Insurance Notes Rondez

LECTURE NOTES ON INSURANCE
WHAT LAWS GOVERN INSURANCE
The laws governing insurance in the order of priority are (1) The Insurance
Code [PD 1460-whose effectivity date is June 11, 1978] (2) In the absence of
applicable provisions, the Civil Code (2) In the absence of applicable
provisions in the Insurance Code and Civil Code, the general principles on the
subject in the United States (Constantino vs. Asia Life Insurance, 87 Phil 248)
Example:
H applied for insurance with S Company with offices in Montreal, Canada.
The application was mailed to S and on November 26, the insurer gave notice
of acceptance by cable. H never received the cable and he died on
December 20. The Insurance Code is silent as to acceptance by cable. The
Civil Code shall apply and under Article 1319, an acceptance made by letter
shall not bind the person making the offer except from the time it came to his
knowledge. There was no valid contract as H died without knowing the
acceptance of his application. (Enriquez vs. Sun Life Assurance of Canada, 41
Phil 269)
WHAT IS A CONTRACT OF INSURANCE
A Contract of Insurance is an agreement whereby one undertakes for a

consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event.
A Contract of Suretyship shall also be deemed an insurance contract if

made by a surety who or which is doing an insurance business.
Doing an insurance business or transacting an insurance business is:
a) making or proposing to make as insurer, any insurance contract;

b) making or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or
activity of the surety;
c) doing any business including a reinsurance business, specifically recognized
as doing an insurance business within the meaning of the Code;
d) doing or proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of the Code.
(Section 2)
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NOTE – the fact that no profit is derived from making of insurance contracts,
agreements or transactions or that no separate or direct consideration is
received shall not be deemed CONCLUSIVE to show that the making thereof
does not constitute the doing or transacting of an insurance business.
NATURE AND CHARACTERISTICS OF A CONTRACT OF INSURANCE
1. IT IS AN ALEATORY CONTRACT - the liability of the Insurer depends upon

the happening of a contingent event. It is not a wagering contract.
2. IT IS A CONTRACT OF INDEMNITY FOR NON-LIFE – recovery is

commensurate to the loss. IT IS AN INVESTMENT IN LIFE INSURANCE – secured by
the insured as a measure of economic security for him during his lifetime and
for his beneficiary upon his death EXCEPT one secured by the creditor on the
life of the debtor.
3. IT IS A PERSONAL CONTRACT - an insurer contracts with reference to the

character of the insured and vice versa.
4. IT IS EXECUTORY AND CONDITIONAL ON THE PART OF THE INSURER -

because upon happening of the event or peril insured against, the conditions
having been met, it has the obligation to execute the contract by paying the
insured. IT IS EXECUTED ON THE PART OF THE INSURED after the payment of the
premium
5. IT IS ONE OF PERFECT GOOD FAITH for both Insurer and Insured, but more
so for the INSURER, since its dominant bargaining position imposes a stricter
liability/responsibility.
6. IT IS A CONTRACT OF ADHESION – Insurance companies manage to

impose upon the insured prepared contracts which the insured cannot
change. Consequently, they are construed as follows:
In case there is no doubt as to the terms of the insurance contract, it is to

be construed in its PLAIN, ORDINARY AND POPULAR SENSE.
If DOUBTFUL, AMBIGUOUS, UNCERTAIN it is to be construed strictly against

the insurer and liberally in favor of the insured because the latter has no voice
in the selection of the words used, and the language used is selected by the
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lawyers of the Insurer. (QUA CHEE GAN v. LAW UNION ROCK INS. CO. LTD 98
Phil. 85)
ILLUSTRATIONS:
a. P Bank obtained insurance against robbery which excluded loss by any

criminal act of the insured or any authorized representative. While transferring
funds from one branch to another, the insured’s armored truck was robbed.
The driver was assigned by a labor contractor with the insured, while the
security guard was assigned by an agency contracted by the insured. Both
driver and guard were found to be involved. Can the loss be excluded? HELD:
THE LOSS IS EXCLUDED, the DRIVER/GUARD ALTHOUGH ASSIGNED BY LABOR
CONTRACTORS – ARE AUTHORIZED REPRESENTATIVES. THE TERMS ARE CLEAR
AND UNAMBIGUOUS (Fortune Insurance v. CA, 244 SCRA 308).
b. Personal Accident policies providing payment for “loss of hand”. The

Insurance policy defines it as amputation. Insured has an accident resulting in
a temporary total disability but hand is not amputated. HELD: Insurer is not
liable (TY v. First National Surety and Assurance Company – 17 SCRA 364) BUT –
in a case where the policy provided for loss of both legs by amputation, a
claim against the policy was allowed for a total paralysis to exclude total
paralysis is contrary to public policy, public good and sound morality, as it
would force the insured to have his legs amputated to be able to claim on the
policy (Panaton v. Malayan – 2 Court of Appeals 783).
c. Warranty in a fire insurance policy prohibited storage of oils having a

flash point of below 300 Fahrenheit. Gasoline is stored. Is there a policy
violation? HELD: The clause is ambiguous. In ordinary parlance oil means
lubricants – not gasoline. There is no reason why gasoline could not be
expressed clearly in the language the public can readily understand. (QUA
CHEE GAN 98 Phil. 85)
d. An action to recover the amount of PHP 2,000.00 due to death by

drowning where the policy provided for indemnity in the amount of PHP
1,000.00 to PHP 3,000.00. HELD: the interpretation of the obscure stipulation in
contract must not favor the one who caused the obscurity. Hence, judgment
for an additional PHP 2,000.00 was affirmed (Del Rosario vs. Equitable Insurance
and Casualty Company, 8 SCRA 343).
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e. Denial of a claim on the ground that the insured vehicle was a
private “owner” type vehicle on the ground that the policy issued to the
insured was a Common Carrier’s Liability Insurance Policy which covers a
public vehicle for hire. HELD: Insurer is liable as it was aware all along that the
vehicle of the insured was a private vehicle. (Fieldmans Insurance v. Mercedes
Vargas Vda De Songco, 25 SCRA 70)
f. Denial of claim for benefit due to the death of Flaviano Landicho in

a plane crash under a GSIS Policy on the ground of non payment of the
premium. HELD: The policy contained a provision that the application for
insurance is authority for GSIS to cause the deduction of premium from the
insured’s salary (Landicho v. GSIS, 44 SCRA 7)
OTHER CASE REFERENCES: New Life Enterprises v. CA, 207 SCRA 669
WHAT ARE THE ELEMENTS OF AN INSURANCE CONTRACT
1. The insured should possess an interest of some kind, susceptible of

pecuniary estimation – known as “insurable interest”. GENERALLY – a person has
insurable interest in the subject matter insured when:
HE HAS SUCH A RELATION OR CONNECTION WITH, OR CONCERN IN, SUCH

SUBJECT MATTER THAT HE WILL DERIVE PECUNIARY BENEFIT OR ADVANTAGE
FROM ITS PRESERVATION OR WILL SUFFER PECUNIARY LOSS OR DAMAGE FROM
ITS DESTRUCTION, TERMINATION OR INJURY BY THE HAPPENING OF THE EVENT
INSURED AGAINST.
It is necessary because its absence renders the contract VOID. This is based on
the principle that insurance is a contract of indemnity. If the insured has no
interest, he will not stand to suffer loss or injury by the happening of the event
insured against.
WHAT DOES A PERSON HAVE INSURABLE INTEREST IN
a. Every person has an insurable interest in the LIFE and HEALTH of (1)
himself, his spouse and of his children (2) any person on whom he depends
wholly or in fact for education or support, or in whom he has a pecuniary
interest (Note Article 195 of the Family Code specifying the persons obligated
to support each other. Example-pecuniary interest-partners, employees) (3)
any person under a legal obligation to him for the payment of money,
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respecting property or services, of which death or illness might delay or prevent
performance (Examples: Mortgagors. Debtors) (4) any person upon whose life,
any estate or interest vested in him depends (Example: Usufructuary X allows Y
to receive fruits of the land of the former as long as he is alive. Y has insurable
interest in the life of X, because the death of X will terminate his right and
cause him damage). (Section 10)
WHAT IS THE BASIS OF INSURABLE INTEREST IN LIFE
It exists when there is reasonable ground founded on the relation of the parties,
either pecuniary or contractual or by blood, or by affinity to expect some
benefit from the continuance of life of the insured.
WHEN MUST INSURABLE INTEREST IN LIFE EXIST
Insurable interest in life must exist at the time of the effectivity of the policy
and need not exist at the time of the death of the insured as life insurance is not
a contract of indemnity.IT IS MEANT TO GIVE FINANCIAL SECURITY EITHER TO THE
INSURED OR HIS BENEFICIARIES (Section 19).However, insurable interest of a
creditor on the life of a debtor must exist not only at the time of effectivity but
also at the time of the death of the debtor– as in this instance it is a contract of
indemnity. HIS INTEREST IS CAPABLE OF EXACT PECUNIARY MEASUREMENT
WHAT IS THE EXTENT OF INSURABLE INTEREST IN ONE’S LIFE
He has unlimited interest in his own life or that of another person regardless
of whether or not the latter has insurable interest. Provided, that if the
beneficiary has no insurable interest, there is no force or bad faith. BUT, if he
takes out a policy on the life of another and names himself as the beneficiary,
he must have an insurable interest in the life of the insured.
IS THE CONSENT OF THE INSURED REQUIRED WHEN INSURANCE IS TAKEN
The law does not require the consent of the person insured and such has
been considered as not essential to the validity of the contract as long as there
is insurable interest at the beginning.
b. A person also has insurable interest in property as EVERY INTEREST IN

PROPERTY, WHETHER REAL OR PERSONAL, OR ANY RELATION THERETO, OR
LIABILITY IN RESPECT THEREOF, OF SUCH NATURE THAT A CONTEMPLATED PERIL
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MIGHT DIRECTLY DAMNIFY THE INSURED IS AN INSURABLE INTEREST (Section 13). It
may consist of:
(1) An existing interest (Example: By means of a conditional deed of sale, A

sold his house to B for PHP 2,000,000.00. B pays a down payment of PHP
500,000.00. Prior to full payment and execution of an absolute sale, A has
insurable interest in the house equivalent to the balance due him, while B has
insurable interest to the extent of the down payment because loss of the house
will mean that he suffers a loss of PHP 500,000.00
(2) An inchoate interest founded on an existing interest (Defined: interest in real

estate which is not a present interest but which may ripen into a vested interest
if not barred, extinguished, or divested. Example: Interest in Corporate property
arising from stockholdings but limited to its value
(3) An expectancy, coupled with an existing interest in that out of which the
expectancy arises (Example: A ship owner has insurable interest in expected
freight charges. Future crops that a farmer will grow on land belonging to him
at the time of the issuance of the policy) Note that the expectancy must be
founded on an actual right to the thing or a valid contract for it. Note also that
a carrier or depository of any kind has insurable interest in the thing held by him
as such to the extent of his liability but not to exceed the value thereof
(Sections 13, 14, 15).
But, a mere contingent or expectant interest in anything, not founded on

contract or actual right to the thing is not INSURABLE – as there is no insurable
interest (Section 16).
Examples:
(1) a son has no insurable interest on a building owned by father despite being
designated as an heir in the will as the will does not produce any effect before
the testator’s death
(2) the owner of land on expected crops has insurable interest as he owns the
land
WHAT IS THE TEST OR MEASURE OF INSURABLE INTEREST IN PROPERTY
Whether one will derive pecuniary benefit or advantage from its

preservation or will suffer pecuniary loss or damage from its destruction.
(Section 17)
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MUST THE BENEFICIARY IN PROPERTY INSURANCE HAVE INSURABLE INTEREST ON

THE PROPERTY INSURED
YES, as no contract or policy of insurance on property shall be enforceable

EXCEPT for the benefit of some person having insurable interest in the property
insured.
EXAMPLE: The owner insures his building against fire naming his nephew as
beneficiary. In case of loss – only the owner can recover – what is not
enforceable is the designation of beneficiary – not the entire policy itself.
WHEN MUST INSURABLE INTEREST IN PROPERTY EXIST
Must exist at the time the insurance takes effect and when the loss occurs but
need not exist in the meantime (Sec. 19)
EXAMPLES:
1. If A insures his house on May 2002 for 1 yr – and without assigning the
policy, he sold it to B – if a fire occurs after it is sold to B – A cannot recover. B
cannot recover also as he has no insurable interest at the time the insurance
was procured.
2. An unsecured creditor secures insurance over the house of his debtor, A.

The house is burned. The creditor cannot recover as he has no insurable
interest at the time the insurance was obtained.
What if A sold the house to the creditor before the loss? Still no recovery as
there was no insurable interest at the time it took effect.
3. If A re-acquires the property from B before the fire – A can recover on the
policy.
COMPARE WITH INSURABLE INTEREST IN LIFE
1. Basis; 2. Insurable Interest; 3. Insurable interest at the time loss is incurred.

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IN RELATION TO THE NEED FOR THE EXISTENCE OF INSURABLE INTEREST, PLS. NOTE:
That a change of interest in any port of a thing insured in accompanied by a

corresponding change of interest in the insurance suspends the insurance to
an equivalent extent until interest in the thing and interest in the insurance is
vested in the same person.
EXAMPLE:
A buyer of a property insured by the previous owner who has not obtained a
transfer of the insurance policy in his name – cannot recover.
RELATED QUERY – How about the seller – NO – no insurable interest at the time
of loss – (Sec 19)
WHAT CHANGE IS CONTEMPLATED
An absolute transfer of the property NOT LIFE A LEASE / MORTGAGE
EXCEPTIONS –
1. Life, Health or accident insurance because they are not contracts of

indemnity and insurable interest is not required at the time of loss.
2. A change of interest after occurrence of an injury and results in loss – does

not affect the right of the insured to indemnity – (Sec 21)
- after loss – the liability of the insurer is fixed
3. a change of interest in one or more several distinct things, separately insured

by one policy, does not avoid the insurance as to the others. (Sec 22)
4. a change of interest by will or succession on the death of the insured does

not avoid the insurance – his interest passes on the thing insured (Sec 23)
5. a transfer of interest by one or several partners, joint owners, or owners in

common, who are jointly insured – to the others, does not avoid insurance even
though it has been agreed that insurance shall lease upon an allocation of the
thing insured.
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NOTE:
- there must be not stipulation against it – otherwise it is avoided.
- transfer to strangers avoid the policy
6. when notwithstanding a prohibition, the consent of the insurer is obtained
7. when the policy is so fraud that it will insure to the benefit of whomsoever
may become the owner during the continuance of the risk.
LASTLY –
The following are void stipulations in property insurance –
A. a stipulation for the payment of the loss whether the person insured has or
has not interest in the property insured – because it is a contract of indemnity.
B. Stipulation that the policy shall be received as proof of such interest –

existence of insurable interest does not depend on the policy –
C. every policy issued by way of gaining or wagering shall be void.
Those insured without insurable interest – as they do not suffer a damage from
the occurrence of the event insured against – they vested profit.
CONTINUATION OF ELEMENTS –
2. The insured is subject to risk of loss through the destruction or impairment of

that interest by the happening of the designated risks.
3. The Insurer assumes the risk of loss
4. Such assertion is part of a general scheme to distributed actual loss among a

large group of persons bearing somewhat similar risks
5. As a consideration for the insurer’s promise, the insured makes a ratable

contribution called a premium to the general insurance fund.
WHAT MAY BE INSURED AGAINST
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ANY UNKNOWN OR CONTINGENT EVENT, WHETHER PAST OR FUTURE, WHICH
MAY DAMNIFY A PERSON HAVING INSURABLE INTEREST OR CREATE A LIABILITY
AGAINST HIM, MAY BE INSURED AGAINST (Section 3)
Example: Insurance against damage, liability,unknown past event ( in marine

insurance – insurance over the vessel against perils of the sea, lost or not lost),
or future event like loss or theft of the object
In relation to the insurance so secured, NOTE (1) The consent of the husband is
not necessary for the validity of an insurance policy taken by a MARRIED
woman on her life and that of her children. Under Article 145 of the Family
Code, she can also insure her separate property without the consent of the
husband. (2) A minor may take out a contract for life, health and accident
insurance with any company authorized to do business in the Philippines,
provided it be taken out on his own life and the beneficiary named is his
estate, father, mother, husband, wife, child, brother or sister. In so doing, the
married woman / minor may exercise all the rights or privileges under the
policy.
NOTE: RA 6809 lowering the age of minority from 21-18.
BUT – WHAT IS THE EFFECT OF THE DEATH OF THE ORIGINAL OWNER OF A POLICY
WHICH COVERS THE LIFE OF A MINOR, AHEAD OF THE MINOR- all rights, title and
interest in the policy shall automatically vest in the minor unless otherwise
provided in the policy.
WHAT CANNOT BE INSURED
An insurance for or against the drawing of any lottery or for or against any
chance or ticket in a lottery drawing a prize. BECAUSE GAMBLING RESULTS IN
PROFIT AND INSURANCE ONLY SEEKS TO INDEMNIFY THE INSURED AGAINST LOSS
(Section 4).
WHO ARE THE PARTIES TO A CONTRACT OF INSURANCE
1. INSURER - Every person, partnership, association or corporation duly

authorized to transact insurance business as provided in the Code may be an
insurer. It is the party who agrees to indemnify another upon the happening of
specified contingency (Section 6).
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2. INSURED – Party to be indemnified in case of a loss (Section 7). Anyone
except a public enemy (is a nation at war with the Philippines and every citizen
or subject of such nation. WHY – the purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is inconsistent to destroy it’s
resources then pay it the value of what has been destroyed) may be insured.
WHO MAY INSURE A MORTGAGED PROPERTY
Both the Mortgagor and Mortgagee may take out separate policies with
the same or different companies. The mortgagor – to the extent of the value of
his property, the mortgagee – to the extent of his credit (Section 8).
WHAT ARE THE CONSEQUENCES WHERE THE MORTGAGOR INSURES THE

PROPERTY MORTGAGED IN HIS OWN NAME BUT MAKES THE LOSS PAYABLE TO
THE MORTGAGEE OR ASSIGNS THE POLICY TO HIM.
UNLESS THE POLICY PROVIDES OTHERWISE
a. The insurance is still deemed to be upon the interest of the mortgagor who
does not cease to be a party to the original contract. HENCE, if the policy is
cancelled, notice must be given to the mortgagor.
b. Any act of the mortgagor, prior to loss, which would otherwise avoid the
policy or insurance, will have the same effect, although the property is in the
hands of the mortgagee. HENCE, if there is a violation of the policy by the
mortgagor , the mortgagee cannot recover.
c. Any act required to be done by the mortgagor may be performed by the

mortgagee with the same effect as if it has been performed by the mortgagor.
Example: if notice of loss is required, the mortgagee may give it.
d. Upon the occurrence of the loss, the mortgagee is entitled to recover to

the extent of his credit, and the balance, if any, is to be paid to the mortgagor,
since such is for both their benefits.
e. Upon recovery by the mortgagee, his credit is extinguished.
IF ON THE OTHER HAND, (Section 9), the Insurer assents to the transfer of
the insurance from the mortgagor to the mortgagee, and at the time of his
assent, imposes further qualifications on the assignee, making a new contract
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with him, the acts of the MORTGAGOR cannot affect the rights of the assignee
– NOTE UNION MORTGAGE CLAUSE – Creates the relation of insured and insurer
between the mortgagee and the insurer independent of the contract of the
mortgagor. In such case, any act of the mortgagor can no longer affect the
rights of the mortgagee – the insurance contract is now independent of that
with the mortgagor.
WHAT IS THE EFFECT OF INSURANCE PROCURED BY THE MORTGAGEE WITHOUT

REFERENCE TO THE RIGHT OF THE MORTGAGOR.
a. The mortgagee may collect from the insurer upon occurrence of the loss
to the extent of his credit.
b. Unless, otherwise stated, the mortgagor cannot collect the balance of the
proceeds, after the mortgagee is paid.
c. The insurer, after payment to the mortgagee, becomes subrogated to the

rights of the mortgagee against the mortgagor and may collect the debt to
the extent paid to the mortgagee.
d. The mortgagee after payment cannot collect anymore from the

mortgagor BUT if he is unable to collect in full from the insurer, he can recover
from the mortgagor.
e. The mortgagor is not released from the debt because the insurer is
subrogated in place of the mortgagee.
3. BENEFICIARY – the person who receives the benefits of an insurance policy

upon its maturity.
WHO MAY BE A BENEFICIARIES IN LIFE INSURANCE
Anyone, except those who are prohibited by law to receive donations

from the insured. Note Article 739 of the Civil Code, hence the following cannot
be designated as beneficiaries (1)Those made between persons guilty of
adultery or concubinage at the time of the designation (2)Those found guilty of
the same criminal offense in consideration thereof (3) Those made to a public
officer or his wife, descendants / ascendants by reason of his office.
A PRIOR CONVICTION FOR ADULTERY / CONCUBINAGE IS NOT REQUIRED, it

can be proven by a preponderance of evidence in the same action nullifying
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the designation. Note the cases of Insular Life vs. Ebrado, 80 SCRA 181, where a
common law wife of the insured who is married could not be named as a
beneficiary and SSS vs. Davac, 17 SCRA 863, where the insured designated his
second wife as a beneficiary was upheld as the latter was not aware of the first
marriage.
The disqualification does not extend to the children of the adultery or

concubinage in view of the express recognition of the successional rights of
illegitimate children (Article 287, NCC and Article 176, Family Code).
MUST THE BENEFICIARY HAVE INSURABLE INTEREST ON THE LIFE OF THE INSURED
It is recognized that the insured may name anyone he chooses, except

those disqualified to receive donations, as a beneficiary in his life insurance,
even if he is a stranger and has no insurable interest in the life of the insured.
The designation, however, must be in GOOD FAITH AND WITHOUT FRAUD OR
INTENT TO ENTER INTO A WAGERING CONTRACT. (Example: Jose obtains several
life insurance policies that he cannot afford. Named as beneficiary is Juan, the
spouse or children of Jose are not named as beneficiaries. The premiums are
paid by Juan, who did not have insurable interest in the life of Jose. In this case
the policies are void because they were entered into as wagering contracts)
CAN THE BENEFICIARY BE CHANGED
The insured shall have the right to change the beneficiary he designated
– unless he has expressly waived the right in the policy (Section 11)
If he has waived the right, the effect is to make the designation as

irrevocable. Note though that the designation of the guilty spouse as
irrevocable beneficiary is revocable at the instance of the innocent spouse in
cases of termination of (1) a subsequent marriage (2) nullification of marriage
(3) annulment of marriage, and (4) legal separation (Article 43 (4) Family Code)
WHAT IS THE EXTENT OF THE INTEREST OF THE IRREVOCABLE BENEFICIARY IN A LIFE

INSURANCE CONTRACT
The beneficiary has a vested right that cannot be taken away without his
consent. In fact should the insured discontinue payment of the premium, the
beneficiary may continue paying. Neither can the insured get a loan or obtain
the cash surrender value of the policy without his consent (Nario vs. Philamlife,
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20 SCRA 434). Note where the wife and minor children were named
irrevocable beneficiaries, wife dies, the husband seeks to change the
beneficiaries with the consent of the children. The consent is not valid due to
minority (Philamlife vs. Pineda, 170 SCRA 416).
WHAT IS THE INTEREST OF AN IRREVOCABLE BENEFICIARY IN AN ENDOWMENT

POLICY
His interest is contingent as benefits are to be paid him only if the assured dies
before the specified period. If the insured outlives the period, the benefits are
paid to the insured.
WHAT IS THE EFFECT OF THE FAILURE TO DESIGNATE OR BENEFICIARY IS
DISQUALIFIED
The benefits of the policy shall accrue to the estate of the insured.
WHO RECOVERS IF BENEFICIARY PREDECEASES THE INSURED
IF DESIGNATION IS IRREVOCABLE, the legal representatives of the

beneficiary may recover unless it was stipulated that the benefits are payable
only “IF LIVING”. IF DESIGNATION IS REVOCABLE, and no change is made, the
benefits passes to the estate of the insured. The rule holds also if benefits were
payable “only if living” or “if surviving” and the beneficiary dies before the
insured.
WHAT HAPPENS TO INTEREST OF THE BENEFICIARY IN LIFE INSURANCE WHERE HE

WILLFULLY KILLS THE INSURED
If the killing is WILLFUL, the interest is forfeited if he is the principal, an

accomplice, or an accessory. The NEAREST RELATIVE OF INSURED GETS THE
PROCEEDS IF NOT OTHERWISE DISQUALIFIED (Section 12). If not willful or
felonious, the provision does not apply.
OUTLINE OF GENERAL PROVISIONS
I. INSURANCE AND WHAT IS DOING AN INSURANCE BUSINESS [2]
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II. CHARACTERISTICS AND ELEMENTS: Insurable Interest- (a) Why it is
necessary (b) What it consists of (b.1) In Life [10] (b.2) In Property [13,14,15, 16]
(c) When it must exist [17,18,19] (d) Effect of a change [20,21,22,23,24]
III. CONTRACT OF INSURANCE: (a) What may be insured against [3] (b)
What cannot be insured against [4]. (c) Void stipulations [25]- Applicability [5]
IV. PARTIES: (a) Insurer [6] (b) Insured [7, 8,9] (c) Beneficiary [11,12]
CONCEALMENT
Concealment is a neglect to communicate that which a party knows and

ought to communicate (Section 26)
WHAT IS THE EFFECT OF CONCEALMENT
Whether intentional or not, it entitles the injured party to rescind the

contract of insurance (Section 27). Note though that the right to rescind is
optional on the part of the injured party. Rescission is an option because it
misleads or deceives the insurer into accepting the risk or accepting it at the
rate of premium agreed upon.
Examples: (1) The insured does not disclose sickness but dies of another cause.
There is concealment because it is material to a determination of the
assumption of risk by the insurer. (2) The father of the insured obtained an
insurance policy over his daughter, but did not disclose that she was a
mongoloid child, the child dies of influenza, the concealment relieves the
insurer of liability (Grepalife vs. CA 89 S 543)
BASIS OF PROVISIONS ON CONCEALMENT / REPRESENTATION
Fundamental characteristic of a contract of insurance that it is one of PERFECT

or UTMOST GOOD FAITH.
WHO MUST PROVE KNOWLEDGE OF THE FACT CONCEALED
The party claiming the existence of concealment must prove that there
was knowledge on the part of the party charged with concealment. Example:
If the Insured stated that there was no hereditary taint (illness that has affected
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members of the family) on either side of the family to my knowledge – IN
ORDER TO PROVE / SHOW CONCEALMENT – the insurer must prove that the
hereditary taint alleged to exist was known to the insured.
AS OF WHAT TIME MUST THE PARTY CHARGED WITH CONCEALMENT HAVE

KNOWLEDGE OF THE FACT CONCEALED
Generally, a party must have knowledge of the fact concealed at the

time of the effectivity of the policy. Note that even if a party did not know of
the existence at the time of application but before its effectivity, there is
concealment.
Information acquired after effectivity is not concealment and does not

constitute ground to rescind the policy, as after the policy is issued, information
subsequently acquired is no longer material as it will not affect or influence the
party to enter into contract. However, in case of the reinstatement of a lapsed
policy, facts known after effectivity but before reinstatement must be
disclosed.
HOW IS THE MATERIALITY OF CONCEALMENT OR REPRESENTATION DETERMINED
Materiality is determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom the communication
is due, in forming his estimate of the disadvantages of the proposed contract
or in making his inquiries (Section 31).
WHAT IS THE TEST OF MATERIALITY
The test of materiality is whether knowledge of the true facts could have
influenced a prudent insurer in determining whether to accept the risk or in
fixing the premiums
MUST THERE BE A CAUSAL CONNECTION BETWEEN THE FACT CONCERNED AND

THE CAUSE OF LOSS
Concealment need not, in order to be material, be of facts which bring

about or contribute to, or are connected of the insured’s loss. It is IMMATERIAL
that there is no causal relationship between the fact concealed and the loss
sustained. IT IS SUFFICIENT THAT THE NON-REVELATION HAS MISLED THE INSURER
IN FORMING ITS ESTIMATE OF DISADVANTAGE OR FIXING THE PREMIUM.
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Examples: Insured concealed kidney disease and enlarged liver – Later he died
of thrombosis, is the insurer liable? NO, since the fact concealed was material
though the insured did not die therefrom. Henson v. Philam – 50 OG 73428.
Insured had concealed that he had kidney disease. He dies in plane crash. The
INSURER not liable (Sunlife vs. CA – 245 SCRA 269)
WHAT FACTS THEN MUST BE COMMUNICATED
Each party to an insurance contract is bound to communicate to the other all

facts that meet the following requisites:
(1) Such facts that must be within his knowledge – as concealment requires
knowledge of the fact concealed by the party charged with concealment.
(2) Fact/s must be material to the contract – it must be of such nature that
had the insurer known of it, it would not have accepted the risk or demanded
a higher premium
(3) That the other party had no means of ascertaining such fact/s
(4) That the party with a duty to communicate makes no warranty (Section
28) as the existence of a warranty makes the requirement to disclose
superfluous BUT – an intentional and fraudulent omission on the part of the one
insured to communicate information on a matter PROVING OR TENDING TO
PROVE THE FALSITY OF A WARRANTY entitles the insurer to rescind (Section 29).
Example: Warranty that the ship is seaworthy – THE INTENTIONAL AND
FRAUDULENT OMISSION OF THE INSURED TO state that the ship’s
communications equipment is out of order will entitle the insurer to rescind.
WHAT MATTERS NEED NOT BE COMMUNICATED
Except in answer to the inquiries of the other:
(1) Those which the other knows – as the insurer cannot say that it has been
deceived or misled. Example: Insured discloses that he has tuberculosis to the
agent of the insurer, who in turn omits to state the same in the application of
the insured was deemed knowledge of the insurer (Insular Life Assurance Co vs.
Feliciano, 74 Phil 468). Insurer had surveyed the location and surrounding area
of a building that is to be insured against fire, an omission to state that there
are neighboring buildings will not avoid policy.
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(b) Those, which, in the exercise of ordinary care, the other ought to know,
and of which, the former has no reason to suppose him to be ignorant. The
facts that the other ought to know as per Section 32 are: (1) all the general
causes which are open to his inquiry, equally with that of the other, and which
may affect the political or material perils contemplated. Example: public
events like the fact that a nation at war, or laws or political conditions in other
countries. Here, the source of information is equally open to the insurer, who is
therefore presumed to know them, and (b) all the general uses of trade.
Examples: Rules of navigation, kinds of seasons, all the risks of navigation.
c) Those of which the other waives communication. A waiver takes place

either, by the terms of the insurance or by the neglect to make inquiries as to
such facts where they are distinctly implied in other facts of which information
is communicated (Section 33). Example: where an application for insurance is
made in writing and the questions therein are unanswered or incompletely
answered – and the insurer without further inquiries, issues the policy. It thereby
waives all right to a disclosure or to a more complete answer. If question asks
whether the insured has submitted himself to any infirmary, sanitarium or
hospital for consultation or treatment. Insured replies that he was confined at
the Quezon Memorial Hospital for five days due to influenza. There is no waiver
and shall constitute concealment as the answer was complete and could be
relied upon by the insurer. If the insured answered “yes”, the answer would
have been incomplete and ambiguous. This would constitute a waiver as the
insured did not make any further inquiry. (Note Ng Gan Zee vs. Asian Crusader
Life Assurance, 122 SCRA 461)
ISSUE: Is the waiver of a medical examination tantamount to a waiver of

material information. NO, because waiver of medical examination is made
when the insured represents himself to be in good health. It is reasonable to
assume that had the insured revealed material information – the insurer would
not have waived the examination. Example: A obtained a non-medical
insurance. In the policy, it was stated that A never had cancer – but 2 months
prior she was operated on for cancer – the beneficiaries claimed payment
stating that there was no material misrepresentation in view of the waiver of
the medical examination. The misrepresentation was to be taken into
consideration before issuing the policy, it was A’s representation that she had a
clean bill of health that led the insurer not to require a medical examination
(Saturnino v. Phil-Am – 7 SCRA 316)
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d) Those which prove or tend to prove the existence of a risk excluded by a
warranty, and which are not otherwise material. Example: The insurance only
covers loss due to hijacking or terrorism. A warranty has been made by the
insured that loss due to perils of the sea is excluded. Consequently, the fact
that the vessel’s engines have been fitted with used parts need not be
disclosed as the seaworthiness of the vessel is not material.
e) Those which relate to a risk exempted from the policy, and which are not
otherwise material (Section 30). Example: Policy covers against loss by theft.
There is no need to disclose that the area where the object is located is
earthquake prone area if loss due to earthquakes is not covered by the policy.
OTHER MATTERS THAT DO NOT NEED TO BE COMMUNICATED –
a. Information of the nature or amount of the interest of one insured need

not be communicated unless in answer to inquiry, except as prescribed by
Section 51 as the extent of the interest of the insured in property insured must
be specified if he is not the absolute owner. Also – a trustee, mortgagee or
building contractor must communicate his particular insurable interest in the
property even if no inquiry is made. (Section 34)
b. Neither party to a contract is bound to communicate even upon inquiry

any information of his own opinion or judgment upon the matters question
(Section 35).Only material facts are required – not opinions, speculations or
expectations, EXCEPT in marine insurance – where the belief or the expectation
of a 3rd person in reference to a material fact is material and must be
communicated. Example: The insured is required to disclose an opinion of
marine experts as to seaworthiness of a vessel (See Section 108)
REPRESENTATION
Oral or written statement of a fact or a condition affecting the risk made

by the INSURED to the insurance company, tending to induce the insurer to
take the risk (Section 36)
WHEN MAY A REPRESENTATION BE MADE
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Since it is an inducement to entering a contract – IT MUST ORDINARILY BE
MADE AT THE SAME TIME AS OR BEFORE – the issuance of the policy (Section
37). Note that it can also be made after the issuance of the policy when the
purpose thereof is to induce the insurer to modify an existing insurance
contract – as the provisions also apply to a MODIFICATION (same with
CONCEALMENT)
HOW SHOULD A REPRESENTATION BE CONSTRUED
The language of a representation is to be interpreted by the same rules as

the language of contracts in general (Section 38). HENCE, it need not be
literally true and correct / accurate in every respect, RATHER, it is sufficient if it is
substantially or materially true. In case of a promissory representation, it is
sufficient if it is substantially complied with. Examples: (1) H bought a car for
PHP 2,800.00 and spent PHP 900.00 for repairs – H gave it to W as a gift. W
secures insurance and says the price is around PHP 4,000.00, though the
present actual value is about PHP 3,000.00. Is W guilty of misrepresentation
because she did not pay for the car? NO, because the literal truth is not
necessary. The insurer can value the car independently.
WHAT ARE THE FORMS AND KINDS OF REPRESENTATION
Representations may be ORAL or WRITTEN and can either be:
AFFIRMATIVE- which is an affirmation of a fact existing when the contract

begins. Example: That the insured is of good health at the time of the contract.
PROMISSORY – which is a statement by the insured concerning what is to

happen during the term of the insurance. Example: That the insured will install
additional fire extinguishers at a stipulated future date. A representation as to
the future is to be deemed a promise, unless it was merely a statement of
belief or expectation.
IS A REPRESENTATION PART OF THE CONTRACT
No, it cannot qualify as an express provision in a contract (it is a collateral

inducement to the contract) BUT it may qualify an implied warranty (Section
40). Example: Under Section 113 – it is implied that a ship is seaworthy. A
representation by the insured that its communication system is defective will
QUALIFY the warranty. Hence, insured can still recover in case of loss.
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CAN A REPRESENTATION BE WITHDRAWN OR ALTERED
Yes, as long as the insurance has not yet been effected and the insured
has not yet been induced to issue the policy. If withdrawn or altered
afterwards, the contract can be rescinded as the insurer has already been led
to issue the policy (Section 41).
TO WHAT DATE DOES A REPRESENTATION REFER
It must be presumed to refer to the date on which the contract goes into
effect (Section 42). NOTE: there is no false representation if it is TRUE at the time
the contract takes effect although false at the time it is made. Example: Insured
states at application that vessel is in TOKYO but is really in HONGKONG, there is
no false representation if at issuance vessel is already in TOKYO. CONVERSELY,
there is a false representation, if it is true at the time it is made but false at the
time the contract takes effect. Example: Insured states that he has never been
affected with pneumonia at application, but if in the meantime, he is afflicted
with pneumonia before the policy takes effect, and he does not disclose, there
is a false representation.
WHEN IS A REPRESENTATION SAID TO BE FALSE
When the facts fail to correspond with its assertions or stipulations (Sec 44)
MUST THE INSURED COMMUNICATE INFORMATION OF WHICH HAS NO

PERSONAL KNOWLEDGE BUT MERELY RECEIVES THE SAME FROM OTHERS
When a person has no PERSONAL KNOWLEDGE OF A FACTS – HE MAY OR

MAY NOT communicate such information to the insurer. If he does
communicate, he is not responsible for its truth (Section 43). Hence, there can
be no misrepresentation
WHEN IS THE INSURED REQUIRED TO DISCLOSE INFORMATION FROM A 3RD

PERSON
When the information material to the transaction was acquired by an

agent of the insured, as knowledge of the agent is also knowledge of the
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principal. Example: If a ship captain is aware of a defect that affects the
seaworthiness, that defect must be communicated as the ship captain is under
obligation to disclose it to the owner.
WHAT IS THE EFFECT OF MISREPRESENTATION ON A MATERIAL POINT
If it is false on a material point, whether affirmative or promissory – the

injured party is entitled to rescind the contract from the time the representation
becomes false. HOWEVER, the right to rescind is considered waived by the
acceptance of premium payments despite knowledge of the ground to
rescind (Section 45) Example: Insurer was aware of the lack of extinguishers
required by the policy. BUT there is no waiver – if the insurer had no knowledge
of the ground at the time of the acceptance of the premium. Example:
Unauthorized driver. (Stokes vs. Malayan 127 SCRA 766)
HOW IS MATERIALITY DETERMINED
The same as concealment (Section 46) probable and reasonable

influence of the facts upon the party to whom the representation is made in
forming his estimate of the advantage/disadvantages of the contract or in
making inquiries.
WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE EXERCISED – (Sec 48)
The right to rescind must be exercised PREVIOUS to the commencement

of an action on the contract (Section 48). Note the case of TAN CHAY HING vs.
WEST COAST LIFE INSURANCE CO, 51 PHIL 80, where an insurer interposed the
defense in an action to claim the proceeds that the contract is null and void.
Section 48 was held to apply only when THERE IS A CONTRACT TO RESCIND.
IT IS ALSO QUALIFIED BY 2ND PAR OF SECTION 48 WHICH PROVIDES that

after a policy of life insurance payable on the death of the insured shall have
been in force during the lifetime of the insured for a period of 2 years from the
date of issue or its last reinstatement, the insurer cannot prove that the policy is
VOID AB INITIO or is subject to rescission by reason of a fraudulent
concealment or misrepresentation of the insured or his agent (KNOWN AS THE
INCONTESTABILITY CLAUSE)
WHAT IS THE THEORY AND OBJECT BEHIND THE INCONTESTABILITY CLAUSE
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On the part of the INSURER – an insurer has/should have a reasonable
opportunity to investigate the statements which are made by the applicant
and that after a definite period, it should no longer be permitted to question its
validity.
On the part of the INSURED – its object is to give the greatest possible
assurance that the beneficiaries would receive payment of the proceeds
without question as to validity of the policy.
WHAT ARE THE REQUISITES
The requisites are (1) It is a life insurance policy (2) It is a payable on the
death of the insured (3) It has been in force during the lifetime of the insured for
AT LEAST TWO YEARS from date of issue / or last reinstatement. NOTE: TAN vs.
CA – 174 SCRA 403- DURING THE LIFETIME OF THE INSURED MEANS THAT THE
POLICY IS NO LONGER IN FORCE IF THE INSURED DIES. Facts: Philam issued policy
on November 6, 1973. On April 26, 1975 the insured died. The beneficiaries
claimed but the insurer denied the claim on September 11, 1975 and rescinded
the policy on the ground of misrepresentation and concealment. HELD – Insurer
has two years from date of issue / reinstatement within which to contest the
policy whether or not the insured still lives within the period.
WHAT DEFENSES ARE NOT BARRED BY INCONTESTABILITY EVEN AFTER THE LAPSE
OF 2 YEARS
The defenses that are not barred are (1) non-payment of premiums (2)
lack of insurable interest (3) that the cause of death was excepted or not
covered by the terms of the policy (4) that the fraud was of a particular vicious
type such as (a) policy was taken in furtherance of a scheme to murder the
insured (b) where the insured substituted another for the medical examination
(c) where the beneficiary feloniously killed the insured (5) violation of a
condition in the policy relating to military or naval service in time of war (6) the
necessary notice or proof of death was not given (7) action is not brought
within time specified in the policy, which in no case should be less than 1 year
as per Section 63.
WHAT ARE THE EFFECTS OF INCONTESTABILITY
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The insurer can no longer escape liability tender the policy or be allowed
to prove that the policy is void ab initio or may be rescinded by reason of
concealment or misrepresentation by the agent of the insured or the insured.
DISTINGUISH CONCEALMENT FROM REPRESENTATION
Concealment is the neglect of one party to communicate to the other

material facts. The information he gives in compliance with his duty to reveal
information is representation. Representation therefore, is the communication
required to comply with the prohibition against concealment.
Concealment is the passive and misrepresentation is the active form of the

same bad faith.
CONCEALMENT AND REPRESENTATION COMPARED
1. In concealment – the insured withholds information of material facts, while

in representation – the insured makes erroneous statements
2. In concealment and misrepresentation both give the insurer the right to

rescind the contract of insurance
3. The materiality of concealment and representation are determined by

the same rules
4. Whether the concealment or representation is intentional or not, the

injured party can rescind
5. Since insurance contracts are of utmost good faith – the insurer is also
covered by the rules
POLICY
It is the written instrument in which a contract of insurance is set forth (Section

49).
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HOW IS IT CONTRUED, WHAT IF THE INSURED DOES NOT UNDERSTAND THE
CONTENTS OF THE POLICY
Generally in favor of the insured and against the insurer. The burden of
proving that the terms of the policy have been explained is upon the party
seeking to enforce it. The claim of the beneficiary that since the insured was
illiterate and spoke Chinese only, she could not be held guilty of concealment
because the application and policy was in English (Tang vs. CA, 90 SCRA 236)
FORM OF THE POLICY
It shall be printed and may contain blank spaces and any word, phrase,
clause or mark, sign, symbol, signature, or number necessary to complete it
shall be written in the blank spaces (Section 50). IF there are RIDERS, CLAUSES,
WARRANTIES OR ENDORSEMENTS purporting to be part of the contract of
insurance and which are pasted or attached to the policy is NOT BINDING on
the insured – UNLESS the descriptive title of the same is also mentioned and
written on the blank spaces provided in the policy. NOTE – if pasted or
attached to the original policy at the time it was issued – the signature of the
insured is not necessary to make it binding. if after the original policy is issued, it
must be counter-signed by the insured UNLESS applied for by the insured.
No rider, clauses, or warranties, or endorsements shall be attached,

printed or stamped on the policy unless the form of such application has been
approved by the Insurance Commissioner.
RIDERS – are forms attached to the policy when the company finds it necessary
to alter or amend the applicant’s answer to any question in the application.
CLAUSES – are forms containing additional stipulations.
WARRANTIES – are written statement / stipulations inserted on the face of the

contract or incorporated by proper words of reference – where the insured
contracts as to the existence of facts, circumstances or conditions – the truth of
which are essential to the validity of the contract.
ENDORSEMENTS – are agreements not contained but may be written or

attached to policy to change or modify a part thereof.
WHAT MUST A POLICY SPECIFY

25
A policy must specify (1) The parties between whom the contract is made
(2) The amount to be insured except in open or running policies (3) The
premium, or if the premium is to be determined at the termination of the
contract, a statement of the basis and rates upon which the final premium is to
be determined (4)The property or life insured (5) The interest of the insured in
the property insured, if not the absolute owner (6) The risks insured against (7)
The period during which the insurance is to continue (Section 51)
WHAT ARE COVER NOTES
It is a written memorandum of the most important terms of a preliminary

contract of insurance intended to give protection pending investigation by the
insurer of the risk or until the issuance of the formal policy (Section 52). It is ALSO
KNOWN AS BINDING SLIP OR RECEIPT OR BINDER
EFFECTIVITY OF A COVER NOTE
The effectivity of a cover note is 60 DAYS – as within such period, a policy

shall be issued including in its terms the identical assurance found under the
cover rate and the premium therefore. It may however, be extended beyond
60 days and with the written approval of the Insurance Commissioner if he
determines that it does not violate the Insurance Code.
NOTE: The following rules have been promulgated by the Insurance

Commissioner- (1) A cover note is valid for 60 days whether or not a premium is
paid but it may be cancelled by either party upon at least 7 day notice to the
other party (2) if the cover note is not cancelled, a regular policy must be
issued within 60 days from the date of issue of the cover note, including within
its terms the identical insurance (3) It may be extended with the written
approval of the commissioner but may be dispensed with by a certification of
the Pres. VP or GM of the insurer that the risks involved and the extension do not
violate the code (4) Insurance companies may impose a deposit premium
equivalent to at least 25% of the estimated premium but in no case less than
PHP 500.00.
WHEN WILL A COVER NOTE GIVE ADEQUATE INSURANCE PROTECTION
It gives adequate insurance protection when it is a preliminary contract of

PRESENT INSURANCE and not a mere agreement to insure at a future time, AS
26
on acceptance of the application or issuance / delivery of the policy. (44 CJS
958). Example: (1) Agent issued a provisional policy acknowledging receipt of
premiums and stating that the insurance shall be effective upon approval and
issuance of the policy by the head office. There is no protection as it is a mere
acknowledgment of the payment of premiums as the effectivity of the
insurance is expressly provided (LIM vs. SUNLIFE – 41 PHIL 265) (2) In life
insurance, a binding slip does not insure by itself as it was stated that it was
subject to the approval of the insurer and the same was subsequently
disapproved (GREPALIFE vs. CA, 89 SCRA 543).
IS PAYMENT OF A PREMIUM PAYMENT FOR THE COVER NOTE NECESSARY TO BE

PROTECTED AGAINST THE RISK INSURED AGAINST
Cover note held to be binding despite the absence of a premium

payment for its issuance. No separate premiums are intended or required to be
paid on a cover note because they DO NOT CONTAIN THE PARTICULARS OF
THE PROPERTY INSURED THAT WOULD SERVE AS THE BASIS FOR THE
COMPUTATION OF PREMIUMS – such being the case no premium can be fixed.
The COVER NOTES should not be treated as a separate policy but should be
integrated in the regular policy subsequently issued so that premiums on the
regular policy should include that for the cover note (PACIFIC TIMBER vs. CA,
112 SCRA 199).
WHOSE INTEREST IS INSURED –
1. The insurance proceeds shall be applied exclusively to the proper interest

of the person in whose name or for whose benefit it is made, unless otherwise
specified in the policy (Section 53). Example: (1) In the case of Del Val v. Del
Val, 29 PHIL 534, the designation of sister as sole beneficiary in a life insurance
cannot be defeated by the contention of the of plaintiff that proceeds belong
to the estate of the insured was disregarded as insurance is to be governed by
special law, not by the law covering donations or succession (2) In the case of
Bonifacio Bros v. Mara, GR No. 20853, May 29, 1967.- Action to recover cost of
repairs and labor to a motor vehicle where the policy states loss is payable to
H.S. Reyes, the mortgagee of the vehicle who had no knowledge of the fact
that Mara had it repaired with Bonifacio Bros., where the court ruled that H.S.
Reyes is the one entitled to the proceeds because a policy of insurance is a
separate and independent contract between the insured and the insurer, and
that third persons have no right to the proceeds of the insurance.
27
MAY A 3RD PERSON SUE THE INSURER – unless otherwise specified in the
policy, a 3rd person may sue if (1) the insurance contract contains a stipulation
in favor of a 3rd person, the latter though not a party may sue to enforce
before the contract is revoked by the parties. Example: In the case of COQUIA
v. FIELDMENS INSURANCE CO – 26 SCRA 179, the insurance company
undertook to indemnify any authorized driver who was driving the motor
vehicle insured. Coquia, while driving the insured motor vehicle, met and
accident and died. His heirs were allowed to sue the insurer, the policy being
considered in the nature of a contract pour autrui and therefore the
enforcement thereof may be demanded by a 3rd party for whose benefit it
was made (2) the insurance contract provides for indemnity against liability to
3rd persons. Example: In the case of GUINGON v. DEL MONTE 20 SCRA 1043, the
insured procured insurance that would indemnify him against any and all sums
which he may be legally liable to pay in respect to the death or bodily injury to
any person. A jeepney covered by the insurance had bumped Guingon and
had caused his death. The insurance was held to be one for indemnity for
liability to third persons (THIRD PARTY LIABILITY), and therefore, such third person
is entitled to sue the insurer. THE TEST TO DETERMINE WHETHER A 3RD PERSON
MAY DIRECTLY SUE THE INSURER OF THE WRONGDOER is: if the contract provides
for indemnity against liability to 3rd persons, then the latter to whom the insured
is liable may directly sue the insurer, ON THE OTHER HAND, if the insurance is for
indemnity against actual loss or payment – then the 3rd person cannot sue the
insurer – recourse is against the insured alone.
2. If the contract is executed with an agent or trustee as the insured, the fact
that his principal or beneficiary is the real party in interest may be indicated by
describing the insured as the agent / trustee or by general words in the policy
(Section 54). If not indicated, it is as if the insurance is the taken out by the
agent / trustee alone, consequently the principal has no right against the
insurer.
3. If a partner or part owner effects insurance, it is necessary that the terms

of the policy should be such as are applicable to the joint or common interest
so that it may be applicable to the interest of his co-partners / owners (Section
55). Consequently, the policy must state that the interest of all is insured, if not,
it is only the interest of the one getting the policy that is insured.
4. When the description of the insured in the policy is so general that it may
comprehend any person or any class of persons, only he who can show that it
was intended to include him can claim the benefit of the policy (Section 56).
28
Example: In a Fire insurance policy where the insured is Dela Cruz & Associates,
X to be able to recover his share must prove that he is a partner.
5. When a policy is so framed that it will inure to the benefit of whomsoever,

during the continuance of the risk, may become the owner of the interest
insured (Section 57). The proceeds become payable to who may be the
owner at the time the loss or injury occurs. This is an exception to Section 20.
6. The mere transfer of a thing insured does not transfer the policy but
suspends it until the same person becomes the owner of both the policy and
the thing insured (Section 58). Note the exceptions to this rule as found in
Sections 20-24 and 57
WHAT ARE THE KINDS OF INSURANCE POLICIES
The kinds of policies are (1) Open (2) Valued, or (3) Running (Section 59).
An OPEN POLICY is one in which the value of the thing insured is not
agreed upon, but is left to be ascertained in case of loss (Section 60). What is
mentioned as the amount is not the value of the property but merely the
maximum limit of the insurer’s liability. In case of loss, the insurer only pays the
actual cash value at the time of loss. Example: FIRE INSURANCE, where the loss
is to be determined but payment is limited to the amount stated in the policy.
A VALUED POLICY is one which expresses on it face that the thing insured
shall be valued at a specified sum (Section 61). The valuation of the property
insured is conclusive between the parties. In the absence of fraud or mistake,
such value will be paid in case of a total loss.
A VALUED POLICY DISTINGUISHED FROM AN OPEN POLICY
(1) In a valued policy, proof of value of the thing after the loss is not necessary.
In an open policy, the insured must prove the value of the thing insured (2) In a
valued policy, the parties have conclusively stipulated that that property
insured is valued at a specified sum. In an open policy, the value is not agreed
but left to be ascertained upon loss (NOTE: this does not violate the principle
that a contract of insurance is a contract of indemnity as long as the valuation
is reasonable and is bonafide).
A RUNNING POLICY is one which contemplates successive insurances and
which provides that the object of the policy may be from time to time defined
29
especially as to the subjects of insurance, by additional statements or
indorsements (Section 62). This is ALSO KNOWN AS a Floating policy – usually
issued to provide indemnity for property which cannot be covered by specific
insurance because of a frequent change in location and quantity. Example:
Insurance procured by a retail establishment to cover its inventory that
fluctuates in quantity, or is located in several areas.
CAN THERE BE AGREEMENTS AS TO PRESCRIPTION OF AN ACTION OR

LIMITATIONS ON THE PERIOD OF TIME TO BRING AN ACTION
YES, provided the period agreed upon should NOT BE LESS THAN ONE
YEAR (Section 63). If less than one year, the agreement is VOID. The period so
agreed shall be considered as having commenced from the time the cause of
action accrues. Usually, the CAUSE OF ACTION accrues from the date of the
insurer’s rejection of the claim of the beneficiary or of the insured – SINCE
BEFORE REJECTION there is no necessity to bring suit. WHEN NO PERIOD IS
STIPULATED OR IF THE STIPULATION IS VOID, the period is within 10 years under
Article 1144, NCC, it being a written contract (EAGLE STAR vs. CHIA YU 96 PHIL
696, ACCFA vs. ALPHA INSURANCE, 24 SCRA 151). IF THE INSURED ASKS FOR A
RECONSIDERATION OF THE DENIAL, the period is still counted from the time the
claim is denied at the first instance – NOT RECONSIDERATION – as it gives the
insured a scheme or devise to waste time until evidence that may be
considered against him can be destroyed( Sun Life Office Ltd vs. CAR 195 SCRA
193). The period does not run if action is brought against an agent of the
insurer.
WHAT IS THE PRESCRIPTIVE PERIOD FOR MOTOR VEHICLE INSURANCE
One year from denial of the claim – NOT DATE OF ACCIDENT – (Summit
Guaranty vs. De Guzman 15 SCRA 389
WHERE IS THE ACTION FILED
An action may be filed in the following: (1) Courts (2) Insurance

Commissioner, who has concurrent jurisdiction with courts for claims not
exceeding PHP 100,000.00 (3) POEA / DOLE have the power to compel a surety
to make good on a solidary undertaking in the same proceeding where the
liability of the principal obligor is determined. Note that the claim becomes an
ACTION upon filing with the Court.
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CANCELLATION OF THE POLICY
No policy other than life shall be cancelled by the insurer EXCEPT UPON
PRIOR NOTICE THEREOF TO THE INSURED. NO NOTICE OF CANCELLATION SHALL
BE EFFECTIVE IF NOT BASED ON THE OCCURRENCE, AFTER EFFECTIVE DATE OF
ONE OR MORE GROUNDS (1) non-payment of premium (2) conviction of a
crime arising out of acts increasing the hazard insured against. Example:
insured has been convicted of arson or car theft (3) discovery of fraud or
material misrepresentation. Example: insured represents himself as the owner
but is not actually the owner (4) discovery of willful or reckless acts or omissions
increasing the hazard insured against. Example: storage of hazardous materials
in the premises (5) physical changes in the property insured which result in the
property being uninsurable. Example: private vehicle being converted into a
racing vehicle (6) determination by the insurance commissioner that a
continuation of the policy would place the insurer in violation of the code.
Example: policy was issued absent insurable interest (Section 64).
FORM OF NOTICE OF CANCELLATION
It must be in writing, mailed or delivered to the name insured at the

address shown in the policy which shall state (1) The grounds relied upon as per
Section 64, and (2) that upon written request of the named insured, the insurer
will furnish the facts on which cancellation is based (Section 65). NOTES: (1) a
fire insurance policy is cancelled on October 15, 1981. The insurer’s clerk
allegedly sent notice of cancellation by mail but there was no proof that it was
actually mailed and received. Insurer relies on the presumption of regularity.
HELD: Considering the strict language of the law that no policy can be
cancelled without prior notice – it behooved on the insurer to make sure that
cancellation was actually sent and received by the insured (Malayan vs.
Arnaldo, 156 SCRA 672). (2) A insured his building against fire and made the
loss payable to mortgagee. Upon cancellation notice was sent to the
mortgagee.HELD: There was no valid notice of cancellation. The notice is
personal to the insured and not to any unauthorized person (Saura Import
Export vs. Philippine International Surety Co, Inc., 8 SCRA 143)
DOES THE INSURED HAVE THE RIGHT TO RENEW HIS POLICY
Yes, in insurance other than life, the NAMED INSURED, may renew the
policy upon payment of the PREMIUM due on the effective date of the
renewal, IF, he has not been given notice BY THE INSURER OF THE INTENTION
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NOT TO RENEW OR TO CONDITION RENEWAL UPON REDUCTION OF LIMITS OR
ELIMINATION OF COVERAGES by mail or delivery at least FORTY FIVE DAYS in
advance of the END of the POLICY (Section 66).
WARRANTIES
It is a statement or promise stated in the policy or incorporated therein by

reference, whereby the INSURED – expressly or impliedly (Section 67) contracts
as to the past, present or future (Section 68) existence of certain facts
conditions or circumstances – the LITERAL TRUTH of which is essential to the
validity of the contract. Examples: AS TO PAST – That he never had a heart
ailment, AS TO THE PRESENT – That he is in good health/ That house is being
utilized as a residence. AS TO THE FUTURE – That insured will not store explosives
FORM
No particular form of words is necessary to create a warranty (Section 69).
What is essential is what the parties intend a statement to be, and if so
intended as a warranty it must be included as part of the contract. NOTE:(1)
Whether a warranty is constituted or not depends upon the intention of the
parties, the nature of the contract, or the words used thereto (2) In case of
doubt, the statement is presumed to be a representation not a warranty.
WHAT ARE THE KINDS OF WARRANTIES
1. Affirmative – those that relate to matters that exist AT or BEFORE the

issuance of the policy. Example: that vessel is equipped of a competent crew.
2. Promissory – those where the insured promises or undertakes that certain

matters shall exist or will be done or will be omitted after the policy takes effect.
It is a statement in the policy, which imports that it is intended to do or not to
do a thing which materially affects the risk, is a warranty that such act or
omission shall take place (Section 72). Example: That a house shall not be
leased out. That the insured’s premises will be fenced.
NOTE that unless the contrary intention appears, the courts will presume that
the warranty is merely an affirmative warranty. Example: A description of the
property as being a two storey residence- there is no promissory warranty that it
will be maintained as a residence OR there is a statement that “ there is a
security guard on duty at night” is not a promissory warranty that a security
guard will be maintained.
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3. Express – a statement in a policy of a matter relating to the person or thing

insured, or to the risk as a fact (Section 71) and where the assertion or promise is
clearly set forth in the policy or incorporated therein by reference. They can be
affirmative or promissory warranties.
AN EXPRESS WARRANTY MADE AT OR BEFORE THE EXECUTION OF THE

POLICY SHOULD BE CONTAINED (a) in the policy itself. (b) in another instrument
signed by the insured and referred to in the policy as making a part of it
(Section 70). This includes a RIDER - it is a part of the policy, it need not be
signed unless the rider was issued after the original policy took effect.
4. Implied – where the assertion or promise is not expressly set forth in the
policy but because of the general tenor of the terms of the policy or from the
very nature of the insurance contract, a warranty is necessarily inferred or
understood. Note that the law only provides for implied warranties in contracts
of marine insurance. See Sections 113 (seaworthiness) and 126 (deviation).
EFFECT OF VIOLATION OF A WARRANTY
The violation of a material warranty, or other material provision of the

policy, on the part of either party thereto, entitles the other to rescind (Section
74) Note that the insured can exercise the right also when the insurer violates a
warranty, like when it refuses to grant a loan on the policy. BUT as far as the
insured, NOTE ALSO that (1) while a policy may declare that a violation of
specified provisions thereof shall avoid it, OTHERWISE the breach of an
immaterial provision does not avoid the policy (Section 75). MEANING-
ORDINARILY A BREACH OF AN IMMATERIAL PROVISION DOES NOT AVOID A
POLICY, however, if stipulated that any breach avoids the policy, the policy is
avoided. (2) a breach of warranty without fraud, merely exonerates an insurer
from the time it occurs, or where it is broken at its inception, prevents the policy
from attaching to the risk (Section 76). MEANING- that if the breach is without
fraud- the policy is avoided only from the time of the breach, prior to the
breach it is still effective. Consequently, the insured is entitled to a pro-rate
return of the premium paid under Section 79 (b) or all premiums, if the breach
occurs at the inception of the contract, as such is void ab initio and had never
become binding.
NOTE that a CAUSAL CONNECTION between the violation of the warranty is

not necessary – So, even if the violation did not contribute to the loss – the
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other party may still rescind. Example: A insured building against fire. A
warranty stated that no hazardous goods would be stored.A stored fireworks.
The building was burned and the fireworks were discovered stored in the area
not affected by the fire. The Insurer was not held liable as the storage had
increased the risk (Young v. Midland Textile Ins. – 30 PHIL 617)
THE NON-PERFORMANCE OF A PROMISSORY WARRANTY DOES NOT AVOID THE

POLICY WHEN BEFORE THE ARRIVAL OF THE TIME FOR PERFORMANCE
(1) the loss insured against happens. Example: There is a warranty that a
firewall will be constructed, but fire occurs before the period for compliance
(2) the performance becomes unlawful at the place of the contract. Example:
A law or ordinance prohibits the construction of the specified firewall (3) the
performance becomes impossible. Example: A severe lack of materials to
construct. (Section 73)
DISTINGUISHING IT FROM REPRESENTATIONS.
1. A warranty is part of the contract, while a representation is merely a

collateral inducement thereto.
2. A warranty is expressly set forth in the policy or incorporated therein by

reference while a representation may be oral or written in another statement.
3. A warranty must be strictly and literally performed while a representation

must be substantially true.
4. A warranty is presumed material while a representation must be shown to

be so.
5. A breach of warranty is a breach of the contract itself while a (mis)

representation is ground to rescind the contract.
PREMIUM
The agreed price for assuming and carrying the risk
WHEN IS THE INSURER ENTITLED TO A PREMIUM
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The insurer is entitled to the payment of a premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement
to the contrary, no policy or contract of insurance issued by an insurance
company is valid and binding unless and until the premium is paid EXCEPT in
(1) In case of life or industrial life (life insurance policy where the premium is
payable monthly or oftener) whenever the grace period applies (Section77),
(2) When the insurer makes a written acknowledgment of the receipt of
premium, such is conclusive evidence of the payment of the premium to
make it binding notwithstanding any stipulation therein that it shall not be
binding until the premium is paid (Section 78) HENCE, the effect of an
acknowledgment in a policy or contract of insurance of the receipt of the
premium – is that it is conclusive evidence of its payment – so far as to make
the policy binding. HOWEVER, it is conclusive only to make the policy binding
and not for the purpose of collecting the premium, and
(3) Where the obligee has accepted the bond or suretyship contract in
which case such bond or suretyship contract becomes valid and
enforceable irrespective of whether or not the premium has been paid by
the obligor to the surety (Section 177).
NOTE – that there is no excuse for non-payment of the premium since payment
on time is of the essence. THE ONLY RECOGNIZED EXCEPTION is when failure is
due to the wrongful conduct of the insurer. Example: the refusal to accept a
validly tendered payment of the premium.
WHAT IS THE EFFECT OF PARTIAL PAYMENT
ORDINARILY, the obligation to pay premium when due is considered an

INDIVISIBLE OBLIGATION.Hence, forfeiture is not prevented by a part payment
UNLESS,payment by installment has been agreed upon or is the established
practice – BASIC PRINCIPLES OF EQUITY AND FAIRNESS would not allow the
insurer to collect and accept installments and later deny liability as premiums
were not paid in full. (See Philippine Phoenix Surety and Ins. v. Woodworks – 20
SCRA 1270, Makati Tuscany Condominium Corporation v. CA, 215 SCRA 462 -
payment by installment was agreed upon, NOTE ALSO TIBAY v. CA – 257 SCRA
126 – any partial payment when there is an agreement that the policy shall not
be effective pending payment of full premium was in the concept of deposit.)
PAYMENT TO INSURANCE AGENT OR BROKER is payment to the insurance

company.
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WILL PAYMENT BY PROMISSORY NOTE OR CHECK BE SUFFICIENT TO MAKE THE

POLICY BINDING
No, Art 1249 2nd paragraph of the Civil Code, that such produces
payment only when it is encashed.
WHEN IS THE INSURED ENTITLED TO A RETURN OF THE PREMIUMS PAID
The insured is entitled to a return when (1) To the whole premium, when no
part of the interest in the thing insured is exposed to any of the perils insured
against (Section 79 –a). Example: insurance on a vessel for a voyage that did
not take place (2) where the insurance is made for a definite period of time
and the insured surrenders his policy before the expiration of the period. Here,
the insured only recovers a portion of the policy premiums corresponding with
the unexpired time BUT it does not apply if (a) the policy is not for a definite
period (b) a short period rate (insurance is for a period of less than a year and
a rate has been agreed to if the policy is surrendered. Example: If the policy is
in force for a month, the insurer retains 20% of the premium) has been agreed
upon (c) the policy is a life insurance policy – it is indivisible but he has a cash
surrender value (3) when the contract is voidable on account of fraud or
misrepresentation of the insurer or the agent (Section 81). Example: where
insurer makes a representation not contained in the policy because policy is
not that applied for (4) where the contract is voidable on account of facts, the
existence of which the insured was ignorant without his fault (Section 81).
Example: when the insurance is taken by the insured, who is ignorant of the
facts, that he did not have insurable interest or a person, not knowing that that
his car has been totally damaged, procured insurance over it.(5). when by any
default of the insured other than actual fraud, the insurer never incurred any
liability under the policy (Section 81) Example: a person insured his vessel for a
trip, but vessel is destroyed before the trip. (6) In case of over-insurance. Here
the insurance is in excess of the amount of the insurable interest of the insured
and it is insured by several insurers, the insured is entitled to a RATABLE RETURN
OF PREMIUM, proportional to the amount by which the aggregate sum insured
in all the policies exceeds the insurable value. Example:
A’s house is valued at 1.5million, he obtained the following policies – Here A is

entitled to the return of 5,000 from X and 10000 from Y
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Insurer Premium Amount

X 10,000 1,000,000
Y 20,000 2,000,000
TO WHOM ARE THE PREMIUMS RETURNED
Unless otherwise stated they shall be returned to the insured who paid
them.
WHEN ARE THEY NOT RECOVERABLE
Premiums cannot be recovered: (1) if the peril insured against has existed,
and the insurer has been liable for any period, the period being entire and
indivisible (Section 80). Example: The vessel is insured for a voyage that will take
5 days, 2 days into a voyage, the policy is surrendered (2) In life insurance –
(Section 79-b), and (3) when the insured is guilty of fraud or misrepresentation
(Section 81)
LOSS AND NOTICE OF LOSS
WHAT ARE THE RULES TO DETERMINE WHETHER THE INSURER IS LAIBLE FOR THE
LOSS OF THE THING INSURED
They are:
(1) Loss of which a peril insured against is the proximate cause ( PROXIMATE
CAUSE – that which, in a natural and continuous sequence, unbroken by any
efficient intervening cause, produces an injury and without which the injury
would not have occurred), although a peril not contemplated by the contract
may have been a remote cause BUT the insurer is not liable for a loss of which
the peril insured against was only a remote cause (Section 84).
Example:
In life insurance that covers death by accident, if the insured sustains an
accident that renders him weak, while in said state, he contracts a cold that
develops into pneumonia. The proximate cause is the accident, while the
remote cause is the pneumonia, the insurer is liable. An example of a loss,
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where the peril insured against is only a remote cause is: firemen train their
hoses at the house of the insured, damaging windows and furnitures, though
not necessary to put out the fire as the same was affecting the house of the
neighbor. The insured cannot claim loss due to fire as it is only a remote cause.
RECOGNIZING THAT THERE ARE PROBLEMS IN DETERMINING PROXIMATE CAUSE –

NOTE THE FOLLOWING RULES:
(a) If there is a single cause which is an insured peril, clearly it is the proximate
cause and there is liability. Example: Insurance is against fire and the property
insured is burned OR Insurance covers accidental death and the insured dies in
an accident
(b) If there are concurrent causes (those happening together) with no

excluded perils, there is liability if one of the causes is an insured peril, the
others may be ignored. Example: In accident insurance where the insured has
a heart disease. He is involved in an accident that causes injuries, which
coupled with his weak heart causes his death. The proximate cause is the
accident. The insurer is liable.
(c) If there are concurrent causes with an excepted peril (insured peril and
excepted peril operate together to produce the loss) the claim will be outside
the scope of the policy. Example: No liability in a claim for property stolen by
rioters under a burglary policy, if the policy exclude riot risks.
(d) But, if the results of the operation of the insured peril can be clearly
separated from the effects of the excepted peril, the insurer is liable. Example:
a personal accident policy will cover death by accident although the insured
was suffering from a disease excluded by the policy
(3) Where a number of causes operate one after the other, and the original
cause happens to be a peril insured against, there is liability. Example: Insured
scratches an open wound, which gets infected, which ultimately results in
death BUT if the direct chain of events can be traced to an excepted peril
there is no liability. Example: An earthquake (if excepted) causes a fire that
spreads, all resulting fire damage is deemed caused by an excepted peril. BUT,
if the chain of events is broken by the intervention of a new an independent
cause, liability will depend upon whether the new cause is an insured or
excepted peril. Example: if the insured is treated in the hospital for an accident
but while there he contracts a disease, the disease is the proximate cause,
38
there will be no liability under the accident policy, if death by disease is
covered, then the insurer is liable.
(2) Loss caused by efforts to rescue the thing insured from a peril insured
against that would otherwise have caused a loss, if in the course of such
rescue, the thing is exposed to peril not insured against, which permanently
deprives the insured of its possession, in whole or in part, or where a loss is
caused by efforts to rescue the thing insured from a peril insured against
(Section 85). Here the principle of proximate cause is extended to loss incurred
while saving the thing insured.
Example: (a) When the thing insured is water damaged due to efforts to put out
a fire, the fire being a peril insured against (b) theft by 3rd persons while the
goods are brought out in the course of rescuing them from a fire, which is the
peril insured against BUT – no loss if the goods are left out and are lost – it is now
due to lack of reasonable care and vigilance (c) A insured the contents of his
house against fire. A fire breaks out, while removing the contents, they were
stolen or they were broken or damaged, theft or breakage not being perils
insured against.
3. Where a peril is especially excepted in a contract of insurance, a loss,

which would not have occurred but for such peril, is thereby excepted
although the immediate cause of the loss was a peril which was not excepted
(Section 86). The immediate cause is the CAUSE OR CONDITION NEAREST THE
TIME AND PLACE OF THE INJURY. Here, the insurer will be liable if both the
immediate cause and the proximate cause are not excepted. If the proximate
cause is excepted and the immediate cause is not, the insurer is not liable.
Example: A factory is insured against fire, but it excepts loss through explosion.
If an explosion occurs and results into a fire that creates a loss, the insurer is not
liable. If a fire occurs first, then an explosion is caused, the insurer is liable.
4. An insurer is not liable for a loss caused by the willful act or through the
connivance of the insured; but he is not exonerated by the negligence of the
insured, or of the insured’s agent or others (Section 87). Consequently, if the
insured was merely negligent, the insurer is still liable as one of the principal
reasons for procuring insurance is to protect himself against the consequences
of his own negligence or that of his agents.
39
Example: The insured carelessly used kerosene in lighting a stove, causing his
house to catch fire, the insurer is liable for loss BUT if the negligence is so gross
so as to be sufficient basis for fraudulent intent – it can amount to a willful act.
TRANSFER OF CLAIMS
An agreement not to transfer the claim of the insured after the loss
happens – IS VOID if MADE BEFORE THE LOSS except as otherwise provided in
case of life insurance (Section 83). This means that the insured has an absolute
right to transfer his claim against the insurer AFTER THE LOSS occurs, what is
prohibited is a transfer prior to the loss. This is so because such a stipulation after
the loss occurs shall hinder the transmission of property. Neither does it affect
the insurer as its liability is already fixed and what is actually assigned is the
money claim, not the contract itself. The EXCEPTION is Section 173 that provides
that the transfer of a fire insurance policy to any person or company who acts
as an agent for or otherwise represents the issuing company is prohibited and is
void insofar as it affects other creditors of the insured.
NOTICE AND PROOF OF LOSS
WHEN MUST NOTICE OF LOSS BE GIVEN AND BY WHOM
Notice of Loss must be given without unnecessary delay by the insured or

some person entitled to the benefit of the insurance. IF NOT GIVEN, the insurer is
exoection 88). MEANING OF WITHOUT UNNECESSARY DELAY is within a
reasonable time, depending on circumstances of a peculiar case, although
courts have construed the requirement liberally in favor of the insured. NOTE
THE SPECIFIC APPLICATION TO FIRE INSURANCE due to the nature of the loss and
urgent need to determine the cause thereof. The longer the period that lapses
from the time of loss, the greater is the opportunity of the insured to tamper with
the evidence in preparation for a fraudulent claim.
PROOF OF LOSS
If the policy requires Preliminary Proof of Loss (evidence given the insurer
of the occurrence of the loss, its particulars, and data necessary to enable it to
determine liability and the amount thereof) IT IS NOT NECESSARY that the
insured give such proof – AS MAY OR WOULD BE NECESSARY IN A COURT OF
JUSTICE. WHAT IS SUFFICIENT is the BEST EVIDENCE which he has in his power at
that time (Section 89).
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WHEN ARE DEFECTS IN THE NOTICE OR PROOF OF LOSS DEEMED WAIVED BY THE
INSURER
1. When the insurer fails to specify to the insured any defect which the
insured can remedy without delay. Example: It is required to be sworn to but is
accepted by the insurer
2. When the insurer denies liability on a ground other than the defect in the
notice or proof of loss. Example: Denial is based on nullity of the contract
(Section 90)
WHEN IS DELAY IN THE GIVING OF NOTICE WAIVED
1. If it is caused by any act of the insurer. Example: The insurer accepts

payment of the premium with full knowledge that the premises have been lost
or damaged will be estopped from claiming delay in the giving of notice of
loss.
2. If the insurer omits to make an objection promptly and specifically on that

ground. MEANING: despite delay, the insurer does not object (Section 91)
REQUIREMENT OF CERTIFICATION OR TESTIMONY OF A THIRD PERSON
If in the giving of preliminary proof of loss, a certification or testimony of a

third person other than the insured is required, it is sufficient for the insured to
use REASONABLE DILIGENCE to procure it. In case of REFUSAL to give it, the
insured can furnish REASONABLE EVIDENCE to the insurer that such refusal WAS
NOT INDUCED BY ANY JUST GROUNDS OF DISBELIEF in the facts necessary to be
certified or testified – ONCE SHOWN or GIVEN the requirement may be
dispensed with (Section 92).
WHAT HAPPENS AFTER PAYMENT BY THE INSURER SUBSEQUENT TO GIVING OF

NOTICE OF LOSS
In property insurance, after the insured has received payment from the
insurer of the loss covered by the policy, the insurance company is
SUBROGATED to the rights of the insured against the wrongdoer or the person
who has violated the contract. The right of subrogation accrues upon payment
41
of the insurance claim. NOTE: That subrogation takes effect by operation of law
and does not require the consent of the wrongdoer (Fireman’s Fire Insurance
vs. Jamilla & Company, 70 SCRA 323). THERE IS NO SUBROGATION in (a) Life
Insurance as it is not a contract of indemnity (b) when proximate cause of the
loss is the insured himself (c) when the insurer pays to the insured a loss not
covered by the policy. THE INSURED IS NO LONGER ENTITLED TO COLLECT FROM
THE WRONGDOER if the amount that he received from the insurer has fully
compensated for the loss.
DOUBLE INSURANCE
WHEN DOES DOUBLE INSURANCE EXIST
Where the same person is insured by several insurers separately in respect

to same subject or interest (Section 93). Its REQUISITES are: (1) same person is
insured (2) there are several insurers (3) subject insured is the same (4) interest
insured is the same (5) risk or peril insured against is the same. There is a
prohibition TO PREVENT OVER-INSURANCE, thus preventing fraud.
EFFECTS OF OVER-INSURANCE BY DOUBLE INSURANCE
1. Insured, unless the policy otherwise provides, may claim payment from the
insurers in such order as he may select up to the amount for which the insurers
are severally liable under their respective contracts. Example: A house is insured
with X Insurance for 10K, with Y Insurance for 20K, and with Z Insurance for 20K. It
is valued at 20K. In case of loss – A can recover 10K-from X Insurance and 10K
from either Y Insurance or Z Insurance
2. Where the policy under which the insured claims is a valued policy, the
insured must give credit as against the valuation for any sum received by him
under any policy without regard to the actual value of the subject matter
insured. Example: A owns a house valued at 40K. He insured it with X Insurance
for 35K and with Y Insurance for 5K. The value of the house with both
companies is 20K. If it is lost – A can collect 5K from Y Insurance. He cannot
collect 35K from Y Insurance but only the difference between the value of the
house (20K) and the value of the policy with Y Insurance (5K)
3. Where the policy under which the insured claims is an unvalued policy, he
must give credit, as against the full insurable value, for any sum received by him
42
under any policy. Example: A insured his house with X Insurance for 40K and
with Y Insurance for 30K, and with Z Insurance for 20K. The policies are open.
The loss is 70K. If Y Insurance and Z Insurance have paid 50K, X Insurance will
only have to pay A, the difference between what he received from Y and Z
(50K) and the amount of loss (70K) or 20K.
4. Where the insured receives any sum in excess of the valuation in case of a
valued policy or the insurable value in case of an unvalued policy, he must
hold such sum in trust for the insurers, according to their right of contribution
among them. Example: if A collects 35K from X Insurance and 5K from Y
Insurance when the value of the house is only 20K, he must hold the 20K excess
in trust. If the policies are open, if A can collect 40K from X Insurance, 30K from
Y Insurance and 20K from Z Insurance, when the actual loss is only 70K – he must
hold the excess in trust.
5. In relation Paragraph (4) – Each insurer is bound, as between himself and

the other insurers to contribute ratably to the loss in proportion to the amount
for which it is liable under his contract. ALSO REFERRED TO AS THE PRINCIPLE OF
CONTRIBUTION – WHICH HAS ALREADY BEEN INCORPORATED IN ALMOST ALL
POLICIES – that should there be other insurances covering the same property,
the liability of the company would be limited to its ratable proportion of the loss
or damage (Also known as CONTRIBUTION CLAUSE)
The formula is: Insurer Policy / total amount of policies times the amount of loss
equals the share of the insurer
Example: 10K x 20K = 4,000 – X Insurance

50K
20K x 20K = 8,000 – Y Insurance
50K
20K x 20K = 8,000 – Z Insurance

50K
If Z Insurance paid 20K but since its share is only 8K, it may collect 4,000 from X
Insurance and 8K from Y Insurance, so that it only pays its ratable share
(Section 94)
TEST TO DETERMINE EXISTENCE OF DOUBLE INSURANCE
43
Whether the insured, in case of happening of the risk, can be directly
benefited by recovering on both policies? If yes – there is double insurance.
IS DOUBLE INSURANCE VALID
If there is an OTHER INSURANCE CLAUSE – one that prevents other

insurance on the property except with the consent of the company – THEN IT
WILL PREVENT ENFORCEMENT OF THE POLICY, the policy then will be NULL AND
VOID. If there is no OTHER INSURANCE CLAUSE, then double insurance is
allowed but the provisions of Section 94 must be followed because property
insurance is a contract of indemnity.
DISTINGUISHING OVER – INSURANCE FROM DOUBLE INSURANCE
1. In double insurance, there must be 2 or more insurers. In over insurance, 1

insurer is sufficient.
2. In double insurance, the total amount of the policies need not exceed
the value of insurable interest. In over insurance, the value must always be in
excess of the insurable interest.
REINSURANCE
Reinsurance occurs when an insurer procures a 3rd person to insure him against
loss or liability by reason of such original insurance (Section 95)
WHEN IS REINSURANCE COMPULSORY
1. When a non-life insurer insure in any one risk or hazard an amount

exceeding 20% of its net worth, the insurer needs reinsurance of the excess over
such limit (Section 215, Paragraph 1)
2. When a foreign insurance company withdraws from the Philippines, it

should cause its primary liabilities under policies insuring residents of the
Philippines to be reinsured by another company authorized to transact an
insurance business in the Philippines (Section 275)
DISTINGUISH REINSURANCE FROM DOUBLE INSURANCE
44
1. In double insurance, the insurer remains an insurer. In reinsurance, the
insurer becomes the insured.
2. In double insurance, the subject matter is property. In reinsurance, the

subject matter is the insurer’s risk or liability
3. In double insurance, the same interest and risk is insured with another. In
reinsurance, different risk and interest are insured
WHAT MUST BE COMMUNICATED WHEN THE ORIGINAL INSURER OBTAINS

REINSURANCE
Except in automatic reinsurance treaties (where two or more insurance

companies agree in advance that they will reinsure a part of any line of
insurance taken by the other. Since such contracts are self-executing and the
obligation attaches automatically, the information required to be
communicated herein could not influence the reinsurer in deciding whether or
not to accept the reinsurance because it is automatic), it must communicate
(1) all representations of the original insured (2) all information or knowledge he
possesses whether previously or subsequently acquired, which are material to
the risk (Section 96). Example: after issuance of the policy, the original insured
had a bad reputation and that he had burned a building, the reinsurance is
rendered void if it is not disclosed. NOTE: the fact that the representations on
the original insured were untrue at the time of the execution of the reinsurance
will not affect liability of the insurer, provided they were true at the time of the
original contract.
WHAT KIND OF CONTRACT IS REINSURANCE
It is presumed to be a contract of indemnity against liability, and not

merely against damage (Section 97). As a RULE, the reinsurer is not liable to the
reinsured for a loss under an original policy if the reinsured is not liable to the
original policy holder. Example: A insured his car against vehicular accidents
with B Insurance. B Insurance reinsures the policy with C Insurance. A violates
the policy by allowing an unlicensed driver to use the vehicle. B insurance
cannot claim against C Insurance on the reinsurance as it was never liable to
A- BUT when the reinsured becomes liable under the original policy, it may
obtain payment from the reinsurer even before paying the loss to the original
insured. Example: A insured his house with X Insurance. X Insurance reinsures
with Z Insurance. The house is burned, but X Insurance cannot pay because it is
45
insolvent. X Insurance can still collect from Z Insurance because it is a contract
of indemnity against liability and not merely against damage. NOTE: The
subject of the reinsurance contract is the insurer’s risk not the property insured in
the original policy – THUS, IT IS NOT NECESSARY THAT THE INSURER FIRST PAY ON A
CLAIM ON THE ORIGINAL POLICY BEFORE CLAIMING FROM THE REINSURER.
WHAT IS THE EXTENT OF THE LIABILITY OF THE REINSURER
The liability of the reinsurer is measured by the liability of the reinsured to

the original policy holder PROVIDED, it does not exceed the amount of
reinsurance. Example: A insures his house valued at 1 million X Insurance for 1.5
million. X Insurance reinsured with Z Insurance for 1.2 million. The house burns.
The liability of Z Insurance is only up to 1 million, which is the liability of X
Insurance. WHAT IF ORIGINAL INSURED AND INSURANCE COMPANY SETTLES FOR
LESS, the liability of Z Insurance is still only up to what is paid by X Insurance
OTHERWISE, the original insurer profits and thus violates that the principle that it
is a contract of indemnity.
WHAT IS THE INTEREST OF THE ORIGINAL INSURED IN THE CONTRACT OF

REINSURANCE
The original insured has no interest in the contract of reinsurance (Section 98).
Hence, only the reinsured can claim against the reinsurer.
CLASSES OF INSURANCE
MARINE INSURANCE
Insurance against loss or damage to:
(a) Vessels, craft, aircraft, vehicles ,goods, freights, cargoes, merchandise,

effects, disbursements, profits, moneys, securities, choses in action, evidences
of debt, valuable papers, bottomry or respondentia interest and all other kinds
of property and interests therein, in respect to, appertaining to or in connection
with any and all risks or PERILS OF NAVIGATION, TRANSIT OR TRANSPORTATION
OR WHILE BEING ASSEMBLED, PACKED, CRATED, BALED, COMPRESSED OR
SIMILARLY PREPARED FOR SHIPMENT OR WHILE AWAITING SHIPMENT OR DURING
ANY DELAYS, STORAGE, TRANSHIPMENT OR RESHIPMENT INCIDENT THERETO,
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including WAR RISKS, MARINE BUILDER’S RISK, AND ALL PERSONAL PROPERTY
FLOATER RISKS (follows property wherever it may be)
(b) Person or property in connection with or appertaining to marine, island

marine, transit or transportation insurance, including liability for loss or in
connection with the construction, repair, operation, maintenance, use of the
subject matter of the insurance (BUT NOT INCLUDING LIFE INSURANCE, OR
SURETY BONDS, NOR INSURANCE AGAINST LOSS BY REASON OF BODILY INJURY
TO ANY PERSON ARISING OUT OF THE OWNERSHIP, MAINTENANCE, USE OF
AUTOMOBILES)
(c) Precious stones, jewels, jewelry, precious metals whether in the course of
transportation or otherwise.
(d) Bridges, tunnels or other instrumentalities of transportation and

communications (excluding buildings, their furniture and furnishings, fixed
contents, and supplies held in storage), piers, wharves, docks, slips, and other
aids to navigation and transportation, including dry docks, marine railways,
dams and appurtenant facilities for the control of waterways.
AND – “Marine Protection and Indemnity insurance” meaning insurance

against, or against legal liability of the insured for loss damage or expense
incident to ownership, operation, chartering, maintenance, use, repair or
construction of any vessel, craft or instrumentality in use in ocean or island
waterways, including liability of the insured for personal injury, illness or death or
for loss or damage to the property of another person (Section 99).
NOTE – that marine insurance is really TRANSPORTATION INSURANCE which is a

kind of insurance which is concerned with the perils of property in (or incidental
to) transit as opposed to property perils at a generally fixed location. BUT it does
not include normal motor vehicle insurance which is treated separately by law.
WHAT ARE THE DIVISIONS OF TRANSPORTATION INSURANCE
The divisions of transportation insurance are: (1) Ocean Marine Insurance

pertaining primarily to sea perils of ships and cargoes, and (2) Inland Marine
Insurance pertaining primarily to land or over land (but sometimes water)
transportation perils of property shipped by railroads, motor trucks, airplanes
and other means of transportation. These includes four basic policies: (a)
property in transit- providing protection to property frequently exposed to loss
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while in transport from one place to another (b) bailee liability- providing
protection to persons who have temporary custody of goods or personal
property of others (c) fixed transportation property- providing protection to
fixed property considered aids to the movement of property, like bridges and
tunnels, and (d) floater- providing protection to personal property (such as
precious stones, jewelry, works of art) wherever it may be located subject
always to the territorial limits of the contract and need not necessarily be in the
course of transportation. NOTE also that marine insurance may be in the form of
property insurance, indemnifying the insured for loss or damage to property
(Par. 1, Section 99) or liability insurance, protecting the insured against the
consequences of legal liability for loss or damage to property or for personal
injury, illness or death of a person (Par. 2, Section 99)
WHAT RISKS ARE INSURED AGAINST
The basic risk insured against is what is commonly known as PERILS OF THE
SEA (all kinds of marine casualties and damages done to the ship or goods at
sea by the violent action of the winds or waves, one that could not be foreseen
and is not attributable to the fault of anybody. Examples: shipwrecks,
foundering, stranding, collision, including the jettisoning of cargo if made for
the purpose of saving the vessel) although it also includes FIRE, ENEMIES,
PIRATES, THIEVES, JETTISON, SURPRISALS, TAKING AT SEA, ARRESTS, RESTRAINTS,
DETAINMENTS OF KINGS, PRINCESS AND PEOPLE OF WHAT NATION, CONDITION
OR QUALITY, BARRATRY OF THE MASTER AND ALL OTHER PERILS LOSSES,
MISFORTUNES THAT HAVE OR SHALL COME TO HURT, DETRIMENT OR DAMAGE OF
THE SAID GOODS, MERCHANDISE, SHIP OR ANY PART THEREOF.
WHAT ARE NOT COVERED
Generally – PERILS OF THE SHIP ARE NOT COVERED (losses or damages that
result from (a) natural and inevitable action of the sea (b) ordinary wear and
tear of the ship (c) negligent failure of the ship owner to provide the vessel with
the proper equipment to convey the cargo under ordinary conditions.
Example: (a) Insurance upon a cargo of rice, when sea water entered the
compartment where the rice was found through a defective steel pipe (b) The
insured loaded logs unto a barge. The logs are covered by insurance. The
barge sank due to improper loading and leaks because the barge was not
provided with tarpaulins that could have prevented the barge from retaining
sea water splashing into it during the voyage.
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WHO MUST CHECK ON THE SEA WORTHINESS OF A VESSEL
Since there is an implied warranty of seaworthiness, it becomes the

obligation of the cargo owner or the insured to look for a reliable common
carrier which keeps it vessels seaworthy. The insured may have no control on
the vessel but has full control in the choice of common carrier.
WHAT PERILS ARE INSURED IN AN “ALL RISKS POLICY”
It is to be construed as creating a special insurance and extending to all

risks than are usually contemplated and will cover all losses except such that
may arise from intentional fraud, intentional misconduct, or that otherwise
excluded. It may include all losses whether arising from a marine peril or not, to
include pilferage during a war (Filipino Merchants Insurance Co. vs. CA, 179
SCRA 638).
DEFINITION OF OTHER TERMS
BARRATRY is a willful act of the master and crew in pursuance of some

fraudulent or unlawful purpose without the consent of the owner and to the
prejudice of his interest. Example: burning of the ship or unlawfully selling the
cargo.
INCHMAREE CLAUSE is a provision in marine insurance that it shall cover loss or

damage to the hull or MACHINERY THRU THE NEGLIGENCE OF THE MASTER,
CHARTERERS, MARINERS, ENGINEERS, or PILOTS THRU EXPLOSION, BURSTING OF
BOILERS, BREAKAGE OF SHAFTS OR THROUGH ANY LATENT DEFECT IN THE HULL
OR MACHINERY NOT RESULTING FROM WANT OF DUE DILIGENCE. THIS IS ALSO AS
KNOWN IN MARINE INSURANCE AS THE “NEGLIGENCE CLAUS.”
ALL RISKS CLAUSE- one that covers any loss other than a willful and fraudulent
act of the insured and avoids putting upon the insured the burden of
establishing that the loss was due to a peril within the policy’s coverage,
whether arising from a marine peril or not PROVIDED the risk is not excluded.
WHAT CONSTITUTES INSURABLE INTEREST IN OCEAN MARINE INSURANCE
1. The owner of a vessel has insurable interest in the vessel, and such shall
continue even if (a) the vessel has been chartered by one who covenants to
pay the owner the value of the vessel upon loss BUT, in case of loss, the insurer is
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liable only for the part of the loss which the insured cannot recover from the
from the charterer (Section 100)
2. The insurable interest of the owner of a ship hypothecated by bottomry is

only the excess of its value over the amount secured by bottomry (Section 101)
BOTTOMRY/RESPONDENTIA DEFINED is a loan payable only if the vessel given as

security for said loan arrives safely at port from contemplated voyage
(BOTTOMRY) or a loan payable only upon the safe arrival in port of the goods
given as security (RESPONDENTIA).
These CONTRACTS ARE IN THE NATURE OF A MORTGAGE as the owner

borrows money for the use, equipment or repair of the vessel for a definite term
with the ship as security with maritime or extraordinary interest on account of
the risks borne by the lender, it being stipulated that if the ship be lost during
the voyage or within a limited period, the lender also loses his money (NOTE
THAT THE LENDER HAS INSURABLE INTEREST TO THE EXTENT OF LOAN) Example:
The owner of the vessel valued at PHP 300,000 as security for a loan of PHP
200,000.00. His insurable interest is the excess of the value of the vessel over the
loan or PHP 100,000.00. If the vessel is lost, the owner does not have to pay the
loan of PHP 200,000.00.
3. The OWNER OF A VESSEL ALSO HAS INSURABLE INTEREST IN EXPECTED
FREIGHTAGE, WHICH ACCORDING TO THE ORDINARY COURSE OF THINGS HE
WOULD HAVE EARNED BUT FOR THE INTERVENTION OF A PERIL INSURED AGAINST
OR OTHER PERIL INCIDENT TO THE VOYAGE. (Section 103)
FREIGHTAGE DEFINED are the benefits derived by the owner from (a) chartering
of the ship (b) its employment for the carriage of his own goods or those of
others (Section 102)
IT EXISTS (a) In case of a charter party – when the ship has broken on the
chartered voyage (b) if a price is to be paid for the carriage of goods, when
they are actually on board or there is contract to put them on board AND the
vessel and goods are ready for the specified voyage (Section 104).
ARE THERE PERSONS/ PARTIES OTHER THAN THE OWNER WHO HAS INSURABLE
INTEREST
1. One who has an interest in the thing from which profits are expected to
proceed, has insurable interest on the profits (Section 105). Example: owner of
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cargo transported on a vessel not only has insurable interest on the cargo but
also on the expected profits from a future sale.
2. The charterer of a ship has insurable interest to the extent that he is liable
to be damnified by its loss (Section 106). Example: A charters B’s vessel on
condition that A would pay B in case of loss the amount of PHP 300,000.00. A
has insurable interest to the extent of PHP 300,000.00.
CONCEALMENT IN MARINE INSURANCE
A PARTY IS BOUND TO COMMUNICATE, in addition to what is required by

Section 28 (facts within his knowledge, material to the contract, other party has
not the means of ascertaining, as to which party with a duty to communicate
makes no warranty) INFORMATION that he possesses, that are material to the
risk AND, to state the EXACT and WHOLE TRUTH in relation to all matters that he
represents, or upon inquiry discloses or assumes to disclose EXCEPT those that
the insurer knows or those in the exercise of ordinary care, the other ought to
know, and which the former has no reason to suppose him to be ignorant
under Section 30 (Section 107)
NOTE: that the rules on concealment in marine insurance are stricter as it is

sufficient that the insured is in POSSESSION OF THE MATERIAL FACT, ALTHOUGH
HE IS UNAWARE OF IT. Example: If an agent fails to notify principal of the loss of
the cargo and the latter, after the loss but ignorant thereof, secured insurance
lost or not lost, the insurance will be void due to concealment.
A PARTY IS ALSO BOUND TO COMMUNICATE, the information belief or

expectation of a 3rd person, in reference to a material fact, is material. Note:
under Section 35 such is not required to be communicated in ordinary
insurance (Section 108)
PRESUMPTION OF A PRIOR LOSS
Insured in marine insurance is presumed to have knowledge, AT THE TIME

OF INSURING, of a prior loss, if INFORMATION MIGHT POSSIBLY HAVE REACHED
HIM IN THE USUAL MODE OF TRANSMISSION AND AT THE USUAL RATE OF
COMMUNICATION (Section 109)
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EFFECT OF CONCEALMENT
WHILE CONCEALMENT AS A RULE ENTITLES THE INJURED PARTY TO RESCIND,

the rule must yield to Section 110 – as it does not vitiate the contract but merely
exonerates the insurer FROM A LOSS RESULTING FROM THE RISKS CONCEALED as
related to (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 the necessary documents (e) the use of
false/simulated documents. Example: The vessel is seized due to lack of
documents, the insurer is exonerated. If the vessel is lost due to a storm, the
insurer is liable despite concealment of lack of documents.
DISTINGUISHING ORDINARY CONCEALMENT FROM THAT IN MARINE INSURANCE
1. In ordinary insurance, opinion or belief of a 3rd person or own judgment of

the insured is not material and need not be communicated (Section 35), in
marine insurance, belief or expectation of a 3rd person in reference to a
material fact is material and has to be communicated.
2. In ordinary insurance, a causal connection between the fact concealed

and cause of loss is not necessary for the insurer to rescind, in marine insurance
the concealment of any of the matters stated in Section 110 merely exonerates
the insurer from loss, if the loss results from the fact concealed.
REPRESENTATION IN MARINE INSURANCE
WHEN IS THE INSURER ENTITLED TO RESCIND
If the representation is INTENTIONALLY FALSE IN ANY MATERIAL RESPECT,

OR, in respect of any fact on which the character and nature of the risk
depends, the insurer may rescind (Section 111) BUT – the eventual falsity of a
representation as to an EXPECTATION does not, IN THE ABSENCE OF FRAUD,
avoid the contract (Section 112). Example: statement as to time of sailing,
nature of the cargo or amount of profits.
WHAT ARE THE IMPLIED WARRANTIES IN MARINE INSURANCE
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(1) In every contract of marine insurance upon a SHIP OR FREIGHT,
FREIGHTAGE or UPON ANYTHING WHICH IS THE SUBJECT OF marine insurance,
there is an implied warranty that the SHIP IS SEAWORTHY (Section 113).
A SHIP IS SEAWORTHY when it is reasonably fit to perform the service and

to encounter the ordinary perils of the voyage, contemplated by the parties to
the policy (Section 114). NOTE that it is relative and is made to depend on the
circumstances. THE IMPLIED WARRANTY OF SEAWORTHINESS IS COMPLIED WITH
as a GENERAL RULE when it is seaworthy at the time of the commencement of
the risk EXCEPT (a) when the insurance is made for a specified length of time, it
must be seaworthy at the commencement of every voyage it undertakes at
that time (b) when the insurance is upon cargo, which by the terms of the
policy, description of the voyage, or established custom of trade, is required to
be transshipped at an immediate port, in which case – each vessel upon which
the cargo is shipped or transshipped must be seaworthy at the
commencement of each particular voyage (Section 115). (c) where different
portions of the voyage contemplated in the policy differ in respect to the things
requisite to make the ship seaworthy, in which case it must be seaworthy at the
commencement of each portion (Section 117). Example: the voyage will pass
thru rivers – then seas – the warranty is not complied with if at the time it goes
out to sea – it is not seaworthy to encounter the perils of the sea.
TO WHAT DOES THE WARRANTY OF SEAWORTHINESS EXTEND TO
The warranty of seaworthiness extends not only to the condition of the structure
of the ship, but it requires that (a) it be properly laden or loaded with cargo (b)
is provided with a competent master, sufficient number of officers and seamen
(c) it must have the requisite equipment and appurtenances LIKE ballasts,
cables, anchors, cordage, sails, food, water, fuel, lights and other necessary
and proper stores and implements for the voyage (Section 116).
NOTE that WHEN A SHIP BECOMES UNSEAWORTHY DURING THE VOYAGE – it will
not avoid the policy – AS LONG AS –there is no UNREASONABLE DELAY IN
REPAIRING THE DEFECT. OTHERWISE – the insurer is exonerated on the ship or the
shipowner’s interest from any liability from any loss arising therefrom (Section
118). HENCE, if loss is not one due to the defect or peril was not increased by
the defect INSURER is still liable.
ALSO, while a ship may be seaworthy for purposes of insurance on it, it

may by reason of BEING UNFITTED TO RECEIVE CARGO, be unseaworthy for the
53
purpose of insurance on the CARGO (Section 119). Example: A cargo of wheat
was laden on a ship which had a port hole insecurely fastened at the time of
lading. The port hole was foot above the water line, and in the course of the
voyage, water entered the cargo area and damaged the wheat. The ship was
deemed unworthy with reference to the cargo, hence the insurer of the cargo
was not liable (Steel vs. State Line Steamship, cited in Go Tiaco vs. Union Society
of Canton, 40 Phil 40)
(2) It shall carry the requisite documents to show its nationality or neutrality
and that it SHALL NOT carry any document that will cast reasonable suspicion
on the vessel (Section 120). THIS WARRANTY ARISES ONLY WHEN NATIONALITY
OR THE NEUTRALITY OF THE VESSEL OR CARGO IS EXPRESSLY WARRANTED.
(3) That the vessel shall not make any improper deviation from the intended
voyage.
HOW IS THE INTENDED VOYAGE DETERMINED
(a) When it is described by places of beginning and ending, the voyage is

the course of sailing fixed by mercantile usage between those places (Section
121).
(b) When it is not fixed by mercantile usage, the voyage is the way between
the places specified which to a master of ordinary skill and discretion would
seem the most natural, direct and advantageous (Section 122).
WHAT IS A DEVIATION
It is a departure from the course of the voyage as defined by Sections 121

and 122 OR an unreasonable delay in pursuing the voyage OR the
commencement of an entirely different voyage (Section 123).
WHEN IS A DEVIATION PROPER
(a) When it is caused by circumstances over which neither the master nor the
owner of the ship has any control. Example: An ailment strikes the crew of the
vessel.
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(b) When necessary to comply with a warranty, or to avoid a peril, whether or
not the peril is insured against. Example: When repairs are necessary or to avoid
getting caught in a conflict.
(c) When made in good faith, and upon reasonable grounds of belief in its
necessity to avoid a peril. Example: When undertaken to avoid the eye of a
storm.
(d) When made in good faith, for the purpose of saving human life or
relieving another vessel in distress. Example: When assistance is given
ANY DEVIATION THAT IS NOT SO INCLUDED IS NOT PROPER (Sections 124 and
125)
CONSEQUENCE OF AN IMPROPER DEVIATION
Insurer is not liable for any loss happening to the thing insured subsequent
to an improper deviation (Section 126). This applies whether the risk has been
increased or diminished.
(4) That the vessel does not or will not engage in any illegal venture.
LOSSES IN MARINE INSURANCE
Losses in marine insurance may be partial or total (Section 127). A loss that
is not TOTAL is PARTIAL (Section 128).
KINDS OF TOTAL LOSSES
A total loss may be ACTUAL or CONSTRUCTIVE (Sec129).
(1) If it is an ACTUAL TOTAL LOSS it may be caused by : (a) total destruction of

the thing insured (b) the irretrievable loss of the thing by sinking or by being
broken up (c) any damage to the thing which renders it valueless to the owner
for the purpose that he held it (d) any other event which effectively deprives
the owner of the possession, at the port of destination, of the thing insured
(Section 130) Example: When palay was rendered valueless because they
began to germinate, thus it no longer remains as the same thing, it was an
ACTUAL TOTAL LOSS (Pan Malayan v. CA 201 SCRA 382)
55
AN ACTUAL TOTAL LOSS CAN ALSO BE PRESUMED from the continued
absence of the ship without being heard of (Section 132). The length of time
which is sufficient to raise this presumption DEPENDS on the CIRCUMSTANCES of
the case
IF THE VESSEL BE PREVENTED, AT AN IMMEDIATE PORT, FROM COMPLETING

THE VOYAGE, by the perils insured against, the liability of the marine insurer on
the cargo continues after they are reshipped (Section 133) and the liability
extends to damages, expenses of discharging, storage, reshipment, extra
freightage and all other expenses incurred in saving the cargo reshipped UP TO
THE AMOUNT INSURED – NOTHING SHALL RENDER THE INSURER LIABLE FOR AN
AMOUNT IN EXCESS OF THE INSURED VALUE OR IF NONE, OF THE INSURABLE
VALUE (Section 134).
UPON ACTUAL TOTAL LOSS, the insured is entitled to payment without

notice of abandonment (Section 135) AND IF THE insurance is confined to an
ACTUAL LOSS it will not cover a CONSTRUCTIVE LOSS, but it will cover any loss,
which necessarily results in depriving the insured of possession, at the port of
destination of the entire thing insured (Section 137)
(2) It is a CONSTRUCTIVE TOTAL LOSS when the person insured is given a right
to ABANDON under Section139 (Section 131)
ABANDONMENT is the act of the insured by which, AFTER A CONSTRUCTIVE

TOTAL LOSS, he declares to the insurer the RELINQUISHMENT in its favor of his
INTEREST in the thing insured (Section 138)
A person insured by a contract of marine insurance may abandon the

thing insured, or any particular portion thereof separately valued by the policy,
or otherwise separately insured AND RECOVER A TOTAL LOSS – WHEN THE
CAUSE OF LOSS IS A PERIL INSURED AGAINST IF (a) more than ¾ thereof in value
is actually lost or would have to be expended to recover it from the peril (b) if it
is injured to such extent as to reduce its value by more than ¾ of value (c) if the
thing injured is a ship, and the contemplated voyage cannot lawfully be
performed without incurring either an expense to the insured of more than ¾
the value of the thing abandoned OR a risk which a prudent man would not
take under the circumstances (d) if the insured is FREIGHTAGE OR CARGO –
and the voyage cannot be performed – NOR another ship procured by the
master – WITHIN A REASONABLE TIME WITH REASONABLE DILIGENCE – to forward
the cargo without incurring the like expense or risk mentioned in item (c) BUT,
56
FREIGHTAGE cannot be abandoned unless the ship is also abandoned (Section
139).
ABANDONMENT MUST NEITHER BE PARTIAL NOR CONDITIONAL (Section

140). Hence, it must be TOTAL and ABSOLUTE
ABANDONMENT MUST BE MADE within a reasonable time after receipt of

RELIABLE information of the loss BUT, where the information is of DOUBTFUL
CHARACTER, the INSURED is entitled to a reasonable time to make an inquiry
(Section 141). This is to enable the insurer to take steps to preserve the property.
If the information proves INCORRECT or thing insured is RESTORED when

the abandonment was made that there was then in fact NO TOTAL LOSS – the
abandonment becomes INEFFECTUAL (Section 142)
HOW NOTICE OF ABANDONEMENT IS MADE
By giving notice oral or written notice to the insurer BUT if orally given, a
written notice of such must be submitted within seven days from giving oral
notice (Section 143). The notice must be explicit and specify the PARTICULAR
cause of the abandonment BUT need state only enough to show that there is
PROBABLE CAUSE THEREFORE and need NOT be accompanied by PROOF OF
INTEREST OR OF LOSS (Section 144). The requirement as the explicitness of the
notice is due to the fact that abandonment can only be sustained upon the
cause specified in the NOTICE (Section 145).
EFFECTS OF ABANDONMENT
(1) it is equivalent to a transfer by the insured of his interest to the insurer, with
all the chances of recovery and indemnity (Section146). NOTE THOUGH, if the
insurer pays for a loss as if it were an actual total loss, he is entitled to whatever
may remain of the thing insured, or its proceeds or salvage as if there has been
a formal abandonment. HERE THE INSURER HAS OPTED TO PAY FOR A TOTAL
ACTUAL LOSS notwithstanding the absence on actual abandonment
(2) acts done in good faith by those who were agents of the insured in
respect to the thing insured SUBSEQUENT TO THE LOSS, are at the risk of the
insurer and for his benefit. (Section 148). THE AGENTS OF THE INSURED BECOME
AGENTS OF THE INSURER. This retroacts to the date of the loss when
abandonment is effectively made.
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EFFECTIVITY OF ABANDONMENT
(1) Abandonment becomes effective upon the acceptance of the insurer.

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

previous to the loss belongs to the insurer of the FREIGHTAGE, that subsequently
earned belongs to the insurer of the SHIP (Section 153). Example: The
contemplated voyage for the transport of cargo is from Point X to Point Y. In
between, a loss occurs and the ship is abandoned. The freightage already
earned from Point X until the point of loss, belongs to the insurer of the
freightage. If the ship is subsequently repaired, and continues on to point Y, the
freightage due belongs to the insurer of the ship.
(3) IF ABANDONMENT IS NOT ACCEPTED despite its validity, the insurer is liable
upon an ACTUAL TOTAL LOSS, deducting from the amount any proceeds of the
thing insured that may have come to the hands of the insured (Section 154).
This is due to the fact that under Section 149 which provides that if notice is
properly given, it does not prejudice the insured, if the INSURER refuses to
accept the abandonment.
IF ABANDONMENT IS NOT MADE OR OMITTED
The fact that abandonment is not made or is omitted does not prejudice
the insured as he may nevertheless recover his ACTUAL LOSS (Section 155)
LIABILITY FOR AVERAGES
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AVERAGE DEFINED – is any extraordinary or accidental expense incurred during
the voyage for the preservation of the vessel, cargo, or both AND all damages
to the vessel or cargo from the time it is loaded and the voyage commenced
until it ends and the cargo is unloaded.
KINDS OF AVERAGES ARE:
(a) PARTICULAR OR SIMPLE AVERAGE is a damage or expense caused to the

vessel or cargo which has NOT INURED to the COMMON BENEFIT and PROFIT of
all PERSONS interested in the CARGO or the VESSEL. This damage or expense is
borne ordinarily by the owner of the vessel or cargo that gives rise to the
expenses or suffered the damage. Examples: Damage sustained by a cargo
from the time it is loaded to the time it is unloaded OR additional expenses that
are incurred by the vessel from the time it puts out to sea until it reaches its
destination
(b) GENERAL OR GROSS AVERAGE is an expense or damage suffered

deliberately in order to save the vessel or its cargo or both from a REAL or
KNOWN risk. THUS, all persons having an interest in the VESSEL and CARGO or
both at the occurrence of the AVERAGE shall contribute. Example: Jettisoning
of cargo.
AS A RULE, WHEN 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 a particular average loss NOT
DEPRIVING THE INSURED OF THE POSSESSION, AT THE PORT OF DESTINATION, of
the whole such thing, or class of things, even though it becomes entirely
worthless, BUT such insurer is liable for his proportion of all general average loss
assessed upon the thing insured (Section 136)
IN CASE OF A GENERAL AVERAGE LOSS
The insurer is liable for the loss falling upon the insured, through a
contribution in respect to the thing insured when required to be made by him
towards a general average loss called for a peril insured against BUT liability is
limited to the proportion of the contribution attaching to his policy value where
this is less than the contributing value of the thing insured (Section 164).
MEANING that the insured can hold his insurer liable for his contribution up to
the value of the policy.
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RIGHT OF SUBROGATION
When a person insured in a contract of marine insurance has a demand

against the others for CONTRIBUTION, HE MAY CLAIM THE WHOLE LOSS FROM HIS
INSURER subrogating the insurer to his own right to contribution BUT no such
claim can be made upon the insurer if (a) there is separation of the interest
liable to contribution. Example: When the cargo liable for contribution has
been removed from the vessel, NOR (b) when the insured having the right and
opportunity to enforce contribution from others, has NEGLECTED OR WAIVED
the exercise of the right (Section 165). MEANING that the insured has a choice
of recovery on the happening of a general average loss. They are: (a)
enforcing the contribution against interested parties, or (b) claiming from the
insurer. If it be the latter, subrogation takes place.
MEASURE OF INDEMNITY IN MARINE INSURANCE
(1) IF THE POLICY IS VALUED
(a) A valuation in the 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. If there is fraud in
valuation, it ENTITLES THE INSURER TO RESCIND AS IT IS AN EXCEPTION AS TO
CONCLUSIVENESS (Section 156)
If however, hypothecated by bottomry or respondentia – BEFORE

INSURANCE AND WITHOUT KNOWLEDGE OF THE PERSON SECURING IT – he may
show the real value. Example: a person purchases a vessel subject to bottomry
but he is not aware of it , he may upon a loss show the real value of the vessel.
The insurer cannot rescind.
(b) An Insurer is liable upon a partial loss – ONLY FOR SUCH PROPORTION OF
THE AMOUNT INSURED BY HIM – as the loss bears to the whole interest of the
insured (Section 157). The effect is that the insured is deemed a co-insurer if the
value of the insurance is less than the value of the property. THIS APPLIES EVEN
IN THE ABSENCE OF A STIPULATION IN CONTRACT AND IS ALSO KNOWN AS THE
AVERAGE CLAUSE. Example: A vessel valued at PHP 500,000.00 is insured for PHP
400,000.00. The vessel is damaged to the extent of PHP 200,000.00. The insurer is
liable not for the PHP 200,000.00 but only for PHP 160,000.00. The formula being:
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Insurance x Loss = Liability
Value
THE 2 REQUISITES FOR THE APPLICATION OF THE AVERAGE CLAUSE: (1) insurance
is for less than actual value (2) the loss is partial
NOTE: That co-insurance exists in Marine Insurance. In Fire Insurance, there is no

co-insurance unless expressly stipulated (Sections 171/172). In Life Insurance,
there is none also as value is fixed in the policy (Section 183)
NOTE ALSO: That Section 157 is further qualified by Section 166, which provides:
That IN CASE OF A PARTIAL LOSS OF THE SHIP OR ITS EQUIPMENT the old
materials are to be applied towards the payment of the new AND UNLESS
STIPULATED IN THE POLICY, the insurer is liable only for 2/3 of the remaining cost
or repairs after the deduction EXCEPT THAT ANCHORS ARE PAID IN FULL (Section
166).
(c) In case profits are separately insured in a contract of marine insurance

(See Section 105), the insured can recover in case of a loss (AND under Section
160, there is a conclusive presumption of a loss from the loss of the property out
of which they were expected to arise, and the valuation fixes their amount), a
proportion of such profits equivalent to proportion of the value of the property
lost bears to the value of the whole (Section 158). Example: Goods are valued
at PHP 500,000.00, expected profits are PHP 50,000.00. Goods suffer a partial
loss of PHP 100,000.00. The insured can recover PHP 10,000.00 on the insurance
over profits.
Insurance of profits x loss = Amount Recoverable

Value of Goods
(d) In case of a valued policy on freightage or cargo, if only a part of the

subject is exposed to the risk, the valuation applies only in proportion to such
part (Section 159). Example: goods are valued at PHP 500,000.00, if only PHP
250,000.00 are shipped and exposed to the risk, the valuation is reduced by ½.
In case of a total loss, the insured can only demand ½ of valuation or PHP
250,000.00.
IF THE POLICY IS OPEN
61
(a) The value of the 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. Note: The value at the time it was built or
acquired is not the value that is material.
(b) 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, 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 any drawback on its exportation or fluctuation of the
market at the port of destination or expenses incurred on the way or on arrival.
DRAWBACK – government allowance upon duties on imported merchandise

when the importer re-exports instead of selling it.
(c) Value of freightage is the GROSS FREIGHTAGE, exclusive of PRIMAGE,

without reference to the cost of earning it.
PRIMAGE – compensation paid by the shipper to the master of the vessel for his
care and trouble bestowed on the goods of the shipper, which he retains in the
absence of a contrary stipulation with the owner of the vessel.
(d) The cost of insurance is in each case to be added to the value thus
estimated (Section 161).
IF CARGO IS INSURED AGAINST PARTIAL LOSS
If it 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 162). Meaning if reduction
in value is 1/5, then amount of recovery on the insurance is also 1/5.
The formula is:

(a) Market Price in sound state less Market Price in damaged state equals
Reduction in Value.
(b) Reduction in Value divided by Market Price in sound state multiplied with
the Amount of Insurance equals the Amount of Recovery
62
CONTINUATION OF MEASURE OF INDEMNITY REGARDLESS OF WHETHER POLICY IS
VALUED OR OPEN
(2) An insurer is liable (a) for all the expenses attendant upon a loss that
forces the ship into port to be repaired. These refer to expenses for repairing the
ship due to damages attributable to perils insured against, as well as other
expenses such as launching, towing, raising and navigating the vessel. These
expenses are also called PORT OF REFUGE EXPENSES. (b) If so stipulated, that
the insured shall LABOR for recovery of the property insured, the insurer is liable
for expenses incurred thereby. Example: When the vessel is unlawfully detained.
This is also known as the SUE AND LABOR CLAUSE. In either case, said expenses
are to be added to a TOTAL LOSS, if that afterwards occurs (Section 163).
FIRE INSURANCE
WHAT IS INCLUDED IN FIRE INSURANCE
Insurance against fire includes loss or damage due to LIGHTNING, WINDSTORM,

TORNADO, EARTHQUAKE OR OTHER ALLIED RISKS when such risks are covered
by extensions to the fire insurance policy or under separate policies (Section
167). Hence, while it is not limited to loss or damage due to fire, coverage as to
other risks is not automatic.
FIRE DEFINED
In insurance, it is defined as the active principle of burning, characterized

by heat and light combustion. Combustion without visible light or glow is not fire
( Example: Damage caused by smoke from a lamp when no ignition occurred
outside the lamp) TO ALLOW RECOVERY, it must be the proximate cause of the
damage or loss AND the fire must be HOSTILE (If it (a) burns at a place where it
is not intended to burn (b) starts as a friendly fire but becomes hostile if it should
escape from the place where it is intended to burn and becomes
uncontrollable (c) is a friendly fire which becomes hostile by not escaping from
its proper place but because of the unsuitable material used to light it and it
becomes inherently dangerous and uncontrollable) as opposed to FRIENDLY
FIRE (one that burns in a place where it is intended to burn and employed for
the ordinary purpose of lighting, heating or manufacturing) BUT the policy itself
may limit or restrict coverage to losses under ordinary conditions but not those
due to extra-ordinary circumstances or abnormal conditions like war, invasion,
rebellion, civil war or similar causes. In these cases recovery is still possible.
63
ALTERATION DEFINED
Is a change in the use or condition of a thing insured from that to which it
is limited by the policy, made without the consent of the insurer, by means
within the control of the insured, and increasing the risk, which entitles the
insurer to rescind the contract of insurance (Section 168).
From the foregoing definition, the requisites must be present to constitute

an alteration so as to allow the rescission of the contract, to wit:
(a) The use or condition of the thing insured is specifically limited or stipulated
in the policy BUT under Section 170, the contract of insurance is not affected by
an act of the insured SUBSEQUENT to the execution of the policy, which does
not violate its provisions, even though it increases the risk and is the cause of
the loss. Example: (1) If the insured stored thinner, paints and varnish. A fire
subsequently occurs and there is no express prohibition as to storage of such
items, even if the risk is increased, the insurer is still liable (BACHRACH v. BRITISH
ASSURANCE,17 Phil 555), OR (2) The policy states that the 1st floor is unoccupied,
it is later occupied. There is no alteration that entitles the insurer to rescind, the
description of the house cannot be said to be a limitation as to use (HODGES v.
CAPITAL INSURANCE (60 O.G. 2227)
(b) There is an alteration in the said use or condition
(c) The alteration is without the consent of the insurer.
(d) The alteration is made by means within the insured’s control. If the
alteration be by accident or means beyond the control of the insured, the
requisite is not met. Example: The alteration is made by a tenant with the
consent or knowledge of the insured, the insurer can rescind. If the alteration
was undertaken by the tenant without the consent or knowledge of the
insured, the insurer cannot rescind.
(e) The alteration increases the risk of loss BUT under Section 169 any
alteration in the use or condition of the thing insured from that to which is
limited by the policy, which does not increase the risk does not affect the
contract.
BUT THERE MUST NOT BE ANY VIOLATION OF THE CONTRACT OTHERWISE THE
BASIS FOR RESCISSION IS THAT payment of the premium is based on the risk as
64
assessed at the time of the issuance of the policy when the risk is increased
without a corresponding increase in premium, it is as if no premium is paid.
MEASURE OF INDEMNITY IN FIRE INSURANCE
In an OPEN POLICY, it 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. In a VALUED POLICY, it is the
same as in marine insurance, the valuation as agreed upon by the parties is
conclusive in the adjustment of either a partial or total loss in the absence of
fraud (Section 171).
HOW IS THE VALUATION MADE

(1) Whenever the insured would like to have a valuation stated in a policy
insuring a building or structure against fire, it may be made by an independent
appraiser, who is paid by the insured and the value may then be fixed
between the insurer and the insured.
(2) Subsequently, the clause is then inserted in the policy that said valuation
has thus been fixed.
(3) In case of loss, PROVIDED there is no change increasing the risk without
the consent of the insurer or fraud on the part of the insured, the insurer will pay
the whole amount so insured and stated in the policy is paid. If it is a PARTIAL
LOSS, the whole amount of the partial loss is paid. In case there are 2 or more
policies, each shall contribute pro-rata to the total or partial loss BUT the liability
of the insurers cannot be more than the amount stated in the policy.
(4) OR the parties may stipulate that instead or payment, the option to repair,
rebuild or replace the property wholly or partially damaged or destroyed shall
be exercised (Section 172).
No policy of Fire insurance shall be pledged, hypothecated or transferred to

any person, firm or company that acts as agent for or otherwise represents the
issuing company, such shall be void and of no effect insofar as it may affect
other creditors of the insured (Section 173).
CASUALTY INSURANCE
65
Generally, it is one that covers loss or liability arising from an accident or
mishap EXCLUDING THOSE THAT FALL EXCLUSIVELY WITHIN OTHER TYPES OF
INSURANCE LIKE FIRE OR MARINE. It includes Employer’s liability, workmen’s
compensation, public liability, motor vehicle liability, plate glass liability,
burglary and theft ,personal accident and health insurance as written by non-
life companies, and other substantially similar insurance (Section 174).
DEFINITIONS
Employer’s liability – is insurance obtained by the employer against liability to
an employee for damages caused or arising from injuries by reason of his
employment
Workmen’s compensation – is insurance secured by an employer for the

benefit of his employees and laborers for loss resulting from injuries,
disablement, or death through industrial accident, casualty, or disease in
connection with their employment. NOTE that most if not all types of this
insurance is underwritten by the GSIS or the SSS.
Public liability – is insurance against liability of the insured to pay damages for
accidental bodily injury or damage to property arising from an activity of the
insured defined in the policy.
Motor vehicle liability – is insurance against loss or injury arising from the use of a
motor vehicle by its owner as opposed loss or damage to the vehicle itself.
Coverage for both may however be contained in one policy.
Plate glass – is insurance that indemnifies the insured against loss caused by the
accidental breaking of plate glass, windows, doors or show cases.
Burglary and Theft – is insurance against loss of property through burglary or

theft
Personal accident – is insurance against expense, loss of time and suffering

from accidents that cause a physical injury.
Health – is insurance for indemnity for expenses or loss occasioned by sickness

or disease.
SURETYSHIP
66
DEFINED An agreement whereby a party called the surety guarantees the

performance by another party called the PRINCIPAL or OBLIGOR of an
obligation or undertaking in favor of a 3rd party called the obligee (Section
175).
INCLUDES – official recognizances, bonds or undertakings issued by any

company under Act No. 536, as
not the natural or probable result of the insured’s voluntary act (Finman
General Assurance Corporation vs. CA, 213 SCRA 493) as opposed to an act of
the insured to confront burglars (Biagtan vs. Insular Life Assurance Company, 44
SCRA 58). By public policy- when the insured is executed for a crime
committed.
(2) SUICIDE, if committed after the policy has been in force for a period of
two years from date of issue or last reinstatement unless policy provides a
shorter period BUT it is nevertheless compensable if committed in the state of
insanity regardless of date of commission (Section 180 A)
IS A LIFE INSURANCE POLICY TRANSFERABLE OR ASSIGNABLE

Yes, it may pass by transfer, will or succession to any person, whether he
has insurable interest or not (Section 181). EFFECT, the person to whom it is
transferred may recover upon it whatever the insured might have recovered.
NOTE: while there is no need for the assignee/transferee to have insurable

interest, it should not be used to circumvent the law prohibiting insurance
without insurable interest. THUS, an assignment CONTEMPORANEOUS with
ISSUANCE may invalidate the policy unless made in good faith.
IS NOTICE TO THE INSURER OF TRANSFER OR BEQUEST REQUIRED
It is not necessary to preserve the validity of the policy UNLESS THEREBY

EXPRESSLY REQUIRED (Section 182)
IS THE CONSENT OF THE BENEFICIARY REQUIRED
Yes, if he is designated as an irrevocable beneficiary as he has acquired a

vested right.
WHAT IS THE MEASURE OF INDEMNITY IN LIFE INSURANCE
67
UNLESS the interest of a person insured is susceptible of pecuniary estimation,
the amount stated or specified in the policy is the measure of indemnity
(Section 183). HENCE a life insurance policy has been held to be a VALUED
POLICY.
BUSINESS OF INSURANCE
ORGANIZATION, CAPITALIZATION AND AUTHORIZATION
REQUIREMENTS FOR A CERTIFICATE OF AUTHORITY FROM THE INSURANCE

COMMISSION
The requirements for a certificate of authority are: (a) qualified by Philippine

Laws to transact insurance business (b) has a name that is not in anyway similar
to another company (c) if organized as a stock corporation, it should have a
paid up capital of no less than PHP 5,000,000.00 (d) If it is organized as a mutual
company (one whose capital funds are not contributed by stockholders but by
policy holders) it must have available cash assets of at least PHP 5,000,000.00
above all liabilities for losses reported, expenses, taxes, legal reserves and
reinsurance of all outstanding risks, and the contributed surplus fund equal to
the amounts required of stock corporations (PHP 1,000,000.00 if a life insurance
company or PHP 500,000.00, if a non-life insurance company). If a foreign
insurance company, it must appoint a resident agent, deposit securities and
maintain a legal reserve (Sections 184- 193).
MARGIN OF SOLVENCY
The margin of solvency is the excess of the value of insurance company’s

admitted assets EXCLUSIVE of its paid up capital. In case of a DOMESTIC
INSURANCE COMPANY and the excess of the value of its admitted assets in the
Philippines exclusive of security deposits over the amount of its liabilities,
unearned premiums, and reinsurance reserves in the Philippines (Sec. 194).
The required margin is in case of life insurance companies is TWO PERCENT

(2%) of the total amount of its insurance in force as of the preceeding calendar
year on all policies except term insurance AND in case of non life insurance
companies, at least TEN PERCENT (10%) of total amount of its net premium
during the proceeding calendar year BUT IN NO CASE TO BE LESS THAN PHP
68
500,000.00. IF NOT MET, the insurance company is (a) not permitted to take on
any new risk and no dividends can be declared (Sec 195).
COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
CONCEPT OF COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
It is to provide protection or coverage to answer for bodily injury or

property damage that may be sustained by another arising from the use of a
motor vehicle. PLEASE NOTE THOUGH that what is now compulsory is death or
bodily injury arising from motor vehicle accidents AS PER AN AMENDMENT TO
THE INSURANCE CODE BY PD 1814 and PD1455 brought about by insurance
losses due to padded claims for property damage. HENCE, property damage is
now optional.
HOW ITS COMPULSORY NATURE IS ENFORCED
The compulsory nature of the insurance is enforced by prescribing that

any land transportation operator (owner/s or motor vehicles for transportation
of passengers for compensation, including school buses) or owner of a motor
vehicle (actual legal owner of a motor vehicle in whose name the vehicle is
registered with the LTO) would be considered as unlawfully operating a motor
vehicle (is any vehicle as defined in Sec (3) RA 4136 which is propelled by any
power other than muscular power using public highways with exceptions (a)
road rollers, holley cars, street sweepers, sprinkles, lawn movers, bulldozers,
graders, forklifts, amphibian trucks, or cranes not used on public highways
(b)Those that ran on rails or tracks (c) Tractor, trailers (when propelled or
intended to be propelled by an attachment to a motor vehicle is classified as a
motor vehicle without power rating), traction engines of all kinds used
exclusively for agricultural purposes) UNLESS there is a (a) policy of insurance
(contract of insurance against passenger or 3rd party liability for death or bodily
injury arising from motor vehicle accidents),or (b) guaranty in cash, or (c) surety
bond, to INDEMNIFY THE DEATH OR INJURY TO A THIRD PARTY other than a
passenger, excluding a member of the household, or a member of the family
of a motor vehicle owner or lane transportation operator or his employee in
respect to death, bodily injury or damage to property arising out of and in the
course of employment) OR PASSENGER (any fare paying person being
transported or conveyed in and by motor vehicle for transportation of
passengers for compensation, including persons expressly authorized by law or
69
by the vehicle’s operator or his agents to ride without fare) ARISING FROM THE
USE THEREOF (Sec. 373, 374).
COMPLIANCE by the motor vehicle owner or the land transportation

operator is monitored as the Land Transportation Office shall not allow
registration or renewal of registration without compliance with Section 374
(Section 376).
EXTENT OF THE LIABILITY COVERAGE
Every insurance policy, surety or cash deposit required by Section 374 shall
comply with the minimum limits prescribed under Section 377. (a) if a Land
Transportation Operator – it is PHP 12,000.00 per passenger, plus PHP 50,000.00
for vehicles with capacity of 26 or more passengers OR PHP 40,000.00 for
vehicles with capacity of 12 to 25 passengers OR PHP 30,000.00 for vehicles
with capacity of 6 to 11 passengers, OR PHP 5,000.00 per passenger for
vehicles with capacity of 5 or less passengers PROVIDED, that if a cash deposit
or surety bond is posted with the Commissioner, it shall be resorted to in case of
accidents, the indemnities for which WERE NOT SETTLED by the Land
Transportation Operator, and in that event, said deposit of surety bond shall be
replenished or surety reposted or restored within 60 days from impairment or
expiration OTHERWISE, he will be required to get an insurance policy. NOTE
ALSO that the cash deposits may be invested in readily marketable
government bonds and / or securities by the Commissioner (b) If a Motor
Vehicle Owner for a Bantam or Light Car- PHP 20,000.00, a Heavy Car-PHP
30,000.00. For other private vehicles Tricyles / Scooters /Motorcycles – PHP
12,000.00, Vehicles with unladed might of 2600 kilos or less-PHP 20,000.00, if over
2601 kilos but not over 3930kilos – PHP 30,000.00, if over 3,930 kilos – PHP
50,000.00.
DISTINGUISHED FROM OWN DAMAGE COVERAGE AND COMPREHENSIVE

MOTOR VEHICLE INSURANCE
Third Party Liability answers for liabilities arising from death or bodily injury
to 3rd persons or passengers.
Own Damage Insurance answers for reimbursement of the cost of

repairing the damage to vehicle of the insured.
70
Comprehensive Insurance answers for all liabilities/damages arising from
the use/operation of a motor vehicle, it includes Third Party, Own Damage,
Theft and Property Damage.
WHEN DOES THE LIABILITY OF THE INSURER ACCRUE
In an insurance policy that directly insures against liability, the insurer’s

liability accrues immediately upon the occurrence of the injury upon which
liability depends, and does not depend on the recovery of judgment by the
injured party against the insured. Hence, there is no need for the insured to
wait for a decision of the court finding him guilty of reckless imprudence. The
occurrence of an injury for which the insured may be liable immediately gives
rise to insurer liability (Shafer vs. Judge, 167 SCRA 386). In fact a third party can
bring a claim or an action directly against the insurer as the general purpose of
the statute is to protect the injured against the insolvency of the insured.
NATURE OF THE LIABILITY OF THE INSURER
It is not solidary with the insured. The liability of the insurer is based on
contract, while that of the insured is based on tort. (Malayan Insurance v. CA
165 SCRA 536)
WHO CAN ISSUE POLICY OR SURETY BOND
Those authorized by the commissioner in the list furnished to Land

Transportation Office (Section 375). If the Motor Vehicle Owner or the Land
Transportation Operator is unable to obtain or is unreasonably denied the
policy of insurance, they will be required to show proof of a cash deposit with
the commissioner, but the authority of the insurance company to engage in
casualty or surety lines of business shall be withdrawn immediately (Section 379)
CANCELLATION OF THE POLICY
BY THE INSURER, requires written notice to Motor Vehicle Owner/Land

Transportation Operator at least 15 days prior to intended effective date. IF SO
CANCELLED, the Land Transportation Office may order the immediate
confiscation of license plates UNLESS it receives new valid insurance / surety /
proof of cash deposit or revival by endorsement of the cancelled policy
(Section 380).
71
BY THE INSURED, the Motor Vehicle Owner/Land Transportation Operator
shall secure a similar policy or surety before the cancelled policy / surety
ceases to be effective or make a cash deposit AND file the same or proof
thereof with the Land Transportation Office (Section 381).
EFFECT OF A CHANGE IN OWNERSHIP OR CHANGE IN ENGINE
There is no need to issue a new policy until the next date of registration
PROVIDED, the insurer shall agree to continue the policy and such change shall
be indicated in a second duplicate which is filed with the Land Transporation
Office (Section 382).
OTHER PROHIBITED ACTS
(1) The Motor Vehicle Owner or the Land Transportation Operator cannot
require driver/s/employees to contribute to the payment of the premium
(Section 386)
(2) Any government office or agency having the duty to implement the
provisions, official or employee thereof shall not act as an agent in procuring
the policy or surety bond and in no case shall the commission of the procuring
agent exceed 10% of the premiums paid (Section 387).
PENALTIES FOR VIOLATION
The penalties for a violation by the Motor Vehicle Owner or the Land
Transportation Operator is a fine of not less than PHP 500.00 nor more than PHP
1,000.00 and / or imprisonment for not more than 6 months. If a Land
Transportation Operator violates Section 377 (minimum limits of coverage) it is
sufficient cause for revocation of a certificate of public convenience (Section
388).
If the violation is committed by a corporation / association or government

office / entity, the executive officer/s who shall have knowingly permitted or
failed to prevent the violation shall be held liable as principals (Section 389).
PAYMENT OF CLAIMS
72
A claim for payment is to be filed without any unnecessary delay, within 6
months from the date of accident by giving written notice setting forth the
nature, extent and duration of the injuries as certified by a duly licensed
physician (Sec. 384).
EFFECT OF FAILURE TO FILE CLAIM WITHIN PERIOD
The failure to file a claim will be deemed a waiver. If a claim is filed but
denied, an action must be brought within 1 year from date of denial with the
Insurance Commissioner or the Court, otherwise the right of action will be
deemed as having prescribed.
WHAT SHALL INSURANCE COMPANY DO UPON FILING OF THE CLAIM
It shall forthwith ascertain the truth and extent of the claim and make
payment within 5 working days after reaching an AGREEMENT. If NO
AGREEMENT IS REACHED, IT MUST NEVERTHELESS PAY THE NO FAULT INDEMNITY
(Section 378) without PREJUDICE TO A FURTHER PURSUIT OF THE CLAIM – IN
WHICH CASE HE SHALL NOT BE REQUIRED OR COMPELLED TO EXECUTE A QUIT
CLAIM OR RELEASE FROM LIABILITY. Note though that in case of dispute as to
enforcement of policy provisions, the adjudication shall be within the original
and exclusive jurisdiction of the commissioner subject to Section 416, which
provides for concurrent jurisdiction but the filing with the Insurance
Commissioner shall preclude filing with the court (Section 385).
WHAT IS NO FAULT INDEMNITY
A no fault indemnity claim is a claim for payment for death or injury to a

passenger or third party without NECESSITY OF PROVING FAULT OR
NEGLIGENCE. This is payable by the insurer PROVIDED (a) indemnity in respect
of one person shall not exceed PHP 5,000.00 (b) the necessary proof of loss
under oath to substantiate the claim is submitted, these are: police report of
accident and either the death certificate and sufficient evidence to establish
the payee OR the medical report and evidence of medical or hospital
disbursement in respect of which refund is made.
AGAINST WHOM IS THE PAYMENT CLAIMED
A claim under the no fault indemnity clause may be made against one
motor vehicle insurer only as follows: (a) in case of an occupant of a vehicle-
73
against the insurer of the vehicle in which the occupant is riding, mounting or
dismounting from (b) in any other case, from the insurer of the directly
offending vehicle (c) in all cases, the right of the party paying the claim to
recover against the owner of the vehicle responsible for the accident shall be
maintained.
INTERPRETATION OF THE AUTHORIZED DRIVER CLAUSE
The authorized driver clause is interpreted to refer to the insured or any

person driving on the order of the insured or with his permission PROVIDED, such
person is permitted to operate a motor vehicle in accordance with our
licensing laws or regulations and who is not otherwise disqualified.
NOTE: the following jurisprudence (1)If license is expired, person is not

authorized to operate a motor vehicle (Tarco Jr. v. Phil Guaranty – 15 SCRA
313), (2) Issued a Temporary Operator’s Permit or a Temporary Vehicle Receipt,
a person is authorized to operate a motor vehicle, but if it has expired, it is as if
he had no license (Gutierrez v. Capital Insurance 130 SCRA 618, PEZA v.
Alikpala, 160 SCRA 31), (3) A tourist with license but in the country for more than
90 days, is not authorized to operate a motor vehicle because it is as if he has
no license (Stokes vs. Malayan 127 SCRA 766), (4) A driver’s license that bears
all the earmarks of a duly issued license is presumed genuine (5) a license is not
necessary, where the insured himself is the driver (Paterno v. Pyramid Insurance
161 SCRA 677, 1986 BAR)
OTHER PROVISIONS
1. Chapter VII- Mutual Benefit Associations (SEC. 390. Any society,

association or corporation, without capital stock, formed or organized not for
profit but mainly for the purpose of paying sick benefits to member, or furnishing
financial support to members while out of employment, or of paying to relatives
of deceased members of fixed or any sum of money, irrespective of whether
such aim or purpose is carried out by means of fixed dues, assessments, or
voluntary contributions, or of providing, by the issuance of certificates of
insurance, payment to its members of accident or life insurance benefits, out of
due or assessments collected from the members, shall be known as a mutual
benefit association within the intent of this Code. Any society, association, or
74
corporation principally organized as a labor union shall be governed by the
Labor Code notwithstanding any mutual benefit feature provisions in its charter
as incident to its organization.) and Trusts for Charitable Use (SEC. 410. The term
“trust for charitable uses” within the intent of this Code, shall include, all real or
personal properties or funds, as well as those acquired with the fruits or income
therefrom or in exchange or substitution thereof, given to or received by any
person, corporation, association, foundation or entity, except the National
Government, its instrumentalities or political subdivisions, for charitable,
benevolent, educational pious, religious, or other uses for the benefit of the
public at large or a particular portion hereof or for the benefit of an indefinite
number of persons.) (Sections 396 to 413)
2. Chapter VIII - Insurance Commissioner (Section 414 - Administrative

Functions, Section 415 - Power to Impose Fines/Suspensions- Section 415,
Adjudicatory Powers-Note: it is concurrent with courts but the filing with the
commissioner shall preclude civil courts from taking cognizance of a suit over
the same subject matter. Decisions are appealable to the CA within 30 days by
notice of appeal (Sec. 416).
75

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LECTURE NOTES ON INSURANCE

WHAT LAWS GOVERN INSURANCE

WHAT IS A CONTRACT OF INSURANCE

A Contract of Insurance is an agreement whereby one undertakes for a

A Contract of Suretyship shall also be deemed an insurance contract if

Doing an insurance business or transacting an insurance business is:

a) making or proposing to make as insurer, any insurance contract;

NATURE AND CHARACTERISTICS OF A CONTRACT OF INSURANCE

1. IT IS AN ALEATORY CONTRACT - the liability of the Insurer depends upon

2. IT IS A CONTRACT OF INDEMNITY FOR NON-LIFE – recovery is

3. IT IS A PERSONAL CONTRACT - an insurer contracts with reference to the

4. IT IS EXECUTORY AND CONDITIONAL ON THE PART OF THE INSURER -

6. IT IS A CONTRACT OF ADHESION – Insurance companies manage to

In case there is no doubt as to the terms of the insurance contract, it is to

If DOUBTFUL, AMBIGUOUS, UNCERTAIN it is to be construed strictly against

a. P Bank obtained insurance against robbery which excluded loss by any

b. Personal Accident policies providing payment for “loss of hand”. The

c. Warranty in a fire insurance policy prohibited storage of oils having a

d. An action to recover the amount of PHP 2,000.00 due to death by

f. Denial of claim for benefit due to the death of Flaviano Landicho in

WHAT ARE THE ELEMENTS OF AN INSURANCE CONTRACT

1. The insured should possess an interest of some kind, susceptible of

HE HAS SUCH A RELATION OR CONNECTION WITH, OR CONCERN IN, SUCH

WHAT DOES A PERSON HAVE INSURABLE INTEREST IN

WHAT IS THE BASIS OF INSURABLE INTEREST IN LIFE

WHEN MUST INSURABLE INTEREST IN LIFE EXIST

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

IS THE CONSENT OF THE INSURED REQUIRED WHEN INSURANCE IS TAKEN

b. A person also has insurable interest in property as EVERY INTEREST IN

(1) An existing interest (Example: By means of a conditional deed of sale, A

(2) An inchoate interest founded on an existing interest (Defined: interest in real

But, a mere contingent or expectant interest in anything, not founded on

WHAT IS THE TEST OR MEASURE OF INSURABLE INTEREST IN PROPERTY

Whether one will derive pecuniary benefit or advantage from its

MUST THE BENEFICIARY IN PROPERTY INSURANCE HAVE INSURABLE INTEREST ON

YES, as no contract or policy of insurance on property shall be enforceable

WHEN MUST INSURABLE INTEREST IN PROPERTY EXIST

2. An unsecured creditor secures insurance over the house of his debtor, A.

COMPARE WITH INSURABLE INTEREST IN LIFE

1. Basis; 2. Insurable Interest; 3. Insurable interest at the time loss is incurred.

That a change of interest in any port of a thing insured in accompanied by a

WHAT CHANGE IS CONTEMPLATED

An absolute transfer of the property NOT LIFE A LEASE / MORTGAGE

1. Life, Health or accident insurance because they are not contracts of

2. A change of interest after occurrence of an injury and results in loss – does

- after loss – the liability of the insurer is fixed

3. a change of interest in one or more several distinct things, separately insured

4. a change of interest by will or succession on the death of the insured does

5. a transfer of interest by one or several partners, joint owners, or owners in

6. when notwithstanding a prohibition, the consent of the insurer is obtained

The following are void stipulations in property insurance –

B. Stipulation that the policy shall be received as proof of such interest –

C. every policy issued by way of gaining or wagering shall be void.

2. The insured is subject to risk of loss through the destruction or impairment of

3. The Insurer assumes the risk of loss

4. Such assertion is part of a general scheme to distributed actual loss among a

5. As a consideration for the insurer’s promise, the insured makes a ratable

WHAT MAY BE INSURED AGAINST

Example: Insurance against damage, liability,unknown past event ( in marine

NOTE: RA 6809 lowering the age of minority from 21-18.

WHAT CANNOT BE INSURED

WHO ARE THE PARTIES TO A CONTRACT OF INSURANCE

1. INSURER - Every person, partnership, association or corporation duly