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)

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.

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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 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).

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 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).

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

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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, 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.

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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 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.

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.

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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.

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 –

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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

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.

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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).

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.

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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 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

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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 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

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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, 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]

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]

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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 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

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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. 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

14
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.

(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.

15
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)

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

16
 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.

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).

17
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 3 RD

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 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

18
 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

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

19
 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

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

20
POLICY

It is the written instrument in which a contract of insurance is set forth (Section 49).

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

21
 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 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).

22
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.

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 3 RD

23
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). 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.

24
 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 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

25
 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.

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 NOT TO RENEW OR TO

26
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.

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.

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 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 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

28
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

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

29
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.

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

30
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

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:

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 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, 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, 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

32
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.

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

33
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).

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)

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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 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

35
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 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)

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TEST TO DETERMINE EXISTENCE OF DOUBLE INSURANCE

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

1. In double insurance, the insurer remains an insurer. In reinsurance, the insurer

becomes the insured.

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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
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

38
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, 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.

39
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 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.

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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.

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.

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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 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 cargo transported

42
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)

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

43
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

(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

44
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 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).

45
(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.

(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).

46
(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)

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

47
the cargo without incurring the like expense or risk mentioned in item (c) BUT,
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.

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

48
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

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

49
(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.

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)

50
 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:

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).

51
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

(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

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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.

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).

53
 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 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

54
(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

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.

55
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

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.

56
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

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

57
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 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 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).

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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 3 rd
persons or passengers.

Own Damage Insurance answers for reimbursement of the cost of repairing the
damage to vehicle of the insured.

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

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 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).

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

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 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

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

61
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- 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 corporation
principally organized as a labor union shall be governed by the Labor Code

62
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).

63