NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
NOTES ON INSURANCE
WHAT LAWS GOVERN INSURANCE
1. The laws governing insurance in the order of
priority are:
(1) The Insurance Code, as amended by Batas
Pambansa Blg. 872 (approved: June 12, 1985);
(2) In the absence of applicable provisions, the
Civil Code;
(3) In the absence of applicable provisions of the
Insurance Code and the Civil Code, the
general principles on the subject in the United
States (Constantino v Asia Life Insurance, 87
Phil. 248).
NOTE: On August 15, 2013, RA 10607 was signed
into law. It is a restatement of the Insurance Code
[PD 612], with amendments. While RA 10607
restated the whole law, most of the amendments
touch only the administrative portion of the Code,
and very little on the substantive portion.
2. 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. HELD: The Civil Code shall apply and under
Art. 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 v Sun Life Assurance
of Canada, 41 Phil. 269).
2.1. B, a married man obtained a life insurance
policy designating his common law wife, C
as beneficiary. Upon B’s death, his widow
contested the right of C to receive the
proceeds. HELD: Since the Insurance Code
did not contain a specific provision
applicable to the case, the provisions of Art.
2012 of the Civil Code provides, “any
person forbidden from receiving any
donation under Art. 739 cannot be named
as a beneficiary of a life insurance policy by
a person who cannot make a donation to
him.” Art. 739 declares as void those
donations “made between persons guilty of
adultery or concubinage at the time of the
donation.”
3. Asia Life Insurance Co., an American corporation
insured the life of Constantino. The first premium
covered the period up to September 26, 1942,
after which no premium payments were made. By
reason of the Japanese occupation, the insurer
had to close its offices until 1945. Upon a
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
subsequent claim, the insurer refused to pay due
to non-payment of the premium. The beneficiary
maintains that the non-payment should be
excused by reason of war. HELD: Since the law is
did not provide for the situation and the fact that
the law on insurance and the Civil Code was
largely copied from the Civil Code of California, the
court applied the United States Rule that declares
that the contract is not merely suspended as held
by New York Rule, but instead is abrogated
(revoked) by reason of non-payment of the
premium, since payment of the same is peculiarly
of the essence of the contract.
WHAT IS A CONTRACT OF INSURANCE?
1. 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 [Sec. 2(a),
Insurance Code].
Bar Question (2011)
Q: In return for the 20 years of faithful service of X
as a house helper to Y, the latter promised to pay
P100,000 to X’s heirs if he (X) dies in an accident
by fire. X agreed. Is this an insurance contract?
A: No, since Y actually made a conditional
donation in X’s favour.
2. A contract of suretyship shall also be deemed an
insurance contract if made by a surety who or
which is doing an insurance business [Sec. 2 (a)].
3. 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
this Code.
3.1. The fact that no profit is derived from
making of insurance contracts, agreements,
or transactions or that no separate or direct
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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.
3.2. Philippine Health Care Providers v CIR
(2009) has stated that:
(1) Contracts of law firm with clients
whereby in consideration of periodical
payments, the law firm promises to
present such clients in all suits for or
against them are not insurance
contracts;
(2) A contract by which a corporation, in
consideration of a stipulated amount,
agrees at its own expense to defend a
physician against all suits for damages
for malpractice is one of insurance, and
the corporation will be deemed as
engaged in the business of insurance.
WHAT IS THE CONCEPT OF INSURANCE?
 Insurance is a means by which one seeks to be
covered against the consequences of an event
that may cause loss or damage.
 The concept is that the premiums that are paid are
accumulated in a pool from which payment of
claims are to be obtained. As a basis, it is
assumed that the people contributing premiums
are in excess of those making claims resulting in a
larger pool of money than the amounts being
claimed.
WHAT ARE PURE AND SPECULATIVE RISKS?
 The risks that may be insured against are what are
known as pure risks, as opposed to speculative
risks.
 A pure risk is whether a person will suffer or will
not suffer a loss from the occurrence of an event.
 A speculative risk is whether a person will profit or
suffer a loss from the occurrence of an event.
INSURANCE IS RISK- DISTRIBUTING
 Insurance is a risk-distributing device because
when the insurer assumes the risk, it is distributing
potential liability in part, among others.
 It is not risk shifting because the entirety of the risk
of loss is not shifted to another.
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From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
NATURE AND CHARACTERISTICS OF A CONTRACT 2.1. An employee earns P20,000 a month. Over
OF INSURANCE a 10-year period, he will receive
P2,400,000. He obtains a 10-year life
What is the nature of a healthcare agreement?
insurance policy for P5,000,000. When the
In the case of Fortune Medicare, Inc. v Amorin (GR No. employee dies, his beneficiary makes a
195872; March 12, 2014), it was held to be in the nature claim on the policy but the insurer refused
of non-life insurance, which is primarily a contract of to pay the full amount, instead it offers to
indemnity. Once the member incurs hospital, medical, or
pay the amount that the employee would
any other expense arising from sickness, injury or other
stipulated contingency, the health care provided must pay have earned had he not died. The refusal of
for the same to the extent provided under the contract. the insurer to pay is not valid because life
insurance is a not contract of indemnity.
The Court also interpreted an ambiguity in favour of the
insured allowing him to recover for his medical expenses
3. It is a personal contract as an insurer contracts
incurred
1. It iswhile abroad. contract as the liability of the
an aleatory
with reference to the character of the insured and
insured depends upon the happening of a
vice versa. It might be willing to make good the
contingent event. It is not a wagering contract (Bar
loss of a person by the destruction of his property,
2012 MCQ).
while it would altogether be unwilling to insure the
same property if owned by another. On the other
2. It is a contract of indemnity if it is a non-life
hand, the insurance taken by one person will not
insurance contract as recovery must be
apply to the interest of another person in the same
commensurate to the loss. It is an investment or a
property.
contract to pay a sum certain in money upon death
if it is a life insurance contract as it is secured by
4. It is an executor and conditional contract on the
the insured as a measure of economic security for
part of the insurer because upon happening of the
him during his lifetime and for his beneficiary upon
event or peril insured against, the conditions
his death, life not being subject to a valuation nor
having been met, it has the obligation to execute
the loss being adjustable on any principle of
the contract by paying the insured. On the other
indemnity, except when it is secured by the
hand, it is an executed contract on the part of the
creditor on the life of the debtor.
insured after payment of the premium.

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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
5. It is a contract 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 as insurance
companies manage to impose upon the insured
prepared contracts which the insured cannot
change.
6.1. The first rule of construction is: 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.
Illustration:
P Bank obtained insurance against robbery
which excluded loss by any criminal act of
the insured or any authorized
representative. While transferring funds
from one branch to another, the insured’s
armored truck was robbed. The driver was
assigned by a labor contractor with the
insured, while the security guard was
assigned by an agency contracted by the
insured. Both driver and guard were found
to be involved. Can the loss be excluded?
HELD: the loss is excluded as while the
driver and guard are assigned by labor
contractors, they are still within the term
“authorized representative (Fortune
Insurance v CA, 244 SCRA 308).
Illustration 2:
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 Co., 17 SCRA 364).
Note though 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 be excluded
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).
6.2. The second rule of construction is: If the
policy or its terms are doubtful, ambiguous,
or uncertain, it is to be construed strictly
against the insurer and in favour of the
insured because the latter has no voice in
the selection of the words used, and the
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
language used is selected by the lawyers of
the insurer.
Bar 2012
An insurance contract is a contract of
adhesion, which means that in resolving
ambiguities in the province of the insurance
contract, they are to be construed liberally
in favour of the insured and strictly against
the insurer who drafted the insurance
policy.
Illustration:
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
(Que Chee Gan v Law Union Rock Ins. Co.
Ltd., 98 Phils. 85).
Illustration 2:
An action to recover the amount of P2,000
due to death by drowning where the policy
provided for indemnity in the amount of
P1,000 to P3,000. HELD: The interpretation
of the obscure stipulation in contract must
not favour the one who caused the
obscurity. Hence, judgment for an additional
P2,000 was affirmed (Del Rosario v
Equitable Insurance and Casualty Co., 8
SCRA 343).
Illustration 3:
Denial of a claim on the ground that the
insured vehicle was a private “owner” type
vehicle on the ground that the policy issued
to the insured was a Common Carrier’s
Liability Insurance Policy which covers a
public vehicle for hire. HELD: Insurer is
liable as it was aware all along that the
vehicle of the insured was a private vehicle
(Fieldmans Insurance v De Songco, 25
SCRA 70).
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
Illustration 4:
Denial of claim for benefit due to the death
of Flaviano Landicho in a plane crash under
GSIS Policy on the ground of non-payment
of the premium. HELD: The policy
contained a provision that the application
for insurance is authority for GSIS to cause
the deduction of premium from the insured’s
salary (Landicho v GSIS, 44 SCRA 7).
6.3. The third rule of construction is: Provisions
in the insurance contract must be read in its
entirety and the stipulation therein cannot
be segregated in determining the intention
of the parties. The provisions must be
construed together to arrive at their true
meaning.
Illustration:
An insurance policy covers loss due
earthquake shock to two swimming pools
and for which a premium was paid. In a
rider entitled Earthquake Endorsement, it
stated that in consideration of a premium,
but without any amount filled in, the
company agrees to be liable for earthquake
shock damage for other properties, the
policy provisions notwithstanding. They
insured claims that the conflict between the
policy and the rider should be resolved in its
favour. HELD: Only the pools are insured
against earthquake shock. The rider cannot
be construed to prevail over the policy
(Guld Resorts, Inc. v Phil. Charter
Insurance Corp., 458 SCRA 550).
7. It is consensual because it is perfected by the
meeting of the minds of the parties. There must be
concurrence of offer and acceptance. Unless
otherwise stipulated, the policy is not essential to
the existence of the contract. It merely evidences
the terms and conditions thereof [Campos,
Insurance (1983)].
NOTE: UST Golden Notes
Consensual – acceptance of the offer perfects the
contract of insurance.
Insurance contracts through correspondence
follow the “cognition theory” wherein an
acceptance made by letter shall not bind the
person making the offer except from the time it
came to his knowledge (Enriquez v Sun Life
Assurance Co. of Canada, GR No L-15774;
November 29, 1920).
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
8. It is voluntary. As a general rule, it is voluntary in
the sense that it is not compulsory and the parties
are free to incorporate such terms and conditions
they may deem convenient provided they are not
contrary to law, morals, good customs, public
order or public policy.
8.1. Exceptions: Insurance contracts particularly
liability insurance, may be required by law
in certain instances:
a. For motor vehicles [Secs. 386 – 402];
b. For employees [Arts. 168 – 184, Labor
Code].
As a condition to granting a license to
conduct business or calling affecting the
public safety or welfare [De Leon (2010)].
Also, there are insurance which may arise
by operation of law. Social insurance for
members of the GSIS and for the
employees in the private sector covered by
the SSS is established by law.
9. It is unilateral because it imposes legal duties only
on insurer who promises to indemnify in case of
loss.
10. It is onerous there is a valuable consideration
called the “premium.”
 Theory of Cognition vs Theory of Manifestation
(Bar 1997)
Q: The Civil Code adopts the Theory of Cognition,
while the Code of Commerce generally recognizes
the Theory of Manifestation, in the perfection of
contracts. How do these two theories differ?
A: under the Theory of Cognition, the acceptance
is considered to effectively bind the offeror only
from the time it came to his knowledge. Under the
Theory of Manifestation, the contract is perfected
at the moment when the acceptance is declared or
made by the offeree.
WHAT ARE THE ELEMENTS OF AN INSURANCE
CONTRACT?
1. Existence of Insurable Interest – the insured
should possess an interest of some kind,
susceptible of pecuniary estimation – known as
“insurable interest.”
1.1. Generally, a person has insurable interest
in the subject matter 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
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From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
against (Lalican v Insular Life Ins. Co.,
2009).
Bar 2000
Q: BD has a bank deposit of half a million
pesos. Since the limit of the insurance
coverage of the PDIC is only 1/1o of BD’s
deposit, he would like some protection for
the excess by taking out an insurance
against all risk or contingencies of loss
arising from any unsound or unsafe banking
practices including unforeseen adverse
effects of the continuing crisis involving the
banking and financial sector in the Asian
region. Does BD have an insurable interest
within the meaning of the Insurance Code
of the Philippines?
A: Yes, BD has insurable interest in his
bank deposit. In case of loss of said
deposit, more particularly to the extent of
the amount in excess of the limit covered by
the PDIC Act, BD will be damnified. He will
suffer pecuniary loss of P400,000, that is,
his bank deposit of half a million pesos
minus P100,000 which is the maximum
amount recoverable from the PDIC.
1.2. Exception: the expectation of benefit from
the continued life of the person insured
need not be of a pecuniary nature.
1.3. A person has insurable interest in life,
health and property.
1.4. It is necessary because its absence renders
th contract of insurance 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.
2. Risk of loss – the insured is subject to risk of loss
through the destruction or impairment of that
interest by the happening of the designated risks.
3. Assumption of Risk – the insurer assumes the risk
of loss
4. Scheme to Distribute Losses – such assumption is
part of a general scheme to distribute actual loss
among a large group of persons bearing
somewhat similar risks.
5. Payment of Premium – as a consideration for the
insurer’s promise, the insured makes a ratable
contribution called a “premium” to the general
insurance fund.
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NOTE: Requisites for a Valid Insurance Contract
(UST Golden Notes)
(1) Subject Matter in which the insured has an
insurable interest;
(2) Consideration which refers to the premium
payments based on probability of loss and
extent of liability;
(3) Object and purpose which is the transfer and
distribution of risk of loss, damage or liability;
(4) Cause which refers to an event or peril insured
against; and
(5) A meeting of minds of the parties upon all the
foregoing essentials.
PERFECTION OF AN INSURANCE CONTRACT
An insurance contract is a consensual contract.
Therefore, it is perfected the moment there is meeting of
minds with respect to the object and the cause of
consideration. Specifically, it is perfected the minute the
offeror learns of the acceptance of his offer by the
offeree. It must be assented to by both parties, either in
person or through their agents, and sol long as an
application for insurance has not been either accepted or
rejected, it is merely a proposal or an offer to make a
contract.
Mere submission of the application without the
corresponding approval of the policy does not result in
the perfection of the contract of insurance (Bar 2011).
Q: On June 1, 2011, X mailed to Y Insurance, Co., his
application for life insurance, with payment for 5 years of
premium enclosed in it. On July 21, 2011, the insurance
company accepted the application and mailed on the
same day its acceptance plus the cover note. It reached
X’s residence on August 11, 2011. But, as it happened,
on August 4, 2011, X figured in a car accident. He died a
day later. May X’s heir recover on the insurance policy?
A: No, since X had no knowledge of the insurer’s
acceptance of his application before he died.
Note: What is being followed in insurance contracts is
what is known as the “cognition theory.”
Bar 2012
For both the life insurance and property insurance, the
insurable interest is required to be existing at the time of
perfection and at the time of loss for property. In life
insurance, however, it need not be present at the time of
loss occurs.
CONSENT REQUIREMENTS WHEN INSURANCE IS
TAKEN
1. Generally, 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.
2. The consent of the husband is not necessary for
the validity of an insurance policy taken out by a
married woman on her life or that of her children.
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
She may exercise all rights and privileges of an
owner under a policy.
2.1. She may also insure her separate property
without the consent of her husband as she
has the right to administer her own property
(Art. 145, Family Code).
3. The provision of the law regarding a minor 18
years of age or more has been rendered moot and
academic by RA 6809 which reduced the age of
majority to 18 years.
3.1. Regarding an unemancipated minor, he
cannot enter into a contract of insurance
without the consent of his parents or
guardian and when he does, the contract is
voidable (Art. 1327 and 1390, Civil Code).
3.2. If the original owner of a policy covering the
life of a minor will die ahead of the minor, all
rights, title and interest in the policy shall
automatically vest in the minor unless
otherwise provided in the policy.
HOW IS AN OFFER AND ACCEPTANCE MADE IN
PROPERTY AND LIABILITY INSURANCE
When the insured applies for the insurance, he is already
making an offer to the insurer, who may now accept,
reject or make a counter-offer.
Acceptance occurs in the same manner as in life and
health insurance.
INSURABLE INTEREST
Insurable interest will exist when the insured 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.
IN WHOSE LIFE AND HEALTH DOES A PERSON
HAVE INSURABLE INTEREST IN
1. Himself, his spouse and of his children;
2. Any person on whom he depends wholly or in part
for education or support, or in whom he has a
pecuniary interest.
2.1. Art. 195 of the Family Code specifies the
persons obligated to support each other.
2.2. A pecuniary interest exists as between
partners or between the employer and
employee.
3. Any person under a legal obligation to him for the
payment of money, respecting property or
services, which death or illness might delay or
prevent performance.
3.1. A creditor has insurable interest in the life
and health of his debtor.
4. Any person upon whose life, any estate or interest
vested in him depends
4.1. When 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
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From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
X, because the death of X will terminate his
right and cause him damage.
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.
However, insurable interest of a creditor on the life of a
debtor exists not only at the time of effectivity but also at
the time of the death of the debtor because in this
instance, it is a contract of indemnity. The interest of the
creditor is capable of pecuniary estimation.
WHAT IS THE EXTENT OF INSURABLE INTEREST IN
ONE’S LIFE?
1. A person 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.
2. However, if a person 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.
Bar 1984
Q: On January 4, 1983, Mr. P joined Alpha Corp.
(Alpha) as President of the company. Alpha took
out a life insurance policy on the life of Mr. P with
Mutual Insurance Co., designating Alpha as the
beneficiary. Alpha also carried fire insurance with
Beta Insurance Co. on a house owned by it, but
temporary occupied by Mr. P again with Alpha as
beneficiary.
On September 1, 1983, Mr. P resigned from Alpha
and purchased the company house he had been
occupying. A few days later, a fire occurred
resulting in the death of Mr. P and the destruction
of the house.
What are the rights of Alpha against Mutual Life
Insurance on the life insurance policy?
A: Alpha can recover against Mutual Life in the life
insurance policy as its insurable interest in the life
of the person insured, Mr. P, existed when the
insurance took effect. In life insurance, insurable
interest need not exist thereafter or when the loss
occurred.
Bar 1987
Q: Blanco took out a P1,000,000 life insurance
policy naming his girlfriend and creditor,
Montenegro, as his beneficiary. When Blanco
died, his outstanding loan obligation to
Montenegro was only P50,000. Blanco’s executor
contended that only P50,000 out of the insurance
proceeds should be paid to Montenegro and the
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balance of P950,000 should be paid to Blanco’s
estate.
Is the executor correct?
A: the contention of the executor is incorrect. The
beneficiary of a life insurance need not have any
insurable interest in the life of the insured.
Alternative Answer:
The contention of the executor is incorrect
because it was Blanco himself who took out the
life insurance policy on his own life, naming
Montenegro as the beneficiary. It would have been
different if it was Montenegro, as creditor, who
took out a life insurance policy on the life of
Blanco, as a debtor. In that case, Montenegro’s
insurable interest in the life of Blanco would be
only to the extent of P50,000, which is the amount
of his credit.
Bar 1987
Q: On July 14, 1985, X, a homosexual, took an
insurance policy on the life of his boyfriend, Y. in
the insurance application, X misrepresented that Y
was in perfect health although he knew all the time
that Y was afflicted with AIDS. On October 18,
1987, Y died in a motor accident. Shortly
thereafter, X filed his insurance claim. Should the
insurer pay?
A: the insurer is not obliged to pay. Friendship
alone is not the insurable interest contemplated in
life insurance. Insurable interest in the life of
others (other than one’s own life, spouse or child)
is merely to the extent of the pecuniary interest in
that life.
Assuming that such pecuniary interest exists, an
insurer would be liable despite concealment or
misrepresentation if the insurance had been in
effect for more than 2 years (Incontestability
Clause).
Bar 1997
Q: A obtains insurance over his life and names his
neighbour B the beneficiary because of A’s secret
love for B. If A dies, can B successfully claim
against the policy?
A: Yes. In life insurance, it is required that the
beneficiary must have insurable interest in the life
of the insured. It was the insured himself who took
the policy on his own life.
Bar 2000
Q: IS is an elderly bachelor with no known
relatives. He obtained life insurance coverage for
P250,000 from Starbite Insurance Corp., an entity
licensed to engage in the insurable business under
the Insurance Code of the Philippines. He also
insured his residential house for twice that amount
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with the same corporation. He immediately
assigned all his rights to the insurance proceeds to
BX, a friend-companion living with him. 3 years
later, IS died in a fire that gutted his insured house
2 days after he had sold it. There is no evidence of
suicide or arson or involvement of BX in these
events. BX demanded payment of the insurance
proceeds from the 2 policies, the premiums for
which IS had been faithfully paying during all the
time he was alive. Starbite refused payment,
contending that BX had no insurable interest and
therefore was not entitled to receive the proceeds
from IS’ insurance coverage on his life and also on
his property. Is Starbite’s contention valid?
A: Starbite is correct with respect to the insurance
coverage on the property of IS. The beneficiary in
the property insurance policy or the assignee
thereof must have insurable interest in the
property insured. BX, a mere friend-companion of
IS, has no insurable interest in the residential
house of IS. BS is not entitled to receive the
proceeds from IS’ insurance on his property.
As to the insurance coverage on the life of IS, BX
is entitled to receive the proceeds. There is no
requirement that he should have insurable interest
in the life of IS. It was IS himself who took the
insurance on his own life.
Bar 2002
Q: Distinguish insurable interest in property from
insurable interest in life insurance.
A:
1) In property insurance, the expectation of
benefit must have a legal basis. In life
insurance, the expectation of benefit to be
derived from the continued existence of a life
need not have any legal basis.
2) In property insurance, the actual value of the
interest therein is the limit of the insurance that
can validly be placed thereon. In life insurance,
there is no limit to the amount of insurance that
may be taken upon life.
3) In property insurance, an interest insured must
exist when the insurance takes effect and when
the loss occurs but need not exist in the
meantime. In life insurance, it is enough that
insurable interest exists at the time when the
contract is made but need not exist at the time
of loss.
Bar 2011
Q: X Co., a partnership, is composed of A
(capitalist), B (capitalist) and C (industrial). If
you were partner A, who between B and C
would have an insurable interest on your life,
such that you my then insure him?
A: Both B and C, as they are your partners.
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Bar 2011
Q: X has been a long-time household helper of
Z. X’s husband, Y, has also been Z’s long-time
driver. May Z insure the loves of both X and Y
as beneficiary?
A: No, since Z has no pecuniary interest in the
lives of X and Y arising from their employment
with him.
Bar 2012
Q: X, a minor, contracted an insurance on his
own life. What is the status of the policy?
A: the life insurance policy is valid, provided the
beneficiary is his estate or his parents, spouse
or child.
Bar 2013
Q: In 2010, the PNP declared Kadafi “Public
Enemy No. 1” because of his terrorist activities
in the country that have resulted in the death of
thousands of Filipinos. A ransom of P15, 000,
000 was place on his head.
Worried about the future or their family,
Kadafi’s wife, Aurelia, secured in December
2010 a life insurance policy on his life and
designated herself as beneficiary. Is the policy
binding?
A: Yes. The policy is valid and binding because
Aurelia has an insurable interest on the life of
Kadafi.
Bar 2014
Q: Carlo and Bianca met in the La Boracay
festivities. They fell in love with each other and
got married soon after. They have been
cohabiting blissfully as husband and wife, but
they did not have any offspring. As the years
passed by , Carlo decided to take out an
insurance on Blanca’s life for P1,000,000 with
him (Carlo) as sole beneficiary, given that the
did not have a steady source of income and he
always depended on Blanca both emotionally
and financially. During the term of the
insurance, Blanca died of what appeared to be
a mysterious cause so that Carlo immediately
requested for an autopsy to be conducted. It
was established that Blanca died of a natural
cause. More than that, it was also established
that Blanca was a transgender all along – a
fact unknown to Carlo. Can Carlo claim the
insurance benefit?
A: Yes, Carlo can claim the insurance benefit.
If a person insures the life or health of another
person with himself as beneficiary, all his
rights, title, and interests in the policy shall
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From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
automatically vest in the person insured. Carlo,
as husband of Blanca, has insurable interest in
the life of the latter. Also, every person has an
insurable interest in the life and health of any
person on whom he depends wholly or in part
for support. The insurable interest in the life of
the person insured must exist when the
insurance takes effect but need not exist when
the loss occurs. Thus, the subsequent
knowledge of Carlo, upon the death of Blanca,
that the latter is a transgender does not destroy
his insurable interest on the life of the insured.
Bar 2014
Q: On July 3, 1993, Delia Sotero took out a life
insurance policy from Ilocos Bankers Life
Insurance Corp., designating Cresencia Aban,
her niece, as her beneficiary. Ilocos Life issued
Policy No. 747 with a face valie of P100,000 in
Sotero’s favour on August 30, 1993, after the
requisite medical examination and payment of
the premium.
On April 10, 1996, Sotero died. Aban filed a
claim for the insurance proceeds on July 9,
1996. Ilocos Life conducted an investigation
into the claim and came out with the following
findings:
1. Sotero did not personally apply for
insurance coverage, as she was illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have financial capability to
pay the premium on the policy;
4. Sotero did not sign the application for
insurance;
5. Aban was the one who filed the insurance
application and designed herself as
beneficiary.
For the above reasons and claiming fraud,
Ilocos Life denied Aban’s claim on April 16,
1997, but refunded the premium paid on the
policy. May Sotero validly designate her
niece as beneficiary?
A: Yes, Sotero may validly designate her
niece, Aban, as beneficiary. Sotero had
insurable interest in her own life, and could
validly designate anyone as her beneficiary.
WHEN DOES A PERSON HAVE INSURABLE
INTEREST IN PROPERTY?
1. A person 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.
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From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
WHAT IS THE TEST OR MEASURE OF INSURABLE
INTEREST IN PROPERTY
1. Whether one will derive pecuniary benefit or
advantage from its preservation or will suffer
pecuniary loss or damage from its destruction.
WHAT DOES INSURABLE INTEREST IN PROPERTY
CONSIST OF
1. An existing interest
1.1. By means of a conditional deed of sale, A
sold his house to B for P2,000,000. B pays
a down payment of P500,000. 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 will suffer a loss of
P500,000.
2. An inchoate interest founded on an existing
interest
2.1. An inchoate interest has been defined as:
Interest in real estate which is not a present
but which may ripen into a vested interest if
not barred, extinguished, or divested.
2.2. Interest in corporate property arising from
stockholdings but limited to its value is an
inchoate interest founded on an existing
interest.
3. An expectancy, coupled with an existing interest in
that out of which the expectancy arises.
3.1. The expectancy must be founded on an
actual right to the thing or a valid contract
for it.
3.2. A farmer has insurable interest on an
anticipated harvest of the crops that he will
grow on land belonging to him at the time of
the issuance of the policy.
4. A carrier depositary 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.
5. 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.
5.1. A son has no insurable interest on a
building owned by father despite being
designated as an heir in the will as the will
does not produce any effect before the
testator’s death.
Bar 1982
Q: A owns a house valued at P50,000 which he
had insured against fire for P100,000. He obtained
a loan from B in the amount of P100,000, and to
secure payment thereof, he executed a deed of
mortgage on the house, but without assigning the
insurance policy to the latter. For A’s failure to pay
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the loan upon maturity, B initiated foreclosure
proceedings and in the ensuing public sale, the
house was sold by the sheriff to B as highest
bidder. Immediately upon issuance of the sheriff’s
certificate of sale in his favour, B insured the
house against fire for P120,000 with another
insurance company. In order to redeem the house,
A borrowed P100,000 from C and, as security
device, he assigned the insured policy of
P100,000 to C. However, before A could pay B his
obligation of P100,000, the house was accidentally
and totally burned.
Does A, B, or C have any insurable interest in the
house? May A, B, and C recover under the
policies? If so, how much?
A: As to A, he has insurable interest in his house,
an existing interest, but only for P50,000, the value
of said house. But, when he assigned it to C, said
A had no more interest in his insurance policy, and
A cannot anymore recover on said insurance
policy.
As to B, he has insurable interest on A’s house,
having an interest founded upon an existing
interest, but only for P50,000, the value of A’s
house, and therefore, he can recover only the
amount of P50,000.
As to C, he has no insurable interest on A’s house,
being mere contingent or expectant interest not
founded on an actual right or valid contract to A’s
house; besides, the assignment to him of A’s
insurance policy was not approved by the insurer.
Hence, C cannot recover.
MUST THE BENEFICIARY IN PROPERTY INSURANCE
HAVE INSURABLE INTEREST ON THE PROPERTY
INSURED?
1. 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.
1.1. 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.
Bar 2009
Q: Ciriaco leased a commercial apartment
from Supreme Building Corp. One of the
provisions of the provisions of the one-year
lease contract states:
“ –18. Xxx The LESSEE shall not insure
against fire the chattels, merchandise,
textiles, goods and effects placed at any
stall or store or space in the leased
premises without first obtaining the written
consent of the LESSOR. If the lessee
obtains fire insurance coverage without the
consent of the lessor, the insurance policy
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is deemed assigned and transferred to the
lessor for the latter’s benefit.”
Notwithstanding the stipulation in the
contract, without the consent of SBC,
Ciriaco insured the merchandise inside the
leased premises against loss by fire in the
amount of P500,000 with First United
Insurance Corp. A day before the lease
contract expired, fire broke out inside the
leased premises, damaging Ciriaco’s
merchandise. Having learned of the
insurance earlier procured by Ciriaco, SBC
demanded from FUIC that the proceeds of
the insurance policy be paid directly to it, as
provided in the lease contract. Who is
legally entitled to receive the insurance
proceeds? Explain.
A: Ciriaco is entitled to receive the proceeds
of the insurance policy.
No contact or policy of insurance on
property shall be enforceable except for the
benefit of some person having insurable
interest in the property insured. The
stipulation that the policy is deemed
assigned and transferred to SBC is void,
because SBC has no insurable interst in the
merchandise of Ciriaco (Cha v CA, 277
SCRA 690; 1997).
WHEN MUST INSURABLE INTEREST IN PROPERTY
EXIST?
1. Must exist at the time the insurance takes effect
and when the loss occurs but need not exceed in
the meantime.
Change of Interest
2. A change of interest in any part of a thing insured
unaccompanied by a corresponding change of
interest in the insurance suspends the insurance
to an equivalent extent until interest in the thing
and interest in the insurance is vested in the same
person.
2.1. The contemplated change is an absolute
transfer of the insured’s entire interest in the
property insured to one not previously
interested or insured.
2.2. The reason for the rule is that insurance is a
personal contract. The insurer may not be
willing to insure the same property if owned
by another person.
2.3. The policy is revived by the assignment of
the policy to the transferee with the consent
of the insurer or the reacquisition by the
insured of his interest in the property.
2.4. If there is a prohibition against alienation or
change of interest without the consent of
the insurer, the policy is not suspended but
rather it is avoided. Hence, the subsequent
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reacquisition of the interest will not revive
the policy.
WHEN IS INSURANCE CONTRACT NOT
SUSPENDED?
1. Life, health or accident insurances because they
are not contracts of indemnity and insurable
interest is not required at the time of loss.
2. A change in interest after occurrence of an injury
that results in loss does not affect the right of the
insured to indemnify as the occurrence of the loss
will fix the liability of the insurer.
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.
4. A change in interest by will or succession on the
death of the insured does not avoid the insurance
and his interest passes in the thing insured to the
person taking his interest in the thing insured.
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 cease upon an alienation of the thing insured.
5.1. The transfer contemplated is that to a
stranger and if so, the policy is only
suspended to such equivalent extent as that
transferred.
6. When notwithstanding a prohibition, the consent of
the insurer is obtained.
7. When the policy is so framed that it will inure to the
benefit of whomsoever may become the owner
during the continuance of the risk.
DISTINGUISHING INSURABLE INTEREST IN LIFE
FROM INSURABLE INTEREST IN PROPERTY
1. Insurable interest in life can be based on
consanguinity, affinity, contract or a pecuniary
interest, while insurable interest in property is
based on pecuniary interest;
2. Insurable interest in life must exist only at the
effectivity of the contract except that taken by a
creditor in the life of the debtor while insurable
interest in property must exist at the time of
effectivity of the contract and when loss occurs,
although it may not exist in the meantime.
3. The value of insurable interest in life is not limited
unless taken by a creditor on the life of the debtor
while insurable interest in property is limited to the
actual value of the interest in the property.
Bar 2002
Q: Distinguish insurable interest in property
insurance from insurable interest in life insurance.
A:
1) In property insurance, the expectation of
benefit must have a legal basis. In life
insurance, the expectation of benefit to be
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
derived from the continued existence of a life
need not have any legal basis;
2) In property insurance, the actual value of the
interest therein is the limit of the insurance that
can validly be placed thereon. In life insurance,
there is no limit to the amount of insurance that
may be taken upon life.
3) In property insurance, an interest insured must
exist when the insurance takes effect and when
the loss occurs, but need not exist in the
meantime. In life insurance, it is enough that
insurable interest exists at the time when the
contract is made but it need not exist at the
time of the loss.
Bar 1977
Q: A owns a house worth P500,000. He insured it
against fire for P250,000 for the period from
January 1, 1977 to January 1, 1978. At the
instance of B, who is a judgment creditor of A, the
said house was levied upon by the Sheriff and sold
at a public auction on March 15, 1977. It was
adjudicated to B for P150,000 at the auction sale.
B insured the house against fire for P150,000 for
the period from March 16, 1977 to March 16,
1978. The house was accidentally burned on April
1, 1977. May A recover under his policy? How
about B?
A: A can recover under his policy. A judgment
debtor whose property has been seized on
execution has an insurable interest therein until
the right to redeem or have the same set aside
has been lost. Inasmuch as the right of A to
redeem has not expired, the 12 months’ time after
the sale having not elapsed before the loss
occurred. A has an insurable interest in the house
at the time of the loss.
As regards B, he can recover upon his policy
because as purchaser at a judicial sale, he has an
insurable interest in the property to the extent of
the amount for which he insured it not exceeding
his interest in the property.
Bar 1980
Q: N owns a condominium unit presently insured
with the Holy Insurance Co. for P1,000,000. N
later sells the condominium unit to O. Somehow, O
fails to obtain the transfer of the insurance policy
to his name from N. subsequently, fire of unknown
origin destroys completely the condominium unit.
Who may collect the insurance proceeds?
A: Neither N nor O may collect the insurance
proceeds. As to N: An interest in property insured
must exist when the insurance takes effect and
when the loss occurs. Although N had insurable
interest when the insurance took effect, he had no
more interest when the loss happened. Further, a
change of interest in any part of a thing insured
unaccompanied by a corresponding change of
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From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
interest in the insurance suspends the insurance
to an equivalent extent, until the interest in the
thing insured and the interest in the insurance are
vested in the same person.
As to O: He cannot recover because he had no
insurance contract on the said condominium unit
which he bought from N.
Bar 1979
Q: The agent of the insured A was employed to
ship A’s copra to Manila and to communicate the
shipment to the buyer A in Manila. The said agent
wrote the owner of the copra announcing the
sailing of the ship, but failed to state that the ship
had run aground, which fact he already knew
before announcing the sailing. A, the buyer of the
copra, in all good faith, took out a marine
insurance on the copra. The copra was badly
damaged and was a total loss. Can the insured
recover on the policy?
A: The insured may not recover on the policy,
since the subject matter of the marine insurance at
the time of contracting the insurance was already
lost. An interest in property insured must exist
when the insurance takes effect and when the loss
occurs.
Bar 1984
Q: On January 4, 1983, P joined Alpha Corp. as
president of the company. Alpha took out a life
insurance policy on the life of P with Mutual
Insurance, designating Alpha as beneficiary. Alpha
also carried fire insurance with Beta Insurance on
a house owned by it, but temporarily occupied by
P again with Alpha as beneficiary.
On September 1, 1983, P resigned from Alpha and
purchased the company house he had been
occupying. A few days later, a fire occurred
resulting in the death of P and the destruction of
the house.
What are the rights of Alpha against Beta
Insurance on the fire insurance?
A: Alpha cannot recover from Beta Insurance
since an interest in the property insured must exist
not only when the insurance took effect but also
when the loss occurs. Since the fire that destroyed
the insured’s house took effect after Alpha had
sold the house of P, the insurable interest of Alpha
in the property insured no longer exists when the
loss occurred.
Bar 1987
Q: On February 3, 1987, while Jose Palacio was in
the hospital preparatory to a heart surgery, he
called his only son, Boy Palacio, and showed the
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latter a will naming the son as sole heir to all the
father’s estate including the family mansion in
Forbes Park. The following day, Boy took out a fire
insurance policy on the mansion. One week later,
the father died. After his father’s death, Boy moved
his wife and children to the family mansion which
he inherited. On March 30, 1987, a fire occurred
razing the mansion to the ground. Boy then
proceeded to collect on the fire insurance he took
earlier on the house.
Should the insurance company pay?
A: In property insurance, insurable interest must
exist both at the time of the taking of the insurance
and at the time the risk insured against occurs.
The insurable interest must be an existing interest.
The fact alone that Boy was the expected sole heir
of his father’s estate does not give the prospective
heir any existing interest prior to the death of the
decedent.
Bar 1991
Q: A piece of machinery was shipped to Pablo on
the basis of C&F, Manila. Pablo insured said
machinery with the Talaga Merchants Insurance
for loss or damage during the voyage. The vessel
sank en route to Manila. Pablo then filed a claim
with Talaga Merchants which was denied for the
reason that prior to delivery, Pablo had no
insurable interest. Decide.
A: Pablo had an existing insurable interest on the
piece of machinery he bought. The purchase of
goods under a perfected contract of sale already
vested equitable interest on the property in favour
of the buyer while it is pending delivery.
Bar 1994
Q: In a civil suit, the Court ordered Benjie to pay
Nat P500,000. To execute the judgment, the
sheriff levied upon Benjie’s registered property (a
parcel of land and the building thereon), and sold
the same at public auction to Nat, the highest
bidder. The latter, on March 18, 1992, registered
with the Register of Deeds the certificate of sale
issued to him by the sheriff. Meanwhile, on
January 27, 1993, Benjie insured with Garapal
Insurance for P1,000,000 the same building that
was sold at public auction to Nat. Benjie failed to
redeem the property by March 18, 1993.
On March 19, 1993, a fire razed the building to the
ground. Garapal Insurance refused to make good
its obligation to Benjie under the insurance
contract.
1. Is Garapal Insurance legally justified in refusing
payment to Benjie?
2. Is Nat entitled to collect on the insurance
policy?
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A:
1. Yes. At the time of the loss, Benjie was no
longer the owner of the property insured as eh
failed to redeem the property. The law requires
in property insurance that a person can recover
the proceeds of the policy if he has insurable
interest at the time of the issuance of the policy
and also at the time when the loss occurs. At
the time of fire, Benjie no longer had insurable
interest in the property insured.
2. No. While at the time of the loss he has
insurable interest in the building, as he was the
owner thereof, Nat did not have any interest in
the policy. There was no automatic transfer
clause in the policy that would give him such
interest in the policy.
Bar 1997
Q: A obtains a fire insurance on his house and as
a generous gesture names his neighbour as
beneficiary. If A’s house is destroyed by fire, can B
successfully claim against the policy?
A: No. In property insurance, the beneficiary must
have insurable interest in the property insured. B
does not have insurable interest in the house
insured.
Bar 1999
Q: A businessman in the grocery business
obtained from First Insurance an insurance policy
of P5,000,000 to fully cover his stocks-in-trade
from the risk of fire. Three months later, a fire of
accidental origin broke out and completely
destroyed the grocery including his stocks-in-
trade. This prompted the businessman to file with
the First Insurance a claim for P5,000,000
representing the full value of his goods.
First Insurance denied the claim because it was
discovered that at the time of the loss, the stocks-
in-trade were mortgaged to a creditor who likewise
obtained from Second Insurance for insurance
coverage for the stocks at their full value of
P5,000,000.
a) May the businessman and the creditor obtain
separate insurance coverage over the same
strocks-in-trade?
b) Suppose you are the judge, how much would
you allow a businessman and the creditor to
recover from their respective insurers?
A:
a) Yes. The businessman, as owner, and the
creditor, as mortgagee, have separate
insurable interests in the same stocks-in-trade.
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Each may insure such interest to protect his
own separate interest.
b) As judge, I would allow the businessman to
recover his total loss of P5,000,000
representing the full value of his goods which
were lost through fire. As to the creditor, I
would allow him to recover the amount to the
extent of or equivalent to the value of the credit
he extended to the businessman for the stocks-
in-trade which were mortgaged by the
businessman.
Bar 2000
Q: IS, an elderly bachelor with no known relatives,
obtained life insurance coverage for P250,000
from Starbite Insurance, an entity licensed to
engage in the insurable interest business under
the Insurance Code of the Philippines. He also
insured his residential house for twice that amount
with the same corporation. He immediately
assigned all his rights to the insurance proceeds to
BX, a friend-companion living with him. Three
years later, IS died in a fire that gutted his insured
house 2 days after he had sold it. There is no
evidence of suicide or arson or involvement of BX
in these events. BX demanded payment of the
insurance proceeds from the 2 policies, the
premiums for which IS had been faithfully paying
during all the time he was alive. Starbite refused to
pay, contending that BX had no insurable interest
and therefore not entitled to receive the proceeds
from IS’ insurance coverage on his life and also on
his property.
Is Starbite’s contention valid?
A: Starbite is correct with respect to the insurance
coverage on the property of IS. The beneficiary in
the property insurance policy or the assignee
thereof must have insurable interest in the
property insured. BX, a mere friend-companion of
IS, has no insurable interest in the residential
house of IS. BX is not entitled to receive the
proceeds from IS’ insurance on his property.
As to the insurance coverage on the life of IS, BX
is entitled to receive the proceeds. There is no
requirement that BX should have insurable interest
in the life of IS. It was IS himself who took the
insurance on his own life.
Bar 2001
Q: JQ, owner of a condominium unit, insured the
same against fire with XYZ Insurance Co., and
made the loss payable to his brother, MLQ. In
case of loss by fire of the said condominium unit,
who may recover on the fire insurance policy?
A: JQ can recover on the fire insurance policy for
the loss of said condominium unit. He has the
insurable interest as owner-insured. As beneficiary
in the fire insurance policy, MLQ cannot recover
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From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
on the fire insurance policy. For the beneficiary to
recover on the fire or property insurance policy, it
is required that he must have insurable interest in
the property insured. In this case, MLQ does not
have insurable interest in the condominium unit.
WHAT ARE THE VOID STIPULATIONS IN
CONTRACT OF INSURANCE?
1. A stipulation for the payment of the loss
whether the person insured has or has no
interest in the property insured because it is a
contract of indemnity.
2. A stipulation that the policy shall be received as
proof of such interest because the existence of
insurable interest does not depend on the
policy.
3. Every policy issued by way of gaming or
wagering shall be void because those insured
without insurable interest do not suffer a
damage from the occurrence of the event
insured against. Instead, they will profit.
Further, it brings a strong temptation to bring
about the occurrence of the event insured
against.
WHAT MAY BE INSURED AGAINST?
1. Any unknown or contingent event, whether past or
future, which may damnify a person having
insurable interest or create a liability against him;
2. Insurance against damage or liability arising from
and unknown past event must ne expressly
stipulated as in marine insurance where the
insurance over the vessel against perils of the sea
will be paid lost or not lost;
3. Insurance risks are:
A a. One that may cause damage to the insured; or
b. One that may create liability against him.
WHAT CANNOT BE INSURED?
1. Insurance for or against the drawing of any lottery
or for or against any chance or ticket in a lottery
drawing a prize cannot be acquired;
2. It cannot be insured because gambling results in
profit, while the object of insurance is to indemnify
the insured against loss;
WHO ARE THE PARTIES TO A CONTRACT OF
INSURANCE?
1. The Insurer – every person, partnership,
association or corporation duly authorized to
transact insurance business as provided in the
Code may be an insurer.
Bar 2000
Q: X Co. procured a group accident insurance policy
for its construction employees variously assigned to
its provincial infrastructure projects. Y Insurance Co.
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
underwrote the coverage, the premiums of which
were paid for entirely X Co. without any employee
contributions.
While the policy was in effect, five of the covered
employees perished at sea on their way to their
provincial assignments. Their wives sued Y Insurance
for payment of death benefits under the policy. While
the suit was pending, the wives signed a power of
attorney designating an X Co. executive, PJ, as their
authorized representative to enter into a settlement
with the insurance company. When a settlement was
reached, PJ instructed the insurance company to
issue a settlement check to the order of the X Co.,
which will undertake the payment to the individual
claimants of their respective shares. PJ
misappropriated the settlement amount and the wives
pursued their case against Y Insurance.
Will the suit prosper?
A: Yes. Y Insurance is liable. X Co., through its
executive PJ, acted as agent of Y Insurance. The
latter is thus bound by the misconduct of its agent. It
is the usual practice in the group insurance business
that the employer-policy holder is the agent of the
issuer.
1.1. It is the party who agrees to indemnify another
upon the happening of a specified contingency.
2. The Insured – who is the party to be indemnified in
case of a loss
2.1. Anyone, except a public enemy or a nation at
war with the Philippines and every citizen or
subject of such nation, may be insured. The
reason is that 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.
Bar 2000
Q: May a member of the MILF or its breakaway
group, the Abu Sayyaf, be insured with a
company licensed to do business under the
Insurance Code of the Philippines?
A: A member of the MILF or the Abu Sayyaf
may be insured with a company licensed to do
business under the Insurance Code of the
Philippines. What is prohibited to be insured is
a public enemy. A public enemy is a citizen or
national of a country with which the Philippines
is at war. Such member of the MILF or the Abu
Sayyaf is not a citizen or national of another
country, but of the Philippines.
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From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
2.2. Both the mortgagor and the mortgagee may
take out separate policies with the same or
different companies. The mortgagor, up to the
extent if the value of his property; the
mortgagee, up to the extent of his credit.
2.3. When the mortgagor insures the property in his
own name but assigns the policy to or makes
loss payable to the mortgagee and unless the
policy provides otherwise, the consequences
are:
(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 of
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 as when
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. However, if 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 under him, the acts of the
mortgagor cannot affect the rights of the
assignee. This is known as the Union
Mortgage Clause, which creates the relation
of the 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. On the other hand,
of the mortgagor still remains as a party, the
policy is said to contain an Open Mortgage
Clause.
2.4. When the mortgagee procures the insurance
without reference to the right of the mortgagor,
the consequences are:
(a) The mortgagee may collect from the insurer
upon occurrence of the loss to the extent of
his credit.
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
(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
Bar 1984, 2010
Q: To secure a loan of P10,000,000, Mario
mortgaged his building to Armando. In
accordance with the loan arrangements, Mario
had the building insured with First Insurance for
P10,000,000, designating Armando as the
beneficiary. Armando also took an insurance of
the building upon his own interest with Second
Insurance for P5,000,000.
The building was totally destroyed by fire, a
peril insured against under both insurance
policies.it was subsequently determined that
the fire had been intentionally started by Mario
and that in violation of the loan agreement, he
had been storing flammable materials in the
building.
a) How much, if any, can Armando recover
from either or both insurance companies?
b) What happens to the P10,000,000 debt of
Mario to Armando?
A:
a) Armando can receive P5,000,000 from
Second Insurance. As mortgagee, he had
an insurable interest in the building.
Armando cannot collect anything from First
Insurance.
First Insurance is not liable for the loss of
the building. First, it was due to a wilful act
of Mario, who committed arson. Second,
fire insurance policies contain a warranty
that the insured will not store hazardous
materials within the insured premises. Mario
breached this warranty when he stored
inflammable materials in the building. These
two factors exonerate First Insurance from
liability to Armando as mortgagee even
though it was Mario who committed them
(Sec. 8, IC).
b) Since Armando would have collected
P5,000,000 from Second Insurance, this
amount shold be considered as partial
payment of the loan. Atmando can still
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From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
collect the balance of P5,000,000 from
Mario, the mortgagor.
It is a well-settled rule that 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. Also,
under the Code, the insurer, after payment
to the mortgagee, becomes subrogated to
the rights against the mortgagor and may
collect the debt to the extent paid to the
mortgagee. Thus, Mario, mortgagor, is not
released from the debt because Second
Insurance is subrogated in place of
Armando, the mortgagee. Hence, Second
Insurance can recover from Mario the
amount of P5,000,000 it paid, because it
became subrogated to the rights of
Armando.
2.5. When a person has dual citizenship, what will
be material is his choice of allegiance. Dual
citizenship arises as a result of the concurrent
application of different laws, a person is
simultaneously considered a national of the
said states. Dual allegiance, which is declared
inimical to national interest (Art. IV, Sec. 5,
Constitution) arises when a person
simultaneously owes, by some positive act,
loyalty to two or more states. In this sense,
dual citizenship can be said to be involuntary,
while dual allegiance is a result of the exercise
of volition. Hence, if he opts for allegiance to
the country which the Philippines is at war with,
he is not insurable.
3. The Beneficiary is the person who receives the
benefits of an insurance policy upon its maturity.
3.1. In life insurance, anyone, except those who are
prohibited by law to receive donations from the
insured. Under Art. 739 of the Civil Code, the
following cannot be designated as
beneficiaries:
(a) Those made between persons guilty of
adultery or concubinage at the time of the
designation;
(b) Those found guilty of the same criminal
offense by reason thereof;
(c) Those made to a public officer, or his wife,
descendants/ ascendants, by reason of his
office.
Bar 1981, 1985, 1998
Q: On July 1, 1979, Crispulo, married to Laura
with whom he has two legitimate children, was
issued Policy No. 8008 of the Midland Life
Insurance, on a whole-life plan for P10,000. He
designated Angie, his common-law wife as the
revocable beneficiary. He referred to her, in his
application and policy, as his wife.
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
Two years later, Crispulo died. Angie filed her
claim for the proceeds of the policy as the
designated beneficiary therein. The widow,
Laura, also filed her claim as legal wife.
If you were the legal counsel for the insurance
company, to whom would you adjudicate the
proceeds of the insurance policy?
A: I would adjudicate the proceeds of the policy
to Laura, the legal wife.
Under Art. 739 of the Civil Code, one cannot be
designated as beneficiary if made between
persons guilty of adultery or concubinage at the
time of the designation.
Since Crispulo was married to Laura at the
time when he designated his beneficiary, his
concubine, Angie, with whom he was guilty of
concubinage at the time of designation, Laura
may have said designation of Angie nullified by
mere preponderance of evidence in the same
action for nullification. There is even no need of
the criminal conviction for concubinage.
3.2. A prior conviction for adultery or concubinage
is not required as it can be proven by a
prepondenrance of evidence in the same
action nullifying the designation. The common
law wife of the insured who is married could not
be named as a beneficiary (Insular Life
Assurance v Ebrado, 80 SCRA 181). Note
where the insured designated his second wife
as beneficiary, the same was upheld as the
later was not aware of the first marriage (SSS v
Davac, 17 SCRA 863).
3.3. 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.
3.4. Generally, there is no requirement that the
beneficiary shall have insurable interest in the
life of the insured as it is recognized that the
insured may name anyone he chooses, except
those disqualified to receive donations, as
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, as
when: Jose obtains several life insurance
policies that he cannot afford; named as
beneficiary is Juan, the spouse or children are
not named as beneficiaries.; the premiums 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.
3.5. The designated beneficiary can be changed as
the insured shall have the right to change the
beneficiary he designated – unless he was
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expressly waived the right in the policy. If he
has waived the right, the effect is to make the
designation as irrevocable.
Bar 1978
Q: On December 20, 1974, A took out a life
insurance policy and named his wife B, as
beneficiary. The policy was silent with regard to
any change of beneficiary. Suspecting that B
was committing adultery, A immediately
notified the insurance company in writing that
he is substituting his brother C as beneficiary in
place of B. A died later on June 30, 1975. B
claims the proceeds of the insurance policy,
contending that as designated beneficiary, she
cannot be changed without her consent, she
having acquired a vested right to the proceeds
of the policy.
A: B cannot claim the proceeds to A’s life
insurance policy. A’s action in substituting his
brother C as his beneficiary in place of B, his
wife, in his insurance policy, is valid. The
insured, A, can change the beneficiary in a
policy of life insurance, without consent of the
beneficiary.
Bar 1998
Q: On October 18, 1988, P took out a life
insurance policy and named his only son Q as
beneficiary. The policy was silent with regard to
any change of beneficiary. P later learned that
Q was hooked on drugs and immediately
notified the insurance company in writing that
he is substituting his sister, R, as his
beneficiary in place of Q. P later died of
advanced tuberculosis. In the application form
filled up by the agent of insurance company
prior to the issuance of the life insurance policy
by the insurance company, the agent, without
the knowledge of P, filled in a false answer and
made it appear that P was in good health.
Upon P’s death, Q claimed the proceeds of the
insurance policy contending that as designated
beneficiary, he cannot be changed without his
consent, he having acquired a vested right to
the proceeds of the policy. Is Q’s contention
correct?
A: No. The designation of the beneficiary is
revocable unless the right to revoke is
expressly waived.
3.6. Note thought that the designation of the guilty
spouse as irrevocable beneficiary is revocable
at the instance of the innocent spouse in cases
of:
a) termination of a subsequent marriage;
b) nullification of marriage;
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From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
c) annulment of marriage;
d) legal separation (Art. 43, Family Code).
3.7. When an irrevocable beneficiary is designated
in a life insurance contract, the beneficiary has
a vested right that cannot be taken away
without his consent (Bar 2005). 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 v Philamlife, 20 SCRA 434).
Where the wife and minor children were named
irrevocable beneficiaries and the wife dies, the
husband’s change of the beneficiaries with the
consent of the children is not valid die to the
minority of the children (Philamlife v Pineda,
170 SCRA 416).
Bar 2005
Q: Jacob obtained a life insurance policy for
P1,000,000 designating irrevocably Diwata, a
friend, as his beneficiary. Jacob, however,
changed his mind and wants Yob and Jojo, his
other friends, to be included as beneficiaries
considering that the proceeds of the policy are
sufficient for the three friends. Can Jacob still
add Yob and Jojo as his beneficiaries?
A: The insured cannot add other beneficiaries
as this would diminish the interest of Diwata
who is the irrevocably designated beneficiary.
The insured can only do so with the consent of
Diwata.
3.8. The interest of an irrevocable beneficiary in an
endowment policy is contingent as benefits are
to be paid to him only if the assured dies before
the specified period. If the insured outlives the
period, the benefits are to be paid.
3.9. The effect of the failure to designate a
beneficiary or when the beneficiary is
disqualified is that the benefits of the policy
shall accrue to the estate of the insured.
3.10. When the beneficiary will predecease the
insured, the effects are:
(a) If the designation is irrevocable, the legal
representatives of the beneficiary may
recover unless it was stipulated that the
benefits are payable only “if living”;
(b) If the designation is revocable, and no
change is made, the benefits pass 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.
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From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
3.11. If the beneficiary is the principal, an accomplice
or an accessory in the wilful killing of the
insured, his interest is forfeited. The nearest
relative of the insured will be entitled to the
proceeds if not otherwise disqualified. If not
wilful or felonious, the provision does not apply.
Here, even if Gemma Rivera wilfully
participated in the killing of Antonio Rivera, the
law provides that the nearest relative of the
insured shall be the one entitled to receive the
proceeds of the policy. Thus, the insurance
company must still pay out the proceeds of the
life insurance policy to the nearest qualified
relative of the insured.

Bar 2008
Q: On January 1, 2000, Antonio Rivera
secured a life insurance from SOS Insurance
Corp. for P1,000,000 with Gemma Rivera, his
adopted daughter, as the beneficiary. Antonio
Rivera dies on March 4, 2005 and in the police
investigation, it was ascertained that Gemma
Rivera participated as an accessory in the
killing of Antonio Rivera. Can SOS Insurance
avoid liability by setting up as a defense the
participation of Gemma Rivera in the killing of
Antonio Rivera ?

A: No, SOS Insurance cannot avoid liability.

Under Sec. 12 of the Insurance Code, the
interest of a beneficiary shall be forfeited when
the beneficiary is the principal, accomplice, or
accessory in wilfully bringing about the death of
the insured. In which event, the nearest relative
of the insured shall receive the proceeds of
said insurance, if not otherwise disqualified.

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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
RESCISION OF INSURANCE CONTRACT
Instances wherein a contract of insurance may be
rescinded:
1. Concealment
2. Misrepresentation/ Omission
3. Breach of Warranties
CONCEALMENT
Concealment is a neglect to communicate that which a
party knows and ought to communicate.
 Requisites:
(1) A party knows a fact which he neglects
communicate or disclose to the other;
(2) Such party concealing is duty bound
disclose such fact to the other;
(3) Such party concealing makes no warranty
the fact concealed;
(4) The other party has not the means
ascertaining the fact concealed;
(5) The fact concealed is material.
Concealment may be committed by either the insured or
the insured [Qua Chee Gan v Law Union & Rock
Insurance (1955); Fieldmen’s Insurance v Vda. de
Songco (1968)].
Generally, a party must have knowledge of the fact
concealed at the time of the effectivity of the policy.
1. Note that even if a party did not know of the
existence at the time of application, but before its
effectivity, there is still concealment.
2. Information acquired after effectivity is not
concealment and does not constitute ground to
rescing 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
reinstatement of a lapsed policy, facts known after
effectivity but before reinstatement must be
disclosed.
to
 Reinstatement of Lapsed Life Policy
to Reinstatement of a lapsed life policy is not a non-
default option. It does not create a new contract,
of but merely revives the original policy so insurer
cannot require a higher premium than the amount
of stipulated in the contract. It does not apply to
group/ industrial life insurance.
Requisites:
(1) It must be exercised within three years from
date of default;
(2) The insured must present evidence of
insurability satisfactory to the insurer;
(3) He must pay all back premiums and all
indebtedness to the insurer;
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
(4) The CSV must not have been duly paid to the
insured nor the extension period expired;
(5) The application must be filed during the lifetime
of the insured [Andres v Crown Life Insurance
(1958)].
3. The party claiming the existence of concealment
must prove that there was knowledge on the part
of the party charged with concealment. If the
insured stated that there was no hereditary taint or
illness that has affected members of the family to
my knowledge, in order to show or prove
concealment, the insurer must prove that the
hereditary taint alleged to exist was known to the
insured.
4. The materiality of the fact concealed or
misrepresented 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.
4.1. 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.
5. Concealment need not, in order to be material, be
of facts which bring about or contribute to, or are
connected of the insured’s loss. It is immaterial
that there is no causal relationship between the
fact concealed and the loss sustained. It is
sufficient that the non-revelation has misled the
insurer in forming its estimate of disadvantage or
in fixing the premium as when the insured had
concealed that he had kidney disease. He later
dies in a plane crash. The insurer would not be
liable due to concealment [Sunlife v CA, 245
SCRA 269].
 Concealment in Non-Medical Insurance
The waiver of medical examination in a non-
medical insurance contract renders even more
material the information required of the applicant
concerning the previous conditions of health and
diseases suffered. The fact that the matter
concealed had no bearing on the cause of death is
not important because it is well settled that the
insured need not die of the disease he had failed
to disclose to the insurer. It is sufficient that his
nondisclosure misled the insurer in forming his
estimates of the risks of the proposed policy or in
making inquiries [Sunlife v Sps. Bacani (1995)].
Where matters of opinion or judgment are called
for, answers made in good faith and without intent
to deceive will not avoid the policy even though
they are untrue. Reason: The insurer cannot
simply rely on those statements. He must make
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
further inquiry [Philamcare Health Systems v CA
(2002)].
Bar 2001
Q: A applied for a non-medical life insurance. The insured
did not inform the insurer that one week prior to his
application for insurance; he was examined and confined
at St. Luke’s Hospital where he was diagnosed for lung
cancer. The insured soon thereafter died in a plane
crash. is the insurer liable considering that the fact
concealed had no bearing with the cause of death of the
insured?
A: No. The concealed fact is material to the approval and
issuance of the insurance policy. It is well-settled that the
insured need not die of the disease he failed to disclose
to the insurer. It is sufficient that his non-disclosure
misled the insurer in forming his estimate of the risks of
the proposed insurance policy or in making inquiries.
Bar 1975
Q: In a non-medical insurance contract (one where the
company waives medical examination) the insured failed
to disclose that she had once been operated on, although
the information on this matter was supposed to have
been supplied the company. Within the proper period,
may the insurance company have the contract
rescinded?
A: Yes, the insurance company can rescind the contract
on the ground of misrepresentation or concealment of
material fact. The fact of the insured’s operation is
material to the insurer, who may have refused to issue
the life policy had it known of such fact. This is even more
true in a non-medical insurance where no medical
examination is made and the information given by the
insured concerning his past health and diseases is a very
important factor which the insurer takes into
consideration in deciding to issue the policy.
Bar 1979
Q: A fire insurance policy in favour of the insured
contained a stipulation that the insured shall give notice
to the company of any insurances already effected or
which may subsequently be effected, covering the
property insured and that unless such notice be given
before the occurrence of any loss, all benefits shall be
forfeited. The face of the policy bore the annotation “Co-
Insurance Declared.” The things insured were burned. It
turned out that several insurances were obtained on the
same goods for the same term. The insurer refused to
pay on the ground of concealment. May the insured
recover?
A: Yes, the insured may recover since there is no
concealment. The face of the policy already bore the
annotation “Co-Insurance Declared” which is a notice to
the insurer as to the existence of other insurance
contracts on the property insured [Gen. Insurance v Ng
Hua; January 30, 1960].
Bar 1983
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 NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez, Bar Qs & As, and Other Review Materials on Insurance
Q: In June 1981, Juan applied for a life insurance policy
with a double indemnity provision in case of death by
accident. Despite an express inquiry in the application
form for insurance, he did not mention the fact that he
had suffered from viral hepatitis the previous year. As
Juan had fully recovered from the disease, the medical
examination performed by the insurance company’s
physician did not reveal such previous illness, and
showed that Juan was healthy and was an insurable risk.
The policy was issued forthwith.
In March 1983, Juan died in an automobile accident.
Subsequent investigation revealed that Juan was
negligent in not having his brakes checked.
The insurance company refused to pay Juan’s wife, the
designated beneficiary, on two grounds: that Juan was
guilty of fraudulent concealment of his liver ailment, and
that Juan’s death was caused by his own negligence.
The policy is silent as to the effect of the insured’s
negligence on the right to recover thereunder. Juan’s wife
insists that she has a right to recover because Juan’s
death was caused by an accident which had nothing to
do whatsoever with his liver ailment. She therefore insists
on double indemnity.
a) Is she entitled to any indemnity?
b) If Juan’s accident occurred in July 1983, would
your answer be the same?
A:
a) No, she is not entitled to any indemnity. Although
Juan did not die of a liver ailment, the fact of his
concealment vitiated the insured’s consent to the
contract of insurance. Under the Insurance Code,
concealment of a material fact is a ground for
rescission. And materiality is determined not by
the event which caused the death but by the
probable and reasonable influence of the fact
concealed upon the other party in forming his
estimate of the disadvantages of the proposed
contract, or in making inquiries. If the insurer had
known of Juan’s previous ailment, it would in all
probabilities have at least made more detailed
inquiries about it or make a special examination of
his liver function, or perhaps even charge a higher
premium because of the greater risk involved. The
concealment was therefore of a material fact,
relieving the insurer from any liability on the policy,
regardless of the cause of death. Since the insurer
is relieved from liability, the question as to whether
the event was an accident or not becomes moot.
In any case, under the Insurance Code,
negligence of the insured or of others does not
exonerate the insurer.
b) My conclusion would be different. The insurer
would be liable despite the fraudulent concealment
because the policy has become incontestable
since more than two years had elapsed from the
date thereof.
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PROOF OF FRAUD IN CONCEALMENT unintentional. Lack of knowledge on the part of the
insured about her ailment will not preclude the
General Rule: Fraud need not be proven in order to prove insurer from raising the defense. The insurer my
concealment. Good faith is not a defense. be held in estoppel only if, having known of the
Exception: When the concealment is made by the insured concealed or misrepresented fact, still accepts the
in relation to the falsity of a warranty, the non-disclosure payment of premium which is not the situation in
must be intentional and fraudulent in order that the this case.
contract may be rescinded.
Bar 1979
WHAT IS THE EFFECT OF CONCELAMENT? Q: Marine insurance was secured upon goods on
board a ship which departed from Madagascar to
Manila, without any disclosure to the insurer of the
1. Whether intentional or not, it entitles the injured
fact that the ship had been reported at Lloyd of
party to rescind the contract of insurance.
London as seen at sea, deep in water and leaky.
This report turned out to be wrong because the
Bar 1989
ship was at no time during the voyage leaky or in
Q: X applied for life insurance with Metropolitan
trouble, but was lost through another insured risk.
Life. The application contained this question:
The insurer refuses to pay the insured, claiming
“Have you ever had any ailment or disease of xxx
concealment. The insured counters that the fact
(b) the stomach or intestines, liver, kidney or
not disclosed was erroneous and did not increase
genitourinary organ?” X, a laundrywoman who has
the risk and therefore immaterial. Decide on the
no medical knowledge answered “No.” The
dispute.
application was approved, premium was paid and
six months later, X died from cancer of the
A: The insured may not recover from the insurer.
stomach. The post medical examination of X
The information that the ship in question was seen
shows that she had the cancer at the time she
at sea, deep in water and leaky, although
applied for a policy. Can the beneficiary of X
erroneous, was material, and its concealment
collect on the policy?
entitled the insurer to rescind the contract of
insurance.
A: No. Concealment, as a defense against liability
Bar 2014
by the insurer, may either be intentional or
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Q: On May 13, 1996, PAM, Inc. obtained a
P15,000,000 fire insurance policy from Ilocano
Insurance covering its machineries and equipment
effective for one year or until May 14, 1997. The
policy expressly stated that the insured properties
located at “Sanyo Precision Phils. Building, Phase
III, Lots 4 and 6, Block 15, PEZA, Rosario, Cavite.”
Before its expiration, the policy was renewed on
“as is” basis for another year until May 14, 1998.
The subject properties were later transferred to
Pace Factory also in PEZA. On October 12, 1997,
during the effectivity of the renewed policy, a fire
broke out at the Pace Factory which totally burned
the insured properties.
The policy forbade the removal of the insured
properties unless sanctioned by Ilocano Insurance.
Condition 9 (c) of the policy provides that “the
insurance ceases to attach as regards the property
affected unless the insured, before the occurrence
of any loss or damage, obtains the sanction of the
company signified by endorsement upon the policy
xxx (c) if the property insured is removed to any
building or place other than in that which is herein
stated to be insured.” PAM claims that it has
substantially complied with notifying Ilocano for the
insurance coverage. Is Ilocano liable under the
policy?
A: Ilocano is not liable under the policy. With the
transfer of the location of the subject properties,
without notice and without the insured’s consent,
after the renewal of the policy, the insured clearly
committed concealment, misrepresentation and a
breach of material warranty. The Insurance Code
provides that a neglect to communicate that which
a party knows and ought to communicate, is called
concealment. It entitles the injured party to rescind
a contract of insurance in case of an alteration in
the use or condition of the thing insured. An
alteration in the use or condition of a thing insured
from that to which it is limited b the policy made
without the consent of the insurer, by means within
the control of the insured, and increasing the risks,
entitles the insurer to rescind the contract of fire
insurance.
Bar 2013
Q: Benny applied for life insurance for P1,500,000.
The insurance company approved his application
and issued an insurance policy effective
November 6, 2008. Benny named his children as
his beneficiaries. On April 6, 2010, Benny died of
hepatoma, a liver ailment. The insurance company
denied the children’s claim for the proceeds of the
insurance policy on the ground that Benny failed to
disclose in his application two previous
consultations with his doctors for diabetes and
hypertension, and that he had been diagnosed to
be suffering from hepatoma. The insurance
company also rescinded the policy and refunded
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the premiums paid. Was the insurance company
correct?
A: Under Sec. 27 of the Insurance Code, whether
intentional or not, concealment entitles the injured
party to rescind the contract of insurance.
Here, Benny did not disclose that he was suffering
from diabetes, hypertension, and hepatoma. The
concealment is material, because these are
serious ailments (Florendo v Philam Plans, 666
SCRA 618; 2012). Thus, the insurance company
has the right to rescind the life policy within two
years from the date of issue or its reinstatement
(Sec. 48, Insurance Code).
1.1. 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 of accepting it at the rate of premium
agreed upon.
2. The provisions on concealment and representation
finds basis in the fact that it is a fundamental
characteristic of a contract of insurance that it is
one of perfect/ utmost good faith.
 Notes on Effects of Concealment
General Rule: Concealment vitiates the contract
and entitles the insurer to rescind, even if the
death or loss is due to a cause not related to the
concealed matter.
Exceptions:
1) Incontestability Clause, which stipulates that
the policy shall be incontestable after a stated
period. The incontestability clause is a
mandatory provision in life policies. The policy
must be payable on the death of the insured
and has been in force during the lifetime of the
insured for at least 2 years from its date of
issue or of its last reinstatement;
2) Concealment after the contract has become
effective, because concealment must take
place at the time of the contract is entered into
in order that the policy may be avoided.
Information obtained after the perfection of the
contract is no longer necessary to be disclosed
by the insured, even if the policy has not been
issued (except in reinstatement);
3) Waiver or Estoppel;
4) Marine insurance, where concealment of the
following matters does not vitiate the entire
contract:
(a) The national character of the insured;
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(b) The liability of the thing insured to capture
and detention;
(c) The liability to seizure from breach of
foreign laws of trade;
(d) The want of necessary documents; and
(e) The use of false and simulated papers [Sec.
112 (e)].
WHAT FACTS THEN MUST BE COMMUNICATED?
1. Each party to an insurance contract is bound to
communicate to the other all facts that meet the
following requisites:
(a) Such facts that must be within his knowledge
as concealment requires knowledge of the fact
concealed by the party charged with
concealment;
(b) Fact/s must be material to the contract as 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’
(c) That the other party had no means of
ascertaining such fact/s
(d) That the party with a duty to communicate
makes no warranty.
1.1. 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 the warranty entitles
the insurer to rescind, as when there is a
warranty that the ship is seaworthy, the
intentional and fraudulent omission of the
insured to state that the ship’s
communications equipment is out of order
will entitle the insurer to rescind.
 If the applicant is aware of the existence of some
circumstance which he knows would influence the
insurer in acting upon his application, food faith
requires him to disclose that circumstance, though
unasked [Vance (1951)].
(a) The mere fact of being a “mongoloid” is a
material fact that needs to be disclosed {Great
Pacific Life v CA (1979)].
(b) Mere possibility of previous hypertension is not
enough to establish concealment.
WHEN IS THERE A WAIVER OF INFORMATION?
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.
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WHAT MATTERS NEED NOT BE COMMUNICATED?
1. Except in answer to the inquiries of the other, the
following facts needs not be communicated.
1.1. Matters already known to the insurer [Sec.
30 (a)]
Those which the other knows as the insurer
cannot say that it has been deceived or
misled as when the 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 v Feliciano, 74 SCRA 468),
or when the 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
building will not avoid the policy.
1.2. Matters which each party is bound to know
[Sec. 30 (b) and Sec. 32]
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
are:
(a) All general causes which are open to his
inquiry, equally with that of the other,
and which may affect the political or
material perils contemplated such as
public events like the fact that a nation is
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 such as the
rules of navigation, kinds of seasons, all
the risks of navigation.
1.3. Matters of which the insurer waives
communication [Sec. 30 (c) and Sec. 33]
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.
As when, 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
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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 5 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 (Ng Gan Zee v Asian Crusader, 112
SCRA 461). Note that the waiver of a
medical examination is not tantamount to a
waiver of material information 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 (Saturnino v
Philamlife, 7 SCRA 316).
Bar 1996
Q: Juan procured a “non-medical” life
insurance from Good Life Insurance. He
designated his wife, Petra, as the
beneficiary. Earlier, in his application
response to the question as to whether or
not he had ever been hospitalized, he
answered in the negative. He forgot to
mention his confinement at the Kidney
Hospital. After Juan died in a plane crash,
Petra filed a claim with Good Life.
Discovering Juan’s previous hospitalization,
Good Life rejected Petra’s claim on the
ground of concealment and
misrepresentation. Petra sued Good Life,
invoking good faith on the part of Juan. Will
her suit prosper?
A: No. Petra’s suit will not prosper
(assuming that the policy of life insurance
has been in force for a period of less than 2
years from the date of its issue). The matter
which Juan failed to disclose was material
and relevant to the approval and issuance
of the insurance policy. They would have
affected Good Life’s action on his
application, either by approving it with the
corresponding adjustment for a higher
premium or rejecting the same. Moreover, a
disclosure may have warranted a medical
examination of Juan by Good Life in order
for it to reasonably assess the risk involved
in accepting the application. In any case,
good faith is no defense in concealment.
The waiver of a medical examination in the
“non-medical” life insurance from Good Life
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makes it even more necessary that Juan
supply complete information about his
previous hospitalization for such information
constitutes an important factor which Good
Life takes into consideration in deciding
whether to issue the policy or not.
If the policy of life insurance has
been in force for a period of 2 years or more
from the date of its issue (on which point
the given facts are vague), then Good Life
can no longer prove that the policy is void
ab initio or is rescindable by reason of
fraudulent concealment or
misrepresentation of Juan.
Bar 1997
Q: The assured answers “No” to the
question in the application for a life policy,
“Are you suffering from any form of heart
illness?” In fact, the assured has been a
heart patient for many years. On September
2, 1991, the assured is killed in a plane
crash. The insurance company denies the
claim for insurance proceeds and returns
the premium paid. Is the decision of the
insurance company justified?
A: assuming that the incontestability clause
does not apply because the policy has not
been in force for 2 years from date of issue,
during the lifetime of the insured, the
decision of the insurance company not to
pay is justified. There was fraudulent
concealment. It is not material that the
insured died of a different cause than the
fact concealed. The fact concealed, that is
the heart ailment, is material to the
determination by the insurance company
whether or not to accept the application for
insurance and to require the medical
examination of the insured.
However, if the incontestability
clause applies to the insurance policy
covering the life of the insured had been in
force for 2 years from date of issuance
thereof, the insurance company would not
be justified in denying the claim for the
proceeds of the insurance and in returning
the premium paid. In that case, the insurer
cannot prove the policy void ab initio or
rescindable by reason of fraudulent
concealment or misrepresentation of the
insured.
Bar 1998
Q: Renato was issued a life insurance
policy on January 2, 1990. He concealed
the fact that 3 years prior to the issuance of
his life insurance policy, he had been
seeing a doctor about his heart ailment, and
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on March 1, 1992, he died of heart failure.
May the heirs file a claim on the proceeds
of the life insurance policy of Renato?
A: Yes. The life insurance policy in question
was issued on January 2, 1990. More than
2 years had elapsed when Renato, the
insured, died on March 1, 1992. The
incontestability clause applies.
1.4. Matters which prove or tend to prove the
existence of a risk excluded by a warranty
and which are not otherwise material [Sec.
30 (d)]
As when, the insured makes a warranty that
when the covered vessel sails to the Middle
East, loss occasioned thereby shall not be
covered. There is thus no need to disclose
the anticipated dangers in the area.
1.5. Matters which relate to a risk excepted in
the policy, and which are not otherwise
material [Sec. 30 (e)]
As when, the policy covers against loss by
theft. There is no need to disclose that the
area where the object is located in
earthquake-prone area if loss due to
earthquake is not covered by the policy.
OTHER MATTERS THAT DO NOT NEED TO BE
COMMUNICATED
1. Information of the nature or amount of the interest
of one insured unless if inquired upon by the
insurer, except if required by Sec. 51 [Sec. 34].
Such information need not be communicated
unless in answer to inquiry, except as prescribed
by Sec. 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.
2. Matter of opinion [Sec. 35]
Neither a party to a contract is bound to
communicate even upon inquiry any information of
his own opinion or judgment upon the matters in
question as 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.
As when, the insured is required to disclose an
opinion of marine experts as to seaworthiness of a
vessel.
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REPRESENTATIONS
1. A representation is an 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.
2. It is made at the same time as or before the
issuance of a policy since it is an inducement to
entering into a contract.
price is around P4,000, though the present
actual value is about P3,000. Is W guilty if
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?

2.1. It can also be made after the issuance of 1. Representations may be oral or written.
the policy when the purpose thereof is to
induce the insurer to modify an existing 1.1. They can be affirmative, when it
insurance contract, as the provisions is an affirmation of a fact existing
likewise apply to a modification. Note that when the contract begins.
the rule is the same when it comes to
concealment. As when, the insured states that
3. The language of representation is to be interpreted he is of good health at the time of
by the same rules as the language of contracts in the contract.
general. 1.2. They can be promissory, when it
is a statement by the insured
3.1. Consequently, it need not be literally true concerning what is to happen
and correct/ accurate in every respect. during the term of the insurance.
Rather it is sufficient that it is substantially
or materially true. In the case of a As when, the insured will install
promissory representation, it is sufficient if it additional fire extinguishers at a
is substantially complied with. stipulated future date. A
representation as to the future is
As when, H bought a car for P2,800 and to be deemed a promise, unless it
spent P900 for repairs. H then gave it to W
as a gift. W secures insurance and says the
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was merely a statement of belief
or expectation.
2. A representation does not form part of
the contract as an express provision
thereof as it is a collateral inducement to
the same.
2.1. While it does not form part of the
contract, it may qualify an implied
warranty.
As when, under Sec. 115, it is
implied that a ship is seaworthy.
A representation. A time it is made.
representation by the insured that
its communication system is
defective will qualify the warranty.
Hence, insured can still recover in
case of loss.
IS A REPRESENTATION PART OF THE INSURANCE
CONTRACT?
a representation does not form part of the contract as an
express provision thereof as it is a collateral inducement
to the same.
While it does not form part of the contract, it may qualify
an implied warranty.
CAN A REPRESENTATION BE WITHDRAWN OR
ALTERED?
A representation can be withdrawn 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.
TO WHAT DATE DOES A REPRESENTATION REFER?
1. It must be presumed to refer to the date on which
the contract goes into effect.
2. There is no false representation of it is true at the
time the contract takes effect although false at the
As when, the insured states at application that
vessel in satisfactory operating condition but is
really undergoing maintenance, there is no false
representation if at issuance the vessel has
completed maintenance.
2.1. Conversely, there is a false representation if
it true at the time it was made but false at
the time the contract takes effect.
As when, insured states that he has never
been affected with pneumonia at the
application, but if in the meantime, he is
afflicted with pneumonia before the policy
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takes effect, and he does not disclose,
there is a false representation.
WHEN IS A REPRESENTATION SAID TO BE FALSE?
A representation is said to be false when the facts fail to
correspond with its assertions or stipulations.
MUST THE INSURED COMMUNICATE INFORMATION
OF WHICH AS NO PERSONAL KNOWLEDGE BUT
MERELY RECEIVES THE SAME FROM OTHERS?
1. When a person has no personal knowledge of a
fact, he may or may not communicate such
information to the insurer. If he does communicate,
he is not responsible for its truth. Hence, there can
be no misrepresentation.
2. However, when the information material to
transaction was acquired by an agent of
insured, the same must be communicated,
knowledge of the agent is also knowledge of
principal.
As when: 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?
1. If it false in a material point, whether affirmative or
promissory, the injured party is entitled to rescind
the contract from the time the representation
becomes false.
 Exceptions:
(1) Incontestability Clause;
(2) Misrepresentation after contract takes effect;
(3) Waiver, made by acceptance of insurer of
premium payments despite knowledge of the
ground for rescission;
(4) A representation of the expectation, belief,
opinion, or judgment of the insured, although
false, and even if material to the risk
[Philamcare Health Systems v CA (2002)]; and
(5) Representation by insured based on
rd
information obtained from 3 persons (not his
the
agent), provided the insured:
the
(a) Has no personal knowledge of the facts;
as
(b) Believes them to be true; and
the
(c) Explains to the insurer that he does so on
the information of others.
2. However, the right to rescind is considered waived
by the acceptance of premium payments despite
knowledge of the ground to rescind.
As when: insurer was aware of the lack of
extinguishers required by the policy.
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2.1. There is no waiver, if the insurer had no
knowledge of the ground at the time of the
acceptance of the premium [Stokes v
Malayan, 127 SCRA 766].
 A representation cannot qualify an express
provision or an express warranty of insurance
[Sec. 40] because a representation is not party of
the contract but only a collateral inducement to it.
However, it may qualify as an implied warranty.
There is fraud and misrepresentation when
another person takes the place of the insured in
the medical examination [Eguaras v Great Eastern
(1916)].
The insurer is not entitled to rescission for
misrepresentation of age if the birth date on the
policy leads to the conclusion that the insured is
beyond the age covered and yet insurer continued
to accept payment and had issued the policy.
Insurer is deemed estopped [Edillon v Manila
Bankers Life (1982)].
HOW IS MATERIALITY DETERMINED?
The materiality of a representation is determined like in a
concealment, that is the probable and reasonable
influence of the facts upon the party to whom the
representation is made in forming his estimate of the
advantages/ disadvantages of the contract or in making
inquiries.
WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE
EXERCISED?
1. The right to rescind must be exercised prior to the
commencement of an action on the contract.
2. The right to rescind is also qualified by the 2nd
paragraph of Sec. 48 which provided: 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. This is known as the Incontestability
Clause.
 INCONTESTABILITY CLAUSE – a clause in a
policy of a life insurance that is payable on the
death of the insured which will prevent the insurer
from claiming if 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 if it 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.
2.1. The theory and object of the clause on the part
of the insurer is that an insurer has/ should
have a reasonable opportunity to investigate
the statements which are made by the
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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.
3. The requisites of its application are:
(a) It is a life insurance policy;
(b) It is payable on the death of the insured;
(c) It has been in force during the lifetime of the
insured for at least 2 years from date of issue
or last reinstatement.
3.1. The two-year period within which to contest the
policy is regardless of whether or not the
insured is still living within the period [Tan v
CA, 174 SCRA 403].
3.2. The defenses that are not barred by the
incontestability clause are:
(a) Non-payment of premiums;
(b) Lack of insurable interest;
(c) That the cause of death was expected or
not covered by the terms of the policy;
(d) That the fraud was of a particular vicious
type such as:
(1) Policy was taken in furtherance of a
scheme to murder the insured;
(2) Where the insured substituted another
for the medical examination;
(3) Where the beneficiary feloniously killed
the insured.
(e) Violation of a condition in the policy relating
to military or naval service in time of war;
(f) The necessary notice or proof of death was
not given;
(g) Action is not brought within the time
specified in the policy, which in no case
should be less than 1 year.
3.3. If the incontestability clause applies, the insurer
can no longer escape liability under 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
insured or his agent.
Bar 1984
Q: On May 5, 1982, Juan applied for a life
insurance policy with Acme Life. The policy
was issued to Juan on June 30, 1982, but the
date of issue, as appearing on the policy was
May 15, 1982, the date of his application. Juan
subsequently realized that some of his answers
in the insurance application were erroneous.
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Accordingly, he supplied the insurance
company with the correct replies. However, his
letter to the insurance company was lost in the
mails. He died on June 1, 1984.
The insurance company now refuses to pay
Juan’s beneficiary contending that Juan
misrepresented the state of his health at the
time of his application. Is the insurance
company liable?
A: Yes. The incontestability clause that must be
contained in every individual life insurance
policy refers to the date of its issue as shown in
the policy. Since the policy of life insurance had
been in force during the lifetime of the insured,
Juan, for a period of 2 years from May 15,
1982, the date of issue as shown in the policy,
the policy has become incontestable. The
insurance company can no longer prove that
the policy is void ab initio or rescindable by
reason of fraudulent concealment or
misrepresentation of the insured.
Bar 1989
Q: Manpower Co. obtained a group life
insurance for its employees from Phoenix
Insurance. The master policy issued by
Phoenix on June 1, 1986 contained a provision
that eligible employees form insurance
coverage were all full time employees of
Manpower regularly working at least 30 hours
per week. The policy also had an incontestable
clause. Beforehand, Phoenix sent enrolment
cards to Manpower for distribution to its eligible
employees. X filled out the card which
contained a printed clause: “I request the
insurance for which I may become eligible
under said Group Policy.” The cards were then
sent to Phoenix and X was among the
employees of Manpower who was issued a
certificate of coverage by Phoenix.
On July 3, 1988, X was killed on the occasion
of a robbery in their house. While processing
the claim of X’s beneficiary, Phoenix found out
that X was not an eligible employee as defined
in the group policy since he has not been
employed 30 hours a week by Manpower.
Phoenix refused to pay. May X’s beneficiary
invoke the incontestability clause against
Phoenix?
A: The beneficiary of X may validly invoke the
incontestability clause can apply even to cases
of intentional concealment and
misrepresentation; there would be no cogent
reason for denying such application where the
insured had not been guilty thereof. When X
filled out the card, it behoved the insurer to look
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into the qualification of X whether he can thus
be covered or not by the group life insurance
policy. In issuing the certificate of coverage to
X, Phoenix may, in fact, be said to have waived
the 30-hour per week requirement.
Bar 1991
Q: Atty. Roberto took out a life insurance policy
from Dana Insurance on September 1, 1989.
On August 31, 1990, Roberto died. Dana
Insurance refused to pay his beneficiaries
because it discovered that Roberto had
misrepresented certain material facts in his
application. The beneficiaries sued on the
basis that Dana Insurance can contest the
validity of the insurance policy only within 2
years from the date of issue and during the
lifetime of the insured. Decide.
A: I would rule in favour of the insurance
company. The incontestability clause applies
only of the policy had been in effect for at least
2 years. The two-year period is counted from
the time the insurance becomes effective until
the death of the insured and not thereafter.
Bar 1994
Q: On Septemeber 23, 1990, Tan took a life
insurance policy from Philam. The policy was
issued on November 6, 1990. He died on April
26, 1992 of hepatoma. The insurance company
denied the beneficiaries’ claim and rescinded
the policy by reason of alleged
misrepresentation and concealment of material
facts made by Tan in his application. It returned
the premiums paid.
The beneficiaries contend that the company
had no right to rescind the contract as
rescission must be done “during the lifetime” of
the insured within 2 years and prior to the
commencement of the action. Is the contention
of the beneficiaries tenable?
A: No. The incontestability clause does not
apply. The insured died within less than 2
years from the issuance of the policy on
September 23, 1990. The insurance died on
April 26, 1992, or less than 2 years from
September 23, 1990.
The right of the insurer to rescind is only lost if
the beneficiary has commenced an action on
the policy. There is no such action in this case.
Bar 1998
Q: Renato was issued a life insurance policy on
January 2, 1990. He concealed the fact that 3
years prior to the issuance of his life insurance
policy, he had been seeing a doctor about his
heart ailment. On March 1, 1992, Renato died
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of heart failure. May the heirs file a claim on the
proceeds of the life insurance policy of
Renato?
A: Yes. The life insurance policy in question
was issued on January 2, 1990. More than 2
years had elapsed when Renato, the insured,
died on March 1, 1992. The incontestability
clause applies.
Bar 2014
Q: On July 3, 1993, Delia Sotero took out a life
insurance policy from Ilocos Bankers Life
Insurance Corp. designating her niece
Cresencia Aban as her beneficiary. Ilocos Life
issued Policy No. 747, with a face value of
P100,000, in Sotero’s favour on August 20,
1998, after the requisite medical examination
and payment of the premium.
On April 10, 1996, Sotero died. Aban filed a
claim for the insurance proceeds on July 6,
1996. Ilocos Life conducted an investigation
into the claim and came out with the following
findings:
1. Sotero did not personally apply for
insurance coverage, as she was illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have financial capability to
pay the premium on the policy;
4. Sotero did not sign the application for the
insurance;
5. Aban was the one who filed the insurance
application and designated herself as
beneficiary.
For the above reasons and claiming fraud,
Ilocos Life denied Aban’s claim on April 6,
1997, but refunded the premium paid on the
policy.
a. May the incontestability period set in
even in cases of fraud as alleged in
this case?
b. Is Aban entitled to claim the
proceeds under the policy?
A:
a. Yes. The incontestability clause is a provision
in law that after a policy of life insurance made
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 date of its issue or
of its last reinstatement, the insurer cannot
prove that the policy is void ab initio or is
rescindable by reason of fraudulent
concealment or misrepresentation of the
insured or his agent.
In this case, the policy was issued on August
30, 1993, and the insured died on April 10,
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1996. The insurance policy was thus in force
for a period of 3 years, 7 months and 24 days.
considering that the insured died after the 2-
year period, Ilocos Life is, therefore, barred
from proving that the policy is vod ab initio by
reason of the insured’s fraudulent concealment
or misrepresentation or want of insurable
interest on the part of the beneficiary.
b. Yes. After the 2-year period lapse, or when the
insured dies within the period, the insurer must
make good on the policy, even though the
policy was obtained by fraud, concealment, or
misrepresentation, as in this case, when the
insured did not personally apply for the policy
as she was illiterate and that it was the
beneficiary who filled up the insurance
application designating herself as beneficiary.
Bar 1976
Q: A, an agent of life insurance company X, induced B
who has been suffering from advance tuberculosis to
apply for P10,000 life insurance which B did and
requested A to fill the application form. Thru the
connivance of the physician, it was made to appear in the
application that B is in good health and the P10,000 life
insurance policy was issued by X to B. If B dies of
tuberculosis, may his beneficiaries recover?
A: It depends. The insurer is bound when its agent writes
a false answer into the application without the knowledge
of the insured, in which case, the insured’s beneficiaries
may recover but a collusion between the agent and the
insured in misrepresenting the facts will vitiate the policy.
Thus, in the instant case, if A obtained from B a correct
and truthful answer to interrogatories contained in the
application but without the knowledge of B filed in a false
answer and thru the connivance with the company
physician, it was made to appear that B was in good
health, the insurer cannot assert the falsity of such
answers as a defense to liability on the policy.
Bar 1988
On October 18, 1980, P took out a life insurance policy
and named his only son Q as beneficiary. The policy was
silent with regard to any change of beneficiary. P later
learned that Q was hooked on drugs and immediately
notified the insurance company in writing that he is
substituting his sister, R, as his beneficiary in place of Q.
P later died of advanced tuberculosis. In the application
form filled up by the agent of the insurance company prior
to the issuance of the life insurance policy by the
insurance company, the agent, without the knowledge of
P, filled in a false answer and made it appear that P was
in good health. Upon P’s death, Q claimed the proceeds
of the insurance policy contending that as designated
beneficiary, he cannot be changed without his consent,
he having acquired a vested right to the proceeds of the
policy.
Can the insurance company refuse liability on the policy?
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A: No, the insurer cannot escape liability. The insurance 2. In concealment and misrepresentation, both give
agent is an agent not of the insured but of the insurer and the insurer the right to rescind the contract of
the latter must thus suffer for the misconduct of the insurance.
agent. The result would have been different had the false
answer been made by the agent in connivance with the
insured. 3. The materiality of concealment and representation
are determined by the same rules.
DISTINGUISH CONCEALMENT FROM
REPRESENTATION 4. Whether the concealment and representation is
1. Concealment is the neglect of one party to intentional or not, the injured party can rescind.
communicate to the other material facts. The
information he gives in compliance with his
duty to reveal information is representation. 5. Since insurance contracts are of utmost good faith,
Representation therefore, is the communication the insurer is also covered by the rules.
required to comply with the prohibition against Bar 2009
concealment.
Q: Antarctica Life Assurance publicly offered a specially
2. Concealment is the passive and designed insurance policy covering persons between
misrepresentation is the active form of the ages of 5- to 75 who may be afflicted with serious and
same bad faith. debilitating illnesses. Quirico applied for insurance
coverage, stating that he was already 80 years old.

CONCEALMENT AND REPRESENTATION Nonetheless, Antarctica Life approved his application.

COMPARED
1. In concealment, the insured withholds information
of material facts; in representation, the insured
makes erroneous statements.
Quirico then requested Antarctica Life for the issuance of
a cover note while he was trying to raise funds to pay the
insurance premium. Antarctica Life granted the request.
Ten days after he received the cover note, Quirico had a
heart seizure and had to be hospitalized. He then filed a
claim on the policy.

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Can Antarctica Life validly deny the claim on the ground
that the insurance coverage, as publicly offered, was
available only to persons 50 to 75 years of age?

A: No. There is no misrepresentation or concealment in

this case which would result to the denial of Quirico’s
claim because by approving the application of Quirico
who disclosed that he was already 80 years old.
Antarctica Life waived the age requirement. The
insurance company is now estopped from raising such
defense of age of the insured.

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WARRANTIES
DEFINED
1. It is a statement or promise stated in the policy or
incorporated therein by reference, whereby the
insured, expressly or impliedly contracts as to the
past, present and future existence of certain facts,
conditions, or circumstances, the literal truth of
which is essential to the validity of the contract.
 Warranty is a statement or promise by the insured
set forth in the policy itself or incorporated in it by
proper reference, the untruth or nonfulfillment of
which in any aspect and without reference to
whether the insurer was in fact prejudiced by such
untruth or nonfulfillment, renders the policy
voidable by the insurer (Vance, 1951).
Bar 1986
Q: Pabaya paid for a fire insurance policy on his multi-
storey building. At the time he applied for the insurance,
he told the representative of the insurance company that
he planned to assign a security guard on every floor of
the building right away. Except for the ground floor, no
security guards were assigned. Eleven months after the
policy was issued, the building was gutted by fire which
started on the third floor. Unknown to Pabaya, the
insurance company had incorporated his planned
undertaking in the policy. Can Pabaya recover on the fire
insurance policy?
A: Pabaya can recover under the insurance policy. The
statement of Pabaya that the planned to assign a security
guard on every floor of the building, whether incorporated
in the policy or not, did not amount to firm commitment so
as to constitute an express warranty or representation.
The facts indicate that it was simply planned, not
obligatory or promissory, undertaking.
FORM
1. No particular form of words is necessary to create
a warranty.
2. 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.
2.1. Whether a warranty is constituted or not
depends upon:
(a) the intention of the parties,
(b) the nature of the contract, or
(c) the words used thereto.
2.2. In case of doubt, the statement is presumed
to be a representation, not a warranty.
WHAT ARE THE KINDS OF WARRANTIES?
1. Affirmative warranties – refer to those that relate to
matters that exist at or before the issuance of the
policy.
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2. Promissory warranties – refer to 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.
2.1. 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.
As when: That a house shall not be leased
our or that the insured premises will be
fenced.
2.2. Unless the contrary intention appears, the
courts will presume that the warranty is
merely an affirmative warranty.
As when: 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 warranty is a statement in a policy of a
matter relating to the person or the thing insured,
or to the risk as a fact and where the assertion or
promise is clearly set forth in the policy or
incorporated therein by reference.
3.1. They can be affirmative or promissory
warranties.
3.2. 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. This also 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 warranties are assertions or promises 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.
4.1. The law only provides for implied warranties
only in contracts of marine insurance.
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EFFECT OF VIOLATION OR BREACH OF
MATERIAL WARRANTY
1. 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.
1.1. 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.
NOTE: Breach of a material warranty may
either be:
(a) Without fraud, in which case, the insurer
will be exonerated from the time it
occurs. If made during the inception, it
will prevent the policy from taking effect
(Sec. 76).
(b) With fraud, in which case, the policy is
avoided ab initio.
2. The 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.
2.1. This means that while ordinarily the breach
of an immaterial provision does not avoid
A the policy, a stipulation that any breach
avoids the policy will cause it to be avoided.
3. 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.
3.1. This means that if the breach is without
fraud, the policy is avoided only from the
time of the breach, but prior to the breach, it
is still effective. Consequently, the insured
is entitled to:
(a) a pro-rata return of the premium paid
under Sec. 80; or
(b) all premiums, if the breach occurs at the
inception of the contract, as such is void
ab initio and had never become binding.
4. Note that a causal connection between a violation
of the warranty and cause of the loss is not
necessary. Hence, even if the violation did not
contribute to the loss, the other party may still
rescind.
As when: A insured his 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 fire. The insurer was
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not held liable as the storage had increased the
risk [Young v Midland Textiles, 30 Phil. 617].
5. Exceptions:
The non-performance of a promissory warranty
does not avoid the policy before the arrival of the
time for performance when:
(a) The loss insured against happens or loss
occurs before thej time of performance of the
warranty.
As when: There is a warranty that a firewall will
be constructed, but fire occurs before the
period for compliance.
(b) The performance becomes unlawful at the
place of the contract.
As when: A law or ordinance prohibits the
construction of the specified firewall.
(c) The performance becomes impossible;
As when: A severe lack of materials to
construct.
(d) Waiver or Estoppel.
Bar 1993
Q: Julie and Alma formed a business partnership. Under
the business name Pino Shop, the partnership engaged
in a sale of construction materials. Julie insured the
stocks in trade of Pino Shop with WGC Insurance for
P350, 000. Subsequently, she again got an insurance
contract with RSI for P1,000,000 and then from EIC for
P200,000. A fire of unknown origin gutted the store of the
partnership. Julie filed her claims with the 3 insurance
companies. However, her claims were denied separately
for breach of policy. Julie went to court and contended
that she could not be blamed for the omission, alleging
that the insurance agents for WGC, RSI and EIC knew of
the existence of the additional insurance coverage and
that she was not informed about the requirement that
such other or additional insurance should be stated in the
policy.
May she recover on her fire insurance policies?
A: No, because she is guilty of violation of a warranty/
condition.
BREACH OF IMMATERIAL WARRANTY
1. General Rule: Breach of an immaterial provision
does not avoid the policy (Sec. 75).
2. Exception: Breach of an immaterial provision
avoids the policy when the parties stipulate that
violation of a particular provision, though
immaterial, shall avoid the policy, in effect, the
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parties converted the immaterial provision into a 3. As to Compliance: A warranty must be strictly and
material one (Sundiang and Aquino, 2013). literally performed, while a representation must be
substantially true.
2.1. A condition in the policy which requires
insured to disclose to the insurer of any 4. As to Materiality: A warranty is presumed material,
insurance that, if violated by the insured, while a representation must be shown to be so.
would ipso facto avoid the contract (Pioneer
v Yap, 1974). 5. As to Applicability of Incontestability Clause:
Incontestability clause does not apply to breach of
2.2. Insurer is barred by waiver (or estoppel) to warranty, while it applies in misrepresentation.
claim violation of the so-called hydrants
warranty when, despite knowing fully that 6. A breach of warranty is a breach of the contract
only 2 fire hydrants existed (out of the 11 itself while a misrepresentation is ground to
hydrants required), it still issued the rescind the contract.
insurance policies and received the
premiums (Qua Chee Gan v Law Union,
1955)

DISTINGUISHING IT FROM REPRESENTATIONS

1. As to Nature: A warranty is a part of the contract; a

representation is merely a collateral inducement
thereto;

2. As to Form: 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.

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POLICY
It is the written instrument in which a contract of
insurance is set forth.
HOW TO CONSTRUE THE POLICY
1. Generally, policy is construed in favour of the
insured and against the insurer.
2. The burden of proving that the terms of the policy
have been explained is upon the party seeking to
enforce it.
As when: 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
when upheld (Tang v CA, 90 SCRA 236).
FORM OF THE POLICY
1. 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.
2. 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.
2.1. If pasted or attached after the original policy
at the time it was issued, the signature of
the insured is not necessary to make it
binding.
2.2. If pasted or attached after the original policy
is issued, it must be counter-signed by the
insured unless it was applied for by the
insured.
2.3. 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.
2.4. Riders are forms attached to the policy
when the policy finds it necessary to alter or
amend the applicant’s answer to any
question in the application.
2.5. Clauses are forms containing additional
stipulations.
2.6. Warranties are written statements/
stipulations inserted on the face of the
contract or incorporated by proper words of
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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.
2.7. 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?
1. A policy must specify
(a) The parties between whom the contract is
made;
(b) The amount to be insured except in open or
running policies;
(c) 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;
(d) The property or life insured;
(e) The interest of the insured in the property
insured, if not the absolute owner;
(f) The risks insured against; and
(g) The period during which the insurance is to
continue.
WHAT ARE COVER NOTES?
1. 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.
2. It is also known as a “binding slip” or “binder.”
3. 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.
3.1. The following rules have been promulgated
by the Insurance Commissioner to govern
cover notes:
(a) 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 a
7-day notice to the other party;
(b) If the cover note is cancelled, a regular
policy must be issued within 60 days
from the date of issue of the cover note,
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including within its terms the identical
insurance;
(c) It may be extended with the written
approval of the Commissioner but may
be dispensed with by a certification of
the President, Vice-President, or
General Management of the insurer that
the risks involved and the extension do
not violate the Code.
(d) Insurance companies may impose a
deposit premium equivalent to at least
25% of the estimated premium but in no
case less than P500.
4. A cover note will give adequate insurance
protection when: it is considered as 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).
4.1. As when: An 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 v Sunlife,, 41 Phil. 265), or a
binding slip stated that it was subject to the
approval of the insurer and the same was
subsequently disapproved (Grepalife v CA,
89 SCRA 543).
5. Rules of Joyce (Joseph Joyce, Author of five
volumes of Commentaries on Insurance)
(a) If the act of the acceptance of the risk by the
agent and the giving by him of a receipt are
within the scope of his authority, and nothing
remains but to issue the policy, then the receipt
will bind the company.
(b) Where an agreement is made between the
applicant and the agent, whether by signing an
application containing such condition, or
otherwise, that no liability shall attach until the
principal approves the risk and a receipt is
given by the agent, such acceptance is merely
conditional and subordinated to the act of the
company in approving or rejecting.
(c) Where the acceptance of the agent is within
the scope of his authority, a receipt containing
a contract of insurance for a specified time
which is not absolute but conditional, upon
acceptance or rejection by the principal, covers
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the specified period unless the risk is declined
within the same period.
Bar 1980
Q: P filed an application with an insurance company for a
20-year endowment policy in the amount of P50,000 on
the life of his one-year old daughter, supplying all the
essential data in the application form, but without
disclosing that his daughter was a mongoloid child. Upon
P’s payment of the annual premium, a binding deposit
receipt was issued to him by the insurance agent, subject
to processing by the company. The insurance company
disapproved the insurance application stating that the
plan applied for was not available for minors below 7
years old, and offered another plan. The insurance agent
did not inform P of the disapproval nor of the alternative
plan offered, and instead, strongly recommended that the
company reconsider and approve the insurance
application.
As fate would have it, P’s daughter died. P sought
payment of the proceeds of the insurance but the
company refused on the grounds that there was
concealment of a material fact in the insurance
application form and that it had rejected the application. P
contended, on the other hand, that the binding deposit
receipt constituted a temporary contract of life insurance.
How would you resolve this?
A: The insurance company is not liable. The binding
deposit receipt is merely conditional and does not insure
outright. Where an agreement is made between the
applicant and the agent, no liability shall attach until the
principal (insurance company) approves the risk. The
binding deposit receipt is subordinated to the act of the
insurance company in approving or rejecting the
application. Thus, in life insurance, a “binding slip” or
“binding receipt” does not insure by itself. And, when as
in this case, the application was disapproved, before the
death of the insured, there was no perfected contract of
insurance in order to make the company liable [Great
Pacific Life v CA; April 30, 1979 (89 SCRA 549)].
6. A cover note has been held to be binding despite
the absence of a premium payment for its
issuance as 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 the premiums. The cover note
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 Export v CA, 112 SCRA 199).
Bar 2009
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Q: Antarctica Life publicly offered a specially designed
insurance policy covering persons between the ages 50
to 75 who may be afflicted with serious and debilitating
illnesses. Quirico applied for insurance coverage, stating
that he was already 80 years old.
Nonetheless, Antarctica Life approved his application.
Quirico then requested Antarctica Life for the issuance of
a cover note while he was trying to raise funds to pay the
insurance premium. Antarctica Life granted the request.
Ten days after he received the cover note, Quirico had a
heart seizure and had to be hospitalized. He then filed a
claim on the policy.
Did Antarctica Life’s issuance of a cover note result in the
perfection of an insurance contract between Quirico and
Antarctica Life?
A: Yes. A cover note has been held to be binding despite
the absence of a premium payment for its issuance as no
separate premiums are intended or required to be paid
on a cover note. The cover note 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. The
issuance of the cover note is because there is a delay on
the issuance of the policy. The rule on cover note is that it
shall be valid for 60 days whether or not a premium is
paid, but it may be cancelled by either party upon at least
a 7-day notice to the other party and if not cancelled, the
policy shall be issued.
7. As application for insurance is nothing more than
an offer to enter into a contract of insurance. Such
application, therefore, shall not become a contract
until accepted by the insurer. Such acceptance
cannot be presumed from a delay on the part of
the insurer in passing upon the application. On the
contrary, such delay for an unreasonable period of
time may be construed as a rejection of the
application.
7.1. Acceptance is presumed when the insurer
accepts and retains for an unreasonable
period of time (30 days) the first premium
covered by a cashier’s receipt stating that
the policy is effective on the date it is
issued, without the policy being issued. If
loss occurs before the rejection of the
policy, the insurer is liable [Gloria, et. al. v
Philamlife, (CA ) 73 OG 8660].
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 is made. Unless
otherwise specified in the policy
1.1. As when:
(a) The designation of sister as sole
beneficiary in a life insurance cannot be
defeated by the contention of the plaintiff
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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 (Del Val v Del Val, 29 SCRA
534);
(b) In an action to recover cost of repairs
and labor to a motor vehicle where they
policy states loss is payable to HS
Reyes, the mortgagee of the vehicle
who had no knowledge of the fact that
Mara had it repaired with Bonifacio
Bros., the Court ruled that HS 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 (Bonifacio
Bros. v Mora; GR No. L-20853; May 29,
1967).
1.2. Unless otherwise specified in the policy, a
3rd person may sue the insurer if:
(a) The insurance contract contains a
stipulation in favor of a 3rd person, the
said 3rd though not a party may sue to
enforce before the contract is revoked
by the parties.
As when: The insurance company
undertook to indemnify any authorized
driver who was driving the motor vehicle
insured. Coquia, while driving the
insured motor vehicle, met an accident
and died. His heirs were allowed to sue
the insurer, the policy being considered
in the nature of a contract pour autrui,
and therefore the enforcement thereof
may be demanded by a 3rd party for
whose benefit it was made (Coquia v
Fieldmen’s Insurance, 26 SCRA 179);
(b) The insurance contract provides for
indemnity against liability to 3rd persons.
As when: The insured procured
insurance that would indemnify him
against any and all sums which he may
be legally liable to pay in respect to the
death or bodily injury to any person. A
jeepney covered by the insurance had
bumped Guingon and had caused his
death. The insurance was held to be
one for indemnity against liability to 3rd
persons, and therefore, such 3rd person
is entitled to sue the insurer (Guingon v
del Monte, 20 SCRA 1043).
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1.3. The test to determine whether a 3rd person
may directly sue the insurer of the
wrongdoer is: If the contract provides for
indemnity against 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.
2.1. If not indicated, it is as if the insurance is
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 and common
interest so that it may be applicable to the interest
of his co-partners/ owners.
. 6.1.
3.1. 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.
As when: 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 (Sec. 57).
5.1. The proceeds become payable to who may
be the owner at the time the loss or injury
occurs. This is an exception to Sec. 20.
6. The mere transfer of a thing insured does not
transfer the policy but it suspends it until the same
person becomes the owner of both the policy and
the thing insured.
Note the exception to this rule as found in
Secs. 20-24 and 57.
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WHAT ARE THE KINDS OF INSURANCE POLICIES?
1. The kinds of policies are:
(a) Open;
(b) Valued;
(c) Running or Floating.
2. 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.
2.1. What is mentioned as the amount is not the
value of the property but merely the
maximum limit of the insurer’s liability. In
case of loss, the insurer only pays the
actual cash value at the time of loss.
3. A valued policy is one which expresses on its face
that the thing insured shall be valued at a specified
sum.
3.1. 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.
3.2. A valued policy distinguished from an open
policy:
(a) In a valued policy, proof of value of the
thing after the loss is necessary. In an
open policy, the insured must prove the
value of the thing insured;
(b) In a valued policy, the parties have
conclusively stipulated that the property
insured is valued at a specified sum. In
an open policy, the value is not agreed
but left to be ascertained upon loss. This
does not violate the principle that a
contact of insurance is a contract of
indemnity as long as the valuation is
reasonable and is bona fide.
4. 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.
4.1. This is also known as “floating policy” which
is usually issued to provide indemnity for
property which cannot be recovered by
specific insurance because of a frequent
change in location and quantity.
As when: Insurance procured by a retail
establishment to cover its inventory that
fluctuates in quantity, or is located in
several areas.
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Bar 1975
Q: In 1964, Jose constructed a house worth P50,000
which he insured against fire for the same amount. The
insurance for the same amount was renewed every year.
In 1974, when the house was already worth P100,000 on
account of inflationary prices (in case of rebuilding), 1/5
of the house was destroyed by fire. As nothing illegal
about the contract, how much, if any, can Jose
successfully recover from the insurance company?
A: If the insurance policy is a valued one, then Jose can
recover 1/5 of P50,000, i.e. P10,000. Under the
Insurance Code, the valuation in a valued policy is
conclusive between the parties in the absence of fraud.
So Jose cannot claim that since his house was worth
P100,000 at the time of the loss, he should be able to
recover P20,000 (actual value of loss – 1/5 of P100,000).
If the policy is an open policy then under the law,
appraisal of loss is made after the fire. Since the house
was worth P100,000 at such time, then the loss of Jose is
P20,000 and he can recover this amount under such an
open policy.
CANCELLATION OF POLICY
1. No policy other than life shall be cancelled by the
insurer, except upon prior notice thereof to the
insured.
2. No notice of cancellation shall be effective if not
based on the occurrence, after effective date of
one or more of the following grounds:
(a) Non-payment of premium;
(b) Conviction of a crime arising out of acts
increasing the hazard insured against
As when: Insured has been convicted of arson
or car theft;
(c) Discovery of fraud or material
misrepresentation
As when: Insured represents himself as the
owner but is not actually the owner;
(d) Discovery of willfull or reckless acts or
omissions increasing the hazard insured
against
As when: There is storage of hazardous
materials in the premises;
(e) Physical changes in the property insured which
result in the property being uninsurable
As when: A private vehicle is converted into a
racing vehicle.
(f) Determination by the Insurance Commissioner
that a continuation of the policy would place the
insurer in violation of the Code
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As when: Policy was issued absent insurable
interest.
3. As to form, the notice must be in writing, mailed or
delivered to the named insured at the address
shown in the policy which shall state:
(a) The grounds relied upon as per Section 64,
and
(b) That upon written request of the named
insured, the insurer will furnish the facts on
which cancellation is based.
3.1. A fire insurance policy is cancelled on October
15, 1981. The insurer’s clerk allegedly sent
notice 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. It was held that considering the
strict language of the law that no policy can be
cancelled without prior notice, it behoved on
the insurer to make sure that cancellation was
actually sent and received by the insured
(Malayan Insurance v Cruz Arnaldo, 154 SCRA
672).
3.2. A insured his building against fire and made
the loss payable to the mortgagee. Upon
cancellation, notice was sent to the mortgagee.
It was held that there was no valid notice of
cancellation. The notice is personal to the
insured and not to any unauthorized person
(Saura Import v Phil. International, 8 SCRA
143).
DOES THE INSURED HAVE THE RIGHT TO RENEW
HIS POLICY?
1. 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 45 days in advance of
the end of the policy.
2. For reckoning the end date of a policy: any policy
written for a term of less than one year shall be
considered as if written for a term of one year. If
written for a term of more than one year or any
policy with no fixed expiration date, it shall be
considered as if written for successive periods or
terms of one year.
HOW IS REINSTATEMENT OF THE POLICY
EFFECTED?
1. Reinstatement can be permitted within 3 years, or
a stipulated longer period, from the date of default.
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2. This is not an absolute right as it is conditioned on
the insurability of the insured or evidence of good
health and the payment of all overdue premiums
and indebtedness, if any.

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PREMIUM
(a) In case of life or industrial life where the
DEFINED premium is payable monthly or oftener,
1. The agreed price for assuming and carrying the whenever the grace period applies;
risk which the insurer is entitled to the payment of (b) When the insurer makes a written
a premium as soon as the thing insured is acknowledgment of the receipt of a premium,
exposed to the peril insured against. such is conclusive evidence of the payment of
the premium to make it binding notwithstanding
2. The payment of a premium is essential to the any stipulation therein that it shall not be
validity of an insurance policy, known as the “cash binding until the premium is paid. Hence, the
and carry basis” or “no premium payment, no effect of an acknowledgment in a policy or
policy” rule. 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,
3. As a rule, the obligation to pay the premium when however it is not conclusive for the purpose of
due is considered an indivisible obligation. avoiding collection of the premium; and
Consequently, forfeiture is not prevented by a part
payment unless payment by instalment has been (c) Where the oblige has accepted the bond or
agreed upon or is the established practice. suretyship contract in which case such bond or
suretyship contract becomes valid and
WHEN IS THE INSURER ENTITLED TO A PREMIUM? enforceable irrespective of whether or not the
premium has been paid by the obligor to the
1. The insurer is entitled to the payment of a
surety.
premium as soon as the thing insured is exposed
to the peril insured against.
3. There is no excuse for non-payment of the
premium since payment on time is of the essence.
2. Notwithstanding any agreement to the contrary, no
The only recognized exception is when failure is
policy or contract of insurance issued by an
due to the wrongful conduct of the insurer.
insurance company is valid and binding unless
and until the premium is paid, except in:

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As when: There is a baseless refusal to accept a
validly tendered payment of the premium
(Gonzales v Asia Life, 92 Phil 197).
NOTE: Non-payment of premiums
Non-payment of first premium, unless
waived, prevents the contract from becoming
binding notwithstanding the acceptance of the
application nor the issuance of the policy.
Non-payment of subsequent premiums
does not affect the validity of the contracts, unless
by express stipulation, it is provided that the policy
shall in that event be suspended or shall lapse. In
case of individual life insurance, the policy holder
is entitled a grace period of either 30 days or one
month within which payment of any premium after
the first may be made. In cases of industrial life
insurance, the grace period is 4 weeks, and where
premiums are paid monthly, either 30 days or one
month.
NO EXCUSES
Fortuitous events which render payment by
the insured wholly impossible will not prevent
forfeiture of the policy when the premium remains
unpaid.
Non-payment of premiums occasioned by
war causes an insurance to be not merely
suspended, but is completely abrogated. It would
be unjust to allow the insurer to retain the reserve
value of the policy, which is the excess of the
premium paid over the actual risk carried during
the years when the policy had been in force in time
of war [Constantino v Asia Life (1950)].
WHAT IS THE EFFECT OF PARTIAL
PAYMENT?
1. As a rule, the obligation to pay the premium
when due is considered an indivisible
obligation. Consequently, forfeiture is not
prevented by a part payment unless payment
by instalment has been agreed upon or is the
established practice (Gulf Resorts v Philippine
Charter Insurance, 458 SCRA 550).
1.1. Payment made to an insurance agent or
broker is payment to the insurance
company.
1.2. A payment by check or a promissory
note will be sufficient to make the policy
binding when it is encashed (Art. 1249,
Civil Code).
NOTE: The payment of premium by a
postdated check at a stated maturity
subsequent to the loss is insufficient to
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put the insurance into effect. But
payment by a check bearing a date prior
to the loss, assuming availability of
funds, would be sufficient, even if it
remains unencashed at the time of the
loss. The subsequent effects of
encashment would retroact to the date
of the instrument and its acceptance by
the creditor [Vitug, Commercial Law and
Jurisprudence (2006)].
Bar 1976
Q: A insured his house against loss by fire for P100,000.
The policy provides that the insurer shall be liable “if the
property insured shall be damaged or destroyed by fire
after payment of premium, at any time from June 15,
1976 to June 15, 1977.” The policy was delivered to A on
June 15, 1976. Instead of paying the premium in cash, A
issued a promissory note dated June 15, 1976, for the
amount of premium, payable within 30 days. The note
was accepted. On June 29, 1976, the property insured
was burned. The insurer refused to pay on the ground
that the premium had not been paid, and the note did not
have the effect of payment as its valued had not been
realized at the time the house was burned. Decide.
A: Since the case given took place after the effectivity of
the Insurance Code, it must be governed by its
provisions. Section 77 thereof provides: “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 thereof has been
paid…” Considering that this cited provision replaced
Sec. 72 of the old Insurance Act expressly by permitting
the granting of credit extension, the only conclusion is
that the law-making power intended by the amendment to
disallow any agreement postponing payment of premium,
including a grant of credit extension. The issuance of a
promissory note postpones payment by granting credit
extension. Therefore, the insurer is not liable under this
express provision of the new Insurance Code. The case
of Capital Insurance v Plastic Era which held that
acceptance of a promissory note constitutes waiver of the
stipulation as to mode of payment, a promissory note
constitutes payment, took place before the Insurance
Code came into effect and was based on Sec. 72 of the
old Insurance Act. It can therefore not be made
applicable to the given case.
Answer from UST Golden Notes:
Yes, the insurer is liable because there has been a
perfected insurance contract. The insurer accepted the
promise of the applicant to pay the insurance premium
within 30 days from the effective date of policy. By so
doing, it has implicitly agreed to modify the tenor of the
insurance policy and in effect, waived any provision
therein that it would only pay for the loss or damage in
case the same occurs after the payment of the premium.
Considering that the insurance policy is silent as to the
mode of payment, insurer is deemed to have accepted
the promissory note in payment of the premium. This
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rendered the policy immediately operative on the date it
was delivered [Capital Insurance v Plastic Era; GR No. L-
22375; July 18, 1975].
Bar 1978
Q: On December 17, 1975, a fire policy, insuring a
building and its contents, was delivered to the insured
company. By agreement, it was allowed to pay the
premium within 30 days. On January 8, 1976, it paid the
premium by means of a check postdated January 16,
1976. The check was deposited by the insurance
company only on February 20, but the check bounced,
although on January 19, the insured had sufficient bank
balance. On January 18, two days after the premium
became due, the insured property was burned and
became a total loss.
Can the insurance company cancel the policy for non-
payment of premium?
A: Yes, the insurance company can cancel the policy for
non-payment of the premium. The new Insurance Code
provides that notwithstanding any agreement to contrary,
no policy or contract of insurance is valid and binding
unless and until the premium thereof has been paid.
Bar 2006
Q: The Peninsula Insurance Co. offered to insure Francis’
brand new car against all risks in the sum of P1,000,000
per year. The policy was issued with the premium fixed at
P60,000 in 6 months. Francis only paid the first two
months instalments. Despite demands, he failed to pay
the subsequent instalments, five months after the
issuance of the policy, the vehicle was carnapped.
Francis filed with the insurance company a claim for its
value. However, the company denied his claim on the
ground that he failed to pay the premium resulting in the
cancellation of the policy.
Can Francis recover from Peninsula Insurance?
A: Yes, considering that his car was carnapped before
the 6-month period to pay the premium installments
expired. An insurance premium can be paid in
instalments, and the insurance contract became valid and
binding upon payment of the first premium. When the
insurer granted a credit term for the payment of the
premium, it is liable when the loss occurred before the
expiration of such term. It could not deny liability on the
ground that payment was not made in full, for the reason
that it agreed to accept instalment payments. For the
same reason, it could not validly cancel the policy, more
so, without giving notice to the insured for its cancellation.
Bar 2010
Q: Enrique obtained from Seguro Insurance a
comprehensive motor vehicle insurance to cover his top
of the line Aston Martin. The policy was issued on March
31, 2010 and, on even date, Enrique paid the premium
with a personal check postdated April 6, 2010.
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On April 5, 2010, the car was involved in an accident that
resulted in its total loss. On April 10, 2010, the drawee
bank returned Enriques’s check with the notation
“insufficient funds.” Upon notification, Enrique
immediately deposited additional funds with the bank and
asked the insurer to redeposit the check. Enrique
thereupon claimed indemnity from the insurer.
Is the insurer liable under the insurance coverage?
A: No. Under Art. 1249 of the Civil Code, the delivery of a
check produces the effect of payment only when it is
encashed. The loss occurred on April 5, 2010. When the
check was deposited, it was returned on April 10, 2010,
for insufficiency of funds. The check was honoured only
after Enrique deposited additional funds with the bank.
Hence, it did not produce the effect of payment.
Bar 2007
Q: Alfredo took out a policy to insure his commercial
building against fire. The broker for the insurance
company agreed to give a 15-day credit within which to
pay the insurance premium. Upon delivery of the policy
on May 15, 2006, Alfredo issued a postdated check
payable on May 30, 2006. On May 28, 2006, a fire broke
out and destroyed the building owned by Alfredo.
May Alfredo recover on the insurance policy?
A: Yes. It is valid to stipulate that the insured will be
granted credit term for payment of premium. Payment by
means of a check which was accepted by the insurer,
bearing a date prior to the loss, would be sufficient. The
subsequent effects of encashment retroact to the date of
the check [UCPB General v Masagana Telamart, 356
SCRA 307 (2001)].
Bar 2013
Q: Stable Insurance and St. Peter Manufacturing have
had a long-standing insurance relationship with each
other: St. Peter secures the comprehensive fire insurance
on its plant and facilities from Stable Insurance. The
standing business practice between them has been to
allow St. Peter a credit period of 90 days from the
renewal of the policy with which to pay the premium.
Soon after the new policy was issued and before
premium payments could be made, a fire gutted the
covered plant and facilities to the ground. The day after
the fire, St. Peter issued a manager’s check to Stable
Insurance for the fire insurance premium, for which it was
issued a receipt. A week later, St. Peter issued its notice
of loss. Stable Insurance responded by issuing its own
manager’s check for the amount of the premiums St.
Peter has paid, and denied St. Peter’s claim on the
ground that under the cash and carry principle governing
fire insurance, no coverage existed at the time the fire
occurred because the insurance premium had not been
paid. Is St. Peter entitled to recover from the loss from
Stable Insurance?
A: St. Peter is entitled to recover for the loss from Stable
Insurance. Stable Insurance granted a credit term to pay
the premiums. This is not against the law, because the
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standing business practice of allowing St. Peter to pay
the premiums after 60 days or 90 days, was relied upon
in good faith by St. Peter. Stable Insurance is in estoppel.
Bar 2014
Q: On September 25, 2013, Danny procured a n
insurance on his life with a face value of P5,000,000 from
RN Insurance, with his wife Tina as sole beneficiary. On
the same day, Danny issued an undated check to RN
Insurance for the full amount of the premium. On October
1, 2013, RN Insurance issued the policy covering
Danny’s life insurance. On October 5, 2013, Danny met a
tragic accident and died. Tina claimed the insurance
benefit, but RN Insurance was quick to deny the claim
because at the time of Danny’s death, the check was not
yet encashed and therefore, the premium remained
unpaid.
Is RN Insurance correct? Will your answer be the same if
the check is dated October 15, 2013?
A: No, RN Insurance is not correct. After the issuance of
the check by Danny for the full amount of the premium,
the unconditional delivery of an insurance policy of RN
Insurance to Danny corresponding to the terms of the
application ordinarily consummates the contract, and the
policy as delivered becomes the final contract between
the parties. Where the parties, so intend, the insurance
becomes effective at the time of the delivery of the policy
notwithstanding the fact that the check was not yet
encashed.
My answer will still be the same even if the check is
dated October 15, 2013 since an acknowledgment in a
policy of the receipt of premium is conclusive evidence of
its payment for the purpose of making the policy binding.
2. Basic principles of equity and fairness would
not allow the insurer to collect and accept
instalments and later deny liability as premiums
were not paid in full (Philippine Phoenix Surety
v Woodworks, 20 SCRA 1272).
2.1. Should any partial payment be made
when there is an agreement that the
policy shall not be effective pending
payment of full premium was in the
concept of a deposit (Tibay v CA, 257
SCRA 126).
REFUND OF PREMIUM
WHEN IS THE INSURED ENTITLED TO A RETURN
(REFUND) OF THE PREMIUMS PAID?
1. The insured will be entitled to a return of the
premiums paid when:
1.1. To the whole premium, when no part of the
interest in the thing insured is exposed to
any of the perils insured against.
As when: Insurance is taken on a vessel for
a voyage that did not take place.
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1.2. 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 to the unexpired time, but it
does not apply if:
(a) A short period rate has been agreed
upon. What will be recoverable is the
agreed percentage of premiums as
stated in the policy.
As when: The policy is returned after a
month, the insurer retains 20% of the
premium because it has been agreed
upon, the insured then receives 80%,
not the premiums equivalent to the 11
months remaining on the term; or
(b) The policy is a life insurance policy as
the same is indivisible but the insured is
entitled to a cash surrender value.
NOTE: Cash Surrender Value
It is the amount that the insured is
entitled to receive if he surrenders the
policy and releases his claims upon it.
The right to CSV accrues only after
three full annual premium payments.
The insured is given the right to claim
the amount less than the reserve,
reduced by surrender surcharge.
The CSV is an amount which the
insurance company hold in trust for the
insured to be delivered to him upon
demand. When the company’s credit for
advances is paid out of the cash value
or CSV, that value and the company’s
liability is diminished [Manufacturer’s
Life v Meer (1951)].
1.3. When the contact is voidable on account of
fraud or misrepresentation of the insurer or
the agent.
As when: The insurer makes a
representation regarding a loan provision
which is not contained in the policy that is
issued.
1.4. Where the contract is voidable on account
of facts, the existence of which the insured
was ignorant without his fault.
As when: The insurance is taken by the
insured, who is ignorant of the fact that he
did not have insurable interest or a person,
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not knowing that his car has been totally 2. Unless otherwise stated, the premiums shall be
damaged, procured insurance over it. returned to the insured that paid them.

1.5. When by default of the insured other than
actual fraud, the insurer never incurred any
liability under the policy.
As when: A person insured his vessel for a
trip, but the vessel is destroyed before the
trip.
1.6. 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.
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
As when: The vessel is insured for a voyage that
will take 5 days; 2 days into the voyage, the policy
is surrendered.
(2) In life insurance because it is considered as an
entire contract of assurance for life; and
(3) When the insured is guilty of fraud or
misrepresentation.

As when: The insured’s property is valued

at P1,500,000. He obtains a policy from 1st
Co. for P1,000,000, paying P10,000 and a
policy from the 2nd Co. for P2,000,000,
paying P20,000. Since the value of the
property is ½ the value of the insurance, the
insured is entitled to recover ½ of the
premiums paid from each of the insurers.

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CLAIMS SETTLEMENT AND SUBROGATION
CONCEPT OF LOSS
Loss in insurance law embraces injury or damage
[Bonifacio Bros. v Mora (1967)].
Requisites for Recovery upon Loss:
(1) The insured must have insurable interest in the
subject matter;
(2) The interest is covered by policy;
(3) There be a loss;
(4) The loss must be one for which the insurer is
liable;
(5) Notice and proof of loss must be given if policy is
fire insurance or when the same is stipulated in the
policy.
Causes of Loss:
(1) Remote causes is an event preceding another in a
causal chain, but separated from it by other
events;
(2) Proximate cause is “that cause, which, in natural
and continuous sequence, unbroken by any
efficient intervening cause, produces the injury,
and without which the result would not have
occurred [Vda. de Bataclan v Medina (1975)]”
(3) Immediate cause is the cause, not the proximate
cause which immediately precedes the loss.
LOSS AND NOTICE OF LOSS
WHAT ARE THE RULES TO DETERMINE WHETHER
THE INSURER IS LIABLE FOR THE LOSS OF THE
THING INSURED
1. Loss of which a peril insured against is the
proximate cause, 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.
1.1. The proximate cause is that which, in a natural
and continuous sequence, unbroken by any
efficient intervening cause, produces an injury
and without which an injury and without which
the injury would not have occurred.
1.2. As when: 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.
1.3. As when: Firemen train their hoses at the
house of the insured, damaging windows and
furniture, though not necessary to put out the
fire as the same was affecting the house of the
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neighbour. The insured cannot claim loss due
to fire as it is only a remote cause.
1.4. Recognizing that there are problems in
determining probable cause, note the following
principles:
(a) If there is a single cause which is an
insured peril, clearly it is the proximate
cause and there is liability.
As when: 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 or those
happening together, with no excluded
perils, there is liability if one of the causes is
an insured peril, the others may be ignored.
As when: In an 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 or when the insured peril and
excepted peril operate together to produce
the loss, the claim will be outside the scope
of the policy.
As when: No liability in a claim for property
stole by rioters under a burglary policy, if
the policy excludes 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.
As when: A personal accident policy will
cover death by accident although the
insured was suffering from a disease
excluded by the policy.
(e) Where a number of causes operate one
after the other, and the original cause
happens to be a peril insured against, there
is liability.
As when: The insured is injured in an
accident, he scratches an open wound,
which gets infected, which ultimately results
in death, there is liability on the accident
insurance policy,
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 but if the direct chain of events can be traced to an
excepted peril, there is no liability
As when: An earthquake, if excepted, causes a fire
that spreads, all resulting fire damage is deemed
caused by an excepted peril,
 but again, if the chain of events is broken by the
intervention of a new and independent cause, the
liability will depend upon whether the new cause is
an insured or excepted peril.
As when: 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. However, if
death by disease is covered, the insurer is liable.
2. Loss cause 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.
2.1. As when: The thing insured is water damaged
due to efforts to put out a fire, the fire being a
peril insured against, or 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 there is no liability for loss
if the goods are left out and are lost as the
same is now due to lack of reasonable care
and vigilance, or while removing the contents
of a burning house, they were stolen or they
were broken or damaged, theft or breakage not
ordinarily 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.
3.1. The immediate cause is the cause or condition
nearest the time and place of injury.
3.2. 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.
3.3. As when: 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.
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Bar 2007
Q: Alfredo took out a policy to insure his
commercial building against fire. The broker for
the insurance company agreed to give a 15-
day credit within which to pay the insurance
premium. Upon delivery of the policy on May
15, 2006, Alfredo issued a postdated check
payable on May 30, 2006. On May 28, 2006, a
fire broke out and destroyed the building
owned by Alfredo.
Suppose it was found that the proximate cause
of the fire was an explosion and that fire was
but the immediate cause of loss and there is no
excepted peril under the policy, may Alfredo
recover on the insurance policy?
A: Yes, recovery under the insurance contract
is allowed if the cause of the loss was either
the proximate cause or the immediate cause as
long as an excepted peril, if any, was not the
proximate cause of the loss (Sec. 86,
Insurance Code of the Philippines).
4. An insurer is not liable for a loss caused by the
wilful act or through the connivance of the insured;
but he is not exonerated by the negligence of the
insured, or of the insured’s agent or others.
4.1. 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.
Bar 2007
Q: If the fire was found to have been caused by
Alfredo’s negligence, can he still recover?
A: Yes. Mere negligence on the part of the
insured will not prevent recovery under the
insurance policy. The law merely prevents
when the cause of the loss is the wilful act of
the insured, alone or in connivance with others
(Sec. 89, Insurance Code of the Philippines).
Bar 1993
Q: S Insurance issued a Personal Accident
Policy to Bob Tan with a face value of
P500,000.
In the evening of September 5, 1992, after his
birthday party, Tan was in a happy mood but
not drunk. He was playing with his handgun,
from which he previously removed the
magazine. As his secretary was watching
television, he stood in front of her and pointed
the gun at her. She pushed it aside and said
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that it may be loaded. He assured her that it
was not and then pointed the gun at his temple.
The next moment, there was an explosion and
Tan slumped on the floor lifeless.
The wife of the deceased sought payment on
the policy but her claim was rejected. The
insurance company agreed that there was no
suicide. However, it was the submission of the
insurance company that there was no accident.
In support thereof, it contended that:
(a) There was no accident when a deliberated
act was performed unless some additional,
unexpected, independent and unforeseen
happening occur which produces or bring
about the injury or death; and
(b) The insured wilfully exposed himself to
needless peril and this removed himself
from the coverage of the insurance policy.
Are the two contentions of the insurance
company tenable?
A: No. The insurer is liable for injury or death
even due to the insured’s gross negligence.
The fact that the insured removed the
magazine from the handgun means that the
insured did not wilfully expose himself to
needless peril. At most, the insured is only
guilty of negligence.
Bar 1995
Q: Sun-Moon Insurance issued a Personal
Accident Policy to Henry Dy with a face value
of P500,000. A provision in the policy states
that “the company shall not be liable in respect
of bodily injury consequent upon the insured
person attempting to commit suicide or wilfully
exposing himself to needless peril except in an
attempt to save human life.” Six months later,
Henry died of a bullet wound in his head.
Investigation showed that one evening, Henry
was in a happy mood although he was not
drunk. He was playing with his handgun from
which he had previously removed its magazine.
He pointed the gun at his sister who got
scared. He assured her it was not loaded. He
then pointed the handgun at his temple and
pulled the trigger. The gun fired and Henry
slumped dead on the floor.
Henry’s wife Beverly, as designated
beneficiary, sought to collect under the policy.
Sun-Moon rejected her claim on the ground
that the death of Henry was not accidental.
Beverly sued the insurer. Decide.
A: Beverly can recover the proceeds of the
policy from the insurer. The death of the
insured was not due to suicide or wilful
exposure to needless peril which are the
excepted risks. The insured’s act was purely an
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act of negligence which is covered by the
policy and for which the insured got the
insurance for his protection. In fact, he
removed the magazine from the gun and when
he pointed it to his temple, he did so because
he thought it was safe for him to do so. He did
so to assure his sister that the gun was
harmless. There is none in the policy that
would relieve the insurer of liability for the
death of the insured since the death was an
accident.
4.2. As when: 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
wilful act.
TRANSFER OF CLAIMS
1. 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.
2. 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 or chose of action,
not the contract itself.
3. The exception is Sec. 175 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
1. Notice of loss must be given without unnecessary
delay by the insurer or some person entitled to the
benefit of the insurance. If not so given, insurer is
exonerated.
2. Unnecessary delay is within a reasonable time,
depending on circumstances of a peculiar case,
although courts have construed the requirement
liberally in favour of the insured.
2.1. 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 the loss, the greater is the
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opportunity of the insured to tamper with the
evidence in preparation for a fraudulent
claim.
FORM OF NOTICE OF LOSS
1. In the absence of any stipulation in the policy,
notice may be given orally or in writing.
2. The notice of loss may be in the form of an
informal or provisional claim containing a minimum
of information as distinguished from a formal claim
which contains the full details of the loss,
computation of the amounts claimed, and
supporting evidence, together with a demand or
request for payment.
PROOF OF LOSS
1. If the policy requires Preliminary Proof of Loss or
evidence given the insurer of the occurrence of the
loss, its particulars, and data necessary to enable
it to determine the liability and the amount thereof,
it is not necessary that the insured give such proof
as may or would be sufficient in a court of justice.
What is sufficient is the best evidence that he has
in his power at that time.
NOTE: Like a notice of loss, in the absence of any
stipulation in the policy, proof may be given orally
or in writing (UP 2014).
2. If in the giving of preliminary proof of loss, a
certification or testimony of a 3rd 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.
RULES FOR RECOVERY
General Rule:
Timely compliance with the notice and proof of loss is a
condition precedent to the right to recover if the policy is
fire insurance, or when the same is stipulated in the
policy.
Exceptions:
(1) For both notice and proof of loss, waiver:
(a) Defects in a notice or proof of loss may be
waived when such defects, which the insured
might remedy, are not specified, without
unnecessary delay, to him as ground of
objection by the insurer (Sec. 92);
(b) Delay in presentation to an insurer of notice or
proof of loss is waived if caused by any act of
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his, or if he omits to take objection promptly
and specifically upon that ground.
(2) For notice of loss, a formal notice of loss is not
necessary if insurer has actual notice of loss.
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
unnecessary delay.
As when: 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.
As when: Denial of claim is based on nullity of the
contract.
WHEN IS DELAY IN THE GIVING OF NOTICE
WAIVED?
1. If it is caused by any act of the insurer.
As when: 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.
As when: Despite a delay, the insurer does not
object.
GUIDELINES ON CLAIMS SETTLEMENT
1. Claims settlement is the indemnification of the loss
suffered by the insured. The claimant may be the
insured or reinsured, the insurer who is entitled to
subrogation, or a 3rd party who has a claim against
the insured.
2. Where a policy gives the insurer the control of the
decision to settle claim or litigate it, the insurer
nevertheless is required to observe a certain
measure of consideration for the interest of the
insured.
3. In case of litigation, it is the duty of the
Commissioner or the Court to determine whether
the claim has been unreasonably denied or
withheld.
4. Failure to pay any such claim within the time
prescribed shall be considered prima facie
evidence of unreasonable delay in payment.
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LIFE instalments arbitration;
NON-LIFE
CLAIMS INSURANC or as an (2)If ascertainment is
INSURANCE
E annuity, not made within 60
Either: when such days after such receipt
(1)Upon instalments by insurer of proof of
death of the or annuities loss, then loss or
person become due; damage shall be paid
insured; within 90 days after
(1)Upon happening of
(2)If maturity such receipt.
event insured against;
(2)Upon his is upon
and
surviving a death, within
specific 60 days after
(2)Event must occur
MATURITY period; or presentation
within the period
of claim and
specified in the policy,
(3)Otherwise filing of proof
otherwise, insurer has
contingently of death of
no liability.
on the insured.
continuance
or cessation (1) This entitles the beneficiary to
of life (Sec. collect interest on the proceeds
180) of policy for the duration of the
delay at rate of twice the ceiling
Effect of
prescribed by the monetary
refusal or
GR: The (1) Within 30 days after: board (unless refusal to pay is
failure to
proceeds based on ground that claim is
pay claim
should be (a) Proof of loss is fraudulent);
within time
delivered received by
DELIVERY prescribed
immediately insurer; and (2) In case damages are awarded,
OF
upon (b) Ascertainment of this includes attorney’s fees and
PROCEED
maturity of loss or damage other expenses incurred due to
S
policy. is made either by delay (pus the interest)
agreement
EXCs: between the
(1)If payable insured and
in insurer or by
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UNFAIR CLAIMS SETTLEMENT: SANCTIONS
No insurance company doing business in the Philippines
shall refuse, without just cause, to pay or settle claims
arising under coverages provided by its policies. Nor shall
any such company engage in unfair claim settlement
practices.
WHAT CONSTITUTES UNFAIR CLAIM SETTLEMENT?
Any of the following acts by an insurance company, if
committed without just cause and performed with such
frequency as to indicate a general business practice,
shall constitute unfair claim settlement practices:
(1) Knowingly misrepresenting to claimants pertinent
facts or policy provisions relating to coverage at
issue;
(2) Failing to acknowledge with reasonable
promptness pertinent to communications with
respect to claims arising under its policies;
(3) Failing to adopt and implement reasonable
standards for the prompt investigation of claims
arising under its policies;
(4) Not attempting in good faith to effectuate prompt,
fair and equitable settlement of claims submitted in
which liability has become reasonably clear; or
(5) Compelling policyholders to institute suits to
recover amounts due under its policies by offering
without justifiable reason substantially less than
the amounts ultimately recovered in suits brought
by them.
Evidence as to numbers and types of valid and
justifiable complaints the Commissioner against an
insurance company, and the Commissioner’s
complaint experience with other insurance companies
writing similar lines of insurance shall be admissible in
evidence in an administrative or judicial proceeding
for the purpose of determining whether unfair claims
settlement practices have been committed.
It is found, after notice and an opportunity to be heard,
that an insurance company has violated this section,
each instance of noncompliance may be treated as a
separate violation and shall be considered sufficient
cause for the suspension or revocation of the
company’s certificate of authority (Sec. 247).
WHAT IS THE EFFECT OF A FRAUDULENT CLAIM?
In United Merchants v Country Bankers [GR No. 198588
(July 11, 2012)], it was held that: Where a fire insurance
policy provides that “if the claim be in any respect
fraudulent, or if any false declaration be made or used in
support thereof, or if any fraudulent means or devices are
used by the insured or anyone acting in his behalf to
obtain any benefit under the policy” and the evidence is
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conclusive that the proof of the claim which the insured
submitted was false and fraudulent as both as to kind,
quality and amount of the goods and their value
destroyed by fire, such proof of claim is a bar against the
insured from recovering on the policy even for the
amount of his actual loss. It has long been settled that a
false and material statement made with intent to deceive
or defraud voids on insurance policy. In Yu Cua v South
British Insurance, the claim was fourteen times bigger
than the real loss; in Go Lu v Yorkshire Insurance, eight
times; in Tuason v North China Insurance, six times. In
the present case, the claim is twenty-five times the actual
claim proved.
SUBROGATION
Subrogation is a process of legal substitution. The
insurer, after paying the amount covered by the
insurance policy, steps into the shoes of the insured and
avails himself of the latter’s rights that exist against the
wrongdoer at the time of loss.
WHEN DOES SUBROGATION TAKE PLACE?
Subrogation inures to the insurer without need of
assignment or express stipulation upon payment made to
the insured. The act of payment makes the insurer a
subrogee in equity.
NOTE: Subrogation applies only to property
insurance and non-life insurance.
WHAT IS THE CONCEPT BEHIND SUBROGATION?
1. Subrogation is the substitution of one person by
another with reference to a lawful claim or right, so
that he who is substituted succeeds to the rights of
the other in relation to a debt or claim, including its
remedies or securities. The payment by the insurer
to the insured operates as an equitable
assignment to the insurer of all the remedies that
the insured may have against the 3rd party whose
negligence or wrongful act caused the loss
[Malayan Insurance v Alberto; GR No. 194320
(February 1, 2012)].
2. The right of subrogation is not dependent upon,
nor does it grow out of, any privity of contract. It
accrues simply upon payment by the insurance
company of the insurance claim (Keppel Cebu
Shipyard v Pioneer Insurance, 601 SCRA 96).
3. It is intended to make the person who caused the
loss legally responsible for it, prevents the insured
from recovering twice, and upholds public policy
by preventing tortfeasors from being absolved
from liability.
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WHAT HAPPENS AFTER PAYMENT BY THE
INSURER SUBSEQUENT TO GIVING OF NOTICE OF
LOSS?
1. 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 insurer becomes entitled to recover
from the wrongdoer the amount of the loss it may
have paid to the insured.
1.1. The right of subrogation accrues upon payment
of the insurance claim.
1.2. The rights to which the subrogee succeeds are
the same as, but not greater than, those of the
person for whom he is substituted.
1.3. The subrogee-insurer cannot acquire any
claim, security, or remedy the subrogor did not
have. In other words, a subrogee cannot
succeed to a right not possessed by the
subrogor. A subrogee can recover only if the
insured likewise could have recovered [Sulpicio
Lines v First Lepanto (2005); Lorenzo Shipping
v Chubb and Sons (2004)].
1.4. Subrogation takes effect by operation of law
and does not require the consent of the
wrongdoer (Fireman’s Insurance v Jamilla &
Co., 70 SCRA 328).
2. There is no subrogation in
(a) Life insurance as it is not a contract of
indemnity;
(b) When the proximate cause of the loss is the
insured himself;
(c) When the insurer pays to be insured a loss not
covered by the policy.
2.1. 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.
UP 2014: The insured can no longer recover
from the offended party what was paid to him
by the insurer but he can recover any
deficiency if the damages suffered are more
than what was paid. The deficiency is not
covered by the right of subrogation. The insurer
must present the policy as evidence to
determine the extent of its coverage [Wallen
Phil. Shipping v Prudential Guarantee (2003)].
3. No right of Subrogation:
(a) If the insured releases the wrongdoer from
liability before payment by the insurer, the
insured destroys his right to collect from the
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insurer (Sy Keng v Queensland Insurance, 45
OG 351). If the insured releases the wrongdoer
after receiving payment from the insurer, the
insurer can recover from the insured the
proceeds paid (Manila Mahogany v CA, 154
SCRA 651);
(b) Where the insurer pays the insured the value of
the loss without notifying the carrier who has in
good faith settled the insured’s claim for loss;
(c) Where the insurer pays the insured for a loss
or risk not covered by the policy [Pan Malayan
v CA, (1997)].
(d) In life insurance;
(e) For recovery of loss in excess of insurance
coverage [de Leon (2010)]
NOTE: Since the insurer can be subrogated to
only such rights as the insured may have,
should the insured, after receiving payment
from the insurer, release the wrongdoer who
caused the loss, the insurer loses his rights
against the later, but in such case, the insurer
will be entitled to recover from the insured
A:
whatever it has paid to the latter, unless the
release was made with the consent of the
insurer [Manila Mahogany v CA (1987)].
4. Subrogation is discretionary on the part of the
insurer. It may or may not exercise the right (FF
Cruz v CA, 164 SCRA 731). Hence, no one can
force it to exercise the right even if it has paid the
insured.
Bar 1978
Q: A helicopter of ABC Co. collided with XYZ’s
tramway steel cables in its logging area in Surigao
resulting in the destruction of the helicopter and death
of two pilots. ABC insured at its expense the
helicopter and death of two pilots. ABC insured at its
expense the helicopter for P80,000 and the two pilots
(life insurance) for P50,000 each, and as a result of
the crash, the insurer paid ABC a total indemnity of
P180,000. Nevertheless, ABC sustained additional
damages of about P100,000 which were not covered
by insurance.
(1) ABC sued XYZ to recover not only the additional
damages, but also the P180,000 which was
already compensated by the insurer. Decide.
(2) What right/ recourse, if any, has the insurer in
order to be reimbursed for the amount it paid to
ABC?
(1) ABC ay bring the action against XYZ for its claim
for the additional damages not covered by the
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insurance, but not for the P180,000 covered by the
insurance. If a property is insured and the owner
received indemnity from the insurer, the latter is
deemed subrogated to the rights of the insured
against the wrongdoer, and if the amount paid by
the insurer does not fully cover the loss, then the
aggrieved party is the one entitled to recover the
deficiency.
(2) The insurer is deemed subrogated to the rights of
ABC against XYZ to the extent of P80,000
insurance paid for the helicopter only, but not for
the life insurance of the two dead pilots, since
subrogation in the New Civil Code refers only to
property, and not to the life insurance [Philippine
Airlines v Herald Lumber; GR No. L-11497 (August
16, 1957)].
Bar 1980
Q: L borrows P50,000 from M payable 360 days after
date, at 12% interest per annum. To secure the loan, L
mortgages his house and lot in favour of M. To protect
himself from certain contingencies, M insures the house
for the full amount of the loan with Rock Insurance. A fire
breaks out and burns the house and M collects from the
insurance company the full value of the insurance.
Upon maturity of the loan, the insurance company
demands payment from L. the latter refuses to pay on the
ground that the loan had been extinguished by the
insurance payment which M received from the insurance
company. He argued that he has not entered into any
loan or contract of whatever nature with the insurance
company. He further contends that it is bad enough to
lose a house but it is worse if one has to pay off a paid
obligation to somebody who has not extended any loan to
him. Besides, he states that the insurance payment
should inure to his benefit because he owns the house.
Pass upon the merits of L’s contentions.
A: Neither the loan of L was extinguished by the
insurance payment which M received from the insurance
company, nor the insurance payment inures to L’s
benefit. What was then insured was the interest of M, the
secured creditor, and not the interest of L, so the
proceeds shall be applied exclusively to the proper
interest of M.
L’s argument that he has not entered into any loan or
contract of whatever nature with the insurance company
is also untenable. When the secured creditor’s interest in
the mortgaged property of the mortgagor, L, was insured
and said property would be burned, the insurance
company had to pay the insured, M, and payment by the
insurer to the insured creates legal subrogation and
makes the insurer an assignee on equity to run after the
mortgagor, L. said right of the insurer is not dependent
upon or does it grow out of, any privity of contract, or
upon written assignment of claim, and payment to
insured makes the insurer an assignee in equity. Thus,
L’s consent to said subrogation is not necessary [Art.
2207, New Civil Code; Fireman’s Fund Insurance v
Jamila and Co., 70 SCRA 323 (April 7, 1976)].
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Bar 1994
Q: Raul’s car bumped the car owned by Luz. The car was
insured by Cala Insurance. For the damage caused, Cala
paid Luz P5,000 in amicable settlement. Luz executed a
release claim, subrogating Cala to all her rights against
Raul. When Cala demanded reimbursement from Raul,
the latter refused saying that he had already paid Luz
P4,500 for the damage to the car as evidence by a
release claim executed by Luz discharging Raul.
So, Cala demanded reimbursement from Luz, who
refused to pay, saying that the total damage to the car
was P9,500. Since Cala paid P5,000 only, Luz contends
that she was entitled to go after Raul to claim the
additional P4,500.
(1)Is Cala, as subrogee of Luz, entitled to reimbursement
from Raul?
(2)May Cala recover what it has paid to Luz?
A:
(1) No. Luz executed a release in favour of Raul.
(2) Yes. Cala lost its right against Raul because of the
release executed by Luz. Since the release was
made without the consent of Cala, Cala may recover
the amount of P5,000.
PRESCRIPTION OF AN ACTION
CAN THERE BE AGREEMENTS AS TO
PRESCRIPTION OF AN ACTION OR LIMITATIONS ON
THE PERIOD OF TIME TO BRING AN ACTION?
1. In the absence of an express stipulation in the
policy, it being based on a written contract, the
action prescribes in 10 years (Art. 1144, Civil
Code). However, there can be an agreement
provided the period agreed upon should not be
less than 1 year. If period agreed upon is less than
1 year, the agreement is void.
1.1. Prescription is essential for the prompt
settlement of claims as it demands for suits
to be brought while the evidence as to the
origin and cause of the loss or destruction
has not yet disappeared.
1.2. In a comprehensive motor liability insurance
claim, a written notice of claim must be filed
within 6 months from the date of accident.
Otherwise, the claim is waived, even if an
action is subsequently brought within 1 year
from rejection of the claim.
2. The period so agreed shall be considered as
having commenced from the time the cause of
action accrues.
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2.1. Usually, the cause of action accrues from
the date of the insurer’s rejection of the
claim of the beneficiary or of the insured,
since prior to the same, there is no
necessity to bring suit.
2.2. If the insured will ask for reconsideration of
the denial, the period is still counted from
the time the claim is denied at the first
instance as to hold otherwise gives the
insured a scheme or devise to waste time
until evidence that may be considered
against him can be destroyed (Sun
Insurance v CA, 196 SCRA 193).
2.3. In motor vehicle insurance, the period is
also 1 year from denial of the claim, not the
date of the accident (Summit Guaranty v
Cruz Arnaldo, 158 SCRA 332)
3. Note Sec. 3 (6) of the provisions of Carriage of
Goods by Sea Act, stating that the carrier and the
ship shall be discharged from all liability for loss or
damage to the goods if no suit is brought within 1
year from delivery of the goods or date when they
should have been delivered.
3.1. If the insurer of the goods brings an action
against the carrier, it must do so within 1
year as reckoned above (Filipino Merchants
v CA, 179 SCRA 638). However, while the
action of the insurer is barred, it does not
mean that the shipper cannot maintain an
action against the insurer as its liability is
determined by the insurance contract and
not by the contract of carriage (Mayer Steel
Pipe v CA, 274 SCRA 432).
3.2. When no period is stipulated as in the case
of Mayer Steel Pipe, or the stipulation is
void, the period is within 10 years, under
Art. 1144 of the Civil code, as the policy is a
written contract (Eagle Star v Chia Yu, 96
Phil 696; ACCFA v Alpha Insurance, 24
SCRA 151).
4. An action may filed in the following:
(a) Courts;
(b) Insurance Commissioner, who has concurrent
jurisdiction with courts for claims not exceeding
P100,000;
(c) POEA or 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.
Bar 1996
Q: Robin insured his building against fire with EFG
Assurance. The insurance policy contained the usual
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stipulation as to the origin and cause of the destruction
has not yet disappeared; that any action or suit must be
filed within 1 year after rejection of the claim.

After his building burned down, Robin filed his claim for
the fire loss with EFG. On February 28, 1994, EFG
denied Robin’s claim. On April 3, 1994, Robin sought
reconsideration of the denial, but EFG reiterated its
position. On March 20, 1995, Robin commenced judicial
action against EFG.

Should Robin’s action be given due course?

A: No. His filing of the request for reconsideration did not

suspend the running of the prescriptive period of 1 year
stipulated in the insurance policy. Thus, when Robin
commenced judicial action against EFG on March 20,
1995, his ability to do so had already prescribed. The 1
year period is counted from February 28, 1994 when
EFG denied Robin’s claim, not from the date (presumably
after April 3, 1994) when EFG reiterated its position
denying Robin’s claim. The reason for this rule is to
insure that claims against insurance companies are
promptly settled and that insurance suits are brought by
the insured while the evidence as to the origin or cause of
the loss or destruction has not yet disappeared.

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DOUBLE INSURANCE
1. Double insurance exists when the same person is
insured by several insurers separately in respect
to the same subject or interest.
2. The requisites are:
(a) Same person is insured;
(b) There are several insurers;
(c) Subject insured is the same;
(d) Interest insured is the same; and
(e) Risk or peril insured against is the same.
2.1. There is a provision as to double insurance
to prevent over-insurance, thereby
preventing fraud.
Bar 1999
Q: A businessman in the grocery business obtained from
First Insurance an insurance policy for P5,000,000 to fully
cover his stocks-in-trade from the risk of fire.
Three months later, a fire of accidental origin broke out
and completely destroyed the grocery including his
stocks-in-trade. This prompted the businessman to file
with First Insurance a claim for P5,000,000 representing
the full value of his goods.
First Insurance denied the claim because it discovered
that at the time of the loss, the stocks-in-trade were
mortgaged to a creditor who likewise obtained from
Second Insurance for insurance coverage for the stocks
at their full value of P5,000,000.
First Insurance refused to pay claiming that double
insurance is contrary to law. Is this contention tenable?
A: No. There is no law providing that double insurance is
illegal per se. Moreover, in the problem at hand, there is
no double insurance because the insured with the First
Insurance is different from the insured with the Second
Insurance. The same is true with respect to the interests
insured in the two policies.
Bar 2012
Q: X borrowed from CCC Bank. She mortgaged her
house and lot in favour of the bank. X insured her house.
The bank also got the house insured.
(a) Is this double insurance?
(b) Is this legally valid?
(c) In case of damage, can X and CCC Bank
separately claim for the insurance proceeds?
A:
(a) No. Double insurance exists where the same
person is insured by several insurers separately
with respect to the same subject and interest.
(b) Yes, X and CCC Bank can both insure the house
as they have different insurable interest therein.
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X, the borrower-mortgagor, has an insurable
interest in the house being the owner thereof,
while CCC Bank, the lender, also has an insurable
interest I the house as mortgagee thereof.
Thus, the insurance contract entered into by both
is legally binding.
(c) Yes.
If X obtained an open policy then she should claim
an amount corresponding to the extent of the
damaged based on the value of the house
determined as of the date when the damage
occurred, but not to exceed the face value of the
insurance policy. However, if she obtained a
valued policy then she could claim an amount
corresponding to the extent of the damage based
on the agreed upon valuation of the house.
As for CCC Bank, it could claim an amount
corresponding to the extent of the damage but not
to exceeds the amount of the loan it extended to X
or so much thereof as may remain unpaid.
Bar 2008
Q: Terrazas de Pation Verde, a condominium
building, has a value of P50,000,000. The owner
insured he building against fire with 3 insurance
companies for the following amounts:
Northern Insurance – P20,000,000;
Southern Insurance – P30,000,000;
Eastern Insurance – P50,000,000.
(a) Is the owner’s taking of insurance for the
building with 3 insurers valid?
(b) The building was totally razed by fire. If the
owner decides to claim from Eastern Insurance
only P50,000,000, will the claim prosper?
A:
(a) The taking of insurance from the 3 insurers is
valid. It is a cause of double insurance. The
Insurance Code provides that double insurance
exists where the same person is insured by
several insurers separately in respect to the
same subject and interest.
Double insurance is valid. What is prohibited is
for the insured to recover more than his interest
or value of the property pursuant to the
principle of indemnity.
(b) Yes. The Insurance Code provides that where
the insured is over insured by double
insurance, the insured, unless the policy
otherwise provides, may claim payment from
the insurers in such order as he may select, up
to the amount for which the insurers are
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severally liable under their respective
contracts.
Each insurer is bound, as between himself and
the other insurers, to contribute ratably to the
loss in proportion to the amount for which he is
liable under his contract.
Other Answer:
Insured can recover from Eastern Insurance up
to the extent of his loss. However, Eastern may
refuse to pay if the policy contains an “other
insurance clause” stipulating that non-
disclosure of double insurance will avoid the
policy. As there is no indication of a contractual
prohibition on double or other insurance, all
insurance contracts over the building are
deemed valid and enforceable.
The law prohibits double or over-recovery, not
double insurance. Since Eastern Insurance
insured the property up to 50% of the total
coverage, it is liable for only 50% of the total
actual loss. Eastern Insurance is liable to the
extent of its coverage, but may recover one-
half of the total indemnity from the co-insurers
in the proportion of 60% for Southern
Insurance to 40% for Northern Insurance.
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.
As when: A house is insured with X Insurance for
P10,000, with Y Insurance for P20,000, and with Z
Insurance for P20,000. It is valued for P20,000. In
case of loss, the insured can recover from any of
the insurers, but is limited to what is stipulated in
their policy and in no case to exceed the value of
the property or P10,000 from X Insurance and
another P10,000 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.
As when: A owns a house valued at P40,000. He
insured it with X Insurance for P35,000, and with Y
Insurance for P5,000. The value of the house with
both companies is P20,000. If it is lost, A can
collect P5,000 from Y Insurance. He cannot collect
P35,000 from Y Insurance but only the difference
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between the value of the house, P20,000, and the
value of the policy with Y Insurance, P5,000.
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.
As when: A insured his house with X Insurance for
P40,000, and with Y Insurance for P30,000, and
with Z Insurance for P20,000. The policies are
open. The loss is P70,000. If Y Insurance and Z
Insurance have already paid P50,000, X Insurance
will only have to pay A, the difference between
what he received from Y and Z Insurance,
P50,000, and the amount of loss P70,000, or
P20,000.
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.
As when: If A collects P35,000 from X Insurance,
and P5,000 from Y Insurance when the value of
the house is only P20,000, he must hold the
P20,000 excess in trust. If the policies are open, if
A can collect P40,000 from X Insurance, P30,000
from Y Insurance and P20,000 from Z Insurance,
when the actual loss is only P70,000, he must hold
the excess recovery in trust for the insurers
subject to the application of the contribution
clause.
5. 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. This is referred to as the Principle of
Contribution, which has 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.
5.1. This is also known as the contribution
clause.
5.2. The formula is: Insurer’s Policy/ Total
Amount of Policies, multiplied by the
amount of loss, equals the share of the
insurer.
Bar 2005
Q: What is the nature of the liability of the several
insurers in double insurance?
A: In double insurance, the insurers are considered as
co-insurers. Each one is bound to contribute ratably to
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the loss in proportion to the amount for which he is liable
under his contract.
Bar 1999
Q: A businessman in the grocery business obtained from
First Insurance an insurance policy for P5,000,000 to fully
cover his stocks-in-trade from the risk of fire.
Three months later, a fire of accidental origin broke out
and completely destroyed the grocery including his
stocks-in-trade. This prompted the business to file with
First Insurance a claim for P5,000,000 representing the
full value of his goods.
First Insurance denied the claim because it discovered
that at the time of the loss, the stock-in-trade was
mortgaged to a creditor who likewise obtained from
Second Insurance for insurance coverage for the stocks-
in-trade at their full value of P5,000,000.
(a) May the businessman and the creditor obtain
separate insurance coverage over the same
stocks-in-trade?
(b) Suppose you are the Judge, how much would you
allow the businessman and the creditor to recover
from their respective insurers?
A:
(a) Yes. The businessman, as owner, and the
creditor, as mortgagee, have separate insurable
interests in the same stocks-in-trade. Each may
insure such interest to protects his own separate
interest.
(b) As Judge, I would allow the businessman to
recover his total loss of P5,000,000 representing
the full value of his goods which were lost through
fire. As to the creditor, I would allow him to recover
the amount to the extent of or equivalent to the
value of the credit he extended to the
businessman for the stocks-in-trade which were
mortgaged by the businessman.
TEST TO DETERMINE EXISTENCE OF DOUBLE
INSURANCE
1. The test is : Whether the insured, in case of
happening of the risk, can be directly benefited by
recovering on both policies? If so, there is double
insurance.
VALIDITY OF DOUBLE INSURANCE
1. If there is an “other insurance” clause or one that
prevents other insurance on the property except
with the consent of the company, then it will
prevent the enforcement of the policy, the policy
then will be null and void.
2. If there is no “other insurance” clause, then double
insurance is allowed but the provisions of Section
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96 must be followed because property insurance is
a contract of indemnity.
Bar 1993
Q: Julie and Alma formed a business partnership. Under
the business name Pino Shop, the partnership engaged
in a sale of construction materials. Julie insured the
stocks in trade of Pino Shop with the WGC Insurance
Company for P350,000.00. Subsequently, she again got
an insurance contract with RSI for P1,000,000.00 and
then from EIC for P200,000.00. A fire of unknown origin
gutted the store of the partnership. Julie filed her claims
with the 3 insurance companies. However, her claims
were denied separately for breach of policy condition
which required the insured to give notice of any insurance
effected covering the stocks in trade. Julie went to court
and contended that she should not be blamed for the
omission, alleging that the insurance agents for WGC,
RSI and EIC knew of the existence of the additional
insurance coverage and that she was not informed about
the requirement that such other or additional insurance
should be stated in the policy.
Is the contention of Julie tenable?
A:
No. An insured is required to disclose the other
insurances covering the subject matter of the insurance
being applied for.
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 insurance interest.
Other Answers from Bar 1994
1. Co-insurance is the percentage in the value of the
insured property which the insured himself
assumes or undertakes to act as insurer to the
extent of the deficiency in the insurance of the
insurance of the insured property. In case of loss
or damage, the insurer will be liable only for such
proportion of the loss or damage as the amount of
insurance bears to the designated percentage of
the full value of the property insured.
2. Reinsurance is where the insurer procures a 3rd
party, called the reinsurer, to insure him against
liability by reason of such original insurance.
Basically, reinsurance is an insurance against
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liability which the original insurer may incur in
favour of the original insured.

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REINSURANCE
Reinsurance occurs when an insurer procures a 3rd
person to insure him against loss or liability by reason of
such original insurance.
WHEN COMPULSARY
1. When a non-life insurer insures in any one risk or
hazard an amount exceeding 20% of its net worth,
the insurer needs reinsurance of the excess over
such limit.
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.
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 insurer’s
risk or liability.
3. In double insurance, the same interest and risk is
insured with another. In reinsurance, different risk
and interest are insured.
WHAT MUST BE COMMUNICATED WHEN THE
ORIGINAL INSURER OBTAINS REINSURANCE?
1. Except in automatic reinsurance treaties, it must
communicate:
(a) All representations of the original insured;
(b) All information or knowledge he possesses,
whether previously or subsequently acquired,
which are material to the risk.
As when: 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 though: 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.
1.1. An automatic reinsurance treaty is one
where two or more insurance companies
agree in advance that they will reinsure
a part of any line of insurance, taken by
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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.
WHAT KIND OF CONTRACT IS REINSURANCE?
1. It is presumed to be a contract of indemnity
against liability, and not merely against damage.
1.1. 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.
As when: 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.
1.2. 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.
As when: 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. The subject of the
reinsurance contract is the insurer’s risk,
not the property insured in the original
policy. It is not necessary that the insurer
first pay a claim on the original policy before
claiming from the reinsurer.
WHAT IS THE EXTENT OF THE LIABILITY OF THE
REINSURER?
1. 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
As when: A insures his house valued at
P1,000,000.00 with X Insurance for P1,500,00.00. X
Insurance then reinsured with Z Insurance for
P1,200,000.00. The house burns. The liability of Z
Insurance is only up to P1,000,000.00, which is the
liability of X Insurance.
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2. If the original insured and the original insurer will
settle for less, the liability of Z Insurance is still only
up to what is paid by X Insurance, otherwise, the
original insurer profits and this violates the principle
that it is a contract of indemnity.

WHAT IS THE LIABILITY OF THE ORIGINAL INSURED

IN THE CONTRACT OF REINSURANCE?

The original insured has no interest in the contract of

reinsurance. Hence, only the reinsured can claim against
the reinsurer.

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CLASSES OF INSURANCE subject matter of the insurance, BUT not
including life insurance or surety bonds, nor
insurance against loss by reason of bodily
MARINE INSURANCE injury to any person arising out of the
ownership, maintenance and use of
WHAT IS MARINE INSURANCE? automobiles.

1. Insurance against loss or damage to:

(c) Precious stones, jewels, jewelry, precious
metals whether in the course of the
(a) Vessels, craft, aircraft, vehicles, goods,
transportation or otherwise.
freights, cargoes, merchandise, effects,
disbursements, profits, money, securities,
(d) Bridges, tunnels or other instrumentalities of
choses in action, evidences of debt, valuable
transportation and communications (excluding
papers, bottomry or respondentia interest, and
buildings, their furniture and furnishings, fixed
all kinds of property and interest therein, in
contents, and supplies held in storage), piers,
respect to, appertaining to or in connection with
wharves, docks, slips, and other aids to
any and all risks or perils of navigation, transit
navigation and transportation, including dry
or transportation, or while being assembled,
docks, marine railways, dams and appurtenant
packed, crated, baled, compressed, or similarly
facilities for the control of waterways, and
prepared for shipment, while awaiting shipment
or during delays, storage, transhipment or
(e) “Marine Protection and Indemnity Insurance,”
reshipment incident thereto, including war
meaning insurance against, or against legal
risks, marine builder’s risk and all personal
liability of the insured for loss damage or
property floater risks. These types of insurance
expense incident to ownership, operation,
follow the property wherever it may be.
operation, chartering, maintenance, use, repair
or construction of any vessel, craft or
(b) Person or property in connection with or
instrumentality in use in ocean or island
appertaining to marine, island marine, transit or
waterways, including liability of the insured for
transportation insurance, including liability for
personal injury, illness or death or for loss or
loss or in connection with the construction,
damage to the property of another person.
repair, operation, maintenance, use of the
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1.1.
2. Marine insurance is really transportation insurance
which is a kind of insurance that is concerned with
the perils of property in, or incidental to, transit as
opposed to property perils at a generally fixed
location.
2.1. It does not include normal motor vehicle
insurance which is treated separately by
law.
WHAT ARE THE DIVISIONS OF TRANSPORTATION
INSURANCE?
1. The divisions of transportation insurance are:
This includes four basic policies:
(a) Property in transit – providing protection for
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

(a) Ocean Marine Insurance pertaining primarily to
sea perils of ships and cargoes.
Scope: Goods or cargoes, Earnings such as
freight, passage money, Liability incurred by
reason of maritime perils, Ships or hulls), 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.

(b) 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.
2. Note: Marine insurance may be in the form of
property insurance, indemnifying the insured for
loss or damage to property 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.

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WHAT RISKS ARE INSURED AGAINST?
1. The basic risk insured against is what is commonly
known as perils of the sea or 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. Such as:
shipwrecks, foundering, stranding, collision,
including the jettisoning of cargo if made for the
purpose of saving the vessel although it may also
include fire, enemies, pirates, thieves, surprisals,
taking at sea, arrests, restraints, detainments of
kings, princes and people of what nation, condition
or quality of barratry of the master and all other
perils, losses, misfortunes that shall have or shall
come to hurt, detriment, or damages of said
goods, merchandise, ship or any part thereof.
Note: Perils of the Sea
Ocean marine insurance protects ships at sea and
the cargo or freight on such ships from standard
“perils of the sea” or “perils of navigation” which
includes casualties arising from the violent action
of the elements and does not cover ordinary wear
and tear, or other damage usually incident to the
voyage. The mere fact that an injury is due to
violence of some marine force does not
necessarily bring it within the protection of the
policy if such violence was not unusual or
unexpected.
Perils of the sea or perils of navigation include only
those casualties due to the unusual violence or
extraordinary causes connected with navigation. It
has been said to include only such losses as are
of extraordinary nature or arise from some
overwhelming power which cannot be guarded
against by the ordinary exertion of human skill or
prudence, as distinguished from the ordinary wear
and tear of the voyage and from injuries suffered
by the vessel in consequence of her not being
unseaworthy.
2. Generally, perils of the ship are not covered. There
are 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.
As when:
(a) Insurance upon a cargo of rice, when sea
water entered the compartment where the
rice was found through a defective steel
pipe;
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(b) The insured loaded logs unto a barge. The
logs are covered 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.
2.1. In the absence of stipulation, the
risks insured against are only perils
of the sea.
2.2. However, in an all risk policy, all risks
are covered unless expressly
excepted. The burden rests on the
insurer to prove that the loss is
caused by a risk that is excluded.
Bar 1998
Q: A marine insurance policy on a cargo states that “the
insurer shall be liable for losses incident to perils of the
sea.” During the voyage, seawater entered the
compartment where the cargo was sored due to the
defective drainpipe of the ship. The insured filed an
action on the policy for recovery of the damages cause to
the cargo. May the insured recover damages?
A: No. The proximate cause of the damage to the cargo
insured was the defective drainpipe of the ship. This is
peril of the ship, and not peril of the sea. The defect in the
drainpipe was the result of the ordinary use of the ship.
To recover under a marine insurance policy, the
proximate cause of the loss or damage must be peril of
the sea.
WHAT RISKS ARE INSURED IN AN “ALL RISKS
POLICY”?
1. 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.
2. This can also be contained in an All Risks Clause
which is one that covers any loss other than a
willfull and fraudulent act of the insured and avoid
putting upon the insured the burden of establishing
that the loss was due to a peril within the policy’s
coverage, whether arising from a marine peril or
not, provided the risk is not excluded.
DEFINITION OF OTHER TERMS
1. Barratry – 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
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prejudice of his interest, such as the burning of the
ship or unlawfully selling the cargo.
2. Inchmaree Clause – a provision in marine
insurance that it shall cover loss or damage to the
hull or machinery through the negligence of the
master, charterers, mariners, engineers or pilots
through explosion, bursting of boilers, breakage of
shafts or through any latent defect in the hull or
machinery. This is also known as the Negligence
Clause.
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 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
charterer.
2.2.
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.
2.1. Bottomry and respondentia are loans
payable only if the vessel (bottomry) or the
goods (respondentia) given as security for
said loan arrives safely at port from
contemplated voyage.
Note: Bottomry and Respondentia
Bottomry Loan – a loan that is obtained for
the value of the vessel on a voyage and the
lender is repaid only if the vessel subject of
the loan arrives safely at its destination. The
insurable interest of a ship owner on its
bottomed boat is the difference between the
amount of the loan and the value of the
boat. Thus, if the amount of the loan does
not cover the total value of the boat, the
owner can still insure the boat.
Respondentia Loan - a loan that is
obtained as security for the value of the
cargo to be transported and the lender is
repaid only if the cargo arrives safely at its
destination.
These contracts are in the nature of
mortgages 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
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during the voyage or within a limited period,
the lender also loses his money.
3. The owner of a vessel has insurable interest in
expected freightage which in the ordinary course
of things he would have earned but for the
intervention of the peril insured against or other
peril incident to the voyage.
3.1. Freightage refers to 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.
3.2. 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.
PERSONS/ PARTIES OTHER THAN THE OWNER
WHO HAVE INSURABLE INTEREST
1. One who has an interest in the thing from which
profits are expected to proceed, has insurable
interest on the profits.
As when: Owner of the 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.
As when: A charters B’s vessel on condition that A
would pay B in case of loss the amount of
P300,000.00. A has insurable interest to the extent
of P300,000.00.
CONCEALMENT IN MARINE INSURANCE
1. A party is bound to communicate, in addition to
what is required by Section 28 referring to facts
within his knowledge, material to the contract,
other party has not the means of ascertaining, as
to which party with 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
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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.
1.1. Note: The rules on concealment in marine
insurance are stricter as it is sufficient that
the insured is in possession of a material
fact, although he is unaware of it.
As when: If an agent fails to notify the
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.
2. A party is also bound to communicate the
information, belief or expectation of a 3rd person, in
reference to a material fact, is material.
3. While concealment as a rule entitles the injured
party to rescind, the rule must yield to Section 112
as it does not vitiate the contract but merely
exonerates the insurer from a loss resulting from
the risk concealed when they relate 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.
As when: 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 the lack of
documents.
DISTINGUISHING ORDINARY CONCEALMENT FROM
THAT IN MARINE INSURANCE
1. In ordinary insurance, opinion or belief of a 3 rd
person o own judgment of the insured is not
material and need not be communicated. In
marine insurance, the belief or expectation of a 3 rd
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 112 merely exonerates the
insurer from loss, if the loss results from the fact
concealed.
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PRESUMPTION OF A PRIOR LOSS
The insured in marine insurance is presumed to have
knowledge, at the time of insuring, of a prior loss, if
information might possibly reach him in the usual mode of
transmission and at the usual rate of communication.
REPRESENTATION IN MARINE INSURANCE
WHEN IS THE INSURER ENTITLED TO RESCIND?
1. 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.
2. However, the eventual falsity of a representation
as to an expectation does not, in the absence of
fraud, avoid the contract. Such as statement as to
time of sailing, general nature of the cargo, or
amount of profits.
IMPLIED WARRANTIES IN MARINE INSURANCE
The following warranties are implied in marine insurance:
a. That the ship is seaworthy to make the voyage
and/or take in certain cargoes;
b. That the ship shall not deviate from the voyage
insured;
c. That the ship shall carry the necessary documents
to show nationality or neutrality and that it will not
carry documents which will cast reasonable
suspicion thereon; and
d. That the ship shall not carry contraband, especially
if it is making voyage through belligerent waters.
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.
Bar 2010
Q: Paolo, the owner of an ocean-going vessel,
offered to transport the logs of Constantino from
Manila to Nagoya. Constantino accepted the offer,
not knowing that the vessel was manned by an
irresponsible crew with deep-seated resentments
against Paolo, their employer.
Constantino insured the logs against both perils of
the sea and barratry. The logs were improperly
loaded on one side, thereby causing the vessel to
tilt on one side. On the way to Nagoya, the crew
unbolted the sea valve of the vessel causing water
to flood the ship hold. The vessel sank.
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Constantino tried to collect from the insurance
company which denied liability, given the
unworthiness of both the vessel and its crew.
Constantino countered that he was not the owner
of the vessel and he could therefore not be
responsible for conditions about which he was
innocent.
Is the insurance company liable?
A: No. There is an implied warranty in every
marine insurance that the ship is seaworthy
whoever is insuring the cargo, whether it be the
shipowner or not. There was a breach of warranty,
because the logs were improperly loaded and the
crew was irresponsible. It is the obligation of the
owner of the cargo to look for a reliable common
carrier which keeps its vessel in seaworthy
condition.
Bar 2008
Q: On October 30, 2007, M/V Pacific, a Philippine-
registered vessel owned by Cebu Shipping
Company (CSC), sank on her voyage from Hong
Kong to Manila. Empire Assurance Company
(EAC) is the insurer of the lost cargoes loaded on
board the vessel which were consigned to
Debenhams Company. After it indemnified
Debenhams, EAC as subrogee filed an action for
damages against CSC.
a) Assume the vessel was not seaworthy as in
fact its hull had leaked, causing flooding in the
vessel. Is CSC liable?
b) Assume the facts in question (a). Can the heirs
of the 3 crew members who perished recover
from CSC?
A:
a) Yes, CSC is liable for the lost cargoes.
Allowing the vessel to depart on a voyage
when it is not seaworthy is a violation of the
implied warranty of seaworthiness, and thus
constitutes negligence on the part of the owner
of the ship and the ship captain. The
hypothecary principle in maritime commerce –
limiting the ship owner’s liability to the amount
of insurance proceeds – it not applicable when
the unseaworthiness of the vessel is due to the
owner’s fault or negligence.
b) Yes, the heirs of the 3 crew members who
perished can recover from CSC for negligence
which constitutes quasi-delict in this case.
1.1. A ship is seaworthy when it is reasonably fit to
perform the service and to encounter the
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ordinary perils of the voyage, contemplated by
the parties to the policy.
1.2. Note: Seaworthiness is relative and is made to
depend on circumstances.
1.3. 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 transhipped at an immediate
port, in which case – each vessel upon
which the cargo is shipped or transhipped
must be seaworthy at the commencement
of each particular voyage;
(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.
1.4. 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.
1.5. Note: While a ship may be seaworthy for
purposes of insurance on it, it may by reason of
being unfit to receive cargo, be unseaworthy
for the purpose of insurance on the cargo.
As when: A cargo of wheat was laden on a ship
which had a port hole not securely fastened at
the time of lading. The port hole was a 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
unseaworthy with reference to the cargo,
hence the insurer of the cargo was not liable.
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1.6. 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 its vessels
seaworthy. The insured may have no control
on the vessel but has full control in the choice
of common carrier.
1.7. 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 ship owner’s interest from any
liability from any loss arising therefrom. Hence,
if loss is not one due to the defect or the peril
was not increased by the defect, the insurer is
still liable.
Bar 1983
Q: A shipped 100 pieces of plywood from
Davao City to Manila. He took a marine
insurance policy to insure the shipment against
loss or damage due to perils of the sea,
barratry, fire, jettison, pirates and other such
perils.
When the ship left the port of Davao, the
shipman in charge forgot to secure one of the
port holes, thru which sea water seeped during
the voyage, damaging the plywood. A filed a
claim against the insurance company which
refused to pay on the ground that the loss or
damage was not due to a peril of the sea or
any of the risks covered by the policy. It was
admitted that the sea was reasonably calm
during the voyage and that no strong winds or
waves were encountered by the vessel.
How would you decide the case?
A: I would decide in favour of the insured A
because the insurer was guilty of breach of
implied warranty of seaworthiness.
The Insurance Code provides that in every
contract of marine insurance, there is a
warranty that the ship is seaworthy at the
commencement of the risk. Seaworthiness
refers not only to the structure of the ship but
also as to its being properly laden. In other
words, a ship which is seaworthy for the
insurance on the ship, may, by reason of being
unfit to receive the cargo, be unseaworthy for
the purpose of insurance upon the cargo. In
this case, the fact that the port hole was not
secured at the port of departure made the ship
unseaworthy as far as the cargo of plywood
was concerned. Thus, the insurer should be
liable for the damage thereto although the loss
was not one due to perils insured against.
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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.
2.1. This warranty arises only when the nationality
or neutrality of the vessel or the cargo has
expressly been warranted.
3. That the vessel shall not make any improper
deviation from the intended voyage.
3.1. The intended voyage is determined as follows:
(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;
(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.
3.2. A deviation is a departure from the course of
the voyage as defined by law or an
unreasonable delay in pursing the voyage, or
the commencement of an entirely different
voyage.
3.3. A deviation is proper:
(a) When it is caused by circumstances over
which neither the master nor the owner of
the ship has any control.
As when: 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.
As 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.
As 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.
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As when: Assistance is given.
Note: Any deviation that is not included is an improper
deviation.
Bar 2008
Q: On October 30, 2007, M/V Pacific, a Philippine-
registered vessel owned by CSC, sank on her voyage
from Hong Kong to Manila. EAC is the insurer of the lost
cargoes loaded on board the vessel which were
consigned to Debenhams Company. After it indemnified
Debenhams, EAC as subrogee filed an action for
damages against CSC.
Assume that the vessel was seaworthy. Before departing,
the vessel was advised by the Japanese Meteorological
Center that it was safe to travel to its destination. But
while at sea, the vessel received a report of a typhoon
moving within its general path. To avoid the typhoon, the
vessel changed its course. However, it was still at the
fringe of the typhoon when it was repeatedly hit by huge
waves, foundered and eventually sank. The captain and
the crew were saved except 3 who perished. Is CSC
liable to EAC?
A: No. The doctrine of proper deviation is applicable in
this case. The change of course made by the vessel is
proper as it was to avoid the typhoon and the huge
waves are considered perils of the sea.
3.4. When there is an improper deviation, the
insurer is not liable for any loss happening to
the thing insured subsequent to an improper
deviation. This is so whether risk has been
increased or diminished.
4. That the vessel does not or will not engage in any
illegal venture.
LOSS AND ABANDONMENT
LOSSES IN MARINE INSURANCE
1. Losses in marine insurance may be
(a) Partial, or
(b) Total
2. A loss that is not partial is total.
3. 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.
3.1. This liability extends to damages, expenses
of discharging, storage, reshipment, extra
freightage and all other expenses incurred
in saving the cargo reshipped up to them
amount insured, nothing however shall
render the insurer liable for an amount in
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excess of the insured value or if none, of
the insurable value.
ACTUAL TOTAL LOSSES
1. What constitutes actual total loss?
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.
1.1. As when: When palay was rendered valueless
because they began to germinate, thus it no
longer remains as the same thing, it was held
to be an actual total loss.
2. An actual total loss can be presumed from the
continued absence of the ship without being heard
of.
2.1. The length of time which is sufficient to raise
this presumption depends on the
circumstances of the case.
3. Upon an actual total loss, the insured is entitled to
payment without notice of abandonment 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.
3.1. This means that the policy can limit a claim for
payment to an actual loss only.
CONSTRUCTIVE TOTAL LOSSES
1. It is a constructive total loss when the person
insured is given the right to abandon.
1.1. Abandonment is the act of the insured by
which, after a constructive total loss, he
declares to the insurer the relinquishment in
its favour of his interest in the thing insured.
1.2. For a constructive total loss to exist in
marine insurance, it is required that the
person insured relinquished his interest in
the thing insured. This relinquishment must
be actual.
2. A person insured by a contract of marine
insurance may abandon the thing insured, or any
particular portion thereof separately valued by the
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policy, or otherwise separately insured and
recover a total loss, when the cause of the loss is
a peril insured against if:
(a) More than ¾ thereof in value is actually lost or
would have to be expended to recover it from
the peril;
(b) If it is injured to such extent as to reduce its
value by more than ¾ of the value;
(c) If the thing injured is a ship, and the
contemplated voyage cannot lawfully be
performed without incurring either an expense
to the insured of more than ¾ the value of the
thing abandoned or a risk which a prudent man
would not take under the circumstances;
(d) If the insured is freightage or cargo and the
voyage cannot be performed, nor another ship
procured by the master, within a reasonable
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.
Bar 1982
Q: An inter-island vessel, insured for P2,000,000.00
against “total and constructive loss” sank in 50 feet of
water one mile off Paranaque during a typhoon. After the
typhoon, the ship owner gave written notice of
abandonment of his interest in the entire sunken ship to
the insurance company. Refusing to accept the offer of
abandonment, the insurer hired salvors to refloat the
vessel at a total cost of P40,000.00. because the
refloated vessel needed repairs, the insurer issued
invitations to bid for repairs. Several firms submitted
separate sealed bids ranging from P1,200,000.00 to
P1,300,000.00 for the complete refurbishing and/or
restoration of the vessel to its original condition. On the
basis of the following facts, the insurance company
rejected the claim of the ship owner for payment of total
loss on the ground that there was no constructive total
loss.
(a) Was the notice of abandonment given by the
owner properly made?
(b) Is the position of the insurance company as to the
absence of constructive total loss well-taken?
(c) Assuming that the ship owner failed to give the
proper notice of abandonment, may he still recover
from the insurer?
A:
(a) First suggested answer:
The notice of abandonment made in writing by the
insured to the insurer was sufficient, had the loss
been a constructive total loss of the vessel,
meaning more than ¾ of the value of the vessel.
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Second suggested answer:
The notice of abandonment made in writing was
not proper, since the existence of the constructive
total loss of the vessel had not yet been
determined.
(b) Yes. The sum total of the damage to the vessel
was only P1,340,000.00 (P40,000.00 for the
salvors; P1,300,000.00 for the restoration of the
vessel to its original condition) which amount is not
more than ¾ of the value of the vessel which is
P2,000,000.00.
(c) Yes. The ship owner may still recover from the
insurer, his actual loss, the amount of
P1,340,000.00 which is now only partial loss,
being not total loss. But since the said amount was
already spent by the insurer on the vessel, the
insurer is no longer liable to the ship owner, except
to deliver the vessel.
Bar 1992
Q: An insurance company issued a marine insurance
policy covering a shipment by sea from Mindoro to
Batangas 1,000 pieces of Mindoro garden stones against
“total loss only.” The stones were loaded in two lighters,
the first with 600 pieces and the second with 400 pieces.
Because of rough seas, damage was caused the second
lighter resulting in the loss of 325 out of the 400 pieces.
The owner of the shipment filed claims against the
insurance company on the ground of constructive total
loss inasmuch as more than ¾ of the stones had been
lost in one of the lighters.
Is the insurance company liable under its policy?
A: The insurance company is not liable under its policy
covering against “total loss only” the shipment of 1,000
pieces of Mindoro garden stones. There is no
constructive total loss that can be claimed since the ¾
rule is to be computed on the total 1,000 pieces of
Mindoro garden stones covered by the single policy
coverage.
3. Abandonment when made must neither be partial
or conditional. Hence, it must be total and
absolute.
Bar 2005
Q: M/V Pearly Shells, a passenger and cargo vessel, was
insured for P40,000,000.00 against “constructive total
loss.” Due to typhoon, it sank near Palawan. Luckily,
there were no casualties, only injured passengers. The
ship owner sent a notice of abandonment of his interest
over the vessel to the insurance company which then
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hired professionals to afloat the vessel for P900,000.00.
when refloated, the vessel needed repairs estimated at
P2,000,000.00, the insurance company refused to pay
the claim of the ship owner, stating that there was “no
constructive total loss.”
(a) Was there “constructive total loss” to entitle the
ship owner to recover from the insurance
company?
(b) Was it proper for the ship owner to send a notice
of abandonment to the insurance company?
A:
(a) There was constructive total loss. When the vessel
sank, it was likely that it would be totally lost
because of the improbability of recovery.
(b) It was proper for the ship owner to send a notice of
abandonment to the insurance company, because
there was reliable information of the loss of the
vessel.
4. Abandonment must be made within 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.
4.1. The requirement as to when notice must be
made is to enable the insurer to take steps
to preserve the property.
4.2. 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.
5. Notice of abandonment is made by giving notice
oral or written notice to the insurer but if orally
given, a written notice of such must be submitted
within 7 days from giving oral notice.
5.1. The notice must be explicit ad 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 loss.
5.2. The requirement as to the explicitness of
the notice is due to the fact that
abandonment can only be sustained upon
the cause specified in the notice.
6. Abandonment becomes effective upon the
acceptance of the insurer.
6.1. The acceptance may either be express or
implied from the conduct of the insurer.
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6.2. The mere silence of the insurer for an
unreasonable length of time after notice
shall be construed as acceptance.
6.3. Once accepted, it is conclusive between the
parties. The loss is admitted together with
the sufficiency of the abandonment.
6.4. It is also irrevocable upon acceptance and
upon its being made unless the ground
upon which it was made proves to be
unfounded. Thus, if the insurer accepts the
abandonment, it cannot raise any question
as to insufficiency of the form under Section
145, time for giving notice under Section
143, or right to abandon under Section 141.
The exception is under Section 152 when
the ground is unfounded which is defined in
Section 154.
7. The effects of abandonment are:
(a) It is equivalent to a transfer by the insured of
his interest to the insurer, with all the chances
of recovery and indemnity.
Note: if the insurer pays for the 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. In this case, the insurer
has opted to pay for an actual total loss
notwithstanding the absence of actual
abandonment.
(b) 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. In effect, the
agents of the agents of the insured become
agents of the insurer. This retroacts to the date
of the loss when abandonment is effectively
made.
7.1. 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.
As when: 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.
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8. 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. This is due to the fact that under
Section 1451 which provides that if notice is
properly given, it does not prejudice the insured, if
the insurer refuses to accept the abandonment.
9. The fact that abandonment is not made or is
omitted does not prejudice the insured as he may
nevertheless recover his actual loss.
AVERAGES
LIABILITY FOR AVERAGES
1. An average is an 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.
2. The kinds of averages are:
(a) Particular or Simple – 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 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.
As when: 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 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 – 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 to the loss.
As when: The ship is jettisoned.
RULE ON LIABILITY FOR AVERAGES
When it has been agreed that an insurance upon a
particular thing or class of things shall be free from a
particular average, a marine insurer is not liable for a
particular average loss not depriving the insured 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.
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IN CASE OF A GENERAL AVERAGE LOSS
1. 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.
1.1. This means that the insured can hold his
insurer liable for his contribution up to the
value of the policy.
RIGHT OF SUBROGATION
MEASURE OF INDEMNITY IN MARINE INSURANCE
1. When a person insured in a contract of marine
insurance has 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, nor
As when: The cargo liable for contribution has
been removed from the vessel.
(b) When the insured having the right and
opportunity to enforce contribution from others,
has neglected or waived the exercise of the
right.
2. This means 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.
Note: If it be the latter, subrogation takes place.
1. If the policy is valued: 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.
1.1. If there is fraud in valuation, it would entitle
the insurer to rescind by way an exception
to conclusiveness.
1.2. If however, the subject of insurance is
hypothecated by bottomry or respondentia
before insurance and without knowledge of
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the person securing it, he may show the
real value.
As when: A person purchases a vessel
subject to bottomry but he is unaware of it,
he may upon a loss show the real value of
the vessel. The insurer cannot rescind.
1.3. 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. 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 the contract as is also
known as the Average Clause.
As when: A vessel valued at P500,000.00 is
insured for P400,000.00. The vessel is
damaged to the extent of P200,000.00. The
insurer is liable not for the P200,000.00, but
for only P160,000.00.
The formula is:
(Insurance / Value) X Loss = Liability
1.4. The requisites for the application of the
Average Clause are:
(a) Insurance is for less than actual value;
(b) The loss is partial.
When does co-insurance exist?
Co-insurance exists when the subject
matter is insured for an amount less
than its value. In this case, the insured is
considered as a co-insurer for the
portion not covered by insurance.
This will apply only if the loss is partial.
This is also known as the “Average
Clause.”
1.5. Note: Co-insurance only exists in marine
insurance, as a general rule. In fire
insurance, there is no co-insurance, unless
expressly stipulated. In life insurance, there
is none as value is fixed in the policy.
1.6. Section 159 is further qualified as in case of
a partial loss of the ship or its equipment,
the old materials are t be applied towards
the payment of the new and unless
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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. This is the 1/3 old for new rule
as it is contended that the repairs once
completed will enhance the value of the
thing insured.
1.7. In case profits are separately insured in a
contract of marine insurance, the insured
can recover in case of a loss, a proportion
of such profits equivalent to proportion of
the value of the property lost bears to the
value of the whole.
As when: Goods are valued at
P500,000.00, expected profits are
P50,000.00. Goods suffer a partial loss of
P100,000.00. The insured can recover
P10,000.00 ion the insurance over profits.
Formula:
Amount Recoverable = (Insurance of
Profits/ Value of Goods) X Loss
Note: 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.
1.8. 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.
As when: Goods are valued at
P500,000.00, if only P250,000.00 are
shipped and exposed to the risk, the
valuation is reduced by ½ . In case of a total
loss, the insured can only demand ½ of
valuation, or P250,000.00.
2. If the policy is Open: 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. The value at the time it was built
or acquired is not the value that is material.
2.1. The value of the cargo is its actual cost to
the insured, when laden on board or where
that cost cannot be ascertained, its market
value at the time and place of lading,
adding the charges incurred in purchasing
and placing it on board, but without
reference to any loss incurred in raising
money for its purchase or any drawback on
its exportation or fluctuation of the market at
the port of destination or expenses incurred
on the way or on arrival.
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A drawback is government allowance upon
duties on imported merchandise when the
importer re-exports instead of selling it.
2.2. The value of freightage is the gross
freightage, exclusive of primage, without
reference to the cost of earning it.
Primage is the 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.
2.3. The cost of insurance is in each case to be
added to the value thus estimated.
2.4. If the cargo is insured against a partial loss
and 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 brought if sound. Meaning, if
reduction in value is 1/5, then the amount of
recovery in the insurance is also 1/5.
The formula is:
(a) Market Price in sound state – Market
Price in damaged state = Reduction in
Value
(b) (Reduction in Value / Market Price in
sound state) X Amount of Insurance =
Amount of Recovery
3. Regardless of whether the policy is Valued or
Open: An insurer is liable:
(a) Port of Refuge Expenses - 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.
(b) Sue and Labor Clause – if so stipulated, that
the insured shall labor for recovery of the
property insured, the insurer is liable for
expenses incurred thereby.
As when: The vessel is unlawfully detained.
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3.1. In either case, said expenses are to be
added to a total loss, if that afterwards
occurs.

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FIRE INSURANCE
2. To allow recovery, it must be the proximate cause
WHAT IS INCLUDED IN FIRE INSURANCE?
1. Insurance against fire may include 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.
1.1. Hence, while it is not limited to loss or
damage due to fire, coverage as to other
risks is not automatic.
FIRE, DEFINED
1. In insurance, fire is “the active principle of burning,
characterized by heat and light combustion.”
Combustion without visible light or glow is not fire.
As when: Damage caused by smoke from a lamp
when no ignition occurred outside the lamp.
1.1. Fire cannot be considered a natural disaster
or calamity since it almost always arises
from some acts of man or by human
means. It cannot be an act of God unless
caused by lightning or a natural disaster or
casualty not attributable to human agency.
of the damage or loss and the fire must be hostile.
2.1. The fire is hostile if:
(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 a friendly fire that burns
in a place where it is intended to burn
and employed for the ordinary purpose
of lighting heating or manufacturing.
2.2. Note: The policy itself may limit or restrict
coverage to losses under ordinary
conditions but not those due to
extraordinary circumstances or abnormal
conditions like war, invasion, rebellion, civil
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war, or similar causes. In these cases,
recovery is still possible.
ALTERATION, DEFINED
1. An alteration 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.
2. From the foregoing definition, the following
requisites must be present to constitute an
alteration so as to allow the rescission of the
contract:
2.1. The use or condition of the thing insured is
specifically limited or stipulated in the
policy. Note that 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.
As when: 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 or 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.
2.2. There is an alteration in the said use or
condition;
2.3. The alteration is without the consent of the
insurer;
2.4. The alteration is made by means within the
insured’s control. If the alteration be by
accident or means beyond the control of the
insured, this requisite is not met.
As when: 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.
2.5. The alteration increases the risk of loss.
Note that any alteration in the use or
condition of the thing insured from that
which is limited by the policy, which does
not increase the risk does not affect the
contract.
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3. Rescission is due to the fact 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
1. 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.
2. 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.
HOW VALUATION IS 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.
3.1. If it is a partial loss, the whole amount of the
partial loss is paid.
3.2. 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 of
payment, the option to repair, rebuild, or replace
the property wholly or partially damaged or
destroyed shall be exercised.
5. 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.
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CASUALTY INSURANCE
CASUALTY INSURANCE, DEFINED
1. 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.
Bar 1975
Q: In a course of a voluntary boxing contest, B
who had an accident insurance policy, slid and
slipped, enabling his opponent boxer to hit him
with a blow that threw him to the ropes, hitting his
head against the canvass, causing his eventual
death. There is nothing in the insurance contract
appertaining to boxing. Is the insurance company
liable?
A: The insurer is liable because the death in this
case was an accident within the meaning of the
policy. It was an accident because the insured did
not expect to die by entering such contest. His
slipping was accidental and this caused him to hit
his head against the canvass, leading to his death.
Case: Finman General Assurance Corp. v. CA
There is no “accident” in the context of an accident
policy, if it is the natural result of the insured’s
voluntary act, unaccompanied by anything
unforeseen except the injury. There is no accident
when a deliberate act is performed, unless some
additional and unforeseen happening occurs that
brings about the injury.
2. It includes:
(a) Employer’s liability;
(b) Workmen’s compensation
(c) Public liability;
(d) Motor vehicle liability;
(e) Plate glass liability;
(f) Burglary and theft;
(g) Personal accident and health insurance as
written by non-life companies; and
(h) Other substantially similar insurance.
DEFINITIONS
1. Employer’s Liability – insurance obtained by the
employer against liability to an employee for
damages caused or arising from injuries by reason
of his employment.
2. Workmen’s Compensation – insurance secured by
an employer for the benefit of his employees and
laborer for loss resulting from injuries,
disablement, or death through industrial accident,
casualty or disease in connection with their
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employment. Note that most if not all types of this
insurance is underwritten by the GSIS or the SSS.

3. Public Liability – 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.

4. Motor Vehicle Liability – 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.

5. Plate Glass – insurance that indemnifies the

insured against loss caused by the accidental
breaking of plate glass, windows, doors, or show
cases.

6. Burglary and Theft – insurance against loss of

property through burglary and theft.

7. Personal Accident – insurance against expense,

loss of time and suffering from accidents that
cause a physical injury.

8. Health – insurance for indemnity for expenses or

loss occasioned by sickness or disease.

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SURETYSHIP In the absence of specific provisions, the Civil Code will
apply in a suppletory character if necessary to interpret
1. An agreement whereby a party called the surety contract provisions.
guarantees the performance by another party
called the principal or obligor of an obligation or DISTINGUISHED FROM GUARANTY
undertaking in favour of a 3rd party called the
obligee. (a) A surety assumes liability as a regular party to the
agreement; a guarantor’s liability depends on an
2. This includes official recognizances, bonds, or independent agreement to pay if primary debtor
undertakings issued by any company under Act fails to pay.
No. 536, as amended by Act No. 2206 in relation
to government transactions by authorized (b) A surety is primarily liable; a guarantor is
companies. secondarily liable.

(c) A surety is not entitled to exhaustion; a guarantor

LIABILITY OF THE SURETY is entitled to exhaustion.

It is joint and several or 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 and obligee.

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 valud
despite the non-payment of the premium.

WHAT OTHER LAWS GOVERN A SURETYSHIP

CONTRACT?

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LIFE INSURANCE 4. 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
It is insurance on human lives and insurance appertaining the end of the period, it is paid to the beneficiaries.
thereto or connected therewith.
5. Annuity – where the insured or a named person is
WHEN PAYABLE paid a sum or sums periodically during life or a
certain period. Note that contracts for the payment
An insurance upon life may be made payable on:
of endowment or annuities are considered as life
(a) Death of the person; or insurance contracts.
(b) His surviving a specified period; or
(c) Or otherwise, contingently on the continuance or
DISTINGUISHING LIFE INSURANCE FROM PAYMENT
cessation of life.
OF ANNUITY
COMMON KINDS OF LIFE INSURANCE
LIFE INSURANCE PAYMENT OF ANNUITY
1. Whole Life/ Ordinary Life/ Straight Life – premiums Payable upon the death of Payable during the lifetime
are payable for life and the insurer agrees to pay the insured of the annuitant
Premium is paid in Annuitant pays a single
the face value upon the death of the insured.
instalments premium
There is lump sum Annuities are paid until
2. Limited Payment Life – insured pays premiums for payment upon death death
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 EXERCISE BY THE MINOR OF HIS RIGHTS AS
payment is not complete – beneficiary receives INSURED OR BENEFICIARY
face amount. As far as a minor, who is the insured or a beneficiary in
an insurance contract, in the absence or capacity of a
3. Term Policy – insurer is liable only upon death of judicial guardian, the father, in default, the mother, may
the insured within the agreed term or period. If act in behalf of the minor without need of bond or court
insured survives, the insurer is not liable. authority when it involves the exercise of any right under
the policy, to include but not limited to obtaining a policy
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loan, surrendering the policy, receiving the proceeds of
the policy and giving the minor’s consent to any
transaction on the policy provided the interest of the
minor does not exceed P20,000.00.
WHAT RISKS ARE COVERED?
1. Generally, all causes of death are covered unless
excluded by law, by the policy or public policy.
2. A cause is excluded by law, as when the
beneficiary is the principal, accomplice or
accessory in bringing the death of the insured.
2.1. It is excluded by the policy, as when it is
stipulated that it does not cover assault,
murder or injuries inflicted intentionally by a
3rd person.
Note: Where the insured is not the intended
victim, the insurer is liable. What must be
considered is that death or injury is not the
natural or probable result of the insured’s
voluntary act as opposed to an act of the
insured to confront burglars.
2.2. It is excluded by public policy, as when the
insured is executed for a crime that he
committed.
3. Suicide is not generally compensable unless
committed after the policy has been in force for a
period of 2 years from date of issue or last
reinstatement, or a shorter period if provided, or if
committed in a state of insanity.
IS A LIFE INSURANCE POLICY TRANSFERABLE OR
ASSIGNABLE?
1. Life insurance may pass by transfer, will or
succession to any person, whether he has
insurable interest or not.
2. The effect is that the person to whom it is
transferred may recover upon it whatever the
insured might have recovered.
2.1. 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.
3. Notice to the insurer is not necessary to preserve
the validity of the policy unless thereby expressly
reserved.
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4. The consent of the irrevocable beneficiary would
be required as he has acquired a vested right.
Bar 1991
Q: The policy of insurance upon his life, with a face value
of P100,000.00, was assigned by Jose, a married man
with 2 legitimate children, to his nephew, Y, as security
for a loan of P50,000.00. He did not give the insurer any
written notice of such assignment despite the explicit
provision to that effect in the policy. Jose died. Upon the
claim on the policy by the assignee, the insurer refused to
pay on the ground that it was not notified of the
assignment. Upon the other hand, the heirs of Jose
contended that Y is not entitled to any amount under the
policy because the assignment without due notice to the
insurer was void.
Resolve the issues.
A: A life insurance is assignable. A provision, however, in
the policy stating that written notice of such an
assignment should be given to the insurer is valid. The
failure of the notice of assignment would thus preclude
the assignee from claiming rights under the policy. The
failure of the notice did not, however, avoid the policy;
hence, upon the death of Jose, the proceeds would, in
the absence of a designated beneficiary, go to the estate
of the insured. The estate, in turn, would be liable for the
loan of P50,000.00 owing in favour of Y.
WHAT IS THE MEASURE OF INDEMNITY IN LIFE
INSURANCE
1. 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.
2. Hence, a life insurance policy has been held to be
a Valued policy.
WHAT ARE THE NON-DEFAULT OPTIONS IN LIFE
INSURANCE?
To prevent a life insurance policy from lapsing, the
following devices are used:
(a) Grace Period
In life insurance, after the payment of the 1st
premium, the insured is entitled to a grace period
of 30 days or one month within which to pay the
succeeding premiums.
(b) Automatic Loan Clause
It is the stipulation in the policy providing that upon
default on the payment of premium, the same shall
be paid from the loan value of the policy until the
value is consumed.
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(c) Paid-Up Insurance COMPULSARY MOTOR VEHICLE LIABILITY
INSURANCE
No more payments are required and consists of
insurance for life in such amount as the sum CONCEPT OF MVLI
available therefore, considered as single and final 1. It is to provide protection or coverage to answer for
premium will purchase. It results in the reduction of bodily injury or property damage that may be
the original amount of insurance but for the same sustained by another arising from the use of a
period originally stipulated. motor vehicle.

(d) Cash Surrender Value 2. Note: What is now compulsory is death or bodily
injury arising from MV accidents as per
As applied to life insurance, it is the sum of money amendment of the Insurance Code, brought about
the company agrees to pay to the holder of the by insurance losses due to padded claims form
policy if he surrenders it and releases his claim property damage. Hence, property damage is now
upon it. The greater the sum of CSV will be if more optional.
premiums are paid; but the CSV is always a lesser
sum than the total amount of premiums paid.
HOW IS THE COMPULSARY NATURE ENFORCED?
(e) Reinstatement
1. The compulsory nature of the insurance is
enforced by prescribing that any land
Every life insurance policy must contain a
transportation operator/ owner or MVs for
provision that the holder of the policy shall be
transportation of passengers for compensation,
entitled to reinstatement of the contract at any time
including school buses or owner of a motor
within 3 years from the date of default in the
vehicle, referring to the actual legal owner of a MV
payment of the premium, unless the cash value
in whose name the vehicle is registered with LTO,
has been duly paid or the extension period expired
would be considered as unlawfully operating a MV,
upon production of evidence of insurability
unless, there is a:
satisfactory to the company and payment of all
overdue premiums and any indebtedness to the
company upon such policy.

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(a) Policy of insurance or contract of insurance
against passenger or 3rd party liability for death
or bodily injury arising from MV accidents;
(b) Guaranty in cash;
(c) Surety bond, to indemnify the death or injury to
a 3rd party other than a passenger, excluding a
member of the household, or a member of the
family of a MV owner or land 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 referring to any fare paying person
being transported or conveyed in and by MV
for transportation of passengers for
compensation, including persons expressly
authorized by law or by the vehicle’s operator
or his agents to ride without fare arising from
the use thereof.
2. Compliance by the MV owner or the land
transportation operator is monitored as the LTO
shall not allow registration or renewal of
registration without compliance with Section 390.
3. A violation of the provision is punishable by a fine
not less than P500,000.00, but not less than
P1,000.00 and/ or imprisonment of not more than
6 months.
3.1. If a land transportation operator violated the
prescribed minimum limits of coverage, it is
sufficient cause for revocation of a
certificate of public convenience.
3.2. 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.
DISTINGUISHED FROM OWN DAMAGE COVERAGE
AND COMPREHENSIVE MV INSURANCE
1. Third party liability answers for liabilities arising
from death or bodily injury to 3rd persons or
passengers.
1.1. Own damage insurance answers for
reimbursement of the cost of repairing the
damage to vehicle of the insured.
1.2. Comprehensive insurance answers for all
liabilities/ damages arising from the use/
operation of a MV; it includes Third Party,
Own Damage, Theft, and Property
Damage.
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How can the theft clause be interpreted?
In Paramount Insurance v. Spouses Remondeulaz, the
respondents entrusted possession of their vehicle only to
the extent that Sales will introduce repairs and
improvements thereon and not to permanently deprive
them of possession thereof. Since theft can also be
committed by misappropriation, the fact that Sales failed
to return the subject vehicle to the respondents
constitutes Qualified Theft. Hence, since the
respondents’ car is undeniably covered by a
Comprehensive MV Insurance Policy that allows for
recovery in cases of theft, petitioner is liable under the
policy for the loss of respondents’ vehicle under the “theft
clause.”
Case: Villacorta v. Insurance Commissioner
The taking of a car even though temporary ad only for a
joy ride, without the consent of the car owner, is theft;
and therefore, insurer is liable for total loss due to car
accident of insured’s car wrongfully taken, without the
insured’s consent, from repair shops entrusted for
repairs.
WHEN DOES THE LIABILITY OF THE INSURER
ACCRUE?
1. In an insurance policy that directly insures against
liability, the insurer’s liability accrues immediately
upon the occurrence of the injury upon which
liability depends, and does not depend on the
recovery of judgment by the injured party against
the insured. Hence, there is no need for the
insured to wait for a decision of the court finding
him guilty of reckless imprudence.
2. The occurrence of an injury for which the insured
may be liable immediately gives rise to insurer
liability. In fact, since third party liability insurance
insures against 3rd persons, the injured party for
whom the contract is intended can directly sue the
insurer. The purpose is to enable the injured
person to proceed directly against the insurer so
as to avoid the probable insolvency of the insured
who had directly caused the damage.
2.1. The provision creates a contractual relation,
which inures to the benefit of any person
who may be negligently injured by the
insured, as if such person was specifically
named in the policy.
2.2. The insurer is not solidarily liable with the
insured as its liability is based on contract,
while that of the insured is based on tort.
Bar 2000
Q: X was riding a suburban utility vehicle covered by a
comprehensive motor vehicle liability insurance
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underwritten by FastPay Insurance when it collided with
a speeding bus
owned by RM Travel. The collision resulted in serious
types of injuries to X; Y, a passenger of the bus; and Z, a
pedestrian waiting for a ride at the scene of the collision.
The police report established that the bus was the
offending vehicle. The bus had a CMVLI policy issued by
Dragon Insurance. X, Y and Z jointly sued RM Travel and
Dragon Insurance for indemnity. The lower court applied
the “no-fault” indemnity policy of the statute, dismissed
the suit against RM Travel, and ordered Dragon
Insurance to pay indemnity to all three plaintiffs.
Do you agree with the court’s judgment?
A: No. The cause of action of Y is based on the contract
of carriage, while that of X and Z is based on torts. The
court should not have dismissed the suit against RM
Travel. The court should have ordered Dragon Insurance
to pay each of X, Y and Z to the extent of the insurance
coverage, but whatever amount is agreed upon in the
policy should be answered first by RM Travel and the
succeeding amount should be paid by Dragon Insurance
up to the amount of the insurance coverage. The excess
of the claims of X, Y and Z, over and above such
insurance coverage, if any, should be answered or paid
by RM Travel.
Bar 1996
Q: While driving his car along EDSA. Cesar sideswiped
Roberto, causing injuries to the latter. Roberto sued
Cesar and the third party liability insurer for damages
and/ or insurance proceeds. The insurance company
moved to dismiss the complaint, contending that the
liability of Cesar has not yet been determined with finality.
(1) Is the contention of the insurer correct?
(2) May the insurer be held liable with Cesar?
A:
(a) No. There is no need to wait for the decision of the
court determining Cesar’s liability with finality
before the third party liability insurer could be
sued. The occurrence of the injury to Roberto
immediately gave rise to the liability of the insurer
under its policy. In other words, where an
insurance policy insures direct liability, the
insurer’s liability accrues immediately upon the
occurrence of the injury or event upon which the
liability depends.
(b) The insurer cannot be held solidarily liable with
Cesar. The liability of the insurer is based on
contract while that of Cesar is based on tort. If the
insurer were solidarily liable with Cesar, it could be
made to pay more than the amount stated in the
policy. This would, however, be contrary to the
principles underlying insurance contracts. On the
other hand, if the insurer were solidarily liable with
Cesar and it is made to pay only up to the amount
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stated in the insurance policy, the principles
underlying solidary obligations would be violated.
EFFECT OF CHANGE IN OWNERHIP 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 LTO.
PAYMENT OF CLAIMS
1. A claim for payment shall be filed without
unnecessary delay, within 6 months from the date
of accident by giving notice setting forth the
nature, extent, and duration of the injuries as
certified by a duly licensed physician.
1.1. The failure to file a claim will be deemed as
a waiver.
1.2. 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 THE INSURANCE COMPANY DO UPON
FILING OF THE CLAIM?
1. 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 without prejudice to a further pursuit of
claim, in which case he shall not be required or
compelled to execute a quit-claim or release from
liability.
1.1. 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
439, which provides for concurrent
jurisdiction but the filing with the Insurance
Commissioner shall preclude filing with the
Court.
NO FAULT INDEMNITY
1. It is a claim for payment for death or injury to a
passenger or 3rd party without necessity of proving
fault or negligence.
2. This is payable by the insurer, provided:
(a) Indemnity in respect of one person shall not
exceed P15,000.00;
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(b) The necessary proof of loss under oath to
substantiate the claim is submitted.
These are:
a. Police report of accident
b. Either death certificate and sufficient
evidence to establish the payee; or
c. The medical report and evidence of medical
or hospital disbursement in respect of which
refund is made.
3. 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.
3.1. The term “occupant” must be
distinguished from a “passenger” who is
“any fare-paying person being
transported and conveyed in and by a
motor vehicle for transportation of
passengers for compensation including
persons expressly authorized by law or
by the vehicle’s operator or his agents to
ride without fare.” Any person other than
a passenger is a “third-party” so long as
they are riding in, or mounting, or
dismounting from a motor vehicle.
INTERPRETATION OF THE AUTHORIZED DRIVER
CLAUSE
1. Purpose: To assure that the persons other than
the insured owner, who drives the car on the
insured’s order, such as his regular driver, or with
his permission, such as friends or family members
or employees of a car service or repair shop, are
duly licensed drivers and have no disqualification
to drive a motor vehicle.
2. Thus, 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.
2.1. When the insured is the one driving the
vehicle, a license is not necessary. He has
a right to recover the damage even if he
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has no driver’s license or that the same had
expired at the time of the accident.
3. Jurisprudence on the interpretation and application
of the authorized driver clause:
3.1. If the license of the driver other than the
insured has expired, such person is not
authorized to operate a motor vehicle. The
renewal of the license a week after the
accident shall not cure the defect.
3.2. When a driver is issued a Temporary
Operator’s Permit or a Temporary Vehicle
Receipt, such person is authorized to
operate a motor vehicle, but if it has
expired, it is as if he had no license.
3.3. A tourist with a license issued in his home
country but in the Philippines for more than
90 days, is not authorized to operate a
motor vehicle because it is as if he had no
license.
3.4. A driver’s license that bears all the
earmarks of a duly issued license is a public
document that is presumed genuine.
3.5. When the driver is authorized to drive, the
fact that the purpose of the trip was not
authorized will not affect the right of the
insured to recover from the insurer should
the vehicle be damaged.
3.6. When a motor vehicle is covered by a policy
that includes theft, the insurer is liable for
the damage sustained by the insured
vehicle on occasion of or while the theft is
being committed by a thief without a license
to drive. The same is true if the thief had an
expired license.
3.7. The unauthorized use of a motor vehicle for
a joy-ride constitutes theft and a prior
criminal conviction is not necessary to
enable the insured to recover under a
comprehensive insurance policy.
4. The standard Authorized Driver clause requires
that the driver at the time of the accident must be
duly authorized and licensed to drive. An irregular
license is not a license at all.
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BUSINESS OF INSURANCE
ORGANIZATION
1. The term insurer or insurance company shall
include all individuals, partnerships, associations
or corporations, including GOCCs or entities
engaged as principals in the insurance business.
2. Expressly excluded is Mutual Benefit Association
which is based on reciprocal contracts and
requires that the members receive benefits as a
matter of right. Commonly, a fraternal or social
organization that provides insurance for members
on an assessment basis. However, before it is
allowed to transact, the law requires it to secure a
license from the Insurance Commissioner.
2.1. It is formed without capital stock and not
organized for profit. Its main purpose is
paying sick benefits to members, or
furnishing financial support to its members
while out of employment or of paying to
relatives of deceased members a 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 insurance
benefits, out of dues, assessments,
collected from members.
2.2. The insurance aspect of their operations,
being an incident and not the main purpose
of the organization, and the insurance
feature is adopted, not for purpose of gain,
but with the object of benevolence.
2.3. Do not confuse with Mutual Insurance
Company, which is a cooperative or
enterprise where the members are both
insurer and insured. In it, the members all
contribute, by a system of premiums or
assessments, to the creation of a fund from
which all losses and liabilities are paid, and
where the profits are divided among
themselves, in proportion to their interest.
2.4. An example is a “Protection and Indemnity
Club,” which is an association composed of
ship owners in general who band together
for the specific purpose of providing
insurance cover on a mutual basis against
liabilities incidental to ship owning that the
members incur in favour of 3rd parties. It is a
form of insurance against 3rd party liability,
where the 3rd party is anyone other than the
P&I and its members. It is therefore, a
mutual insurance association engaged in
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the marine insurance business and must be
duly licensed by the Insurance Commission.
2.5. If a Labor Union shall provide its members
with a mutual benefit feature, it shall be
governed by the provisions of the Labor
Code.
3. Insurance Corporation – one that is formed or
organized to have any person or persons or other
corporations harmless from loss, damage or
liability arising from any unknown or future or
contingent event, or to indemnify or to compensate
any person or persons or other corporations for
any such loss, damage or liability, or to guarantee
the performance of or compliance with contractual
obligations or the payment of debts of others.
REQUIREMENTS FOR A CERTIFICATE OF
AUTHORITY FROM THE INSURANCE COMMISSION
1. The requirements are:
(a) Qualified by Philippine laws to transact
insurance business;
(b) Has a name that is not in any way similar to
another company;
(c) If organized as a stock corporation, it should
have a paid-up capital of no less than
P5,000,000.00;
(d) If organized as a mutual company or one
whose capital funds are not contributed by
stockholders but by policy holders, it must have
available cash assets of at least P5,000,000.00
above all liabilities for losses reported,
expenses, taxes, legal reserves and
reinsurance of all outstanding risks, and the
contributed surplus fund equal the amounts
required of stock corporations, P1,000,000.00 if
life insurance company, P500,000.00 if non-
life.
MARGIN OF SOLVENCY
1. The margin of solvency is the excess of the value
of insurance company’s admitted assets, exclusive
of its paid up, in case of a domestic insurance
company or an excess of the value of its admitted
assets in the Philippines exclusive of security
deposits, in case of a foreign company, over the
amount of its liabilities, unearned premiums, and
reinsurance reserves in the Philippines.
2. The required margin in case of life insurance
companies is 2% of the total amount of its
insurance in force as of the preceding calendar
year on all policies except term insurance.
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2.1. In case of non-life insurance companies, at
least 10% of the total amount of its net
premium during the preceding calendar
year.
3. In no case shall the margin of solvency be less
than P500,000.00.
3.1. If the requirement is not met, the insurance
company is not permitted to take on any
new risk and no dividends can be declared
by the deficient company.
LIQUIDATION OF INSURANCE COMPANY
If the company is determined by the Commissioner to be
insolvent, or cannot resume business, he shall, if public
interest so requires, order its liquidation (Section 256).
This should be distinguished from a situation where a
conservator is appointed when the Commissioner finds
that a company is in a state of continuing inability or
unwillingness to maintain a condition of solvency or
liquidity adequate to protect the policy holders and
creditors. The conservator will take charge of the
management of the insurance company (Section 255).
REVOCATION OF CERTIFICATE OF AUTHORITY
Grounds:
(a) The company is in an unsound condition;
(b) That it has failed to comply with the provisions of
law or regulations obligatory upon it
(c) That its condition or method of business is such as
to render its proceedings hazardous to the public
or its policy holders;
(d) That its paid-up capital stock, in the case of a
domestic stock corporation, or its available cash
assets, in the case of a domestic mutual company,
or its security deposits, in the case of a foreign
company, is impaired or deficient;
(e) That the margin of solvency required of such
company is deficient.
The Commissioner is authorized to suspend or revoke all
certificates of authority granted to such insurance
company, its officers and agents, and no new business
shall thereafter be done by such company or for such
company by its agents in the Philippines, while such
suspension, revocation or disability continues or until its
authority to do business is restored by the Commissioner.
Before restoring such authority, the Commissioner shall
require the company concerned to submit to him a
business plan showing the company’s estimated receipts
and disbursements, as well as the basis therefor, for the
next succeeding 3 years.
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OTHER PROVISIONS
BANCASSURANCE
RA 10607 introduced provisions governing
bancassurance.
Such term shall mean the presentation and sale to bank
customers by an insurance company of its insurance
products within the premises of the head office of such
bank duly licensed by the BSP, or any of its branches
under rules and regulations which the Commissioner and
the BSP may promulgate.
To engage in a bancassurance arrangement, a bank is
not required to have equity ownership of the insurance
company. No insurance company shall enter into a
bancassurance arrangement unless it possesses all the
requirements as may be prescribed by the Commissioner
and the BSP.
No insurance product, whether life or non-life, shall be
issued or delivered pursuant to a bancassurance
arrangement, unless in the form previously approved by
the Commissioner (Section 375).
Personnel tasked to present and sell insurance products
within the bank premises shall be duly licensed by the
Commissioner and shall be subject to the rules and
regulations of this Act (Section 376).
INSURANCE COMMISSIONER
JURISDICTION AND ADJUDICATORY POWERS
1. The Insurance Commissioner has, among other
functions, concurrent jurisdiction with the courts for
claims under any kind of policy or contract of
insurance where the amount of the loss, damage
or liability, excluding interest, costs, attorney’s fees
does not exceed P100,000.00.
1.1. With the increase in the jurisdictional
amounts for the courts, that of the
Insurance Commissioner was not
increased. Hence, the court with which he
as concurrent jurisdiction refers to the MTC.
2. The filing with the Commissioner shall preclude
civil courts from taking cognizance of a suit over
the same subject matter. However, this does not
preclude a claimant who has filed an action with
the courts from pursuing an administrative action
against the insurer simultaneously.
3. Decisions are appealable to the CA within 30 days
by notice of appeal. This matter is now open to
question.
The Commissioner has the power to adjudicate disputes
relating to an insurance company’s liability to an insured
under a policy. A complaint or claim filed with such official
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is considered an “action” or “suit” the filing of which would is not covered by the term “doing or transacting insurance
have the effect of tolling the suspending the running of business” under Section 2, neither is it covered by
the prescriptive period. Section 439, which grants the Commissioner adjudicatory
powers.
Concurrent jurisdiction (with regular civil courts) over
cases where any single claim does not exceed P5,000.00
involving liability arising from:

(a) Insurance contract;

(b) Contract of suretyship;
(c) Reinsurance contact;
(d) Membership certificate issued by members of
mutual benefit association (Section 439).

Primary and exclusive jurisdiction over claims for benefits

involving pre-need plans where the amount of benefits
does not exceed P100,000.00 (Section 55, Pre-Need
Code).

For the purpose of proceeding under its adjudicatory

powers under the Insurance Code, the Commissioner or
any officer thereof designated by him, is empowered to
administer oaths and affirmation, subpoena witnesses,
and compel their attendance, take evidence and require
the production of any books, papers, documents or
contracts or other records which are relevant or material
to the inquiry (Section 439).

Note: However, the Commission has no jurisdiction to

decide the legality of a contract of agency entered into
between an insurance company and its agent. The same
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