must the insureds liability be

first determined by the court before the third party
liability insurer could be sued?
A: No, there is no need to wait for the decision of the court determining insureds
liability with finality before the third party liability insurer could be sued. The
occurrence of the injury to a third person immediately gave rise to the liability of
the insurer under its policy. In other words, where an insurance policy insures
directly against liability, the insurers liability accrues immediately upon the
occurrence of the injury or event upon which the liability depends.

The insurer cannot be held solidarily liable with the insured. The liability of the
insurer is based on contract while that of the insured is based on tort. If the
insurer was solidarily liable with the insured, it could be made to pay more than
the amount stated in the policy. This would, however, be contrary to the
principles underlying insurance contracts. On the other hand, if the insurer was
solidarily liable and it is made to pay only up to the amount stated in the
insurance policy, the principles underlying solidary obligations would be violated.
(1996 Bar Question)

Q: What is a no action clause?

A: It 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
person injured recover on the policy. (Guingon v. Del Monte, G.R. No. L 21806,
Aug. 17, 1967)

Note: A no action clause must yield to the provisions of the Rules of Court
regarding multiplicity of suits. (Shafter v. RTC, G.R. No. 78848, Nov. 14, 1988)

Suretyship
"Section 177. 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 undertaking in favor of a third party called the obligee. It includes official
recognizances, stipulations, bonds or undertakings issued by any company by virtue of
and under the provisions of Act No. 536, as amended by Act No. 2206.

"Section 178. The liability of the surety or sureties shall be joint and several with the
obligor and shall be limited to the amount of the bond. It is determined strictly by the
terms of the contract of suretyship in relation to the principal contract between the
obligor and the obligee.

"Section 179. The surety is entitled to payment of the premium as soon as the contract
of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship
or bonding shall be valid and binding unless and until the premium therefor has been
paid, except where the obligee has accepted the bond, in which case the bond becomes
valid and enforceable irrespective of whether or not the premium has been paid by the
obligor to the surety: Provided, That if the contract of suretyship or bond is not accepted
by, or filed with the obligee, the surety shall collect only a reasonable amount, not
exceeding fifty percent (50%) of the premium due thereon as service fee plus the cost of
stamps or other taxes imposed for the issuance of the contract or bond: Provided,
however, That if the nonacceptance of the bond be due to the fault or negligence of the
surety, no such service fee, stamps or taxes shall be collected.

"In the case of a continuing bond, the obligor shall pay the subsequent annual premium
as it falls due until the contract of suretyship is cancelled by the obligee or by the
Commissioner or by a court of competent jurisdiction, as the case may be.

"Section 180. Pertinent provisions of the Civil Code of the Philippines shall be applied in
a suppletory character whenever necessary in interpreting the provisions of a contract of
suretyship.

Q: What is suretyship?
A: It is an agreement whereby the surety guarantees the performance by another
of an undertaking or an obligation in favor of a third party. (Sec. 177)

3 What is the nature of liability of a surety?

"Section 178. The liability of the surety or sureties shall be joint and several with the
obligor and shall be limited to the amount of the bond. It is determined strictly by the
terms of the contract of suretyship in relation to the principal contract between the
obligor and the obligee.

1. Solidary with the bond obligor

2. Limited to the amount in the bond (it cannot be extended by implication)

3. It is determined strictly by the terms of the contract of suretyship in relation

to the principal contract between the obligor and the oblige

4
No. Torrentos bound herself together with the surety, solidarily for the payment of the
obligation and therefore, the creditor may bring an action against anyone of them. The
surety may be sued either alone or together with the principal debtor. NASSCO vs.
TORRENTO

5 Is suretyship contract valid and binding where

premium thereon has not been paid?
Generally, payment of premium is a condition precedent for the validity of suretyship
contract or bond and therefore unless and until the premium is paid, the suretyship
contract or bond is not valid.
However, when a bond or suretyship contract is issued and accepted by the obligee or
creditor, said bond or suretyship contract shall be valid and binding notwithstanding the
non-payment of premium. (Sec. 179).

6 What is the effect of co-insurance?

Whenever co-insurance exists, the insurer is liable upon a partial loss only for such
portion of the amount insured by him as the loss bears to the value of the whole interest
of the insured in the property insured. (Sec. 157). It results in a proportionate division of
risk between the insured and the insurer with the following formula:

7 Is the increase in the risk of loss alone sufficient to

entitle the insurer to rescind the contract of insurance?
Explain.
No. There must be a corresponding violation of the provision of the policy otherwise
there is no right to rescind the policy.
"Section 172. A contract of fire insurance is not affected by any act of the insured
subsequent to the execution of the policy, which does not violate its provisions, even
though it increases the risk and is the cause of the loss.

What are the rules in the payment of premiums in

suretyship?
1. The premium becomes a debt as soon as the contract of suretyship or bond is
perfected and delivered to the obligor (Sec. 77)

2. The contract of suretyship or bonding shall not be valid and binding unless and
until the premium therefore has been paid

3. Where the obligee has accepted the bond, it shall be valid and enforceable
notwithstanding that the premium has not been paid; (Philippine Pryce
Assurance Corp. v. CA, G.R. No. 107062, Feb. 21, 1994)

4. If the contract of suretyship or bond is not accepted by, or filed with the
obligee, the surety shall collect only a reasonable amount;

5. If the non acceptance of the bond be due to the fault or negligence of the
surety, no service fee, stamps, or taxes imposed shall be collected by the surety;
and

6. In the case of continuing bond (for a term longer than one year or with no fixed
expiration date), the obligor shall pay the subsequent annual premium as it falls
due until the contract is cancelled. (Sec. 177)

Q: What are the types of surety bonds?

1. Contract bonds These are connected with construction and supply
contracts. They are for the protection of the owner against a possible
default by the contractor or his possible failure to pay materialmen,
laborers and sub contractors. The position of surety, therefore, is to
answer for a failure of the principal to perform in accordance with the
terms and specifications of the contract.

. There may be two bonds:

a. Performance bond One covering the faithful performance of the

contract; and

b. Payment bond One covering the payment of laborers and

material men.

2. Fidelity bonds They pay an employer for loss growing out of a dishonest
act of his employee.

For the purposes of underwriting, they are classified as:

a. Industrial bond One required by private employers to cover loss through

 dishonesty of employees; and

b. Public official bond One required of public officers for the faithful
performances of their duties and as a condition of entertaining upon the
duties of their offices.

3. Judicial bonds They are those which are required in connection with judicial
proceedings.

Q: What are the distinctions between suretyship and

property insurance?
SURETYSHIP

It is an accessory contract.

There are three parties: the surety, obligor/debtor, and the obligee/creditor.

More of a credit accommodation with the surety assuming primary liability

Surety is entitled to reimbursement from the principal and his guarantors for the
loss it may suffer under the contract.

A bond may be cancelled by or with the consent of the obligee or by the

commissioner or by the court.

Requires acceptance of the obligee before it becomes valid and enforceable.

A risk shifting device, the premium paid being in the nature of a service fee.

PROPERTY INSURANCE

The principal contract itself.

There are only two parties: insurer and insured

A contract of indemnity

No right of recovery for the loss the insurer may sustain except when the insurer
is entitled to subrogation.

May be cancelled unilaterally either by the insured or by the insurer on grounds

provided by law.

Does not need acceptance of any third party.

A risk distributing device, the premium paid being considered a ratable
contribution to a common fund.

5 Life Insurance
"Section 181. Life insurance is insurance on human lives and insurance appertaining
thereto or connected therewith.

"Every contract or undertaking for the payment of annuities including contracts for the
payment of lump sums under a retirement program where a life insurance company
manages or acts as a trustee for such retirement program shall be considered a life
insurance contract for purposes of this Code.

"Section 182. 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 this Code.

"In the absence of a judicial guardian, the father, or in the latters absence or incapacity,
the mother, of any minor, who is an insured or a beneficiary under a contract of life,
health, or accident insurance, may exercise, in behalf of said minor, any right under the
policy, without necessity of court authority or the giving of a bond, where the interest of
the minor in the particular act involved does not exceed Five hundred thousand pesos
(P500,000.00) or in such reasonable amount as may be determined by the
Commissioner. Such right may include, but shall not be limited to, obtaining a policy
loan, surrendering the policy, receiving the proceeds of the Policy, and giving the minors
consent to any transaction on the policy.

"In the absence or in case of the incapacity of the father or mother, the grandparent, the
eldest brother or sister at least eighteen (18) years of age, or any relative who has actual
custody of the minor insured or beneficiary, shall act as a guardian without need of a
court order or judicial appointment as such guardian, as long as such person is not
otherwise disqualified or incapacitated. Payment made by the insurer pursuant to this
section shall relieve such insurer of any liability under the contract.

"Section 183. The insurer in a life insurance contract shall be liable in case of suicide
only when it is committed after the policy has been in force for a period of two (2) years
from the date of its issue or of its last reinstatement, unless the policy provides a shorter
period: Provided, however, That suicide committed in the state of insanity shall be
compensable regardless of the date of commission.

"Section 184. A policy of insurance upon life or health may pass by transfer, will or
succession to any person, whether he has an insurable interest or not, and such person
may recover upon it whatever the insured might have recovered.
"Section 185. Notice to an insurer of a transfer or bequest thereof is not necessary to
preserve the validity of a policy of insurance upon life or health, unless thereby expressly
required.

"Section 186. Unless the interest of a person insured is susceptible of exact pecuniary
measurement, the measure of indemnity under a policy of insurance upon life or health
is the sum fixed in the policy.

1 What is life insurance?

A: It is that which is payable on the death of a person or on his surviving a
specified period, or otherwise contingently on the continuance or cessation of life
(Sec. 180). It is a mutual agreement by which a party agrees to pay a given sum
on the happening of a particular event contingent on the duration of human life, in
consideration of the payment of a smaller sum immediately, or in periodical
payments by the other party.

"Section 181. Life insurance is insurance on human lives and insurance appertaining
thereto or connected therewith.

"Every contract or undertaking for the payment of annuities including contracts for the
payment of lump sums under a retirement program where a life insurance company
manages or acts as a trustee for such retirement program shall be considered a life
insurance contract for purposes of this Code.

Q: What is annuity?
Is a contract to pay the insured, or a named person or persons, a sum periodically during
life or a certain period.

Distinguish annuity vs. life insurance.

Annuity is payable during the lifetime of the annuitant while life insurance is usually
payable upon the death of the insured;

The annuitant pays a single premium while the insured in life insurance pays premiums
by instalments;

In annuity, the insurer undertakes to pay annuities until the death of the annuitant, while
in life insurance, the insurer pays a lump sum upon the death of the insured.

2 Is insurer liable when the insured suffered a violent

death and assault or murder is excluded in the policy?
In a life insurance policy where death by the insured by assault or murder, or intentional
killing is excepted from its coverage, the mere fact that the insured suffered a violent
death by the hands of another person will not necessarily relieve the insurer of liability.
The insurers liability in such case will depend on whether the insureds death was
intended or not.

If the insured was killed by another person intentionally the insurer is not liable. Kanapi
vs. Insular Life Assurance Co., Ltd.,; Biagtan vs. Insular Life Assurance

But where the insured was not an intended victim of a felonious assault, the insurer is
still liable. Calanoc vs. CA

Ojeda then sought help from a policeman who prompted Basilio to come along. While
they were standing in front of the main gate of Ojedas residence, a robber fired a shot
that hit Basilios abdomen and caused his death. The insurer refused to pay proceeds of
the policy on the ground that Basilios death was caused by murder or assault and
therefore, excepted from the policy.
Was the insurer liable?
Yes. There was no proof that Basilios death was caused by murder or assault nor can it
be said that the killing was intentional for there was possibility that the robber fired the
shot merely to scare away the people around and not necessarily to kill the victim. It
cannot be pretended that the robber aimed at the deceased precisely because he
wanted to take his life. Calanoc vs. CA

Can a life insurer be made liable where the insured was

executed for a crime?
Burt vs Union Cent. L. Ins. Co., 187 U.S. 362, 23 Sup. Ct. 139
A policy of life insurance does not insure against the legal execution of the insured for
crime even though he may in fact have been innocent, and, therefore, unjustly convicted
and executed.

3 Is the insurer in life insurance contract liable where

the insured committed suicide?
YES, but only when it is committed after the policy has been in force for a period of two
years from the date of its issue or of its last reinstatement, unless the policy provides a
shorter period; provided, however, that SUICIDE committed in the state of insanity
shall be compensable regardless of the date of commission. (Sec. 180-A).

Who has the burden of proving suicide?

Edralin vs Insular Life Co., Ltd., [CA] 73 O.G. 976

The basic instinct of self-preservation militates against the commission of suicide.

Hence, it is incumbent upon a party alleging suicide as a defense, especially in actions
involving insurance policies to prove it by clear and convincing proof.

Will an industrial life insurance lapse by non-payment of

premiums where the insurer failed to send a collector of
the premiums?
Industrial life insurance shall not lapse for non- payment of premiums if such non-
payment was due to failure of the insurer to send its representative or agent to the
insured at the residence of the insured or some other place indicated by him for the
purpose of collecting such premium. However, this does not apply when the premium on
the policy remains unpaid for a period of three months or twelve weeks after the grace
period has expired. (Sec. 229, par.2).

4 May a life or health insurance policy be transferred?

A policy insurance upon life or health may pass by transfer, will or succession to any
person, whether he has an insurable interest or not, and such person may recover upon
it whatever the insured might have recovered. (Sec. 181).

Is notice to the insurer necessary for the transfer or

bequest of the life insurance policy?
Notice to an insurer of a transfer or bequest thereof is not necessary to preserve the
validity of a policy of insurance upon life of health, unless thereby expressly required.
(Sec. 182).

Is consent of the beneficiary necessary for the validity

of an assignment of a life insurance policy?
If the designation of the beneficiary is irrevocable, the consent of such beneficiary to the
assignment of the policy must be obtained since the beneficiary in such case has a
vested right on the policy that cannot be defeated by an assignment or transfer without
his consent. (Morgan vs Penn. Mut. Life Ins., Co. 94 F. 2d., 129).

On the other hand, the consent of the beneficiary to an assignment of the policy is not
necessary where the beneficiary is revocable for such case the beneficiary has no
vested right as the insured may still change him. (Aetna Life Ins., Co. vs Philipps, 39 F.
2d., 901; Sec. 11).

Must the assignee of a life insurance policy have

insurable interest in the life of the insured?
He need not have. (Sec. 181). In those instances where the insured can assign his
policy, his assignee may be any person, whether or not he (assignee) has an insurablee
interest int eh life of the insured. A life insurance is a property right within the capacity of
its owner to dispose of , like his other properties.

5 A man insures his life and later transfers the policy

to one who has no insurable interest. If the insured dies
before the transfer is notified to the insurer, may the
transferee collect the insurance?
Yes, the transferee may collect the insurance. Unless required by the policy, the
transfer by the insured of his policy to his assignee does not need the knowledge, much
less, the conformity, of the insurer.

However, assignment of a policy should not be used to circumvent the provision of the
law prohibiting insurance without insurable interest.
An assignment of a policy of life insurance to one without insurable interest on the life of
the insured may invalidate the policy where the assignment is substantially
contemporaneous with the issuance of the policy and made with intent to evade the rule
against wagering contracts, but where the assignment is made in good faith, the fact that
it is made its inception. Bankers Reserve Life Co. vs. Matthews

6 The policy insurance upon his life, with no

beneficiary named in the policy, with the face value of
P100,000 was assigned by Jose, a married man with two
children, to his nephew, Y, as security for a loan of
P50K. He did not give the insurer any written notice of
such assignment despite the explicit provision to that
effect in the policy. Jose died. Upon the claim on the
policy by the assignee, the insurer refused to pay on the
ground that it was not notified on the assignment. Upon
the other hand, the heirs of Jose contended that Y is not
entitled to any amount because the assignment without
due notice to the insurer was void. Resolve. (1991 Bar)
The heirs are entitled to the policy.
While assignment of the policy is a prerogative belonging to the insured, in cases
however where the policy expressly provides that notice to the insurer must be made by
the insured, in case of assignments of the policy, the failure of the insured to notify the
insurer of the said assignment will not bind the insurer. The insurer therefore may pay to
the heirs of Jose, as there is no beneficiary named in the policy.

What is the measure of indemnity in life insurance?

Unless the interest of a person insured is susceptible of exact pecuniary measurement,
the measure of indemnity under a policy of insurance upon life or health is the sum fixed
in the policy. (Sec. 183).
By reason of this rule it has been said that life insurance contract is a valued policy. (1
Joyce, 133).

However, when the insurable interest is susceptible of pecuniary estimation, then the
amount of the loss suffered should be the basis of payment as in the case of insurance
procured by a creditor on the life of the debtor, for then, life insurance of such nature is a
contract of indemnity. (1 Joyce, 134).
What are the distinctions between life insurance and
fire/marine insurance?
A: See Appendix C

Q: S Ins. Co. issued a Personal Accident Policy to B with

a face value of P500K. In the evening of Sep. 1, 2016,
after his birthday party, B was in a happy mood but not
drunk. He was playing with his hand gun, form which he
previously removed the magazine. As his secretary was
watching TV, he stood in front of her and point the gun
at her. She pushed it aside and said that it may be
loaded. He assured her that it was not and then pointed
it at his temple. The next moment, there was an
explosion and B slumped to the floor lifeless.
The wife of the deceased sought payment on the policy but her claim was rejected.
The insurance company agreed that there was no suicide. However, it was the
submission of the insurance company that there was no accident. In support thereof, it
contended that (a) there was no accident when a deliberate act was performed unless
some additional, unexpected, independent and unforeseen happening occur which
produces or brings about the injury or death; and (b) that the insured willfully exposed
himself to needless peril and thus removed himself from the coverage of he insurance
policy.
Are the twO contentions of the insurance company
tenable?
No. The insurer is liable for injury or death due to the insureds gross negligence.
The fact that the insured removed the magazine from the hand gun means that the
insured did not willfully expose himself to needless peril. At most,t he insured is only
guilty of negligence. (Sun Insurance vs. CA)

X Company procured a group accident insurance policy

to tis construction employees variously assigned to tis
provincial infrastructure projects. Y Insurance Co.
underwrote the coverage the premiums of which were
paid for entirely by X Co. without any employee
contributions. While the policy ws in effect, five of the
covered employees perished at sea on their way to their
provincial assignments. Their wives sued Y insurance
Co. for payment of death benefit under the policy. While
the suit was pending, the wives signed a power of
attorney designating an X Co. executive, P, as their
authorized representative to enter into a settlement with
insurance company. When a settlement was reached, P
instructed the insurance company to issue the
settlement check to t hearer of X Co., which will
undertake the payment to the individual claimants of
their respective shares. P misappropriated the
settlement amount and the wives pursued their case
against Y Ins. Co. Will the suit prosper?
Yes. Y Ins. Co. is liable. X Co., through its executive, P, acted as agent of Y Ins.
Co. The latter is thus bound by the misconduct of its agent. It is the usual practice in the
group insurance business that the employer-policyholder is the age of the insurer.

What are the kinds of life insurance policies?

1. Ordinary life, general life or old line policy Insured pays a premium every
year until he dies. Surrender value after 3 years.

2. Limited payment Insured pays premium for a limited period. It is payable only
at the death of the insured.

3. Endowment Insured pays a premium for a specified period. If he outlives the

period, the face value of the policy is paid to him; if not, his beneficiaries receive
benefit.

4. Term insurance Insured pays once only, and he is insured for a specified
period. If he dies within the period, his beneficiaries benefit. If he outlives the
period, no person benefits from the insurance. Also known as temporary
insurance.

5. Industrial life Life insurance entitling the insured to pay premiums weekly, or
where premiums are payable monthly or oftener

6. Variable contract Any policy or contract on either a group or individual basis

issued by an insurance company providing for benefits or other contractual
payments or values thereunder to vary so as to reflect investment results of any
segregated portfolio of investment.

Q: What is the effect if the beneficiary will fully bring

about the death of the insured?
GR: The interest of a beneficiary in a life insurance policy shall be forfeited when
the beneficiary is the principal, accomplice; accessory in willfully bringing about
the death of the insured, in which event, the nearest relative of the insured shall
receive the proceeds of said insurance, if not otherwise disqualified. (Sec. 12)

XPN:

1. The beneficiary acted in self defense;

2. The insureds death was not intentionally caused (e.g., thru accident);
 3. Insanity of the beneficiary at the time he killed the insured.

Q: When is the insurer liable in case of suicide?

1. The suicide is committed after the policy has been in force for a period of 2
years from the date of its issue or of its last reinstatement.

2. The suicide is committed after a shorter period provided in the policy although
within the 2 year period;

3. The suicide is committed in the state of insanity regardless of the date of

commission, unless suicide is an excepted risk. (Sec. 180 A)

Note: The policy cannot provide a period longer than 2 years. If the policy
provides for a longer period and the suicide is committed within said period but
after 2 years, the insurer is liable.

The insurer is not liable if it can show that the policy was obtained with the
intention to commit suicide even in the absence of any suicide exclusion in the
policy.

Q: What is the measure of indemnity under a policy of

insurance upon life or health?
A: Unless the interest of a person insured is susceptible of exact pecuniary
measurement, the measure of indemnity under a policy of insurance upon life or
health is the sum fixed in the policy. (Sec. 183)

6 Compulsory Motor Vehicle

Liability Insurance (CMVLI)
"Section 386. For purposes of this chapter:

"(a) Motor Vehicle is any vehicle as defined in Section 3, paragraph (a) of Republic Act
No. 4136, otherwise known as the Land Transportation and Traffic Code.

"(b) Passenger is any fare paying person being transported and conveyed in and by a
motor vehicle for transportation of passengers for compensation, including persons
expressly authorized by law or by the vehicles operator or his agents to ride without
fare.

"(c) Third party is any person other than a passenger as defined in this section and shall
also exclude a member of the household, or a member of the family within the second
degree of consanguinity or affinity, of a motor vehicle owner or land transportation
operator, as likewise defined herein, or his employee in respect of death, bodily injury, or
damage to property arising out of and in the course of employment.

"(d) Owner or motor vehicle owner means the actual legal owner of a motor vehicle, in
whose name such vehicle is duly registered with the Land Transportation Office;

"(e) Land transportation operator means the owner or owners of motor vehicles for
transportation of passengers for compensation, including school buses.

"(f) Insurance policy or Policy refers to a contract of insurance against passenger and
third-party liability for death or bodily injuries and damage to property arising from motor
vehicle accidents.

"Section 387. It shall be unlawful for any land transportation operator or owner of a motor
vehicle to operate the same in the public highways unless there is in force in relation
thereto a policy of insurance or guaranty in cash or surety bond issued in accordance
with the provisions of this chapter to indemnify the death, bodily injury, and/or damage to
property of a third-party or passenger, as the case may be, arising from the use thereof.

"Section 388. The Commissioner shall furnish the Land Transportation Office with a list
of insurance companies authorized to issue the policy of insurance or surety bond
required by this chapter.

"Section 389. The Land Transportation Office shall not allow the registration or renewal
of registration of any motor vehicle without first requiring from the land transportation
operator or motor vehicle owner concerned the presentation and filing of a substantiating
documentation in a form approved by the Commissioner evidencing that the policy of
insurance or guaranty in cash or surety bond required by this chapter is in effect.

"Section 390. Every land transportation operator and every owner of a motor vehicle
shall, before applying for the registration or renewal of registration of any motor vehicle,
at his option, either secure an insurance policy or surety bond issued by any insurance
company authorized by the Commissioner or make a cash deposit in such amount as
herein required as limit of liability for purposes specified in Section 387.

"(a) In the case of a land transportation operator, the insurance guaranty in cash or
surety bond shall cover liability for death or bodily injuries of third-parties and/or
passengers arising out of the use of such vehicle in the amount not less than Twelve
thousand pesos (P12,000.00) per passenger or third-party and an amount, for each of
such categories, in any one accident of not less than that set forth in the following scale:

"(1) Motor vehicles with an authorized capacity of twenty-six (26) or more passengers:
Fifty thousand pesos (P50,000.00);

"(2) Motor vehicles with an authorized capacity of from twelve (12) to twenty-five (25)
passengers: Forty thousand pesos (P40,000.00);

"(3) Motor vehicles with an authorized capacity of from six (6) to eleven (11) passengers:
Thirty thousand pesos (P30,000.00);

"(4) Motor vehicles with an authorized capacity of five (5) or less passengers: Five
thousand pesos (P5,000.00) multiplied by the authorized capacity.
"Provided, however, That such cash deposit made to, or surety bond posted with, the
Commissioner shall be resorted to by him in cases of accidents the indemnities for which
to third-parties and/or passengers are not settled accordingly by the land transportation
operator and, in that event, the said cash deposit shall be replenished or such surety
bond shall be restored within sixty (60) days after impairment or expiry, as the case may
be, by such land transportation operator, otherwise, he shall secure the insurance policy
required by this chapter. The aforesaid cash deposit may be invested by the
Commissioner in readily marketable government bonds, and/or securities.

"(b) In the case of an owner of a motor vehicle, the insurance or guaranty in cash or
surety bond shall cover liability for death or injury to third-parties in an amount not less
than that set forth in the following scale in any one accident:

"(1) Private Cars

"(i) Bantam: Twenty thousand pesos (P20,000.00);

"(ii) Light: Twenty thousand pesos (P20,000.00); and

"(iii) Heavy: Thirty thousand pesos (P30,000.00).

"(2) Other Private Vehicles

"(i) Tricycles, motorcycles and scooters: Twelve thousand pesos (P12,000.00);

"(ii) Vehicles with an unladen weight of 2,600 kilos or less: Twenty thousand pesos
(P20,000.00);

"(iii) Vehicles with an unladen weight of between 2,601 kilos and 3,930 kilos: Thirty
thousand pesos (P30,000.00); and

"(iv) Vehicles with an unladen weight over 3,930 kilos: Fifty thousand pesos
(P50,000.00).

"The Commissioner may, if warranted, set forth schedule of indemnities for the payment
of claims for death or bodily injuries with the coverages set forth herein.

"Section 391. Any claim for death or injury to any passenger or third-party pursuant to
the provisions of this chapter shall be paid without the necessity of proving fault or
negligence of any kind: Provided, That for purposes of this section:

"(a) The total indemnity in respect of any person shall not be less than Fifteen thousand
pesos (P15,000.00);

"(b) The following proofs of loss, when submitted under oath, shall be sufficient evidence
to substantiate the claim:

"(1) Police report of accident; and

"(2) Death certificate and evidence sufficient to establish the proper payee; or
"(3) Medical report and evidence of medical or hospital disbursement in respect of which
refund is claimed;

"(c) Claim may be made against one motor vehicle only. In the case of an occupant of a
vehicle, claim, shall lie against the insurer of the vehicle in which the occupant is riding,
mounting or dismounting from. In any other case, claim shall lie against the insurer of the
directly offending vehicle. In all cases, the right of the party paying the claim to recover
against the owner of the vehicle responsible for the accident shall be maintained.

"Section 392. No land transportation operator or owner of motor vehicle shall be

unreasonably denied the policy of insurance or surety bond required by this chapter by
the insurance companies authorized to issue the same, otherwise, the Land
Transportation Office shall require from said land transportation operator or owner of the
vehicle, in lieu of a policy of insurance or surety bond, a certificate that a cash deposit
has been made with the Commissioner in such amount required as limits of indemnity in
Section 390 to answer for the passenger and/or third-party liability of such land
transportation operator or owner of the vehicle.

"No insurance company may issue the policy of insurance or surety bond required under
this chapter unless so authorized under existing laws.

"The authority to engage in the casualty and/or surety lines of business of an insurance
company that refuses to issue or renew, without just cause, the insurance policy or
surety bond therein required shall be withdrawn immediately.

"Section 393. No cancellation of the policy shall be valid unless written notice thereof is
given to the land transportation operator or owner of the vehicle and to the Land
Transportation Office at least fifteen (15) days prior to the intended effective date
thereof. Upon receipt of such notice, the Land Transportation Office, unless it receives
evidence of a new valid insurance or guaranty in cash or surety bond as prescribed in
this chapter, or an endorsement of revival of the cancelled one, shall order the
immediate confiscation of the plates of the motor vehicle covered by such cancelled
policy. The same may be reissued only upon presentation of a new insurance policy or
that a guaranty in cash or surety bond has been made or posted with the Commissioner
and which meets the requirements of this chapter, or an endorsement or revival of the
cancelled one.

"Section 394. If the cancellation of the policy or surety bond is contemplated by the land
transportation operator or owner of the vehicle, he shall, before the policy or surety bond
ceases to be effective, secure a similar policy of insurance or surety bond to replace the
policy or surety bond to be cancelled or make a cash deposit in sufficient amount with
the Commissioner, and without any gap, file the required documentation with the Land
Transportation Office, and notify the insurance company concerned of the cancellation of
its policy or surety bond.

"Section 395. In case of change of owner ship of a motor vehicle, or change of the
engine of an insured vehicle, there shall be no need of issuing a new policy until the next
date of registration or renewal of registration of such vehicle, and: Provided, That the
insurance company shall agree to continue the policy, such change of ownership or such
change of the engine shall be indicated in a corresponding endorsement by the
insurance company concerned, and a signed duplicate of such endorsement shall, within
a reasonable time, be filed with the Land Transportation Office.

"Section 396. In the settlement and payment of claims, the indemnity shall not be availed
of by any accident victim or claimant as an instrument of enrichment by reason of an
accident, but as an assistance or restitution insofar as can fairly be ascertained.

"Section 397. Any person having any claim upon the policy issued pursuant to this
chapter shall, without any unnecessary delay, present to the insurance company
concerned a written notice of claim setting forth the nature, extent and duration of the
injuries sustained as certified by a duly licensed physician. Notice of claim must be filed
within six (6) months from the date of accident, otherwise, the claim shall be deemed
waived. Action or suit for recovery of damage due to loss or injury must be brought, in
proper cases, with the Commissioner or the courts within one (1) year from denial of the
claim, otherwise, the claimants right of action shall prescribe.

"Section 398. The insurance company concerned shall forthwith ascertain the truth and
extent of the claim and make payment within five (5) working days after reaching an
agreement. If no agreement is reached, the insurance company shall pay only the no-
fault indemnity provided in Section 391 without prejudice to the claimant from pursuing
his claim further, in which case, he shall not be required or compelled by the insurance
company to execute any quit claim or document releasing it from liability under the policy
of insurance or surety bond issued.

"In case of any dispute in the enforcement of the provisions of any policy issued
pursuant to this chapter, the adjudication of such dispute shall be within the original and
exclusive jurisdiction of the Commissioner, subject to the limitations provided in Section
439.

"Section 399. It shall be unlawful for a land transportation operator or owner of motor
vehicle to require his or its drivers or other employees to contribute in the payment of
premiums.

"Section 400. No government office or agency having the duty of implementing the
provisions of this chapter nor any official or employee thereof shall act as agent in
procuring the insurance policy or surety bond provided for herein. The commission of an
agent procuring the said policy or bond shall in no case exceed ten percent (10%) of the
amount of the premiums therefor.

"Section 401. Any land transportation operator or owner of motor vehicle or any other
person violating any of the provisions of the preceding sections shall be punished by a
fine of not less than Five hundred pesos (P500.00) and/or imprisonment for not more
than six (6) months. The violation of Section 390 by a land transportation operator shall
be a sufficient cause for the revocation of the certificate of public convenience issued by
the Land Transportation Franchising and Regulatory Board covering the vehicle
concerned.

"Section 402. Whenever any violation of the provisions of this chapter is committed by a
corporation or association, or by a government office or entity, the executive officer or
officers of said corporation, association or government office or entity who shall have
knowingly permitted, or failed to prevent, said violation shall be held liable as principals.
Q: What is motor vehicle liability insurance?
A: It is a protection coverage that will answer for legal liability for losses and
damages for bodily injuries or property damage that may be sustained by another
arising from the use and operation of a motor vehicle by its owner.

Q: What is the purpose of motor vehicle liability

insurance?
A: To give immediate financial assistance to victims of motor vehicle accidents
and/or their dependents, especially if they are poor regardless of financial
capability of motor vehicle owners of operators responsible for the accident
sustained. (First Integrated Bonding Insurance Co., Inc. v. Hernando, G.R. No.
L 51221, July 31, 1991)

Q: Who is a passenger?
A: Any fare paying person being transported and conveyed in and by a motor
vehicle for transportation of passengers for compensation, including persons
expressly authorized by law or by the vehicles operator or his agents to ride
without fare. (Sec. 373 [b])

Q: Who is a third party?

A: Any person other than a passenger as defined in this section and shall also
exclude a member of the household, or a member of the family within the second
degree of consanguinity or affinity, of a motor vehicle owner or land
transportation operator, as likewise defined herein, or his employee in respect of
death, bodily injury, or damage to property arising out of and in the course of
employment. (Sec. 373, [c])

Q: What is the meaning of a motor vehicle owner?

A: It means the actual legal owner of a motor vehicle, whose name such vehicle
is duly registered with the Land Transportation Office. (Sec. 373, [d])

Q: What is the meaning of land transportation

operator?
A: It means the owner or owners of motor vehicles for transportation of a
passenger for compensation, including school buses. (Sec. 373, [e])

Q: What is a no fault indemnity clause?

A: It is a clause where the insurer is required to pay a third party injured or killed
in an accident without the necessity of proving fault or negligence on the part of
the insured. There is a stipulated maximum amount to be recovered. (1994 Bar
Question)

Q: What are the rules under the no fault clause??

1. The total indemnity in respect of any one person shall not exceed P15,000 for
all motor vehicles (Insurance Memorandum Circular No. 4 2006) (Sec. 378)

2. Proof of loss:

a. Police report of accident

b. Death certificate and evidence sufficient to establish proper payee

c. Medical report and evidence of medical or hospital disbursement.

(Sec. 378 [ii])

3. Claim may be made against one motor vehicle only

4. In case of an occupant of a vehicle, the claim shall lie against the insurer
of the vehicle in which the occupant is riding, mounting or dismounting
from

5. In any other case, claim shall lie against the insurer of the directly
offending vehicle

6. In all cases, the right of the party paying the claim to recover against the
owner of the vehicle responsible for the accident shall be maintained

Note: The claimant is not free to choose from which insurer he will claim the "no
fault indemnity," as the law, by using the word "shall, makes it mandatory that
the claim be made against the insurer of the vehicle in which the occupant is
riding, mounting or dismounting from. That said vehicle might not be the one that
caused the accident is of no moment since the law itself provides that the party
paying may recover against the owner of the vehicle responsible for the accident.
(Perla Compania de Seguros, Inc. v. Ancheta, G.R. No. L 49599, Aug. 8, 1988)

This no fault claim does not apply to property damage. If the total indemnity
claim exceeds P15, 000 and there is controversy in respect thereto, the finding of
fault may be availed of by the insurer only as to the excess. The first P15, 000
shall be paid without regard to the fault.

1 Q: Driving his car one night, A crossed an

intersection as the signal light turned green. Suddenly
he saw an old woman crossing the street just a few feet
from his car. He applied his brakes immediately, but just
the same, he hit the woman who turned out to be senile
already. He brought her to the nearest hospital where
she was confined for three days due to her injuries.
Upon her discharge, A had to pay the hospital bill which
amounted to P2K, including X-ryas, doctors fees and
the medicines.
Being covered by the compulsory liability policy required of all vehicle owners
under the Insurance Code, A referred the matter to his insurance company, which
refused to reimburse him, claiming that since A was not at fault (it was admitted that he
was not speeding or in any way negligent), there was no third-party liability for which the
insurance company could be liable under As policy.
Is the insurance company liable to reimburse A for
the hospital expense? Explain (1983 Bar).
Yes, the insurance company is liable to reimburse A for the hospital expenses of
the pedestrian.
This is a case for recovery under the no-fault clause provisions of the Insurance
Code. Without regard to the fault or negligence of any person involved in the accident,
the insurer of the only vehicle involved in the accident is liable up to a maximum of P5K
upon submission by the insured of the police report, the medical report, and evidence of
medical or hospital disbursement.

Jose, driving his own car together with his wife, Maria,
were on their way home from their respective offices
when a car driven by Pedro hit them from behind which
was in turn hit by a gasoline tanker driven by Mario,
causing the car of Jose to turn -turtle, thus resulting to
the death of Maria. All motor vehicles being insured,
Jose filed his claim for the death of Maria against the
insurers of the said three motor vehicles under the NO-
FAULT insurance of the Insurance Code (Sec. 390).
a. Will Joses claim for the death of Maria against
the insurers of said three motor vehicles prosper and up
to what amount?
b. If Jose includes in the claim damage for his car,
will the claim prosper? (1977 Bar)
a. As Jose has invoked the No-Fault provisions of the Insurance Code, Jose
can only claim against the insurer of his own car, the vehicle Maria was riding in at the
time of the accident.
The amount recoverable under this provision with respect to the death of Maria,
Joses wife, cannot exceed P5K.

b. If Joses claim include damage to his car, the claim ma prosper if brought
against the insurers of the other vehicles, not his own, unless of course, Joses
insurance on his car is a comprehensive one, and not just the required compulsory third
party liability coverage.
Joses claim against the insurers of the other vehicles however cannot be under
the No-Fault provision, as this covers death or physical injuries to third persons only.
2 X owns and operates several passenger jeepneys in
Tacloban City. He entered into a contract with Y Ins. Co.,
insuring the operation of his jeepneys against accidents
with third-party liability.
During the effectivity of the insurance, one of his
jeepneys bumped B who had just alighted form another
passenger jeepney whose driver unloaded passengers
in the middle of the street. B suffered bodily injury as a
consequence and filed a claim against the insurance
company. The latter refused to pay on the ground that
the driver of the jeepney from which passenger B
alighted was guilty of negligence in unloading in the
middle of the street, and that the driver of the insured
operator was not at fault.
Can passenger B recover from the insurance
company? (1981 Bar)
B cannot recover from Y insurance company. The compulsory motor vehicle
insurance provisions of the Insurance Code allow a passenger recovery from the
insurance of the vehicle where he was riding.
The contract of transportation between B and the jeepney, a common carrier he
rode in, and which unloaded him in the middle of the street, subsists up to the time, B,
the passenger, is unloaded in a safe place. To all intents and purposes, B was still a
passenger or the jeepney he rode in, and which unloaded him in the middle of the street,
at the time B was bumped by one of the jeepnesy of X. As B was still such passenger,
the jeep he rode in would be liable to B, as a common carrier, and necessarily, the
insurer of said jeepney, because of the compulsory insurance coverage, would be liable
to B.

3 While driving his car along Real St., C sideswiped R,

causing injuries to the latter. R sued C and the third
party liability insurer for damages and/or insurance
proceeds. The insurance company moved to dismiss the
complaint, contending that the liability of C has not yet
been determined with finality.
a. Is the contention of the insurer correct?
b. May the insurer be held liable with C? (1996 Bar)
a. No, the contention of the insurer is not correct. There is no need to wait for the
decision of the court determining Cs liability with finality before the third party liability
insurer could be sued. The occurrence of the injury to R immediately gave rise to the
liability of the insurer under its plicy. In other words, where an insurance policy insures
directly against liability, the insurers liability accrues immediately upon the occurrence of
the injury or event upon which the liability depends. (Sherman Shafer vs. Judge, RTC,
Olongapo City)
b. The insurer cannot be held solidarity liable with C. The liability of the insurer is
based on contract while that of C is based on tort. If the insurer were solidarity liable with
C, it could be made to pay more than the amount stated in the policy. This would,
however, be contrary to the principles underlying insurance contracts. On the other
hand, if the insurer were solidarity liable with C and it is made to pay only up to the
amount stated in the insurance policy, the principles underlying solitary obligations would
be violated. (Malayan Ins. Co vs. CA; Ferguson vda. de Maglana vs Hon. Consolacion)

4 X was riding a suburban utility vehicle (SUV)

covered by a comprehensive motor vehicle liability
insurance (CMVLI) underwritten by Y Ins. Co. when it
collided with a speeding bus owned by R. The collision
resulted in serious injuries to X; Y, a passenger of the
bus; and Z, a pedestrian waiting for a ride at the scene
of the collision. The police report established that the
bus was the offending vehicle. The bus had a CMVLI
policy issued by D Ins. Co. X, Y, and Z jointly sued R and
D for indemnity under the Insurance Code. The lower
court applied the no-fault indemnity policy of the
statute, dismissed the suit against R, and ordered D to
pay indemnity to all three plaintiffs. Do you agree with
the courts judgment? (2000 Bar)
No. The cause of action of Y is based on the contract of carriage, while that of X
and Z is based on torts. The court should not have dismissed the suit against R. The
court should have ordered D to pay each of X, Y and Z to the extent of the insurance
coverage, but whatever amount is agreed upon in the policy should be answered first by
R and the succeeding amount should be paid by D up to the amount of the insurance
coverage. The excess of the claims of X, Y and Z over and above such insurance
coverage, if any, should be answered or paid by R.
S insured her newly acquired car, a Nissan Navarra,
against any loss or damage for P500K and against third
party liability for P200K with the Y Ins. Co. Under the
policy, the car must be driven only by an authorized
driver who is either: (1) the insured, or (2) any person
driving on the insureds order or with his permission,
provided that the person driving is permitted in
accordance with the licensing or other laws or
regulations to drive the motor vehicle and is not
disqualified form driving such motor vehicle by order of
the court. During the effectivity of the policy, the car,
then driven by S herself who had no drivers license,
met an accident and was extensively damaged. The
estimated cost of repair was P400K. S immediately
notified Y, but the latter refused to pay on the policy
alleging that S violated the terms thereof when she
drove it without drivers license. Is the insurer correct?
(1991 Bar)
No. The authorized driver requirement in car insurance applies to persons other
than the insured himself. (Palermo vs. Pyramid)
In the problem above, the insured herself, S, was the driver of the car at the time of
the accident. The authorized driver requirement does not apply to her, and the car
damage of P400K, being with the P500K loss or damage limit set in the policy, S can
recover the said amount.

M obtained a comprehensive insurance policy on his

car. The policy carried the standard authorized driver
clause which states that the insurance company is not
liable for any loss accidents, or damage sustained while
the car is being driven by someone other that a duly
authorized driver. One day, M allowed his friend, F, to
drive the car. F figured in a mishap and the car was a
total loss.
F has been driving for the past five years but it appears that his drivers license
was irregularly issued because he cannot read nor write; neither did he take any of
prescribed drivers tests. After the initial license was issued, he merely asked his wife to
go to the LTO office to get a renewal of his license. M did not know about the irregularity
in the drivers license of F.
Can M recover on the insurance policy? (1986 Bar)
No. F possessed an irregularly issued license which is not at all a valid license. At
the time of the accident, the insured car was driven by a person who was not an
authorized driver, and therefore violates the Authorized driver license provisions of the
policy, entitling the insurer to rescind the insurance contract.

H insured his brand new car with P for comprehensive

coverage wherein the insurance company undertook to
indemnify him against loss or damage to the car (a) by
accidental collision xxx (b) by fire, external explosion,
burglary, or theft, and (c) malicious act.
After a month, the car was carnapped while parked in the parking space in front of
the hotel. Hs wife who was driving said car before it was stolen reported immediately the
incident to various government agencies in compliance with the insurance requirements.
Because the car could not be recovered, H filed a claim for the loss of the car with
the insurance company but it was denied not he ground that his wife who was driving the
car when it was carnapped was in possession of an expired drivers license, a violation
of the authorized driver clause o the insurance company.
a. May the insurance company be held liable to
indemnify H for the loss of the insured vehicle?
b. Assuming that the car was bought by H on
installment basis and there were installments due and
payable before the loss of the car as well as installments
not yet payable. Because of the loss of the car, the
vendor demanded from H the unpaid balance of the
promissory note. H resisted the demand and claim that
he was only liable for the installments due and payable
before the loss of the car but no longer liable for the
other installments not yet due at the time of the loss of
the car. Decide. (1993 Bar)
a. Yes. The car was lost due to theft. What applies in this case is the theft clause,
and not the authorized driver clause. It is immaterial that Hs wife was driving the car
with an expired license at the time it was carnapped. (Perla Compania de Saguaros vs.
CA)
B. THE promissory note is not affected by whatever befalls the subject matter of the
accessory contract. The unpaid balance on the promissory note should be paid and not
only the installments due and payable before the loss of the car.

G was the owner of a car insured with M for Own

Damage, Theft, and Third Party Liability effective
May 14 2015 to May 14, 2016. On May 2, 2016, the car
was brought to a machine shop for repairs. On May 11,
2016, while in the custody of the machine shop, the car
was taken by one of the employees (of the machine
shop) to show off to his girlfriend. While on the way to
his girlfriends house, the car smashed into a parked
truck and was extensively damaged. G filed a claim for
recovery under the policy but was refused payment. The
insurance company averred that the car was not stolen,
and therefore was covered by the Theft clause.
Decide. (1998 bar)
The insurer is liable under the theft clause provisions of the policy. Where a car in
a motor shop is taken by an employee for a drive, and meets an accident, the act is
theft, as the car was taken out without the consent of its owner. The insurer is therefore
liable.

What is the authorized driver clause?

A: It indemnifies the insured owner against loss or damage to the car but limits
the use of the insured vehicle to:

1. The insured himself; or

2. Any person who drives on his order or with his permission. (Villacorta v.
Insurance Commissioner, G.R. No. 54171, Oct. 28, 1980)

Q: What is the main purpose of an authorized driver

clause?
A: Its main purpose is to require a person other than the insured, who drives the
car on the insureds order, such as, his regular driver, or with his permission,
such as a friend or member of the family or the employees of a car service or
repair shop to be duly licensed drivers and have no disqualification to drive a
motor vehicle. (Villacorta v. Insurance Commission, G.R. No. L 54171, Oct. 28,
1980)

Q: What is the theft clause?

A: It is that which includes theft as among the risks insured against. Where a car
is unlawfully and wrongfully taken without the knowledge and consent of the
owner, such taking constitutes theft and it is the theft clause, not the authorized
driver clause which should apply. (Palermo v. Pyramid Inc., G.R. No. L 36480,
May 31, 1988)

Q: What is a cooperation clause?

A: It is that which provides that the insured shall give all such information and
assistance as the insurer may require, usually including attendance at trials or
hearings.

Q: When a passenger jeepney, insured but with an

authorized drivers clause and was driven by a driver
who only holds a Traffic Violation report (TVR) because
his license was confiscated, met an accident, may the
owner of the jeepney claim from the insurance
company?
A: Yes. The fact that the driver was merely holding a TVR does not violate the
condition that the driver should have a valid and existing drivers license.
Besides, such a condition should be disregarded because what is involved is a
passenger jeepney, and what is involved here is not own damage insurance but
third party liability where the injured party is a third party not privy to the contract
of insurance. (2003 Bar Question)

5 Q: Anna insured her brand new car with Vilches Ins.

Co. for comprehensive coverage wherein the insurance
company undertook to indemnify him against loss or
damage to the car a) by accidental collision b) by fire,
external explosion, burglary, or theft, and c) malicious
act. The car was carnapped and at that time, Annas
license was already expired. Anna filed a claim with the
insurance company but it denied the claim because of
authorized driver clause. May the insurance company
be held liable to indemnify Anna for the loss of the
insured vehicle?
A: Yes. The car was lost due to theft. What applies in this case is the theft
clause, and not the authorized driver clause. It is immaterial that Anna was
driving the car with an expired drivers license at the time it was carnapped.
(1993 Bar Question)

6 Who are the persons subject to the compulsory

motor vehicle liability insurance requirement?
1. Motor vehicle owner (MVO) or one who is the actual legal owner of a motor
vehicle in whose name such vehicle is registered with the LTO; or

2. Land transportation operator (LTO) or one who is the owner of a motor

vehicle or vehicles being used for conveying passengers for compensation
including school buses.

Q: What are the substitutes for a compulsory motor

vehicle liability insurance policy?
A: MVOs or LTOs, instead of a CMLVI policy, may either:

1. Post a surety bond with the Insurance Commissioner who shall be made
the obligee or creditor in the bond in such amount or amounts required as limits
of indemnity to answer for the same losses sought to be covered by a CMLVI
policy; or

2. Make a cash deposit with the Insurance Commission in such amount or

amounts required as limits of indemnity for the same purpose.