LECTURE NOTES ON INSURANCE

2004

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.

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.
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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:

a. 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.

b. 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
insureds armored truck was robbed. The driver was assigned by a labor contractor with the
insured, while the security guard was assigned by an agency contracted by the insured. Both driver
and guard were found to be involved. Can the loss be excluded? HELD: THE LOSS IS
EXCLUDED, the DRIVER/GUARD ALTHOUGH ASSIGNED BY LABOR CONTRACTORS ARE
AUTHORIZED REPRESENTATIVES. THE TERMS ARE CLEAR AND UNAMBIGUOUS (Fortune
Insurance v. CA, 244 SCRA 308).

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

c. Warranty in a fire insurance policy prohibited storage of oils having a flash point of below
300 Fahrenheit. Gasoline is stored. Is there a policy violation? HELD: The clause is ambiguous. In
ordinary parlance oil means lubricants not gasoline. There is no reason why gasoline could not be
expressed clearly in the language the public can readily understand. (QUA CHEE GAN 98 Phil. 85)

d. An action to recover the amount of PHP 2,000.00 due to death by drowning where the
policy provided for indemnity in the amount of PHP 1,000.00 to PHP 3,000.00. HELD: the
interpretation of the obscure stipulation in contract must not favor the one who caused the
obscurity. Hence, judgment for an additional PHP 2,000.00 was affirmed (Del Rosario vs. Equitable
Insurance and Casualty Company, 8 SCRA 343).

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 Carriers Liability Insurance
Policy which covers a public vehicle for hire. HELD: Insurer is liable as it was aware all along that

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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
insureds salary (Landicho v. GSIS, 44 SCRA 7)

OTHER CASE REFERENCES: New Life Enterprises v. CA, 207 SCRA 669

WHAT ARE THE ELEMENTS OF AN INSURANCE CONTRACT

1. The insured should possess an interest of some kind, susceptible of pecuniary estimation
known as insurable interest. GENERALLY a person has insurable interest in the subject matter
insured when:

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

SUBJECT MATTER THAT HE WILL DERIVE PECUNIARY BENEFIT OR ADVANTAGE FROM ITS
PRESERVATION OR WILL SUFFER PECUNIARY LOSS OR DAMAGE FROM ITS
DESTRUCTION, TERMINATION OR INJURY BY THE HAPPENING OF THE EVENT INSURED
AGAINST.

It is necessary because its absence renders the contract VOID. This is based on the principle that
insurance is a contract of indemnity. If the insured has no interest, he will not stand to suffer loss or
injury by the happening of the event insured against.

IN 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

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WHAT IS THE EXTENT OF INSURABLE INTEREST IN ONES LIFE

He has unlimited interest in his own life or that of another person regardless of whether or not the
latter has insurable interest. Provided, that if the beneficiary has no insurable interest, there is no
force or bad faith. BUT, if he takes out a policy on the life of another and names himself as the
beneficiary, he must have an insurable interest in the life of the insured.

IS THE CONSENT OF THE INSURED REQUIRED WHEN INSURANCE IS TAKEN

The law does not require the consent of the person insured and such has been considered as not
essential to the validity of the contract as long as there is insurable interest at the beginning.

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

WHETHER REAL OR PERSONAL, OR ANY RELATION THERETO, OR LIABILITY IN RESPECT
THEREOF, OF SUCH NATURE THAT A CONTEMPLATED PERIL 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 testators 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)

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.

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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 (Section 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

LIFE PROPERTY

1. not necessary can be based based on pecuniary interest

on consanguinity or affinity

2. only at effectivity except that exist at the time of effectivity and loss
taken by a creditor in the life
of the debtor

3. no limit exist if based on debtor limited to actual volume insured

creditor

IN RELATION TO THE NEED FOR THE EXISTENCE OF INSURABLE INTEREST, PLS. NOTE:

That a change of interest in any port of a thing insured in accompanied by a corresponding change
of interest in the insurance suspends the insurance to an equivalent extent until interest in the thing
and interest in the insurance is vested in the same person.

Example: A buyer of a property insured by the previous owner who has not obtained a transfer of
the insurance policy in his name cannot recover.

RELATED QUERY How about the seller NO no insurable interest at the time of loss (Sec
19)

WHAT CHANGE IS CONTEMPLATED

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

EXCEPTIONS

1. Life, Health or accident insurance because they are not contracts of indemnity and insurable
interest is not required at the time of loss.
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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

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 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 insurers promise, the insured makes a ratable contribution called a
premium to the general insurance fund.
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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.

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 its 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

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a. The insurance is still deemed to be upon the interest of the mortgagor who does not cease
to be a party to the original contract. HENCE, if the policy is cancelled, notice must be given to the
mortgagor.

b. Any act of the mortgagor, prior to loss, which would otherwise avoid the policy or insurance,
will have the same effect, although the property is in the hands of the mortgagee. HENCE, if there
is a violation of the policy by the mortgagor , the mortgagee cannot recover.

c. Any act required to be done by the mortgagor may be performed by the mortgagee with the
same effect as if it has been performed by the mortgagor. Example: if notice of loss is required, the
mortgagee may give it.

d. Upon the occurrence of the loss, the mortgagee is entitled to recover to the extent of his
credit, and the balance, if any, is to be paid to the mortgagor, since such is for both their benefits.

e. Upon recovery by the mortgagee, his credit is extinguished.

IF ON THE OTHER HAND, (Section 9), the Insurer assents to the transfer of the insurance from the
mortgagor to the mortgagee, and at the time of his assent, imposes further qualifications on the
assignee, making a new contract with him, the acts of the MORTGAGOR cannot affect the rights of
the assignee NOTE UNION MORTGAGE CLAUSE Creates the relation of insured and insurer
between the mortgagee and the insurer independent of the contract of the mortgagor. In such case,
any act of the mortgagor can no longer affect the rights of the mortgagee the insurance contract is
now independent of that with the mortgagor.

WHAT IS THE EFFECT OF INSURANCE PROCURED BY THE MORTGAGEE WITHOUT

REFERENCE TO THE RIGHT OF THE MORTGAGOR.

a. The mortgagee may collect from the insurer upon occurrence of the loss to the extent of his
credit.

b. Unless, otherwise stated, the mortgagor cannot collect the balance of the proceeds, after the
mortgagee is paid.

c. The insurer, after payment to the mortgagee, becomes subrogated to the rights of the
mortgagee against the mortgagor and may collect the debt to the extent paid to the mortgagee.

d. The mortgagee after payment cannot collect anymore from the mortgagor BUT if he is
unable to collect in full from the insurer, he can recover from the mortgagor.

e. The mortgagor is not released from the debt because the insurer is subrogated in place of
the mortgagee.

3. BENEFICIARY the person who receives the benefits of an insurance policy upon its
maturity.

WHO MAY BE A BENEFICIARIES IN LIFE INSURANCE

Anyone, except those who are prohibited by law to receive donations from the insured. Note Article
739 of the Civil Code, hence the following cannot be designated as beneficiaries (1)Those made
between persons guilty of adultery or concubinage at the time of the designation (2)Those found
guilty of the same criminal offense in consideration thereof (3) Those made to a public officer or his
wife, descendants / ascendants by reason of his office.
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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 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

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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]

IV. PARTIES: (a) Insurer [6] (b) Insured [7, 8,9] (c) Beneficiary [11,12]

CONCEALMENT

WHAT IS 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 /UTMOST GOOD

FAITH.

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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 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 insureds 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

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(3) That the other party had no means of ascertaining such fact/s

(4) That the party with a duty to communicate makes no warranty (Section 28) as the existence
of a warranty makes the requirement to disclose superfluous BUT an intentional and fraudulent
omission on the part of the one insured to communicate information on a matter PROVING OR
TENDING TO PROVE THE FALSITY OF A WARRANTY entitles the insurer to rescind (Section 29).
Example: Warranty that the ship is seaworthy THE INTENTIONAL AND FRAUDULENT
OMISSION OF THE INSURED TO state that the ships 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. 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 As 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
12
terrorism. A warranty has been made by the insured that loss due to perils of the sea is excluded.
Consequently, the fact that the vessels 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)

REPRESENTATIONS

WHAT IS A 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

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

13
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).

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 (Section 44)

MUST THE INSURED COMMUNICATE INFORMATION OF WHICH HAS NO PERSONAL

KNOWLEDGE BUT MERELY RECEIVES THE SAME FROM OTHERS

When a person has no PERSONAL KNOWLEDGE OF A FACTS HE MAY OR MAY NOT

communicate such information to the insurer. If he does communicate, he is not responsible for its
truth (Section 43). Hence, there can be no misrepresentation

WHEN IS THE INSURED REQUIRED TO DISCLOSE INFORMATION FROM A 3RD PERSON

When the information material to the transaction was acquired by an agent of the insured, as
knowledge of the agent is also knowledge of the 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

14
If it is false on a material point, whether affirmative or promissory the injured party is entitled to
rescind the contract from the time the representation becomes false. HOWEVER, the right to
rescind is considered waived by the acceptance of premium payments despite knowledge of the
ground to rescind (Section 45) Example: Insurer was aware of the lack of extinguishers required by
the policy. BUT there is no waiver if the insurer had no knowledge of the ground at the time of the
acceptance of the premium. Example: Unauthorized driver. (Stokes vs. Malayan 127 SCRA 766)

HOW IS MATERIALITY DETERMINED

The same as concealment (Section 46) probable and reasonable influence of the facts upon the
party to whom the representation is made in forming his estimate of the advantage/disadvantages
of the contract or in making inquiries.

WHEN THE RIGHT TO RESCIND IS 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

15
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

POLICY

DEFINE 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)

16
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 applicants 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

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
17
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).

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 3 rd 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 3 rd 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
18
insurance was held to be one for indemnity for liability to third persons (THIRD PARTY LIABILITY),
and therefore, such third person is entitled to sue the insurer. THE TEST TO DETERMINE
WHETHER A 3RD PERSON MAY DIRECTLY SUE THE INSURER OF THE WRONGDOER is: if the
contract provides for indemnity against liability to 3rd persons, then the latter to whom the insured is
liable may directly sue the insurer, ON THE OTHER HAND, if the insurance is for indemnity against
actual loss or payment then the 3rd person cannot sue the insurer recourse is against the
insured alone.

2. If the contract is executed with an agent or trustee as the insured, the fact that his principal
or beneficiary is the real party in interest may be indicated by describing the insured as the agent /
trustee or by general words in the policy (Section 54). If not indicated, it is as if the insurance is the
taken out by the agent / trustee alone, consequently the principal has no right against the insurer.

3. If a partner or part owner effects insurance, it is necessary that the terms of the policy should
be such as are applicable to the joint or common interest so that it may be applicable to the interest
of his co-partners / owners (Section 55). Consequently, the policy must state that the interest of all
is insured, if not, it is only the interest of the one getting the policy that is insured.

4. When the description of the insured in the policy is so general that it may comprehend any
person or any class of persons, only he who can show that it was intended to include him can claim
the benefit of the policy (Section 56). 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 insurers liability. In case of loss, the insurer only pays
the actual cash value at the time of loss. Example: FIRE INSURANCE, where the loss is to be
determined but payment is limited to the amount stated in the policy.

A VALUED POLICY is one which expresses on it face that the thing insured shall be valued at a
specified sum (Section 61). The valuation of the property insured is conclusive between the parties.
In the absence of fraud or mistake, such value will be paid in case of a total loss.

A VALUED POLICY DISTINGUISHED FROM AN OPEN POLICY

(1) In a valued policy, proof of value of the thing after the loss is not necessary. In an open policy,
the insured must prove the value of the thing insured (2) In a valued policy, the parties have
conclusively stipulated that that property insured is valued at a specified sum. In an open policy, the
value is not agreed but left to be ascertained upon loss (NOTE: this does not violate the principle

19
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 insurers rejection of the claim of the beneficiary or of the insured SINCE
BEFORE REJECTION there is no necessity to bring suit. WHEN NO PERIOD IS STIPULATED OR
IF THE STIPULATION IS VOID, the period is within 10 years under Article 1144, NCC, it being a
written contract (EAGLE STAR vs. CHIA YU 96 PHIL 696, ACCFA vs. ALPHA INSURANCE, 24
SCRA 151). IF THE INSURED ASKS FOR A RECONSIDERATION OF THE DENIAL, the period is
still counted from the time the claim is denied at the first instance NOT RECONSIDERATION as
it gives the insured a scheme or devise to waste time until evidence that may be considered against
him can be destroyed( Sun Life Office Ltd vs. CAR 195 SCRA 193). The period does not run if
action is brought against an agent of the insurer.

WHAT IS THE PRESCRIPTIVE PERIOD FOR MOTOR VEHICLE INSURANCE

One year from denial of the claim NOT DATE OF ACCIDENT (Summit Guaranty vs. De Guzman
15 SCRA 389

WHERE IS THE ACTION FILED

An action may be filed in the following: (1) Courts (2) Insurance Commissioner, who has concurrent
jurisdiction with courts for claims not exceeding PHP 100,000.00 (3) POEA / DOLE have the power
to compel a surety to make good on a solidary undertaking in the same proceeding where the
liability of the principal obligor is determined. Note that the claim becomes an ACTION upon filing
with the Court.

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).

20
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 insurers 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 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

DEFINED

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 insureds premises will be fenced.

21
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.

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 construction of the specified firewall (3) the performance becomes
impossible. Example: A severe lack of materials to construct. (Section 73)
DISTINGUISHING IT FROM REPRESENTATIONS.

22
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

DEFINED

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 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.)

23
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 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:
As 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

24
WHAT ARE THE RULES TO DETERMINE WHETHER THE INSURER IS LAIBLE FOR THE LOSS
OF THE THING INSURED

They are:
(1) Loss of which a peril insured against is the proximate cause (PROXIMATE CAUSE that
which, in a natural and continuous sequence, unbroken by any efficient intervening cause, produces
an injury and without which the injury would not have occurred), although a peril not contemplated
by the contract may have been a remote cause BUT the insurer is not liable for a loss of which the
peril insured against was only a remote cause (Section 84).

Example: In life insurance that covers death by accident, if the insured sustains an accident that
renders him weak, while in said state, he contracts a cold that develops into pneumonia. The
proximate cause is the accident, while the remote cause is the pneumonia, the insurer is liable. An
example of a loss, 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 policies 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 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
25
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 insureds 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
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.
26
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)

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 (Firemans 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

27
WHEN DOES DOUBLE INSURANCE EXIST

Where the same person is insured by several insurers separately in respect to same subject or
interest (Section 93). Its REQUISITES are: (1) same person is insured (2) there are several
insurers (3) subject insured is the same (4) interest insured is the same (5) risk or peril insured
against is the same. There is a prohibition TO PREVENT OVER-INSURANCE, thus preventing
fraud.

EFFECTS OF OVER-INSURANCE BY DOUBLE INSURANCE

1. Insured, unless the policy otherwise provides, may claim payment from the insurers in such
order as he may select up to the amount for which the insurers are severally liable under their
respective contracts. Example: A house is insured with X Insurance for 10K, with Y Insurance for
20K, and with Z Insurance for 20K. It is valued at 20K. In case of loss A can recover 10K-from X
Insurance and 10K from either Y Insurance or Z Insurance

2. Where the policy under which the insured claims is a valued policy, the insured must give
credit as against the valuation for any sum received by him under any policy without regard to the
actual value of the subject matter insured. Example: A owns a house valued at 40K. He insured it
with X Insurance for 35K and with Y Insurance for 5K. The value of the house with both companies
is 20K. If it is lost A can collect 5K from Y Insurance. He cannot collect 35K from Y Insurance but
only the difference between the value of the house (20K) and the value of the policy with Y
Insurance (5K)

3. Where the policy under which the insured claims is an unvalued policy, he must give credit,
as against the full insurable value, for any sum received by him 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)

28
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

WHAT IS REINSURANCE

Reinsurance occurs when an insurer procures a 3 rd 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.

2. In double insurance, the subject matter is property. In reinsurance, the subject matter is the
insurers 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

29
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 insurers risk not the property
insured in the original policy THUS, IT IS NOT NECESSARY THAT THE INSURER FIRST PAY
ON A CLAIM ON THE ORIGINAL POLICY BEFORE CLAIMING FROM THE REINSURER.

WHAT IS THE EXTENT OF THE LIABILITY OF THE REINSURER

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

WHAT IS THE INTEREST OF THE ORIGINAL INSURED IN THE CONTRACT OF

REINSURANCE

The original insured has no interest in the contract of reinsurance (Section 98). Hence, only the
reinsured can claim against the reinsurer.

CLASSES OF INSURANCE:

MARINE INSURANCE
30
WHAT IS 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 BUILDERS RISK, AND ALL PERSONAL PROPERTY
FLOATER RISKS (follows property wherever it may be)

(b) Person or property in connection with or appertaining to marine, island marine, transit or
transportation insurance, including liability for loss or in connection with the construction, repair,
operation, maintenance, use of the subject matter of the insurance (BUT NOT INCLUDING LIFE
INSURANCE, OR SURETY BONDS, NOR INSURANCE AGAINST LOSS BY REASON OF BODILY
INJURY TO ANY PERSON ARISING OUT OF THE OWNERSHIP, MAINTENANCE, USE OF
AUTOMOBILES)

(c) Precious stones, jewels, jewelry, precious metals whether in the course of transportation or
otherwise.

(d) Bridges, tunnels or other instrumentalities of transportation and communications (excluding

buildings, their furniture and furnishings, fixed contents, and supplies held in storage), piers,
wharves , docks, slips, and other aids to navigation and transportation, including dry docks, marine
railways, dams and appurtenant facilities for the control of waterways.

AND Marine Protection and Indemnity insurance meaning insurance against, or against legal
liability of the insured for loss damage or expense incident to ownership, operation, chartering,
maintenance, use, repair or construction of any vessel, craft or instrumentality in use in ocean or
island waterways, including liability of the insured for personal injury, illness or death or for loss or
damage to the property of another person( Section 99).

NOTE that marine insurance is really TRANSPORTATION INSURANCE which is a kind of

insurance which is concerned with the perils of property in (or incidental to) transit as opposed to
property perils at a generally fixed location. BUT it does not include normal motor vehicle insurance
which is treated separately by law.

WHAT ARE THE DIVISIONS OF TRANSPORTATION INSURANCE

The divisions of transportation insurance are: (1) Ocean Marine Insurance pertaining primarily to
sea perils of ships and cargoes, and (2) Inland Marine Insurance pertaining primarily to land or
over land (but sometimes water) transportation perils of property shipped by railroads, motor trucks,
airplanes and other means of transportation. These includes four basic policies: (a) property in
transit- providing protection to property frequently exposed to loss 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
31
of property insurance, indemnifying the insured for loss or damage to property (Par. 1, Section 99)
or liability insurance, protecting the insured against the consequences of legal liability for loss or
damage to property or for personal injury, illness or death of a person (Par. 2, Section 99)

WHAT RISKS ARE INSURED AGAINST

The basic risk insured against is what is commonly known as PERILS OF THE SEA (all kinds of
marine casualties and damages done to the ship or goods at sea by the violent action of the winds
or waves, one that could not be foreseen and is not attributable to the fault of anybody. Examples:
shipwrecks, foundering, stranding, collision, including the jettisoning of cargo if made for the
purpose of saving the vessel) although it also includes FIRE, ENEMIES, PIRATES, THIEVES,
JETTISON, SURPRISALS, TAKING AT SEA, ARRESTS, RESTRAINTS, DETAINMENTS OF
KINGS, PRINCESS AND PEOPLE OF WHAT NATION, CONDITION OR QUALITY, BARRATRY OF
THE MASTER AND ALL OTHER PERILS LOSSES, MISFORTUNES THAT HAVE OR SHALL
COME TO HURT, DETRIMENT OR DAMAGE OF THE SAID GOODS, MERCHANDISE, SHIP OR
ANY PART THEREOF.

WHAT ARE NOT COVERED

Generally PERILS OF THE SHIP ARE NOT COVERED (losses or damages that result from (a)
natural and inevitable action of the sea (b) ordinary wear and tear of the ship (c) negligent failure of
the ship owner to provide the vessel with the proper equipment to convey the cargo under ordinary
conditions. Example: (a) Insurance upon a cargo of rice, when sea water entered the compartment
where the rice was found through a defective steel pipe (b) The insured loaded logs unto a barge.
The logs are covered by insurance. The barge sank due to improper loading and leaks because the
barge was not provided with tarpaulins that could have prevented the barge from retaining sea
water splashing into it during the voyage.

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.

32
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 policys coverage, whether arising from a marine peril or not PROVIDED the risk is not
excluded.

WHAT CONSTITUTES INSURABLE INTEREST IN OCEAN MARINE INSURANCE

1. The owner of a vessel has insurable interest in the vessel, and such shall continue even if
(a) the vessel has been chartered by one who covenants to pay the owner the value of the vessel
upon loss BUT, in case of loss, the insurer is 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 is 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 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 Bs 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

33
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 3 rd

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 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 3 rd 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.
34
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 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 shipowners 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

35
(a) When it is described by places of beginning and ending, the voyage is the course of sailing
fixed by mercantile usage between those places (Section 121).

(b) When it is not fixed by mercantile usage, the voyage is the way between the places specified
which to a master of ordinary skill and discretion would seem the most natural, direct and
advantageous (Section 122).

WHAT IS A DEVIATION

It is a departure from the course of the voyage as defined by Sections 121 and 122 OR an
unreasonable delay in pursuing the voyage OR the commencement of an entirely different voyage
(Section 123).

WHEN IS A DEVIATION PROPER

(a) When it is caused by circumstances over which neither the master nor the owner of the ship
has any control. Example: An ailment strikes the crew of the vessel.

(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 (Section 129).

(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)
36
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 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 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 the value of the thing abandoned OR a risk which a
prudent man would not take under the circumstances (d) if the insured is FREIGHTAGE OR
CARGO and the voyage cannot be performed NOR another ship procured by the master
WITHIN A REASONABLE TIME WITH REASONABLE DILIGENCE to forward the cargo without
incurring the like expense or risk mentioned in item (c) BUT, 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

37
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 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

38
AVERAGE DEFINED is any extraordinary or accidental expense incurred during the voyage for
the preservation of the vessel, cargo, or both AND all damages to the vessel or cargo from the time
it is loaded and the voyage commenced until it ends and the cargo is unloaded.

KINDS OF AVERAGES ARE: (a) PARTICULAR OR SIMPLE AVERAGE is a damage or expense

caused to the vessel or cargo which has NOT INURED to the COMMON BENEFIT and PROFIT of
all PERSONS interested in the CARGO or the VESSEL. This damage or expense is borne ordinarily
by the owner of the vessel or cargo that gives rise to the expenses or suffered the damage.
Examples: Damage sustained by a cargo from the time it is loaded to the time it is unloaded OR
additional expenses that are incurred by the vessel from the time it puts out to sea until it reaches its
destination (b) GENERAL OR GROSS AVERAGE is an expense or damage suffered deliberately in
order to save the vessel or its cargo or both from a REAL or KNOWN risk. THUS, all persons having
an interest in the VESSEL and CARGO or both at the occurrence of the AVERAGE shall contribute.
Example: Jettisoning of cargo.

AS A RULE, WHEN IT HAS BEEN AGREED THAT AN INSURANCE UPON A PARTICULAR THING
OR CLASS OF THINGS SHALL BE FREE FROM PARTICULAR AVERAGE, a marine insurer is not
liable for a particular average loss NOT DEPRIVING THE INSURED OF THE POSSESSION, AT
THE PORT OF DESTINATION, of the whole such thing, or class of things, even though it becomes
entirely worthless, BUT such insurer is liable for his proportion of all general average loss assessed
upon the thing insured (Section 136)

IN CASE OF A GENERAL AVERAGE LOSS

The insurer is liable for the loss falling upon the insured, through a contribution in respect to the
thing insured when required to be made by him towards a general average loss called for a peril
insured against BUT liability is limited to the proportion of the contribution attaching to his policy
value where this is less than the contributing value of the thing insured (Section 164). MEANING
that the insured can hold his insurer liable for his contribution up to the value of the policy.

RIGHT OF SUBROGATION

When a person insured in a contract of marine insurance has a demand against the others for
CONTRIBUTION, HE MAY CLAIM THE WHOLE LOSS FROM HIS INSURER subrogating the
insurer to his own right to contribution BUT no such claim can be made upon the insurer if (a) there
is separation of the interest liable to contribution. Example: When the cargo liable for contribution
has been removed from the vessel, NOR (b) when the insured having the right and opportunity to
enforce contribution from others, has NEGLECTED OR WAIVED the exercise of the right (Section
165). MEANING that the insured has a choice of recovery on the happening of a general average
loss. They are: (a) enforcing the contribution against interested parties, or (b) claiming from the
insurer. If it be the latter, subrogation takes place.

MEASURE OF INDEMNITY IN MARINE INSURANCE

(1) IF THE POLICY IS VALUED

(a) A valuation in the policy of marine insurance is conclusive between the parties thereto in the
adjustment of either a partial or total loss, if the insured has some interest at risk and there is no
fraud on his part. If there is fraud in valuation, it ENTITLES THE INSURER TO RESCIND AS IT IS
AN EXCEPTION AS TO CONCLUSIVENESS (Section 156)

If however, hypothecated by bottomry or respondentia BEFORE INSURANCE AND WITHOUT

KNOWLEDGE OF THE PERSON SECURING IT he may show the real value. Example: a person

39
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). 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 . In case of a total loss, the insured can only demand 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

40
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

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

41
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).

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 insureds 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

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In an OPEN POLICY, it is the expense it would be to the insured at the time of the commencement
of the fire to replace the thing lost or injured in the condition in which it was at the time of the injury.
In a VALUED POLICY, it is the same as in marine insurance, the valuation as agreed upon by the
parties is conclusive in the adjustment of either a partial or total loss in the absence of fraud
(Section 171).

HOW IS THE VALUATION MADE

(1) Whenever the insured would like to have a valuation stated in a policy insuring a building or
structure against fire, it may be made by an independent appraiser, who is paid by the insured and
the value may then be fixed between the insurer and the insured.

(2) Subsequently, the clause is then inserted in the policy that said valuation has thus been
fixed.

(3) In case of loss, PROVIDED there is no change increasing the risk without the consent of the
insurer or fraud on the part of the insured, the insurer will pay the whole amount so insured and
stated in the policy is paid. If it is a PARTIAL LOSS, the whole amount of the partial loss is paid. In
case there are 2 or more policies, each shall contribute pro-rata to the total or partial loss BUT the
liability of the insurers cannot be more than the amount stated in the policy.

(4) OR the parties may stipulate that instead or payment, the option to repair, rebuilds 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

CASUALTY INSURANCE DEFINED

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 Employers liability, workmens 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

Employers liability is insurance obtained by the employer against liability to an employee for
damages caused or arising from injuries by reason of his employment

Workmens 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.

43
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 amended by Act No. 2206 (GOVERNMENT TRANSACTIONS BY AUTHORIZED
COMPANIES)

WHAT IS THE LIABILITY OF THE SURETY

It is joint and several (solidary) with the OBLIGOR but limited to the amount of the BOND AND
DETERMINED STRICTLY BY THE TERMS OF THE CONTRACT IN RELATION TO THE
PRINCIPAL CONTRACT BETWEEN OBLIGOR OBLIGEE (Section 176).

IS A SURETYSHIP CONTRACT VALID AND BINDING WHERE THE PREMIUM HAS NOT YET
BEEN PAID

Generally, payment of the premium is a condition precedent. Hence the bond is not valid. An
EXCEPTION is when it is issued and accepted by the obligee, it is valid despite non payment of the
premium (Section 177)

WHAT OTHER LAWS GOVERN A SURETYSHIP CONTRACT

IN THE ABSENCE OF SPECIFIC PROVISIONS, CIVIL CODE PROVISIONS APPLY IN A

SUPPLETORY CHARACTER IF NECESSARY TO INTERPRET THE CONTRACT PROVISIONS
(Section 178)

DISTINGUISHED WITH GUARANTY

(1) A surety assumes liability as a regular party to the agreement, a guarantors liability
depends on an independent agreement to pay if primary debtor fails to pay (2) A surety is primarily
liable, a guarantor is secondarily liable (3) a surety is not entitled to EXHAUSTION, a guarantor is
entitled to EXHAUSTION

44
 LIFE INSURANCE

DEFINED

Is insurance on human lives and insurance appertaining thereto or connected therewith (Section
179)

WHEN IS IT PAYABLE

An insurance upon life may be made payable on (1) death of the person, or (2) his surviving a
specified period, or (3) or otherwise, contingently on the continuance or cessation of life.

COMMON KINDS

WHOLE LIFE/ORDINARY LIFE/STRAIGHT LIFE premiums are payable for life and the insurer
agrees to pay the face value upon the death of the insured.

LIMITED PAYMENT LIFE insured pays premiums for a limited period after which he stops with a
guarantee by the insurer that upon death the face amount is to be paid if death occurs while
payment is not complete beneficiary receives face amount.

TERM POLICY Insurer is liable only upon death of the insured within the agreed term or period. If
insured survives the insurer is not liable.

ENDOWMENT protection is for a limited period, if the insured is still alive at the end of the period,
the value of the policy is paid to him. If he dies before the end of the period, it is paid to the
beneficiaries.

ANNUITY where the insured or a named person/s is paid a sum or sums periodically during life or
a certain period (NOTE that CONTRACTS FOR THE PAYMENT of endowment or annuities are
CONSIDERED AS LIFE INSURANCE CONTRACTS)

Distinguishing Life Insurance from Payment of Annuity. In the former, it is payable upon the death of
the insured, while in the latter, it is payable during the lifetime of the annuitant. In the former, the
premium is paid in installments, while in the latter, annuitant pays a single premium. In the former,
there is lump sum payment upon death, while in the latter, annuities are paid until death.

NOTE THAT Section 180 also provides that as far as a minor, who is the insured or a beneficiary in
an insurance contract, in the absence or incapacity of a JUDICIAL GUARDIAN, the father, in
default, the mother, MAY ACT IN BEHALF OF THE MINOR WITHOUT NEED OF BOND OR
COURT AUTHORITY when it involves the exercise of any right under the policy, to include but not
limited to obtaining a policy loan, surrendering the policy, receiving the proceeds of the policy and
giving the minors consent to any transaction on the policy PROVIDED the interest of the minor
does not exceed PHP 20,000.00.

WHAT RISKS ARE COVERED

(1) Generally all causes of death are covered UNLESS excluded by law, by the policy or
public policy. Examples: By law- beneficiary is the principal, accomplice or accessory in bringing
death of the insured. By the policy- when it does not cover assault, murder or injuries inflicted
intentionally by a 3rd person BUT where the insured is not the intended victim, insurer is liable
(Calanoc vs. CA, 98 Phil 79) What must be considered is that death or injury is not the natural or
probable result of the insureds 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
45
Assurance Company, 44 SCRA 58). By public policy- when the insured is executed for a crime
committed.

(2) SUICIDE, if committed after the policy has been in force for a period of two years from date
of issue or last reinstatement unless policy provides a shorter period BUT it is nevertheless
compensable if committed in the state of insanity regardless of date of commission (Section 180 A)

IS A LIFE INSURANCE POLICY TRANSFERABLE OR ASSIGNABLE

Yes, it may pass by transfer, will or succession to any person, whether he has insurable interest or
not (Section 181). EFFECT, the person to whom it is transferred may recover upon it whatever the
insured might have recovered.

NOTE while there is no need for the assignee/transferee to have insurable interest, it should not be
used to circumvent the law prohibiting insurance without insurable interest. THUS, an assignment
CONTEMPORANEOUS with ISSUANCE may invalidate the policy unless made in good faith.

IS NOTICE TO THE INSURER OF TRANSFER OR BEQUEST REQUIRED

It is not necessary to preserve the validity of the policy UNLESS THEREBY EXPRESSLY
REQUIRED (Section 182)

IS THE CONSENT OF THE BENEFICIARY REQUIRED

Yes, if he is designated as an irrevocable beneficiary as he has acquired a vested right.

WHAT IS THE MEASURE OF INDEMNITY IN LIFE INSURANCE

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 companys admitted assets
EXCLUSIVE of its paid up capital. In case of a DOMESTIC INSURANCE COMPANY and the
46
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 (Section
194).

The required margin is in case of life insurance companies is TWO PERCENT (2%) of the total
amount of its insurance in force as of the preceeding calendar year on all policies except term
insurance AND in case of non life insurance companies, at least TEN PERCENT (10%) of total
amount of its net premium during the proceeding calendar year BUT IN NO CASE TO BE LESS
THAN PHP 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 (Section 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 3 rd 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 vehicles operator or his agents to ride without fare) ARISING FROM
THE USE THEREOF (Sections 373, 374).

COMPLIANCE by the motor vehicle owner or the land transportation operator is monitored as the
Land Transportation Office shall not allow registration or renewal of registration without compliance
with Section 374 (Section 376).

EXTENT OF THE LIABILITY COVERAGE

Every insurance policy, surety or cash deposit required by Section 374 shall comply with the
minimum limits prescribed under Section 377. (a) if a Land Transportation Operator it is PHP
12,000.00 per passenger, plus PHP 50,000.00 for vehicles with capacity of 26 or more passengers
OR PHP 40,000.00 for vehicles with capacity of 12 to 25 passengers OR PHP 30,000.00 for
47
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 insurers liability accrues immediately
upon the occurrence of the injury upon which liability depends, and does not depend on the
recovery of judgment by the injured party against the insured. Hence, there is no need for the
insured to wait for a decision of the court finding him guilty of reckless imprudence. The occurrence
of an injury for which the insured may be liable immediately gives rise to insurer liability
( Shafer vs. Judge, 167 SCRA 386). In fact a third party can bring a claim or an action directly
against the insurer as the general purpose of the statute is to protect the injured against the
insolvency of the insured.

NATURE OF THE LIABILITY OF THE INSURER

It is not solidary with the insured. The liability of the insurer is based on contract, while that of the
insured is based on tort. (Malayan Insurance v. CA 165 SCRA 536)

WHO CAN ISSUE POLICY OR SURETY BOND

Those authorized by the commissioner in the list furnished to Land Transportation Office (Section
375). If the Motor Vehicle Owner or the Land Transportation Operator is unable to obtain or is
unreasonably denied the policy of insurance, they will be required to show proof of a cash deposit
with the commissioner, but the authority of the insurance company to engage in casualty or surety
lines of business shall be withdrawn immediately (Section 379)

CANCELLATION OF THE POLICY

BY THE INSURER, requires written notice to Motor Vehicle Owner/Land Transportation Operator at
least 15 days prior to intended effective date. IF SO CANCELLED, the Land Transportation Office
may order the immediate confiscation of license plates UNLESS it receives new valid insurance /
surety / proof of cash deposit or revival by endorsement of the cancelled policy (Section 380).
48
BY THE INSURED, the Motor Vehicle Owner/Land Transportation Operator shall secure a similar
policy or surety before the cancelled policy / surety cease to be effective or make a cash deposit
AND file the same or proof thereof with the Land Transportation Office (Section 381).

EFFECT OF A CHANGE IN OWNERSHIP OR CHANGE IN ENGINE

There is no need to issue a new policy until the next date of registration PROVIDED, the insurer
shall agree to continue the policy and such change shall be indicated in a second duplicate which is
filed with the Land Transporation Office (Section 382).

OTHER PROHIBITED ACTS

(1) The Motor Vehicle Owner or the Land Transportation Operator cannot require
driver/s/employees to contribute to the payment of the premium (Section 386)

(2) Any government office or agency having the duty to implement the provisions, official or
employee thereof shall not act as an agent in procuring the policy or surety bond and in no case
shall the commission of the procuring agent exceed 10% of the premiums paid (Section 387).

PENALTIES FOR VIOLATION

The penalties for a violation by the Motor Vehicle Owner or the Land Transportation Operator is a
fine of not less than PHP 500.00 nor more than PHP 1,000.00 and / or imprisonment for not more
than 6 months. If a Land Transportation Operator violates Section 377 (minimum limits of coverage)
it is sufficient cause for revocation of a certificate of public convenience (Section 388).

If the violation is committed by a corporation / association or government office / entity, the

executive officer/s who shall have knowingly permitted or failed to prevent the violation shall be held
liable as principals (Section 389).

PAYMENT OF CLAIMS

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 (Section 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).

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WHAT IS NO FAULT INDEMNITY

A no fault indemnity claim is a claim for payment for death or injury to a passenger or third party
without NECESSITY OF PROVING FAULT OR NEGLIGENCE. This is payable by the insurer
PROVIDED (a) indemnity in respect of one person shall not exceed PHP 5,000.00 (b) the necessary
proof of loss under oath to substantiate the claim is submitted, these are: police report of accident
and either the death certificate and sufficient evidence to establish the payee OR the medical report
and evidence of medical or hospital disbursement in respect of which refund is made.

AGAINST WHOM IS THE PAYMENT CLAIMED

A claim under the no fault indemnity clause may be made against one motor vehicle insurer only as
follows: (a) in case of an occupant of a vehicle- 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 Operators 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 drivers 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 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)

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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 (Section 416).

51