INSURANCE CODE

(P.D. No. 1460)

1.
2.

3.
4.

1.
2.

3.
4.

5.

6.

7.

I. GENERAL CONCEPTS
CONTRACT OF INSURANCE
An agreement whereby one undertakes for a
consideration to indemnify another against
loss, damage or liability arising from an
unknown or contingent event. (Sec. 2, par. 2,
IC)
DOING AN INSURANCE BUSINESS OR
TRANSACTING AN INSURANCE BUSINESS
(Sec. 2, par. 4)
Making or proposing to make, as insurer, any
insurance contract;
Making or proposing to make, as surety, any
contract of suretyship as a vocation, not as a
mere incident to any other legitimate business
of a surety;
Doing any insurance business, including a
reinsurance business;
Doing or proposing to do any business in
substance equivalent to any of the foregoing
II. CHARACTERISTICS OF AN INSURANCE
CONTRACT (The Insurance Code of the
Philippines Annotated, Hector de Leon, 2002
ed.)
Consensual it is perfected by the meeting of
the minds of the parties.
Voluntary the parties may incorporate
such terms and conditions as they may deem
convenient.
Aleatory it depends upon some contingent
event.
Unilateral imposes legal duties only on the
insurer who promises to indemnify in case of
loss.
Conditional It is subject to conditions the
principal one of which is the happening of the
event insured against.
Contract of indemnity Except life and accident
insurance, a contract of insurance is a contract
of indemnity whereby the insurer promises to
make good only the loss of the insured.
Personal each party having in view the
character, credit and conduct of the other.
REQUISITES OF A CONTRACT OF INSURANCE
(The Insurance Code of the Philippines
Annotated, Hector de Leon, 2002 ed.)
1. A subject matter which the insured has an
insurable interest.
2. Event or peril insured against which may be
any future contingent or unknown event, past
or future and a duration for the risk thereof.
3. A promise to pay or indemnify in a fixed or
ascertainable amount.
4. A consideration known as premium.
5. Meeting of the minds of the parties.
5 CARDINAL PRINCIPLES IN INSURANCE
1. Insurable Interest
2. Principle of Utmost Good Faith
An insurance contract requires utmost good
faith (uberrimae fidei) between the parties.
The applicant is enjoined to disclose any
material fact, which he knows or ought to
know.

Reason: An insurance contract is an aleatory

contract. The insurer relies on the
representation of the applicant, who is in the
best position to know the state of his health.
3. Contract of Indemnity
It is the basis of all property insurance. The
insured who has insurable interest over a
property is only entitled to recover the amount
of actual loss sustained and the burden is upon
him to establish the amount of such loss
(Reviewer on Commercial Law, Professors
Sundiang and Aquino)
Rules:
a. Applies only to property insurance except when
the creditor insures the life of his debtor.
b. Life insurance is not a contract of indemnity.
c. Insurance contracts are not wagering contracts.
(Sec. 4)
4. Contract of Adhesion (Fine Print Rule)
Most of the terms of the contract do not
result from mutual negotiations between the
parties as they are prescribed by the insurer in
final printed form to which the insured may
adhere if he chooses but which he cannot
change. (Rizal Surety and Insurance Co., vs. CA,
336 SCRA 12)
5. Principle of Subrogation
It is a process of legal substitution where the
insurer steps into the shoes of the insured and
he avails of the latters rights against the
wrongdoer at the time of loss.
The principle of subrogation is a normal
incident of indemnity insurance as a legal effect
of payment; it inures to the insurer without any
formal assignment or any express stipulation to
that effect in the policy. Said right is not
dependent upon nor does it grow out of any
private contract. Payment to the insured makes
the insurer a subrogee in equity. (Malayan
Insurance Co., Inc. v. CA, 165 SCRA 536; see
also Art. 2207, NCC)
Purposes: (The Insurance Code of the
Philippines Annotated, Hector de Leon, 2002
ed.)
1. To make the person who caused the loss legally
responsible for it.
2. To prevent the insured from receiving a double
recovery from the wrongdoer and the insurer.
3. To prevent tortfeasors from being free from
liabilities and is thus founded on considerations
of public policy.
Rules:
1. Applicable only to property insurance.
2. The insurer can only recover from the third
person what the insured could have recovered.
3. There can be no subrogation in cases:
a. Where the insured by his own act releases the
wrongdoer or third party liable for the loss or
damage;
b. Where the insurer pays the insured the value of
the loss without notifying the carrier who has
in good faith settled the insureds claim for
loss;

c. Where the insurer pays the insured for a loss or

In case of conflict between a rider and the
risk not covered by the policy. (Pan Malayan
printed stipulations in the policy, the rider
Insurance Company v. CA, 184 SCRA 54)
prevails, as being a more deliberate expression
d. In life insurance
of the agreement of the contracting parties. (C.
e. For recovery of loss in excess of insurance
Alvendia, The Law of Insurance in the
coverage
Philippines, 1968 ed.)
CONSTRUCTION OF INSURANCE CONTRACT
Clauses
The ambiguous terms are to be construed
An agreement between the insurer and the
strictly against the insurer, and liberally in favor
insured on certain matter relating to the
of the insured. However, if the terms are clear,
liability of the insurer in case of loss. (Prof. De
there is no room for interpretation. (Calanoc vs.
Leon, p.188)
Court of Appeals, 98 Phil. 79)
Endorsements
III. DISTINGUISHING ELEMENTS OF AN
Any provision added to the contract altering
INSURANCE CONTRACT
its scope or application. (Prof. De Leon, p.188)
1. The insured possesses an insurable interest
POLICY OF INSURANCE
susceptible of pecuniary estimation;
The written instrument in which a contract
2. The insured is subject to a risk of loss through
of insurance is set forth. (Sec. 49)
the destruction or impairment of that interest
Contents: (Sec. 51)
by the happening of designated perils;
1. Parties
3. The insurer assumes that risk of loss;
2. Amount of insurance, except in open or
4. Such assumption is part of a general scheme to
running policies;
distribute actual losses among a large group or
3. Rate of premium;
substantial number of persons bearing
4. Property or life insured;
somewhat similar risks; and
5. Interest of the insured in the property if he is
5. The insured makes a ratable contribution
not the absolute owner;
(premium) to a general insurance fund.
6. Risk insured against; and
A contract possessing only the first 3
7. Duration of the insurance.
elements above is a risk-shifting device. If all
Persons entitled to recover on the policy
the elements, it is a risk-distributing device.
(sec. 53): The insurance proceeds shall be
(The Insurance Code of the Philippines
applied exclusively to the proper interest of the
Annotated, Hector de Leon, 2002 ed.)
person in whose name or to whose benefit it is
IV. PERFECTION OF AN INSURANCE CONTRACT
made, unless otherwise specified in the policy.
An insurance contract is a consensual
Kinds:
contract and is therefore perfected the
1. OPEN POLICY value of thing insured is not
moment there is a meeting of minds with
agreed upon, but left to be ascertained in case
respect to the object and the cause or
of loss. (Sec. 60)
consideration.
The actual loss, as determined, will
What is being followed in insurance
represent the total indemnity due the insured
contracts is what is known as the cognition
from the insurer except only that the total
theory. Thus, an acceptance made by letter
indemnity shall not exceed the face value of
shall not bind the person making the offer
the policy. (Development Insurance Corp. vs.
except from the time it came to his
IAC, 143 SCRA 62)
knowledge. (Enriquez vs. Sun Life Assurance
2. VALUED POLICY definite valuation of the
Co. of Canada, 41 Phil. 269)
property insured is agreed by both parties, and
Binding Receipt
written on the face of policy. (Sec. 61)
A mere acknowledgment on behalf of the
In the absence of fraud or mistake, the
company that its branch office had received
agreed valuation will be paid in case of total
from the applicant the insurance premium and
loss of the property, unless the insurance is for
had accepted the application subject to
a lower amount.
processing by the head office.
3. RUNNING POLICY contemplates successive
Cover Note (Ad Interim)
insurances and which provides that the object
A concise and temporary written contract
of the policy may from time to time be defined
issued to the insurer through its duly
(Sec. 62)
authorized agent embodying the principal
V. TYPES OF INSURANCE CONTRACTS
terms of an expected policy of insurance.
1. Life insurance
Purpose: It is intended to give temporary
a. Individual life (Secs. 179183, 227)
insurance protection coverage to the applicant
b. Group life (Secs. 50, last par., 228)
pending the acceptance or rejection of his
c. Industrial life (Secs. 229231)
application.
2. Non-life insurance
Duration: Not exceeding 60 days unless a
a. Marine (Secs. 99166)
longer period is approved by Insurance
b. Fire (Secs. 167173)
Commissioner (Sec. 52).
c. Casualty (Sec. 174)
Riders
3. Contracts of bonding or suretyship (Secs. 175178)
Printed stipulations usually attached to the
Note:
policy because they constitute additional
1. Health and accident insurance are either
stipulations between the parties. (Ang Giok
covered under life (Sec. 180) or casualty
Chip vs. Springfield, 56 Phil. 275)
insurance. (Sec. 174).

2. Marine, fire, and the property aspect of

casualty insurance are also referred to as
property insurance.
VI. PARTIES TO INSURANCE CONTRACT
1. Insurer - Person who undertakes to
indemnify another.
For a person to be called an insurance agent, it
is necessary that he should perform the
function for compensation. (Aisporna vs. CA,
113 SCRA 459)
2. Insured - The party to be indemnified upon
the occurrence of the loss. He must have
capacity to contract, must possess an insurable
interest in the subject of the insurance and
must not be a public enemy.
A public enemy- a nation with whom the
Philippines is at war and it includes every
citizen or subject of such nation.
3. Beneficiary - A person designated to receive
proceeds of policy when risk attaches.
Rules in the designation of the beneficiary:
a. LIFE
i. A person who insures his own life can designate
any person as his beneficiary, whether or not
the beneficiary has an insurable interest in the
life of the insured subject to the limitations
under Art. 739 and Art. 2012 of the NCC.
Reason: in essence, a life insurance policy is
no different form a civil donation insofar as the
beneficiary is concerned. Both are founded on
the same consideration of liberality. (Insular
Life vs. Ebrado, 80 SCRA 181)
ii. A person who insures the life of another person
and name himself as the beneficiary must have
an insurable interest in such life. (Sec. 10)
iii. As a general rule, the designation of a
beneficiary is revocable unless the insured
expressly waived the right to revoke in the
policy. (Sec. 11)
iv. The interest of a beneficiary in a life insurance
policy shall be forfeited when the beneficiary is
the principal accomplice or accessory in
willfully bringing about the death of the insured
in which event, the nearest relative of the
insured shall receive the proceeds of said
insurance if not otherwise disqualified. (Sec.
12)
b. PROPERTY
The beneficiary of property insurance must
have an insurable interest in such property,
which must exist not only at the time the policy
takes effect but also when the loss occurs. (Sec.
13 and 18).
Effects of Irrevocable Designation Of
Beneficiary
Insured cannot:
1. Assign the policy
2. Take the cash surrender value of the policy
3. Allow his creditors to attach or execute on the
policy;
4. Add new beneficiary; or
5. Change the irrevocable designation to
revocable, even though the change is just and
reasonable.
The insured does not even retain the power
to destroy the contract by refusing to pay the
premiums for the beneficiary can protect his

a.
b.
c.

d.

1.
2.
3.

interest by paying such premiums for he has an

interest in the fulfillment of the obligation.
(Vance, p. 665, cited in de Leon, p. 101, 2002
ed.)
VII. INSURABLE INTEREST
A. In General
A person has an insurable interest in the
subject matter if he is so connected, so
situated, so circumstanced, so related, that by
the preservation of the same he shall derive
pecuniary benefit, and by its destruction he
shall suffer pecuniary loss, damage or
prejudice.
B. Life
Every person has an insurable interest in the
life and health:
of himself, of his spouse and of his children;
of any person on whom he depends wholly or
in part for education or support;
of any person under a legal obligation to him to
pay money or respecting property or services,
of which death or illness might delay or prevent
performance; and
of any person upon whose life any estate or
interest vested in him depends. (Sec. 10)
When it should exist: When the insurance
takes effect; not thereafter or when the loss
occurs.
Amount:
GENERAL RULE: There is no limit in the
amount the insured can insure his life.
EXCEPTION: In a creditor-debtor relationship
where the creditor insures the life of his
debtor, the limit of insurable interest is equal
to the amount of the debt.
Note: If at the time of the death of the debtor
the whole debt has already been paid, the
creditor can no longer recover on the policy
because the principle of indemnity applies.
C. Property
Every interest in property whether real or
personal, or any relation thereto, or liability in
respect thereof, of such nature that the
contemplated peril might directly damnify the
insured (Sec. 13), which may consist in:
an existing interest;
any inchoate interest founded on an existing
interest; or
an expectancy coupled with an existing interest
in that out of which the expectancy arises. (Sec.
14)
When it should exist: When the insurance
takes effect and when the loss occurs, but need
not exist in the meantime.
Amount: The measure of insurable interest
in property is the extent to which the insured
might be damnified by loss or injury thereof.
(Sec. 17)
INSURABLE
INTEREST IN LIFE
Must exist only at the
time the policy takes
effect and need not
exist at the time of
loss

INSURABLE
INTEREST IN
PROPERTY
Must exist at the
time the policy
takes effect and
when the loss
occurs

Unlimited except in
life
insurance
effected by creditor
on life of debtor.
The expectation of
benefit to be derived
from the continued
existence of life need
not have any legal
basis whatever. A
reasonable
probability
is
sufficient
without
more.
The beneficiary need
not have an insurable
interest over the life
of the insured if the
insured
himself
secured the policy.
However, if the life
insurance
was
obtained by the
beneficiary, the latter
must have insurable
interest over the life
of the insured.

1.

2.

Limited to actual
value of interest in
property insured.
An expectation of a
benefit
to
be
derived from the
continued
existence of the
property insured
must have a legal
basis.

The lessor cannot be validly a beneficiary of

a fire insurance policy taken by a lessee over
his merchandise, and the provision in the lease
contract providing for such automatic
assignment is void for being contrary to law
and public policy. (Cha vs. Court of Appeals,
227 SCRA 690)
OPEN OR LOSS
PAYABLE
MORTGAGE
CLAUSE

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

Effects of Loss Payable Clause

a. The contract is deemed to be upon the
interest of the mortgagor; hence, he does not
cease to be a party to the contract.
b. Any act of the mortgagor prior to the loss,
which would otherwise avoid the insurance
affects the mortgagee even if the property is in
the hands of the mortgagee.
c. Any act, which under the contract of
insurance is to be performed by the mortgagor,
may be performed by the mortgagee with the
same effect.
d. In case of loss, the mortgagee is entitled to
the proceeds to the extent of his credit.
e. Upon recovery by the mortgagee to the
extent of his credit, the debt is extinguished.

The
beneficiary
must
have
insurable interest
over the thing
insured.

SPECIAL CASES
In case of a carrier or depositary
A carrier or depository of any kind has an
insurable interest in a thing held by him as
such, to the extent of his liability but not to
exceed the value thereof (Sec. 15)
In case of a mortgaged property
The mortgagor and mortgagee each have an
insurable interest in the property mortgaged
and this interest is separate and distinct from
the other.
a. Mortgagor As owner, has an insurable
interest therein to the extent of its value, even
though the mortgage debt equals such value.
The reason is that the loss or destruction of the
property insured will not extinguish the
mortgage debt.
b. Mortgagee His interest is only up to the
extent of the debt. Such interest continues
until the mortgage debt is extinguished.

STANDARD OR
UNION MORTGAGE
CLAUSE

Subsequent acts of
the
mortgagor
cannot affect the
rights
of
the
assignee

1.
2.

3.

1.
2.

3.

4.
5.

In case a mortgagee insures his own interest

and a loss occurs, he is entitled to the proceeds
of the insurance but he is not allowed to retain
his claim against the mortgagor as the claim is
discharged but it passes by subrogation to the
insurer to the extent of the money paid by such
insurer. (Palileo vs. Cosio)
VIII. RISK
What may be insured against:
Future contingent event resulting in loss or
damage Ex. Possible future fire
Past unknown event resulting in loss or damage
Ex. Fact of past sinking of a vessel unknown
to the parties
Contingent liability Ex. Reinsurance
IX. PREMIUM PAYMENTS
Consideration paid an insurer for
undertaking to indemnify the insured against a
specified peril.
Basis of the right of the insurer to collect
premiums: Assumption of risk.
GENERAL RULE: No policy issued by an
insurance company is valid and binding until
actual payment of premium. Any agreement to
the contrary is void. (Sec. 77)
EXCEPTIONS:
In case of life or industrial life insurance, when
the grace periods applies; (Sec. 77)
When the insurer makes a written
acknowledgment of the receipt premium; (Sec.
78)
Section 77 may not apply if the parties have
agreed to the payment of the premium in
installments and partial payment has been
made at the time of the loss. (Makati Tuscany
Condominium Corp. v. CA, 215 SCRA 462)
Where a credit term has been agreed upon.
(UCPB vs. Masagana Telemart, 308 SCRA 259)
Where the parties are barred by estoppel.
(UCPB vs. Maagana Telemart, 356 SCRA 307)

 Section 77 merely precludes the parties from

stipulating that the policy is valid even if the
premiums are not paid. (Makati Tuscany
Condominium Corp. v. CA, 215 SCRA 462)
Effect of Acknowledgment of Receipt of
Premium in Policy: Conclusive evidence of its
payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it
shall not be binding until the premium is
actually paid. (Sec. 78)
ENTITLEMENT OF INSURED TO RETURN OF
PREMIUMS PAID
A. Whole:
If the thing insured was never exposed to the
risks insured against; (Sec. 79)
2. If contract is voidable due to the fraud or
misrepresentation of insurer or his agents;
(Sec. 81)
3. If contract is voidable because of the existence
of facts of which the insured was ignorant
without his fault; (Sec. 81)
4. When by any default of the insured other than
actual fraud, the insurer never incurred liability;
(Sec. 81)
5. When rescission is granted due to the insurers
breach of contract. (Sec. 74)
B. Pro rata:
1. When the insurance is for a definite period and
the insured surrenders his policy before the
termination thereof;
Exceptions:
a. policy not made for a definite period of time
b. short period rate is agreed upon
c. life insurance policy
2. When there is over-insurance (Sec. 82);
Instances
when
premiums
are
not
recoverable:
1. When the risk has already attached and the
risk is entire and indivisible.
2.
In life insurance.
3. When the contract is rescindable or
rendered void ab initio by the fraud of the
insured.
4. When the contract is illegal and the parties
are in pari delicto.
PREMIUM
ASSESSMENT
1.

Levied and paid to

meet
anticipated
losses.

Collected to meet
actual losses.

Payment is not
enforceable against
the insured.

Payment
is
enforceable once
levied
unless
otherwise agreed
upon.

Not a debt.

It becomes a debt
once
properly
levied
unless
otherwise agreed.

X. TRANSFER OF POLICY
1. Life Insurance

1.
2.

3.

4.
5.

6.

7.

4.

It can be transferred even without the

consent of the insurer except when there is a
stipulation requiring the consent of the insurer
before transfer. (Sec. 181)
Reason: The policy does not represent a
personal agreement between the insured and
the insurer.
2. Property insurance
It cannot be transferred without the consent
of the insurer.
Reason: The insurer approved the policy
based on the personal qualification and the
insurable interest of the insured.
3. Casualty insurance
It cannot be transferred without the consent
of the insurer. (Paterson cited in de Leon p. 82)
Reason: The moral hazards are as great as
those of property insurance.
CHANE OF INTEREST IN THE THING INSURED
The mere (absolute) transfer of the thing
insured does not transfer the policy, but
suspends it until the same person becomes the
owner of both the policy and the thing insured.
(Sec. 58)
Reason: Insurance contract is personal.
GENERAL RULE: A change of interest in any
part of a thing insured unaccompanied by a
corresponding change of interest in the
insurance suspends the insurance to an
equivalent extent, until the interests in the
thing and the interest in the insurance are
vested in the same person. (Sec. 20)
EXCEPTIONS:
In life, health and accident insurance.(Sec. 20);
Change in interest in the thing insured after
occurrence of an injury which results in a loss.
(Sec. 21);
Change in interest in one or more of several
distinct things separately insured by one policy.
(Sec. 22);
Change of interest, by will or succession, on the
death of the insured. (Sec. 23);
Transfer of interest by one of several partners,
joint owners, or owners in common, who are
jointly insured, to others. (Sec. 24);
When a policy is so framed that it will inure to
the benefit of whomsoever, during the
continuance of the risk, may become the owner
of the interest insured. (Sec. 57);
When there is an express prohibition against
alienation in the policy, in case of alienation,
the contract of insurance is not merely
suspended but avoided. (Art. 1306, NCC).
XI. ASCERTAINMENT AND CONTROL OF RISK
AND LOSS
A. Four Primary Concerns of the Parties:
1. Correct estimation of the risk;
2. Precise delimitation of the risk;
3. Control of the risk;
Determining whether a loss occurred and if so,
the amount of such loss.
B. Devices used for ascertaining and
controlling risk and loss:
1. Concealment A neglect to communicate
that which a party knows and ought to
communicate (Sec. 26)
Requisites:

a.
b.
c.
d.
e.

a.
b.

c.

A party knows a fact which he neglects to

communicate or disclose to the other.
Such party concealing is duty bound to disclose
such fact to the other.
Such party concealing makes no warranty as to
the fact concealed.
The other party has not the means of
ascertaining the fact concealed.
Material
Effects: Entitles insurer to rescind, even if
the death or loss is due to a cause not related
to the concealed matter (Sec. 27).
Note: Good Faith is not a defense in
concealment. Sec. 27 clearly provides that, the
concealment
whether
intentional
or
unintentional entitles the injured party to
rescind the contract of insurance.
Test of Materiality: Determined not by the
event, but solely by the probable and
reasonable influence of the facts upon the
party to whom the communication is due, in
forming his estimate of the advantages of the
proposed contract, or in making his inquiries
(Sec. 31).
Exception to Sec. 31:
a. Incontestability clause
b. Matters under Sec.110 (marine insurance)
The waiver of medical examination in a nonmedical insurance contract renders even more
material the information required of the
applicant concerning the previous conditions of
health and diseases suffered. (Sunlife v. Sps.
Bacani, 246 SCRA 268).
The right to information of material facts
may be waived, either by the terms of the
insurance or by neglect to make inquiries as to
such facts where they are distinctly implied in
other facts of which information is
communicated. (Sec.33)
Where matters of opinion or judgment are
called for, answers made in good faith and
without intent to deceiver will not avoid the
policy even though they are untrue. Reason:
The insurer cannot rely on those statements.
He must make further inquiry. (Philamcare
Health Systems vs. CA, G.R. No. 125678, March
18, 2002).
2. Representations Factual statements made
by the insured at the time of, or prior to, the
issuance of the policy to give information to the
insurer and induce him to enter into the
insurance contract. They are considered an
active form of concealment.
Requisites of a false representation
(misrepresentation):
The insured stated a fact which is untrue.
Such fact was stated with knowledge that it is
untrue and with intent to deceive or which he
states positively as true without knowing it to
be true and which has a tendency to mislead.
Such fact in either case is material to the risk.
Characteristics:
a. It is not a part of the contract but merely a
collateral inducement to it.
b. It may be oral or written.
c. It is made at the same time of issuing the
policy or before but not after.

d. It may be altered or withdrawn before the

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

REPRESENTATION
Mere collateral
inducement
May be written in
the policy or may
be oral.

Presumed material

Must be proved to
be material
Must be strictly
Requires only
complied with
substantial truth
and compliance
4. Conditions Events signifying in its broadest
sense either an occurrence or a non-occurrence
that alters the previously existing legal relations
of the parties to the contract. They may be
conditions precedent or conditions subsequent.
Effect of breach:
a. Condition precedent prevents the accrual of
cause of action
b. Condition subsequent avoids the policy or
entitles the insurer to rescind
The insurer may also protect himself against
fraudulent claims of loss and this he attempts
to do by inserting in the policy various
conditions which take the form of conditions
precedent. For instance, there are conditions
requiring immediate notice of loss or injury and
detailed proofs of loss within a limited period.
5. Exceptions Provisions that may specify
excepted perils. It makes more definite the
coverage indicated by the general description
of the risk by excluding certain specified risk
that otherwise would be included under the
general language describing the risks assumed.
Effect: Limit the coverage of the contract.
RESCISSION
Grounds:
A. Concealment
B. Misrepresentation
C. Breach of material warranty
D. Breach of a condition subsequent
Waiver of the right to rescind: Acceptance
of premium payments despite the knowledge
of the ground for rescission. (Sec. 45)
Limitations on the right of the insurer to
rescind:
1. Non-life such right must be exercised prior
to the commencement of an action on the
contract;
2. Life such right must be availed of during
the first two years from the date of issue of
policy or its last reinstatement; prior to
incontestability. (Sec. 48)
CANCELLATION OF NON-LIFE INSURANCE
POLICY
Right of the insurer to abandon the contract
on the occurrence of certain grounds after the
effectivity date of a non-life policy.
Grounds:
1. Non-payment of premium;
2. Conviction of a crime out of acts increasing the
hazard insured against;
3. Discovery
of
fraud
or
material
misrepresentation;
4. Discovery of willful or reckless acts of omissions
increasing the hazard insured against;
5. Physical changes in property making the
property uninsurable; and
6. Determination by the Insurance Commissioner
that the continuation of the policy would
violate the Insurance Code. (Sec. 64)
Requirements:
1. Prior notice of cancellation to the insured;

2. Notice must be in writing, mailed or delivered

to the named insured at the address shown in
the policy;
3. Notice must state which of the grounds set
forth in Sec. 64 is relied upon and upon request
of the insured, the insurer must furnish facts on
which the cancellation is based;
4. Grounds should have existed after the
effectivity date of the policy.
XII. INCONTESTABILITY CLAUSE
Clause in life insurance policy that stipulates
that the policy shall be incontestable after a
stated period.
Requisites:
1. Life insurance policy
2. Payable on the death of the insured
3. It has been in force during the lifetime of the
insured for a period of at least two years from
the date of its issue or of its last reinstatement
Note: The period of 2 years may be shortened
but it cannot be extended by stipulation.
Incontestability only deprives the insurer of
those defenses which arise in connection with
the formation and operation of the policy prior
to loss. (Prof. De Leon, p. 173 citing Wyatt and
Wyatt, p. 878)
BARRED DEFENSES
OF THE INSURER
1. Policy is void ab
initio
2. Policy
is
rescindable
by
reason
of
the
fraudulent
concealment
or
misrepresentation
of the insured or his
agent

XIII.

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

1.
2.

1.
2.
3.
4.
5.

1.

2.

3.

4.

5.

1.

A. OVER-INSURANCE results when the

insured insures the same property for an
amount greater than the value of the property
with the same insurance company.
Effect in case of loss:
The insurer is bound only to pay to the extent
of the real value of the property lost;
The insured is entitled to recover the amount
of premium corresponding to the excess in
value of the property;
B. DOUBLE INSURANCE exists where same
person is insured by several insurers separately
in respect to same subject and interest. (Sec.
93)
Requisites:
Person insured is the same;
Two or more insurers insuring separately;
Subject matter is the same;
Interest insured is also the same;
Risk or peril insured against is likewise the
same.
Effects: Where double insurance is allowed,
but over insurance results: (Sec. 94)
The insured, unless the policy otherwise
provides, may claim payment from the insurers
in such order as he may select, up to the
amount for which the insurers are severally
liable under their respective contracts;
Where the policy under which the insured
claims is a valued policy, the insured must give
credit as against the valuation for any sum
received by him under any other policy without
regard to the actual value of the subject matter
insured;
Where the policy under which the insured
claims is an unvalued policy he must give
credit, as against the full insurable value, for
any sum received by him under any policy;
Where the insured receives any sum in excess
of the valuation in the case of valued policies,
or of the insurable value in the case of
unvalued policies, he must hold such sum in
trust for the insurers, according to their right of
contribution among themselves;
Each insurer is bound, as between himself and
the other insurers, to contribute ratably to the
loss in proportion to the amount for which he is
liable under his contract.
Additional or Other Insurance Clause
A condition in the policy requiring the
insured to inform the insurer of any other
insurance coverage of the property insured. It
is lawful and specifically allowed under Sec. 75
which provides that (a) policy may declare
that a violation of a specified provision thereof
shall avoid it, otherwise the breach of an
immaterial provision does not avoid it.
A stipulation against double insurance.
Purposes:
To prevent an increase in the moral hazard
2. To prevent over-insurance and fraud.
To constitute a violation of the clause, there
should have been double insurance.
C. REINSURANCE a contract by which the
insurer procures a third person to insure him
against loss or liability by reason of an original

insurance (also known as Reinsurance

Cession). (Sec. 95)
In every reinsurance, the original contract of
insurance and the contract of reinsurance are
covered by separate policies.
DOUBLE
INSURANCE
Involves the same
interest
Insurer remains in
such capacity
Insured is the party
in interest in the 2
contracts
Subject of insurance
is property
Insured has to give
his consent

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

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

Loss for which

insurer is not
liable
1. Loss
by
insureds
willful
act;
2. Loss due to
connivance of the

2. Loss
the
immediate cause of
which is the peril
insured
against
except
where
proximate cause is
an excepted peril;
3. Loss
through
negligence
of
insured
except
where there was
gross
negligence
amounting to willful
acts; and
4. Loss caused by
efforts to rescue the
thing from peril
insured against;
5. If during the
course of rescue,
the thing is exposed
to a peril not
insured
against,
which permanently
deprives the insured
of its possession, in
whole or in part
(Sec. 85).

insured (Sec. 87);

and
3. Loss
where
the excepted peril
is the proximate
cause.

Proximate Cause An event that sets all other

events in motion without any intervening or
independent case, without which the injury or
loss would not have occurred.
REQUISITES FOR RECOVERY UPON INSURANCE
1. The insured must have insurable interest in
the subject matter;
2. That interest is covered by the policy;
3. There must be a loss; and
4. The loss must be proximately caused by the
peril insured against.
NOTICE OF LOSS
In fire insurance

In other types of
insurance

Required

Not required

Failure
to
give
notice will defeat
the right of the
insured to recover.

Failure to give
notice will not
exonerate
the
insurer,
unless
there
is
a
stipulation in the
policy requiring the
insured to do so.

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

NON-LIFE POLICIES
LIFE POLICIES
a. Maturing
upon
the
expiration of the
term

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

The proceeds shall

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

In case of an unreasonable delay in the

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

Commissioner should be filed within 1 year

from the date of the denial of the claim by the
insurer, otherwise claimants right of action
shall prescribe. (Sec. 384)
PARTICULAR
CONTRACTS

KINDS

OF

INSURANCE

XVI. MARINE INSURANCE

Insurance against risks connected with
navigation, to which a ship, cargo, freightage,
profits or other insurable interest in movable
property, may be exposed during a certain
voyage or a fixed period of time. (Sec. 99)
Coverage:
A.
1. Vessels, goods, freight, cargo, merchandise,
profits, money, valuable papers, bottomry and
respondentia, and interest in respect to all risks
or perils of navigation;
2. Persons or property in connection with marine
insurance;
3. Precious stones, jewels, jewelry and precious
metals whether in the course of transportation
or otherwise; and
4. Bridges, tunnels, piers, docks and other aids to
navigation and transportation. (Sec. 99)
Cargo can be the subject of marine
insurance, and once it is entered into, the
implied warranty of seaworthiness immediately
attaches to whoever is insuring the cargo,
whether he be the shipowner or not. (Roque v.
IAC, 139 SCRA 596)
B. Marine Protection and Indemnity Insurance
Classes of inland marine insurance: (Prof.
De Leon, p. 325)
1. Property in transit provides protection to
property frequently exposed to loss while it is
transportation form one location to another.
2. Bailee liability - insurance for those who have
temporary custody of the goods.
3. Fixed transportation property they are so
insured because they are held to be an
essential part of the transportation system
such as bridges, tunnels, etc.
4. Floater provides insurance to follow the
insured property wherever it may be located,
subject always to the territorial limits of the
contract.
Insurable interest:
A.
1. Shipowner
a. Over the vessel to the extent of its value,
except that if chartered, the insurance is only
up to the amount not recoverable from the
charterer. (Sec. 100).
b. He also has an insurable interest on expected
freightage. (Sec. 103).
c. No insurable interest if he will be compensated
by charterer for the value of the vessel, in case
of loss.
2. Cargo owner
Over the cargo and expected profits (Sec.
105).
3. Charterer

Over the amount he is liable to the

shipowner, if the ship is lost or damaged during
the voyage (Sec. 106).
B.
In loans on bottomry and respondentia
Repayment of the loan is subject to the
condition that the vessel or goods, respectively,
given as a security, shall arrive safely at the
port of destination.
1. Owner/Debtor
Difference between the value of vessel or
goods and the amount of loan. (Sec. 101)
2. Creditor/lender
Amount of the loan
Note: If a vessel is hypothecated by bottomry,
only the excess is insurable, since a loan on
bottomry partakes of the nature of an
insurance coverage to the extent of the loan
accommodation. The same rule would apply to
the hypothecation of the cargo by
respondentia. (Pandect of Commercial Law and
Jurisprudence, Justice Jose Vitug, 1997 ed.)
PERILS OF THE SEA
PERILS OF THE
SHIP
Includes only those A loss which in the
casualties due to ordinary course of
the:
events,
results
1. unusual
from the:
violence; or
1. natural
and
2. extraordinary
inevitable action of
action of wind and the sea
wave; or
2. ordinary wear
3. Other
and tear of the
extraordinary
ship or
causes connected 3.
Negligent
with navigation.
failure of the ships
owner to provide
the vessel with
proper equipment
to convey the
cargo
under
ordinary
conditions.
Note: It is only perils of the sea which may be
insured against unless perils of the ship is
covered by an all-risk policy.
SPECIAL MARINE INSURANCE CONTRACTS
AND CLAUSES
A. All Risks Policy insurance against all causes
of conceivable loss or damage, except: 1) as
otherwise excluded in the policy; or 2) due to
fraud or intentional misconduct on the part of
the insured.
The insured has the initial burden of proving
that the cargo was in good condition when the
policy attached and that the cargo was
damaged when unloaded from the vessel;
thereafter, the burden then shifts to the
insurer to show the exception to the coverage.
(Filipinas Merchants Insurance vs. Court of
Appeals, 179 SCRA 638)
B. Barratry Clause

 A clause which provides that there can be no

recovery on the policy in case of any willful
misconduct on the part of the master or crew
in pursuance of some unlawful or fraudulent
purpose without consent of owners, and to the
prejudice of the owners interest. (Roque vs.
IAC, 139 SCRA 596)

1.
2.
3.

C. Inchamaree Clause
A clause which makes the insurer liable for
loss or damage to the hull or machinery arising
from the:
Negligence of the captain, engineers, etc.
Explosions, breakage of shafts; and
Latent defect of machinery or hull. (Bar Review
Materials in Commercial Law, Jorge Miravite,
2002 ed.)

1.
2.
3.
4.

5.

While the payment by the insurer for the

insured value of the lost cargo operates as a
waiver of the insurers right to enforce the
term of the implied warranty against the
assured under the marine insurance policy, the
same cannot be validly interpreted as an
automatic admission of the vessels
seaworthiness by the insurer as to foreclose
recourse against the common carrier for any
liability under the contractual obligation as
such common carrier. (Delsan Transportation
Lines vs. CA, 364 SCRA 24)

D. Sue and Labor Clause

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

1.
2.
3.
4.
5.

MATTERS ALTHOUGH CONCEALED, WILL NOT

VITIATE THE CONTRACT EXCEPT WHEN THEY
CAUSED THE LOSS (Sec. 110)
National character of the insured;
Liability of the thing insured to capture or
detention;
Liability to seizure from breach of foreign laws;
Want of necessary documents; and
Use of false or simulated papers.
Note: This should be related to the general rule
regarding material concealment.
DISTINCTIONS
ON
CONCEALMENT
(Commercial Law Reviewer, A.F. Agbayani,
1988 ed.)
MARINE INSURANCE
The information of the
belief or expectation
rd
of 3
persons is
material and must be
communicated

The concealment of
any fact in relation to
any of the matters
stated in Sec. 110
does not vitiate the
entire contract but
merely exonerates the
insurer from a risk
resulting from the fact
concealed
IMPLIED WARRANTIES

OTHER PROPERTY
INSURANCE
The information or
rd
belief of a 3 party
is not material and
need
not
be
communicated
unless it proceeds
form an agent of
the insured whose
duty it is to give
information
Concealment
of
any material fact
will vitiate the
entire
contract,
whether or not the
loss results for the
risk concealed.

Seaworthiness of the ship at the inception of

the insurance (Sec. 113);
Against improper deviation (Sec. 123, 124,
125);
Against illegal venture;
Warranty of neutrality: the ship will carry the
requisite documents of nationality or neutrality
of the ship or cargo where such nationality or
neutrality is expressly warranted; (Sec. 120)
Presence of insurable interest.

1.

2.

3.

Seaworthiness
A relative term depending upon the nature
of the ship, voyage, service and goods,
denoting in general a ships fitness to perform
the service and to encounter the ordinary perils
of the voyage, contemplated by the parties to
the policy (Sec. 114).
GENERAL
RULE:
The
warranty
of
seaworthiness is complied with if the ship be
seaworthy at the time of the commencement
of
the
risk.
Prior
or
subsequent
unseaworthiness is not a breach of the
warranty nor is it material that the vessel
arrives in safety at the end of her voyage.
EXCEPTIONS:
In the case of a time policy, the ship must be
seaworthy at the commencement of every
voyage she may undertake
In the case of cargo policy, each vessel upon
which the cargo is shipped or transshipped,
must be seaworthy at the commencement of
each particular voyage
In the case of a voyage policy contemplating a
voyage in different stages, the ship must be
seaworthy at the commencement of each
portion
Applicability of implied warranty of
seaworthiness to cargo owners: It becomes
the obligation of a cargo owner to look for a
reliable common carrier, which keeps its
vessels in seaworthy conditions. The shipper
may have no control over the vessel but he has
control in the choice of the common carrier
that will transport his goods (Roque v. IAC, 139
SCRA 596).
Deviation
A departure from the course of the voyage
insured, or an unreasonable delay in pursuing
the voyage or the commencement of an
entirely different voyage. (Sec.123)
Instances:

1.
2.

3.
4.

1.
a.
b.
c.
d.

2.

Departure of vessel from the course of the

sailing fixed by mercantile usage
Departure of vessel from the most natural,
direct and advantageous route if not fixed by
mercantile usage
Unreasonable delay in pursuing voyage
Commencement of an entirely different voyage
(Secs. 121-123)
Kinds:
Proper When caused by circumstances outside the
control of the ship captain or ship owner;
When necessary to comply with a warranty or
to avoid a peril;
When made in good faith to avoid a peril;
When made in good faith to save human life or
to relieve another vessel in distress (Sec. 124)
Effect: In case of loss, the insurer is still
liable.
Improper - Every deviation not specified in Sec.
124 (Sec. 125).
Effect: In case of loss or damage, the insurer
is not liable. (Sec. 126)

LOSS
1. Total:
a. Actual i. Total destruction;
ii. Irretrievable loss by sinking;
iii. Damage rendering the thing valueless; or
iv. Total deprivation of owner of possession of
thing insured. (Sec. 130)
b. Constructive i. Actual loss of more than of the value of the
object;
ii. Damage reducing value by more than of the
value of the vessel and of cargo; and
iii. Expense of transshipment exceed of value of
cargo. (Sec. 131, in relation to Sec. 139)
In case of constructive total loss, insured
may:
1. Abandon goods or vessel to the insurer and
claim for whole insured value (Sec. 139), or
2. Without abandoning vessel, claim for partial
actual loss. (Sec. 155)
2. Partial: That which is not total (Sec. 128).

1.
2.

3.

4.

5.

6.

1.
2.

AVERAGE
Any extraordinary or accidental expense
incurred during the voyage for the preservation
of the vessel, cargo, or both, and all damages
to the vessel and cargo from the time it is
loaded and the voyage commenced until it
ends and the cargo unloaded.
1.
GENERAL
Has inured to the
common benefit and
profit of all persons
interested in the
vessel and cargo
To be borne equally
by all of the interests
concerned in the
venture.

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

2.
3.
4.

5.

Requisites for the

right
to
claim
contribution:
Common danger to
the vessel or cargo;
Part of the vessel or
cargo was sacrificed
deliberately;
Sacrifice must be for
the common safety
or for the benefit of
all;
Sacrifice must be
made by the master
or
upon
his
authority;
It must be not be
caused by any fault
of the party asking
the contribution;
It must be successful,
i.e. resulted in the
saving of the vessel
or cargo; and
Necessary.
RIGHT OF INSURED IN CASE OF GENERAL
AVERAGE
GENERAL RULE: The insured may either hold
the insurer directly liable for the whole of the
insured value of the property sacrificed for the
general benefit, subrogating him to his own
right of contribution or demand contribution
from the other interested parties as soon as the
vessel arrives at her destination
EXCEPTIONS:
After the separation of interests liable to
contribution
When the insured has neglected or waived his
right to contribution
FPA Clause (Free From Particular Average)
A clause agreed upon in a policy of marine
insurance in which it is stated that the insurer
shall not be liable for a particular average, such
insurer shall be free therefrom, but he shall
continue to be liable for his proportion of all
general average losses assessed upon the thing
insured. (Sec. 136)
ABANDONMENT
The act of the insured by which, after a
constructive total loss, he declared the
relinquishment to the insurer of his interest in
the thing insured. (Sec. 138)
Requisites for validity:
There must be an actual relinquishment by the
person insured of his interest in the thing
insured (Sec. 138);
There must be a constructive total loss (Sec.
139);
The abandonment be neither partial nor
conditional (Sec. 140);
It must be made within a reasonable time after
receipt of reliable information of the loss (Sec.
141);
It must be factual (Sec. 142);

6.

7.

1.

2.

It must be made by giving notice thereof to the

insurer which may be done orally or in writing
(Sec. 143); and
The notice of abandonment must be explicit
and must specify the particular cause of the
abandonment (Sec. 144).

value of the property

insured. (Bar Review
Materials in
Commercial Law,
Jorge Miravite, 2002
ed.)

Effects:
It is equivalent to a transfer by the insured of
his interest to the insurer with all the chances
of recovery and indemnity (Transfer of
Interest)(Sec.146)
Acts done in good faith by those who were
agents of the insured in respect to the thing
insured, subsequent to the loss, are at the risk
of the insurer and for his benefit. (Transfer Of
Agency)(Sec.148)

XVII. FIRE INSURANCE

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

If an insurer refuses to accept a valid

abandonment, he is liable upon an actual total
loss, deducting form the amount any proceeds
of the thing insured which may have come to
the hands of the insured. (Sec.154)

Prerequisites to recovery:
1. Notice of loss must be immediately given,
unless delay is waived expressly or impliedly by
the insurer
2. Proof of loss according to best evidence
obtainable. Delay may also be waived expressly
or impliedly by the insurer

CO-INSURANCE
A marine insurer is liable upon a partial loss,
only for such proportion of the amount insured
by him as the loss bears to the value of the
whole interest of the insured in the property
insured. (Sec. 157)
When the property is insured for less than
its value, the insured is considered a co-insurer
of the difference between the amount of
insurance and the value of the property.

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

Requisites:
1. The loss is partial;
2. The amount of insurance is less than the
value of the property insured.
Rules:
1. Co-insurance applies only to marine
insurance
2. Logically, there cannot be co-insurance in life
insurance.
3. Co-insurance applies in fire insurance when
expressly provided for by the parties.
CO-INSURANCE
A percentage in the
value of the insured
property which the
insured himself
assumes to act as
insurer to the extent
of the deficiency in
the insurance of the
insured property. In
case of loss or
damage, the insurer
will be liable only for
such proportion of
the loss or damage
as the amount of the
insurance bears to
the designated
percentage of the full

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

FRIENDLY FIRE
One that burns in a
place where it was
intended to burn
and ought to be
Insurer is not liable

Measure of Indemnity
1. Open policy: only the expense necessary to
replace the thing lost or injured in the
condition it was at the time of the injury
2. Valued policy: the parties are bound by the
valuation, in the absence of fraud or mistake

1.

2.
3.

1.
2.
3.
4.

Note: It is very crucial to determine whether a

marine vessel is covered by a marine insurance
or fire insurance. The determination is
important for 2 reasons:
Rules on constructive total loss and
abandonment applies only to marine
insurance;
Rule on co-insurance applies primarily to
marine insurance;
Rule on co-insurance applies to fire insurance
only if expressly agreed upon. (Commercial Law
Reviewer, Aguedo Agbayani, 1988 ed.)
ALTERATION AS A SPECIAL GROUND FOR
RESCISSION BY INSURER
Requisites:
The use or condition of the thing is specifically
limited or stipulated in the policy;
Such use or condition as limited by the policy is
altered;
The alteration is made without the consent of
the insurer;
The alteration is made by means within the
control of the insured;

5.
6.

The alteration increases the risk; (Sec. 168) and

There must be a violation of a policy provision.
(Sec. 170)
Fall-of-building clause
A clause in a fire insurance policy that if the
building or any part thereof falls, except as a
result of fire, all insurance by the policy shall
immediately cease.
Option to rebuild clause
A clause giving the insurer the option to
reinstate or replace the property damaged or
destroyed or any part thereof, instead of
paying the amount of the loss or the damage.
The insurer, after electing to rebuild, cannot
be compelled to perform this undertaking by
specific performance because this is an
obligation to do, not to give. Remedy: Art.
1167, NCC.
XVIII. CASUALTY OR ACCIDENT INSURANCE
Insurance covering loss or liability arising
from accident or mishap, excluding those
falling under other types of insurance such as
fire or marine. (Sec. 174)
Classifications:
1. Insurance against specified perils which may
affect the person and/or property of the
insured. (accident or health insurance)
Examples: personal accident, robbery/theft
insurance
2. Insurance against specified perils which may
give rise to liability on the part of the insured
for claims for injuries to or damage to property
of others. (third party liability insurance)
Insurable interest is based on the interest of
the insured in the safety of persons, and their
property, who may maintain an action against
him in case of their injury or destruction,
respectively.
Examples: workmens compensation, motor
vehicle liability
In a third party liability (TPL) insurance
contract, the insurer assumes the obligation by
paying the injured third party to whom the
insured is liable. Prior payment by the insured
to the third person is not necessary in order
that the obligation may arise. The moment the
insured becomes liable to third persons, the
insured acquires an interest in the insurance
contract which may be garnished like any other
credit. (Perla Comapnia de Seguro, Inc vs.
Ramolete, 205 SCRA 487)
Aside from compulsory motor vehicle
liability insurance, the Insurance Code contains
no other provisions applicable to casualty
insurance. Therefore, such casualty insurance
are governed by the general provisions
applicable to all types of insurance, and outside
of such statutory provisions, the rights and
obligations of the parties must be determined
by their contract, taking into consideration its
purpose and always in accordance with the
general principles of insurance law.

In burglary, robbery and theft insurance, the

opportunity to defraud the insurer the moral
hazard is so great that insurer have found it
necessary to fill up the policies with many
restrictions designed to reduce the hazard.
Persons frequently excluded are those in the
insureds service and employment. The
purpose of the exception is to guard against
liability should theft be committed by one
having unrestricted access to the property.
(Fortune Insurance vs. CA, 244 SCRA 208)
Right of a third party injured to sue the insurer
1. Indemnity against liability A third party
injured can directly sue the insurer.
2. Indemnity for actual loss or reimbursement
after actual payment by the insured A third
party has no cause of action against the insurer
(Sec. 53, Bonifacio Bros. v. Mora, 20 SCRA 261).
The insurer is not solidarily liable with the
insured. The insurers liability is based on
contract; that of the insured is based on torts.
Furthermore, the insurers liability is limited by
the amount of the insurance coverage (Pan
Malayan Insurance Corporation v. CA, 184 SCRA
54).

INTENTIONAL vs. ACCIDENTAL AS USED IN

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

motor vehicle owners or operators responsible

for the accident sustained (Shafer v. Judge,
RTC, 167 SCRA 386).
Claimants/victims may be a passenger or a
rd
3 party
It applies to all vehicles whether public and
private vehicles.
Note: It is the only compulsory insurance
coverage under the Insurance Code.

Method of coverage
1. Insurance policy
2. Surety bond
3. Cash deposit
Passenger Any fare-paying person being
transported and conveyed in and by a motor
vehicle for transportation of passengers for
compensation, including persons expressly
authorized by law or by the vehicles operator
or his agents to ride without fare. (Sec. 373[b])
Third Party Any person other than the
passenger, excluding a member of the
household or a member of the family within
the second degree of consanguinity or affinity,
of a motor vehicle owner or land
transportation operator, or his employee in
respect of death or bodily injury arising out of
and in the course of employment. (Sec. 373[c])
No-Fault Clause
A clause that allows the victim (injured
person or heirs of the deceased) to an option
to file a claim for death or injury without the
necessity of proving fault or negligence of any
kind.
Purpose: To guarantee compensation or
indemnity to injured persons in motor vehicle
accidents.
Rules:
1. Total indemnity - maximum of P5,000
2. Proofs of loss a. Police report of accident;
b.
Death certificate and evidence
sufficient to establish proper payee;
c.
Medical report and evidence of
medical or hospital disbursement.
3. Claim may be made against one motor
vehicle only
4. Proper insurer from which to claim a. In case of an occupant: Insurer of the
vehicle in which the occupant is riding,
mounting or dismounting from;
b. In any other case: Insurer of the
directly offending vehicle. (Sec. 378)
The claimant is not free to choose from
which insurer he will claim the no fault
indemnity as the law makes it mandatory that
the claim shall lie against the insurer of the
vehicle in which the occupant is riding,

mounting or dismounting from. That said

vehicle might not be the one that caused the
accident is of no moment since the law itself
provides that the party paying may recover
against the owner of the vehicle responsible for
the accident. (Perla Compania de Seguros, Inc.
v. Ancheta, 169 SCRA 144)
This no-fault claim does not apply to
property damage. If the total indemnity claim
exceeds P5,000 and there is controversy in
respect thereto, the finding of fault may be
availed of by the insurer only as to the excess.
The first P5,000 shall be paid without regard to
fault. (Prof. De Leon, p. 716)
The essence of the no-fault indemnity
insurance is to provide victims of vehicular
accidents
or
their
heirs
immediate
compensation although in limited amount,
pending final determination of who is
responsible for the accident and liable for the
victims injuries or death. (Ibid.)
SPECIAL CLAUSES
A. Authorized Driver Clause
A clause which aims to indemnify the
insured owner against loss or damage to the
car but limits the use of the insured vehicle to
the insured himself or any person who drives
on his order or with his permission (Villacorta v.
Insurance Commissioner)
The requirement that the person driving the
insured vehicle is permitted in accordance with
the licensing laws or other laws or regulations
to drive the motor vehicle (licensed driver) is
applicable only if the person driving is other
than the insured.
B. Theft Clause
A clause which includes theft as among the
risks insured against.
Where the car is unlawfully and wrongfully
taken without the owners consent or
knowledge, such taking constitutes theft, and
thus, it is the theft clause and not the
authorized driver clause that should apply
(Palermo v. Pyramids Ins., 161 SCRA 677).

C. Cooperation Clause
A clause which provides in essence that the
insured shall give all such information and
assistance as the insurer may require, usually
requiring attendance at trials or hearings.
XX. SURETYSHIP
An agreement whereby a surety guarantees
the performance by the principal or obligor of
an obligation or undertaking in favor of an
obligee. (Sec. 175)
It is essentially a credit accommodation.
It is considered an insurance contract if it is
executed by the surety as a vocation, and not
incidentally. (Sec. 20
When the contract is primarily drawn up by
1 party, the benefit of doubt goes to the other
party (insured/obligee) in case of an ambiguity

following the rule in contracts of adhesion.

Suretyship, especially in fidelity bonding, is thus
treated like non-life insurance in some
respects.

1.
2.
3.

Nature of liability of surety

Solidary;
Limited to the amount of the bond;
It is determined strictly by the terms of the
contract of suretyship in relation to the
principal contract between the obligor and the
obligee. (Sec. 176)
SURETYSHIP

1.

2.

3.

4.

5.

PROPERTY
INSURANCE
Accessory contract
Principal contract
3 parties: surety, 2 parties: insurer and
obligor and oblige
insured
Credit
Contract of indemnity
accommodation
Surety can recover
Insurer has no such
from principal
right; only right of
subrogation
Bond can be
May be cancelled
cancelled only with unilaterally either by
consent of obligee, insured or insurer on
Commissioner or
grounds provided by
court
law
Requires
No need of
acceptance of
acceptance by any
obligee to be valid
third party
Risk-shifting
Risk-distributing
device; premium
device; premium
paid being in the
paid as a ratable
nature of a service
contribution to a
fee
common fund
XXI. LIFE INSURANCE
Insurance on human lives and insurance
appertaining thereto or connected therewith
which includes every contract or pledge for the
payment of endowments or annuities. (Sec.
179)
Kinds: (Bar Review Materials in Commercial
Law, Jorge Miravite, 2002 ed.)
Ordinary Life, General Life or Old Line Policy Insured pays a fixed premium every year until
he dies. Surrender value after 3 years.
Group Life Essentially a single insurance
contract that provides coverage for many
individuals. Examples: In favor of employees,
mortgage redemption insurance.
Limited Payment Policy insured pays premium
for a limited period. If he dies within the
period, his beneficiary is paid; if he outlives the
period, he does not get anything.
Endowment Policy pays premium for
specified period. If he outlives the period, the
face value of the policy is paid to him; if not, his
beneficiaries receive the benefit.
Term Insurance insurer pays once only, and
he is insured for a specified period. If he dies
within the period, his beneficiaries benefits. If
he outlives the period, no person benefits from
the insurance.

6.

Industrial Life - life insurance entitling the

insured to pay premiums weekly, or where
premiums are payable monthly or oftener.
Mortgage Redemption Insurance
A life insurance taken pursuant to a group
mortgage redemption scheme by the lender of
money on the life of a mortgagor who, to
secure the loan, mortgages the house
constructed from the use of the proceeds of
the loan, to the extent of the mortgage
indebtedness such that if the mortgagor dies,
the proceeds of his life insurance will be used
to pay for his indebtedness to the lender
assured and the deceaseds heirs will thereby
be relieved from paying the unpaid balance of
the loan. (Great Pacific Life Assurance Corp. vs.
Court of Appeals, 316 SCRA 677)

LIABILITY OF INSURER IN CERTAIN CAUSES OF

DEATH OF INSURED
1. Suicide
Insurer is liable in the following cases:
1. If committed after two years from the date of
the policys issue or its last reinstatement;
2. If committed in a state of insanity regardless of
the date of the commission unless suicide is an
excepted peril. (Sec. 180-A)
3. If committed after a shorter period provided in
the policy
Any stipulation extending the 2-year period
is null and void.
2. At the hands of the law (E.g. by legal
execution)
It is one of the risks assumed by the insurer
under a life insurance policy in the absence of a
valid policy exception. (Vance,p.572 cited in de
Leon, p. 107)
Note: Justice Vitug believes that death by
suicide (if the insured is sane) or at the hands
of the law obviates against recovery as being
more in consonance with public policy and as
being implicit under Section 87, ICP. (Pandect
of Commercial Law and Jurisprudence, 1997 ed.
P. 191)
3. Killing by the beneficiary
GENERAL RULE: The interest of a beneficiary
in a life insurance policy shall be forfeited when
the beneficiary is the principal accomplice or
accessory in willfully bringing about the death
of the insured, in which event, the nearest
relative of the insured shall receive the
proceeds of said insurance if not otherwise
disqualified. (Sec. 12)
EXCEPTIONS:
1. Accidental killing
2. Self-defense
3. Insanity of the beneficiary at the time he
killed the insured
If the premiums paid came from conjugal
funds, the proceeds are considered conjugal. If
the beneficiary is other than the insureds
estate, the source of premiums would not be
relevant. (Del Val v. Del Val, 29 Phil 534)

 The measure of indemnity in life or health

insurance policy is the sum fixed in the policy
except when a creditor insures the life of his
debtor. (Sec. 183)
IS THE CONSENT OF THE BENEFICIARY
NECESSARY TO THE ASSIGNMENT OF A LIFE
INSURANCE POLICY?
It depends. If the designation of the
beneficiary is irrevocable, the beneficiarys
consent is essential because of his vested right.
If the designation is revocable, the policy may
be assigned without such consent because the
beneficiary only has a mere expectancy to the
proceeds. (The Insurance Code of the
Philippines Annotated, Hector de Leon, 2002
ed.)

vary so as to reflect investment results of any

segregated portfolio of investment.
XXIII. INSURANCE COMMISSIONER
Main agency charged with the enforcement
of the Insurance Code and other related laws.
Functions:
1. ADJUDICATORY/QUASI-JUDICIAL
a. Exclusive original jurisdiction Any
dispute in the enforcement of any policy issued
pursuant to Chapter VI (CMVLI). (Sec. 385, par.
2)
b. Concurrent original jurisdiction (with
the RTC) Where the maximum amount
involved in any single claim is P100,000 (Sec.
416), except in case of maritime insurance
which is within the exclusive jurisdiction of the
RTC. (BP 129; admiralty & maritime jurisdiction)
Where the amount exceeds P100,000, the
RTC has jurisdiction.

Cash Surrender Value

As applied to a life insurance policy, it is the
amount the insured in case of default, after the
payment of at least 3 full annual premiums, is
entitled to receive if he surrenders the policy
and releases his claims upon it.
LIFE INSURANCE
Contract
of
investment not of
indemnity
Valued policy
May be transferred
or assigned to any
person even if he
has no insurable
interest
Consent of insurer
is not essential to
validity of
assignment
Contingency that is
contemplated is a
certain event, the
only uncertainty
being the time
when it will take
place
A long-term
contract and
cannot be
cancelled by the
insurer
Beneficiary is
under no
obligation to prove
actual financial loss

FIRE INSURANCE
Contract of
indemnity
Open or valued
policy
The
insurable
interest
of
the
transferee
or
assignee is essential
Consent of insurer
must be secured in
the absence of
waiver
Contingency insured
against may or may
not occur

The Insurance Commissioner has no

jurisdiction to decide the legality of a contract
of agency entered into between an insurance
company and its agent. The same is not
covered by the term doing or transacting
insurance business under Sec 2, ICP, neither is
it covered by Sec. 416 of the same Code which
grants the Commissioner adjudicatory powers
(Philippine American Life Insurance Co. v.
Ansaldo, 234 SCRA 509).

May be cancelled by
either party and is
usually for a term of
one year
Insured is required
to submit proof of
his actual pecuniary
loss as a condition
precedent to
collecting the
insurance.

a.
b.

XXII. VARIABLE CONTRACT

Any policy or contract on either a group or
individual basis issued by an insurance
company providing for benefits or other
contractual payments or values thereunder to

c.

2. ADMINISTRATIVE/REGULATORY
Enforcement of insurance laws
Issuance, suspension or revocation
certificate of authority
Power to examine books and records, etc.
d. Rule-making authority
e. Punitive

of