INSURANCE NOTES (RKUW/Rondez)

WHAT LAWS GOVERN INSURANCE?

1. Insurance Code (as amended by Batas Pambansa Blg. 874)
2. Civil Code (in the absence of applicable provisions)
3. The general principles on the subject in the United States (in the absence of applicable
provisions from IC and CC)

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.

WHAT IS A CONTRACT OF INSURANCE?

1. It 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 2a, IC)
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 2a)
3. Doing an insurance business or transacting an insurance business is:
a. Making or proposing to make an insurer, any insurance contract;
b. Making or proposing to make, as surety
c. Doing any business, including a reinsurance business, specifically recognized as doing
d. an insurance business within the meaning of the Code
e. Doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of the Code
3.1 The fact that no profit is derived from making of insurance contract, agreements or transactions,
or that no separate or direct consideration is received shall not be deemed conclusive to show
that the making thereof does not constitute the doing or transacting of an insurance business
3.2 Philhealth care v CIR (2009):
1. Contracts of law firm with clients whereby in consideration of periodical payments, the law
firm promises to represent 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?

a. A means by which one seeks to be covered against the consequences of an event that may
cause loss or damage
b. The concept is that the premiums are paid and 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 amount being
claimed.

WHAT ARE PURE AND SPECULATIVE RISKS?

Pure risk – whether a person will suffer or will not suffer a loss from the occurrence of an event (risk
insured)
Speculative risk – whether a person will profit or suffer a loss from the occurrence of an event

Insurance as 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 risk of loss is not shifted to another.

NATURE AND CHARACTERISTICS

1. Aleatory – liability of the insurer depends upon the happening of a contingent event. It is not a
wagering contract. (Bar 2012)
2. Contract of Indemnity – recovery must be commensurate to the loss.
 2.1. It is an investment or a contract to pay a sum certain in money upon death if it is a life
insurance as it is secured by the insured as a measure of economic security for him during
his lifetime and for his beneficiary upon his death, life not being subject to a valuation nor
the loss being adjustable on any principle of indemnity, except when it is secured by the
creditor on the debtor’s life.

2.2. Nature of health care agreement – non-life insurance; primarily a contract of indemnity
(Fortune Medicare v Amorin)

3. Personal – insurer contracts with reference to the character of the insured and vice versa.
4. Executory and Conditional
a. On the part of the insurer, it is conditional because upon the happening of the event or peril
insured against, the conditions having been met, it has the obligation to execute the
contract by paying the insured.
b. On the part of the insured, it is n executed contract after payment of the premium.
5. Contract of perfect good faith – more for the insurer, since its dominant bargaining position
imposes a stricter liability or responsibility. (Based on the representation made by the parties)
6. Contract of adhesion – insurance companies manage to impose upon the insured prepared
contracts which the insured cannot change.
6.1. Rules of construction
a. In case there is no doubt as to the terms of the insurance contract, it is to be construed
in its plain, ordinary, and popular sense
b. If the policy or its terms are doubtful, ambiguous, or uncertain it is to be construed
strictly against the insurer and liberally in favor of the insured because the latter has no
voice in the selection of the words used, and the language used is selected by the
lawyers of the insurer.
c. Provisions in the insurance contract must be read in its entirety and the stipulations
therein cannot be segregated in determining the intention of the parties. The provisions
must be construed together to arrive at their true meaning.
7. Consensual – Perfected by meeting of the minds of the parties. There must be concurrence of
offer and acceptance.
7.1. Policy not essential to the existence of the contract
8. Voluntary
8.1. GR: 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.
Exc: Insurance contracts, particularly liability insurance, may be required by law in certain
instances: Motor vehicles (Sec 386-402), Employees (A 168-184, LC)
8.2. As a condition to granting a license to conduct business or calling affecting the public safety
or welfare. (De Leon)
8.3. There are insurance which may arise by operation of law.
9. Unilateral – imposes legal duties only on insurer who promises to indemnify in case of loss
10. Onerous – there is a valuable consideration (Premium)

Theory of cognition v Theory of Manifestation

Theory of Cognition – acceptance is considered to effectively bind the offeror only from the time it came
to his knowledge; adopted by the Civil Code
Theory of Manifestation – the contract is perfected at the moment when the acceptance is declared or
made by the offeree; adopted by the Code of Commerce.

Elements of Insurance Contract

1. Existence of insurable interest
2. Risk of loss
3. Insurer assumes the risk of loss
4. Such assumption is part of a general scheme to distribute actual loss among a large group of
persons bearing similar risks
5. Payment of premium

Perfection of insurance contact

- It is perfected the minute the offeror learns of the acceptance of his offer by the offeree.
- 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)
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
insurance at the beginning.
2. The consent of the husband is not necessary for the validity of the insurance policy taken
out by a married woman on her life or that of her children. She may exercise all rights and
privileges of an owner under a policy.
2.1. She may also insure her separate property without her husband’s consent.
3. An unemancipated minor may not enter into a contract of insurance without the consent of
his parents or guardian. Otherwise, voidable.
3.1. If the original owner of a policy covering the life of a minor dies ahead of the minor, all
rights, title, and interest in the policy shall automatically vest in the minor unless
otherwise provided.

How offer and acceptance is made?

Offer Acceptance
Life insurance Premium paid with the a. When policy is issued
application. If premium is not strictly in accordance
paid, it is only an invitation. with the offer.
b. Unreasonable delay in
the return of the
premium raises a
presumption that the
offer has been accepted
Property insurance Upon application
a. When policy is
issued strictly in
accordance with the
offer.
b. Unreasonable delay
in the return of the
premium raises a
presumption that
the offer has been
accepted

Insurable interest
- Exists 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.

On whose life and health does a person have insurable interest in?
1. Himself, his spouse, and 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. There is pecuniary interest between partners or employer and employee
3. Any person under a legal obligation to him for the payment of money, respecting property or
services, of which death or illness might delay or prevent performance.
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 the fruits of the land of the former as long as he is
alive, Y has insurable interest in the life of X because the death of X will terminate his right
and cause him damage.

Basis of insurable interest

I. Life insurance
- It exists when there is reasonable ground founded on the relation of the parties, either
pecuniary or contractual or by blood, or by affinity to expect some benefit from the continuance
of life of the insured.
 GR: It must exist at the time of the effectivity of the policy and need not exist at the time of
the insured as life insurance is not a contract of indemnity
  Exc: Insurable interest of a creditor on the life of a debtor must exist not only at the time of
effectivity but also at the time of death of the debtor because in this instance it is a contract
of indemnity. The interest of the debtor is capable of pecuniary estimation.

Extent of Insurable Interest in one’s life

GR: 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.
Exc: 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.

II. Property insurance

- A person has insurable interest in property, as every interest in property, whether real or
property, 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.

Test or measure of insurable interest in property

- Whether one will derive pecuniary benefit or advantage from its preservation or will suffer
pecuniary loss or damage from its destruction.

What does insurable interest in property consist of?

1. An existing interest
Ex. By means of a conditional deed of sale, A sold his house to B for P2M. B pays downpayment
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
downpayment because loss of the house will mean that he would suffer a loss of P500,000
2. Inchoate interest founded on an existing interest
2.1. Inchoate interest – interest in real estate which is not a present interest 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 to it.
Ex. 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 or depository of any kind has insurable interest in the thing held by him as such, to the
extent of his liability but not to exceed the value thereof.
5. A mere contingent or expectant interest in anything not founded on contract or actual right to
the thing is not insurable interest as there is no insurable interest.
Ex. A son has no insurable interest on a building owned by a father despite being designated as
an heir in the will because it does not produce any effect before the testator’s death.

Must the beneficiary in property insurance have insurable interest on the property insured?
- Yes, as no contract of policy of insurance on property shall be enforced, except for the benefit
of some person having insurable interest in the property insured.
Ex. The owner insures his building against fire and names his nephew as beneficiary. In case of
loss, only the owner can recover because what is not enforceable is the designation of
beneficiary, not the entire policy itself.

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 exist in
the meantime.
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 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
reacquisition of the interest will not revive the policy.

When 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 of 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 liability of the insurer.
3. A change of interest in one of more several distinct things, separately insured by one policy,
does not avoid the insurance as to the others.
4. A change of 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 his interest passes in the thing insured to the person taking his interest in 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.

Insurable interest in life vs in property

Life Property
As to basis On consanguinity, affinity, Pecuniary interest
contract, or a pecuniary interest
As to existence Only at the effectivity of the At time of effectivity of the
contract, except that taken by a contract and when loss occurs,
creditor in the life of the debtor although it may not exist in the
meantime
As to value Not limited, unless taken by a Limited to the actual value of
creditor on the life of the the interest in the property
debtor

Void stipulations in an insurance contract

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 voided because those insured without
insurable interest do not suffer 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 may be insured against
2. Insurance against damage or liability arising from and unknown past event must be expressly
stipulated
2.1. In marine insurance, the insurance over vessel against perils of the sea will be paid, lost or
not
3. Insurable risks are:
a. One that may cause damage to the insured
b. One that may create a liability against him

What cannot be insured

1. Insurance for or against the drawing of any lottery 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 an insurance contract
1. Insurer
- partnership, association, or corporation duly authorized to transact insurance business as
provided in the Code
- It is a party who agrees to indemnify another upon the happening of a specific contingent
2. Insured
- Who is to be indemnified in case of loss
- Anyone, except a public enemy (one who is a citizen of a nation who is at war with the
Philippines) may be insured
2.1. Mortgagor and Mortgagee
 Both the mortgagor and mortgagee may take out separate policies with the same or
different companies.
 Extent:
a. Mortgagor – up to the value of his property
b. Mortgagee – up to the extent of his credit
 When the mortgagor insures the property mortgaged 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 or
insurance, will have the same effect, although the property is in the hands of the
mortgagee. Hence, if there is a violation of the policy by the mortgagor, the mortgagee
cannot recover.
c. Any act required to be done by the mortgagor may be performed by the mortgagee with
the same effect as if it has been performed by the mortgagor 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 same time of his assent, imposes further qualifications on the assignee, making a
new contract with him, the acts of the mortgagor cannot affect the rights of the
assignee
Union Mortgage Clause - Creates the relation of insured and insurer between the
mortgagee and the insurer independent of the contract of the mortgagor. Thus, any act
of the mortgagor can no longer affect the right of the mortgagee.
Open Mortgage Clause – If the mortgagor remains a party
 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 the occurrence of the loss to the
extent of his credit
b. The mortgagor cannot collect the balance of the proceeds after the mortgagee is paid,
unless otherwise provided
c. The insurer, after payment to the mortgagee, becomes subrogated to the right 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.
2.2. When a person has dual citizenship with the Philippines and the country to which the
Philippines is at war with, what will be material is his choice of allegiance. Hence, if he opts
for allegiance to the country which the Philippines is at war with, he is not insurable.
3. Beneficiary – the person who receives the benefits of an insurance policy upon its maturity
3.1. The following cannot be designated as beneficiaries: (A739, CC)
a. Those made between persons guilty of adultery or concubinage at the time of the
designation
i. A prior conviction is not required.
ii. The common law wide of the insured, who is married, could not be named as a
beneficiary. (Insular Life v Ebrado)
 iii. Where the insured designated his second wife as beneficiary, the same was upheld
because the latter was not aware of the first marriage. (SSS v Davac)
b. Those found guilty of the same criminal offense in consideration thereof
c. Those made to a public officer or his wife, descendants or ascendants by reason of his
office.
3.2. Generally, there is no requirement that the beneficiary have insurable interest in the life of
the insured as it is recognised that the insured may name anyone he chooses, except those
disqualified to receive donations, as a beneficiary in his life insurance. The designation,
however, must be in good faith and without fraud or intent to enter into a wagering
contract.
3.3. The designated beneficiary can be changed as the insured shall have the right to change the
beneficiary he designated—unless he has expressly waived the right in the policy.
If he has waived the right, the designation is irrevocable.
If he doesn’t change the designation during his lifetime, the designation is presumed to be
irrevocable.
3.4. Designation of the guilty spouse as irrevocable beneficiary is revocable at the instance of the
innocent spouse in case of termination of a.) subsequent marriage, b.) nullification of
marriage, c.) annulment of marriage, or d.) legal separation.
3.5. 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.
3.6. 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 paid to the insured,
3.7. 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.
3.8. If the beneficiary predeceases the insured, the effects are:
a. 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 passes to the estate
of the insured.
3.9. If the beneficiary is the principal, accomplice, or accessory in the wilful killing of the insured,
his interest is forfeited. The nearest relative of the insured willful be entitled to the proceeds
if not otherwise disqualified. If not willful or felonious, the provision does not apply.

Ex. A, a married man, designates B, his paramour, as his beneficiary.

a. If A dies, the proceeds cannot go to B
b. The proceeds instead goes to his estate.
c. If A designated C & D, his children, and B as his beneficiaries:
1. B cannot get proceeds
2. C and D gets proceeds

RESCISSION OF INSURANCE CONTRACT

Instances where an insurance contract may be rescinded:
1. Concealment
2. Misrepresentation or omission
3. Breach of warranties

I. Concealment
- It is a neglect to communicate that which a party knows and ought to communicate
Requisites:
a. A party knows a fact which he neglects to communicate or disclose to the other
b. Such party concealing is duty-bound to disclose such fact to the other
c. Such party concealing makes no warranty of the fact concealed
d. The other party has no other means of ascertaining the fact concealed
e. The fact concealed is material

NOTE:
1. Concealment may be committed by either insurer or insured. (Qua Chee Gan v Law Union)
2. Generally, a party must have knowledge of the fact concealed at the time of the effectivity of
the policy.
3. Even if a party did not know of the existence at the time of the application, but before its
effectivity, there is still concealment.
 4. Information acquired after effectivity is not concealment and does not constitute ground to
rescind the policy, as after the policy is issued, information subsequently acquired is no longer
material as it will not affect or influence the party to enter into contract. However, in case of
reinstatement of a lapsed policy, facts known after effectivity but before reinstatement must be
disclosed.

NOTE: Reinstatement of lapsed life policy

- Not a non-default option.
- It does not create a new contract, but merely revives the original policy so insurer cannot
require a higher premium than the amount stipulated in the contract.
- It does not apply to a group/industrial life insurance
Requisites:
a. It must be exercised within three years from date of default
b. The insured must present evidence of insurability satisfactory to the insurer
c. He must pay all back premiums and all indebtedness to the insurer
d. The CSV must not have been duly paid to the insured nor the extension period expired
e. The application must be filed during the insured’s lifetime (Andres v Crown Life)

5. The party claiming the existence of concealment must prove that there was no 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 on either side 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.
6. The materiality of the fact concealed or misinterpreted 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.
6.1. Test of materiality – whether knowledge of the true facts could have influence a prudent
insurer in determining whether to accept the risk or in fixing the premiums.
7. 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.
7.1. 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 and later dies in a plane crash. The insurer would not be liable due to the
concealment. (Sunlife v CA)

CONCEALMENT IN NON-MEDICAL INSURANCE

a. 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 non-disclosure misled the insurer in
forming his estimates of the risks if the proposed policy or in making inquiries. (Sunlife v Bacani)
b. 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. The insurer cannot
simply rely on those statements. He must make further inquiry. (Philam Health v CA)

Effect of concealment
1. Whether intentional or not, it entitles the injured party to rescind the contract of insurance
1.1. The right to rescind is optional on the part of the injured party. Rescission in an option
because it misleads or deceives the insurer into accepting the risk or accepting it at the rate
of premium agreed upon.
2. The provision 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 or utmost good faith.

NOTE:
GR: 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.
Exc:
1. Incontestability clause – 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 two 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 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 do not vitiate the entire
contract but merely exonerates the insurer from a loss resulting from the risk concealed:
a. The national character of the insured
b. The liability of the thing insured to capture and detain
c. The liability to seizure from breach of foreign laws of trade
d. The want of necessary documents
e. The use of false and simulated papers
(Sec 112e)

What facts must be communicated

1. Each party to an insurance contract is bound to communicate to the other all the facts that meet
the following requisites:
a. Such facts 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 facts
d. That the party with a duty to communicate make no warranty

1.1. The existence of a warranty makes the requirement to disclose superfluous but an
intentional and fraudulent omission on the pat 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 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.

NOTE: If the applicant is aware of the existence of some circumstance which he knows
would influence the insurer in acting upon his application, good faith requires him to
disclose that circumstance, though unasked. (Vance, 1951)
a. The fact of being a “mongoloid “ is a material fact that needs to be disclosed (Great
Pacific v CA, 1979)
b. Mere possibility of previous hypertension is not enough to establish concealment (Great
Pacific v CA, 1999)

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.

What matters need not be communicated

1. Except in answer to the inquiries of the other, the following facts need not be communicated:
a. Matters already known to the insurer (Section 30a).
a.1. 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 v Feliciano)
a.2. 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 buildings will not
avoid policy.
b. Matters which each party are bound to know (Section 30b and Section 32)
b.1. 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.
b.2. The facts that the other ought are:
1. All the general causes which are open to his inquiry, equally, with that of the other,
and which may affect the political or material perils contemplated, 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
2. All the general uses of trade, such as the rules of navigation, kinds of seasons, all the risks
of navigation.
(Sec 32, Insurance Code)
c. Matters of which the insurer waives communication (Section 30c and Section 33)
c.1. Those of which the other waives communication.
c.2. A waiver takes place either, by the terms of the insurance, or by neglect to make
inquiries as to such facts where they are distinctly implied in other facts of which
information is communicated (Sec 33) 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 disclosure
or to a more complete answer.
c.3. If question asks whether the insured has submitted himself to any infirmary, sanitarium
or hospital for consultation or treatment, insured replies that he was confined at the
Quezon Memorial Hospital for five days due to influenza. There is no waiver and shall
constitute concealment as the answer was complete and could be relied upon by the
insurer. If the insured answered “yes”, the answer would have been incomplete and
ambiguous. This would constitute a waiver as the insured did not make nay further inquiry.
(Ng Gan Zee v Asian Crusader)
c.4. 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
Philam)
d. Matters which prove or tend to prove the existence of a risk excluded by a warranty and
which are not otherwise material (Section 30d)
d.1. Those which prove or tend to prove or tend to prove the existence of a risk excluded by
a warranty, and which are not otherwise material, 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.
e. Matters which relate to a risk excepted in the policy, and which are not otherwise material
(Section 30e)
e.1. Those which relate to a risk exempted from the policy, and which are not otherwise
material, as when the policy covers the against loss by theft. There is no need to disclose
that the are where the object is located is earthquake prone area if loss is 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 required upon by
the insurer, except if required by Section 51 (Section 34)
1.1. Information of the nature or amount of the interest of one insured need not be
communicated unless in answer to inquiry, except as prescribed by Section 51 as the extent
of the interest of the insured in property insured must be specific 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. Matters of opinion (Section 35) – knowledge of the agent is also the knowledge of the insurer
2.1. GR: Neither party to a contract is bound to communicate even upon inquiry any information
of his own opinion or judgment upon the matters question as only material facts are
required, not opinions, speculations, or expectations
2.2. Exc: in marine insurance, where the belief or the expectation of a third 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.

II. Misrepresentations

What is a representation
1. A representation is an oral or written statement of a fact or 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.
 2.1. It can also be made after the issuance of the policy when the purpose thereof is to induce
the insurer to modify an existing insurance contract, as the provisions likewise apply to a
modification. Note that the rule is the same when it comes to concealment.
3. The language of a representation is to be interpreted by the same rules, as the language of
contracts in general
3.1. Consequently, it need not be literally true and correct or accurate in every respect. Rather, it
is sufficient that it is substantially or materially true.
3.2. In the case of a promissory representation, it its sufficient if it is substantially complied with.

What are the forms and kinds of representation

1. May be oral or written
1.1. Affirmative – when it is an affirmation of a fact existing when the contract begins.
Ex. When the insured states that he is of good health at the time of the contract.
1.2. Promissory – when it is a statement by the insured concerning what is to happen during the
term of the insurance.
Ex. When the insured installs additional fire extinguishers at a stipulated future date. A
representation as to the future is to be deemed a promise, unless it was merely a statement
of belief or expectation.

Is 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, as when under
section 115 implies that a ship is seaworthy. A representation by the insured that its
communication system is defective will qualify the warranty. Hence, the insured can still recover
the case of loss.

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 if it is true at the time the contract takes effect although false at
the time it is made. As when the insured states at application that vessel is in satisfactory
operating condition but us 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 is true at the time it is made, but false at the
time time contract takes effect.
Ex. insured states that he has never been affected with pneumonia at application, but if in
the meantime, he is afflicted with pneumonia before the policy takes effect, and he does not
disclose, there is false representation.

When is 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 has 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 the transaction was acquired by the agent of the
insured, the same must be communicated, as knowledge of the agent is also knowledge of the
principal.
Ex. A ship captain is aware of a defect that affect 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 is false on a material point, whether affirmative or promissory, the injured party is entitled
to rescind the contract from the time the representation becomes false.
 Exc:
a. Incontestability clause
b. Misrepresentation after contract takes effect
c. Waiver, made by acceptance of insurer of premium payments despite knowledge of the
ground for rescission
d. A representation of the expectation, belief, opinion, or judgment or the insured, although
false, and even if material to the risk (PhilAm care v CA 2002)
e. Representation by insured based on information obtained from third persons (not his
agent), provided the insured:
1. Has no personal knowledge of the facts
2. Believes them to be true
3. 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 or premium payments
despite knowledge of the ground to rescind.
Ex. Insurer was aware of the lack of extinguishers required by the policy.
2.1. There is no waiver if the insured had no knowledge of the ground at the time of the
acceptance of the premium. (Strokes v Malayan)

NOTE:
- A representation cannot qualify an express provision or an express warranty of insurance
(Section 40) because a representation is not part 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)
- 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)

How is materiality determined

- The materiality of a representation is determined like in concealment: that there is probable and
reasonable influence of the facts upon the party to whom the representation is made in forming
his estimate of the advantage or disadvantage of the contract or in making inquiries,

When is the right to rescind supposed to be exercised

1. Prior to the commencement of an action on the contract
2. Incontestability Clause - The right to rescind is also qualified by the 2 nd paragraph of section 48
which provides: that after a policy of life insurance payable on the death of the insured shall
have been in force during the lifetime of the insured for a period of 2 years from the date of
issue or its last reinstatement, the insurer cannot prove that the policy is void ab initio or is
subject to rescission by reason of a fraudulent concealment or misrepresentation of the insured
or his agent.
2.1. Applicable only to life insurance
2.2. 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
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 for 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 two years from date of
issue/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)
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 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.

Distinguish Concealment from Misrepresentation

Concealment Representation
Nature It is the neglect of one party to a. The information he
communicate to the other the gives is in compliance
material facts. with his duty to reveal
information.
b. It is the communication
required to comply with
the prohibition against
concealment
Form Concealment is the passive Misrepresentation is the active
form form

Concealment and Representation compared

Concealment Misrepresentation
Nature The insured withholds Insured makes erroneous
information of material facts statements
Right of rescission Insurer has right to rescind the Insurer has right to rescind the
insurance contract insurance contract
Materiality Determined by the same rules Determined by the same rules
When can injured party rescind Whether concealment is Whether misrepresentation is
intentional or not intentional or not
If insurer covered by the rules Yes Yes

III. Warranties
Warranty - 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, or
future existence of facts, conditions, or circumstances, the literal truth of which is essential
to the validity of the contract.

Form
1. No particular form of words is necessary to creat 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 the intention of the
parties, the nature of the contract, or the words used thereto.
2.2. In case of doubt, the statement is presumed to be a representation, not a
warranty
Kinds
1. Affirmative warranties – those that relate to matters that exist at or before the issuance of the
policy
2. Promissory warranties – 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. It is a warranty that such act or omission shall take place.
Ex. That a house shall not be leased out 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.
Ex. As when the description of the property is being a two-storey residence, there is no
promissory warranty that it will be maintained as a residence or there is 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 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.
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.

Effect of violation or breach of a 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. (Section 76)
b. With fraud, in which case, the policy is voided 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 it.
2.1. This means that while ordinarily, the breach of an immaterial provision does not avoid 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 pro-rata return of the premium paid under Section 80b or 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.
Ex. 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 the fire. The insurer was not held liable as the storage had increased
the risk. (Young v Midland Textiles)
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 the time of performance of the
warranty.
Ex. 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.
Ex. A law or ordinance prohibits construction of the specified firewall
c. Waiver or estoppel

Breach of immaterial warranty

1. GR: Breach of an immaterial provision does not avoid the policy (Section 75)
2. Exc: 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 parties
converted the immaterial provision into a material one.
2.1. A condition in the policy which requires insured to disclose to the insurer of any insurance
that, if violated by the insured, would ipso facto avoid the contract. (Pioneer v Yap)
2.2. Insurer is barred by waiver or estoppel to claim violation of the so-calked hydrants warranty
when, despite knowing fully that only 2 fire hydrants existed (out of the 11 hydrants
required), it still issued the insurance policies and received premiums. (Qua Chee Gan v Law
Union)
Warranty v Representation
Warranty Representation
Nature Part of the contract Merely collateral inducement
 Form Expressly set forth in the policy May be oral or written in
or incorporated therein by another statement
reference
Compliance Strictly and literally performed Substantially true
Materiality Presumed material Must be shown to be so
Applicability of incontestability Does not apply to breach of Applies in misrepresentation
clause warranty
Effect Breach of warranty is breach of Misrepresentation is ground for
contract itself rescission of contract

POLICY
- It is the written instrument which a contract of insurance is set forth

How to construe the policy

1. Generally, policy is construed in favor 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.
Ex. 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 was
upheld. (Tang v CA)

Form
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 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 to 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 company 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 statement/stipulations inserted on the face of the contract or
incorporated by proper words or reference where the insured contracts as to the existence
of facts, circumstance 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. 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 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 7 days 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, 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 Pres, VP, GM 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/deliver of the policy. (44 CJS 958)
Ex. 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 acknowledgement of the payment of premiums as the effectivity of
the insurance is expressly provided (Lim v Sunlife) or a binding slip stated that it was subject to
the approval of the insurer and the same was subsequently disapproved. (Grepalife v CA)
5. Rules of Joyce (Joseph Joyce, author of Commentaries on Insurance) pertaining to a binding
receipt issued by an agent are:
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, the 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 of rejection by the principal, covers the specified period unless the risk is
declined within the same period.
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 v CA)
7. An application for insurance is nothing more than an offer to enter into a contract of insurance.
Such application, therefore, shall mot 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 (American Life v Hutcheson). On the contrary, such delay for an unreasonable period
of time may be construed as a rejection of the application. (Vance)
7.1. Acceptance is presumed when the insurer accepts and retains for an unreasonable length of
time (30 days) the first premium covered by the 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.

Whose interest is insured

1. The insurance proceeds shall be applied exclusively to the proper interest of the person in
whose name or for whose benefit it is made, unless otherwise specified in the policy.
Ex. a) the designation of sister as sole beneficiary in a life insurance cannot be defeated by the
contention of plaintiff that proceeds belong to the estate of the insured, was disregarded as
insurance is to be governed by special law, not by the law covering donations or succession. (Del
Val v Del Val)
b) In an action to recover cost of repairs and labor to a motor vehicle where the policy states
loss is payable to HS Reyes, the mortgagee of the vehicle who had no knowledge of the fact that
Mora 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 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)

1.1. Unless otherwise specified in the policy, a third person may sure the insurer if:
a. The insurance contract contains a stipulation in favor of a third person, the said third
person may sue to enforce before the contract is revoked by the parties.
Ex. the insurance company undertook to indemnify any authorized driver who was
driving the motor vehicle insured. Coquia, while driving the insured 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 autri and therefore, the enforcement thereof may be
 demanded by a third party for whose benefit it was made. (Coquia v Fieldman’s
Insurance)
b. The insurance contract provides for indemnity against liability to third persons.
Ex. 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 third persons,
and therefore, such third person is entitled to sue the insurer. (Guingon v Del Monte)
1.2. The test to determine whether a 3rd person may directly sue the insurer or the wrongdoer is:
if the contract provides for indemnity against liability to 3 rd persons, then the latter to whom
the insured is liable may directly sue the insurer.
1.3. 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 or common interest so that it may be applicable to the
interest of his co-partners/owners.
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.
Ex. In a fire insurance policy, where the insured is Dela Cruz and Associates, X, to be able to
recover his share, must prove that he is a partner.
5. When a policy is so framed that it will inure to the benefit of whomsoever, during the
continuance of the risk, may become the owner of the interest insured. (Section 57)
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 Section 20.
6. The mere transfer of a thing insured does not transfer the policy but suspends it until the same
person becomes the owner of both the policy and the thing insured.
6.1. Note the exceptions to this rule as found in Sections 20-24 and 57

Kinds of Insurance Policy

1. Open Policy – One which the value of the thing insured is not agreed upon, but is left to be
ascertained in case of loss
1.1. 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.
2. Valued Policy – One which expresses on its face that the thing I sured shall be valued at a
specified sum.
2.1. 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 total loss.
2.2. Valued Policy v Open Policy
Valued Policy Open Policy
Proof of value Not necessary Insured must prove the value of
the thing
How valued Parties conclusively stipulates Value is not agreed but left to
the value at a specified sum be ascertained upon loss.

3. Running Policy – 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.
3.1. Also known as Floating Policy which is usually issued to provide indemnity for property
which cannot be covered by specific insurance because of a frequent change in location in
quantity.
Ex. Insurance procured by a retail establishment to cover its inventory ghat fluctuates in
quantity, or is located in several areas.
Cancellation of Policy
1. No policy other than life shall be cancelled by the insurer, except upon prior notice 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.
Ex. Insured has been convicted of arson or car theft
c. Discovery of fraud or material misrepresentation.
Ex. Insured represents himself as the owner but is actually not
d. Discovery of willful or reckless acts or omissions increasing the hazard insured against.
Ex. There is storage of hazardous materials in the premise.
e. Physical changes in the property insured which result in the property being uninsurable.
Ex. 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.
Ex. Policy was issued absent insurable interest.
3. As to form:
3.1.Notice must be:
a. In writing
b. Mailed or delivered to the named insured at the address shown in the policy
c. Stating:
1. The ground relied upon as per Section 64
2. That upon written request of the named insured, the insurer will furnish the facts on
which cancellation is based.
3.2. A fire insurance policy is cancelled on October 15, 1981. The insurer’s clerk allegedly sent
notice of cancellation by mail but there was no proof that it was actually mailed and
received. Insurer relies on the presumption of regularity. It was held that considering the
strict language of the law that no policy can be cancelled without prior notice, it behooved
on the insurer to make sure that cancellation was actually sent and received by the insured.
(Malayan v Arnaldo)
3.3. A insured his building against fire and made the loss payable to 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)

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 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 stipulated longer period, from the date of
default.
2. This is not an absolute right as it is conditioned on insurability of the insured or evidence of good
health and the payment of all overdue premiums and indebtedness, if any.

PREMIUM
- The agreed price for assuming and carrying the risk which the insurer is entitled to the payment
of a premium as soon as the thing insured is exposed to the peril insured against.
- The payment of a premium is essential to the validity of an insurance policy is known as the
“cash and carry basis” or “no premium payment no policy” rule
- 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 installment has
been agreed upon or is established practice.
When is the insurer entitled to a premium
1. The insurer is entitled to the payment of a premium as soon as the thing insured is exposed to
the peril insured against.
2. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an
insurance company is valid and binding unless and until the premium is paid, except in:
a. In case of life or industrial life where the premium is payable monthly or oftener, whenever
the grace period applies.
b. When the insurer makes a written acknowledgement of the receipt of premium, such is
conclusive evidence of the payment of the premium to make it binding notwithstanding any
stipulation therein that it shall not be binding until the premium is paid. Hence, the effect of
an acknowledgement in a policy or contract of insurance of the receipt of the premium, is
that it is conclusive evidence of its payment so far as to make the policy binding. However, it
is not conclusive for the purpose of avoiding the collection of the premium.
c. Where the obligee has accepted the bond or suretyship contract in which case such bond or
suretyship contract becomes valid and enforceable irrespective of whether or not the
premium has been paid by the obligor to the surety.
3. There is no excuse for non-payment of the premium since payment on time is of the essence.
The only recognized exception is when failure is due to the wrongful conduct of the insurer.
Ex. There is baseless refusal to accept a validity tendered payment of the premium. (Gonzales v
Asia Life)

NOTE: Non-payment of premiums

a. 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.
b. 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
case of industrial life insurance, the grace period is four 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. In other words, it is not an
excuse.

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 premiums paid over the actual risk
carried during the years when the policy had been in force in time of war. (Constantino v
Asia Life)

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 installment has
been agreed upon or is the established practice. (Gulf Resorts v PCIC)
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. (A1249, CC)
NOTE: The payment of premium by a postdated check at a stated maturity subsequent to
the loss is insufficient to pull the insurance into the 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 Laws and
Jurisprudence)
2. Basic principles of equity and fairness would not allow the insurer to collect and accept
installments and later deny liability as premiums were not paid in full. (Philippine Phoenix v
Woodworks)
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)

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:
a. To the whole premium, when no part of the interest in the thing insured is exposed to any
of the perils insured against.
Ex. Insurance is taken on a vessel for a voyage that did not take place.
b. Where the insured 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:
i. a short period rate has been agreed upon – what will be recoverable is the
agreed percentage of premiums as stated in the policy.
Ex. The policy is returned after a month, the insurer retains 20% of the premium
because it has been agreed upon, the insured receives the 80% not the
premiums equivalent to the 11 months remaining on the term
ii. 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

 Is 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 charge.
 The cash value or cash surrender value is an amount which the
insurance company holds 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 cash surrender value, that value and the company’s
liability is diminished. (Manufacturer’s Life Insurance v Meer 1951)
c. When the contract is voidable on account of fraud or misrepresentation of the insurer or the
agent.
Ex. The insurer makes a representation regarding a loan provision which is not comtained in
the policy that is issued.
d. Where the contract is voidable on account of facts, the existence of which the insured was
ignorant without his fault.
Ex. The insurance is taken by the insured, who is ignorant of the fact that he did not have
insurable interest or a person, not knowing that his car has been totally damaged, procured
insurance over it.
e. When by any default of the insured other than actual fraud, the insurer never incurred any
liability under the policy.
Ex. A person insured his vessel for a trip, but vessel is destroyed before the trip.
f. 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
rateable return of premium, proportional to the amount by which the aggregate sum
insured in all the policies exceeds the insurable value.
Ex. The insured’s property is valued at P1, 500, 000. He obtains a policy from 1 st company for
P1, 000, 000, paying P10, 000 and a policy from the 2 nd company 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.
2. Unless otherwise stated, the premiums shall be returned to the insured that paid them.

When not recoverable

- Premiums cannot be recovered:
a. If the peril insured against has existed, and the insurer has been liable for any period, the
period being entire and indivisible
Ex. The vessel is insured for a voyage that will take 5 days, 2 days into voyage, the policy is
surrendered
b. In life insurance, because it is considered as an entire contract of assurance for life
c. When the insured is guilt of fraud and misrepresentation

CLAIMS SETTLEMENT AND SUBROGATION

Concept of loss
-Loss in insurance law embraces injury or damage. (Bonifacio Bros. V Mora)
Requisites for recovery upon loss:
1. The insured must have insurable interest in the subject matter
2. The interest is covered by the 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

Cause of loss
1. Remote cause is an event preceding another in a causal chain, but separated from it by other
2. Proximate cause – 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 1957)
3. Immediate Cause – Cause, not a proximate cause, which immediately precedes 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 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. 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.
1.2. 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
neighbor. The insured cannot claim loss due to fire as it is only a remote cause.
1.3. 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.
Ex. Insurance against fire and the property insured is burned or insurance covers
accidental death and the insured dies in an accident.
b. If there 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.
Ex. In accident insurance where the insured has a heart disease. He is involved in an
accident that causes injuries, which coupled with his weak heart, thus causing his death.
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 loss, the claim will be outside the scope of
the policy.
Ex. No liability in a claim for property stolen by rioters under a burglary policy if the
policy exclude riot risks
d. 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.
Ex. 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.
Ex. The insured is injured in an accident, he scratches an open wound which gets
infected, ultimately resulting to his death. There is liability on the accident insurance
policy
e.1. The direct chain of events can be traced to an excepted peril, there is no liability
Ex. An earthquake, if excepted, causes a fire that spreads, all resulting fire damage, is
deemed caused by an excepted peril
e.2. If the chain of events is broken by the intervention of a new and independent cause,
liability will depend upon whether the new cause is an insured or excepted peril
Ex. 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, then insurer is liable.
 2. Loss caused by efforts to rescue the thing insured from a peril insured against that would
otherwise have caused a loss. If in the course of such rescue, the thing is exposed to peril not
insured against which permanently deprives the insured of its possession, in whole or in part, or
where a loss is cause by efforts to rescue the thing insured from a peril insured against.
2.1. The principle of proximate cause is extended to loss incurred while saving the thing insured.
Ex. 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 mow 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 the peril is especially excepted in a contract of insurance, a loss, which would mot 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 the 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
liable.
Ex. A factory is insured against fire, but it excepts loss through explosion. If an explosion
occurs and results into a fire that creates a loss, the insurer is not liable. If a fire occurs first,
then an explosion is caused, the insurer is liable.
4. GR: An insurer is not liable for a loss caused by the willful act or through the connivance of the
insured. But he is not exonerated by the negligence of the insured, or of the insured’s agent or
others.
Exc: Consequently, if the insured was mere 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,
Ex. The insured carelessly used kerosene in lighting a stove, causing his house to catch fire, the
insurer is liable for loss. But if the negligence is so gross so as to be sufficient basis for fraudulent
intent, it can amount to a willful act.

Transfer of claims
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 transfer prior to the loss. This is because such 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 choice of
action, not the contract itself,
3. The exception is section 175, which 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 void insofar as it affects other creditors of the insured.

When must notice of loss be given, and by whom

- Notice of Loss must be given without any unnecessary delay by the insured or some person
entitled to the benefit of the insurance. If not so given, the insurer is exonerated,
- “Without unnecessary delay” – within a reasonable time, depending on the circumstances of a
peculiar case, although courts have construed the requirement liberally in favor of the insured
- Note the specific application to fire insurance due to the nature of the loss and urgent need to
determine the cause thereof. The longer the period that lapses from the time of loss, the
greater is the opportunity of the insured to tamper with the evidence in preparation for a
fraudulent claim.

Form
1. Notice may be given orally or in writing, in the absence of any stipulation in the policy
2. May be informal or provisional claim containing a minimum of information as distinguished from
a formal claim which contains the full details of the loss, computations of the amounts claimed,
and supporting evidence, together with a demand or request for payment. (De Leon)

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 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.
2. If in the giving of preliminary proof of loss, a certification or testimony of a third person or 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

GR: Timely compliance with the notice or 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 (Section 92)
b. Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any
act of his, or if he omits to take objection promptly and specifically upon that ground
2. For notice of loss, a formal notice 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.
Ex. 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
Ex. 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
Ex. 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
Ex. Despite a delay, the insurer does not object

GUIDELINES ON CLAIMS SETTLEMENT

- Claims settlement is the indemnification of the loss suffered by the insured. The claimant may
be insured or reinsured, the insurer who is entitled to subrogation, or a third party who has a
claim against the insured.
- Where a policy gives the insurer the control of the decision to settle claim or litigate it, the
insurer nevertheless is required to observe certain measure of consideration for the interest
insured.
- In case of litigation, it is the duty of the Commissioner or the Court to determine whether the
claim has been unreasonable denied or withheld.
- Failure to pay any such claim within the time prescribed shall be considered prima facie
evidence of unreasonable delay in payment.

Claims Life Insurance Non-Life Insurance

Maturity Either: (Section 180) 1. Upon happening of
1. Upon death of the event insured against
person insured 2. Event must occur within
2. Upon his surviving a the period specified in
specific period the policy. Otherwise,
3. Otherwise contingently insurer has no liability
on the continuance or
cessation of life
 Delivery of proceeds GR: The proceeds should be 1. Within 30 days after:
delivered immediately upon a. Proof of loss is
maturity of policy received by insurer
Exc: b. Ascertainment of
1. If payable in loss or damage is
installments or as an made either by
annuity, when such agreement between
installments or the insured and
annuities become due insurer or by
2. If maturity is upon arbitration
death, within 60 days 2. If ascertainment is not
after presentation of made within 60 days
claim and filing of proof after such receipt by
of death of insured insurer of proof of loss,
the loss or damage
shall be paid within 90
days after such receipt
Effect of refusal or failure to pay 1. This entitles the beneficiary to collect interest on the
claim within time prescribed proceeds of policy for the duration of the delay at rate of
twice the ceiling prescribed by the monetary board (unless
refusal to pay is based on ground that claim is fraudulent)
2. In case damages are awarded, this includes attorney’s fees
and other expenses incurred due to delay (plus the interest

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 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
5. Compelling policy holders 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 complaints to 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 claim settlement practices have been
committed.
- If it is found, after notice and an opportunity to be heard, that an insurance company has
violated this section, each instance of non-compliance 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. (Section 247)

What is the effect of a fraudulent claim

- In the cad of United Merchants v Country Bankers, the Supreme Court 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 conclusive that the proof of the claim which the insured submitted was false and
fraudulent 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, the claim was
fourteen times bigger than the real loss; In Go Lu v Yorkshire, eight times; and in Tuason v North
China, six times. In the present case, the claim is twenty five times the actual claim proved.

SUBROGATION
- It is the 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

- In the case of Malayan Insurance v Alberto, it was held that subrogation is the substitution of
one person by another with reference to a lawful claim or right, so that he who us substituted
succeeds to the rights of the other in relation to a debt of claim, including its remainders 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 third party whose
negligence or wrongful act caused the loss.
- 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
v Pioneer Insurance)
- 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.

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; Lorenzo Shipping v Chubb and Sons)
1.4. Note that subrogation takes effect by operation of law and does not require the consent of
the wrongdoer. (Fireman’s Fire Insurance v Jamilla)
2. There is no subrogation in:
a. Life insurance as it is not a contract of indemnity
b. When proximate cause of the loss is the insured himself
c. When the insurer pays to the insured a loss not covered by the policy
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.
 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 v
Prudential Guarantee)
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 insurer. (Sy Keng v Queensland) 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)
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)
d. In life insurance
e. For recovery of loss in excess of insurance coverage(De Leon)
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 right against the latter. But in such a case, the insurer
will be entitled to recover from the insured whatever it has paid to the latter, unless the
release was made with the consent of the insurer (Manila Mahogany v CA)
4. Subrogation is discretionary on the part of the insurer, it may or may not exercise the right. (FF
Cruz v CA) Hence, no one can force it to exercise the right even if it has paid the insured)

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 (A1144 CC). However, there can be an agreement provided the
period agreed upon should not be less than one year. If period agreed upon is less than one
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 filled
within 6 mos 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.
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 necessit 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)
2.3. In motor vehicle insurance, the period is also one year from denial of the claim, not the date
of the accident. (Summit Guaranty v Cruz Arnaldo)
3. Note Section 3(6) of the provisions of the Carriage of Hoods by Sea Act stating that the carrier
and the ship shall be discharged from all liability for loss of damage to the goods if no suit is
brought within one 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 one year
as reckoned above. (Filipino Merchants v CA). 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 Steele v CA)
3.2. When no period is stipulated as in the case of Mayer Steel or the stipulation is void, the
period is within 10 years under Article 1144 CC, as the policy is a written contract.
4. An action may be filed in the following:
a. Courts
b. Insurance Commissioner, who has concurrent jurisdiction with courts for claims not
exceeding P100, 000
c. POEA/DOLE have the power to compel a surety to make good on a solidary undertaking in
the same proceeding where the liability of the principal obligor is determined

DOUBLE INSURANCE

When does double insurance exist

 1. Double insurance exists where the same person is insured by several insurers separately in
respect to same subject or interest (Bar 2005)
2. Its requisites are:
a. Same person is insured
b. There are several insurers
c. Subject insured is the same
d. Interest insured is the same
e. Risk or peril insured against the same
2.1. There is a provision as to double insurance to prevent over-insurance, thereby
preventing fraud

Effects of over-insurance by double insurance

1. Insured, unless the policy otherwise provides, may claim payment from the insurers in such
order as he may select up to the amount for which the insurers are severally liable under their
respective contracts.
Ex. A house is insured with X Insurance for P10, 000, with Y Insurance for P20, 000, and with Z
Insurance 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.
Ex. A owns a house valued at P40, 000. He insured it with X Insurance for P35, 000 and withY
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 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.
Ex. 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 for P 20, 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.
Ex. 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 rateably 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 rateable 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.
Ex. 10K/50K x 20K = 4000 – X Insurance
20K/50K x 20K = 8000 – Y Insurance
20K/50K x 20K = 800p – Z Insurance

If Z Insurance paid P20, 000 but since its share is only P8, 000, it may collect P4, 000 from X
Insurance and P8, 000 from Y Insurance, so that it only pays its rateable share.

Test to determine existence of double insurance

- Whether the insured, in case of happening of the risk, can be directly benefited by recovering on
both policies. If 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
will then be null and void.
2. If there is no other insurance clause, then double insurance is allowed but the provisions of
Section 96 must be followed because property insurance is a contract of indemnity.

Distinguishing Over-Insurance from Double Insurance

Double Insurance Over Insurance
Number of Insurers Two or more One is sufficient
Value of insurable interest The total amount of the policies Value must always be in excess
need not exceed the value of of the insurable interest
insurable interest

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
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 third party, called the reinsurer, to insure him
against liability by reason of such original insurance. Basically, reinsurance is an insurance
against liability which the original insurer may incur in favor of the original insured.

REINSURANCE
- Reinsurance occurs when an insurer procures a 3 rd person to insure him against loss or liability
by reason of such original insurance,

When Reinsurance compulsory

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

Double Insurance Reinsurance
What happens to the insurer The insurer remains an insurer The insurer becomes the
insured
Subject matter Property Risk or Liability
What is insured The same interest and risk is Different risk and interest are
insured with another 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.
Ex. After issuance of the policy, the original insured had a bad reputation and that he had
burned a building, the reinsurance is rendered void if it is not disclosed.
NOTE: The fact that the representations on the original insured were untrue at the time of the
execution of the reinsurance will not affect liability of the insurer, provided they were true at
the time of the original.
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 the others. 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.
Ex. 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 Insured 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.
Ex. 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 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
Ex. A insures his house valued at P1, 000, 000 with X Insurance for P1, 500, 000. X Insurance
then reinsured with Z Insurance for P1, 200, 000. The house burns. The liability of Z Insurance is
only up to P1M, which is the liability of X Insurance.
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 thus violates
that the principle that it is a contract of indemnity.

What is the interest of the original insured in the contract of reinsurance

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

CLASSES OF INSURANCE
I. MARINE INSURANCE
1. It is insurance against loss or damage to:
a. Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects,
disbursements, profits, moneys, securities, choses in action, evidences of debt, valuable
papers, bottomry or respondentia interest and all other kinds of property and interests
therein, in respect to, appertaining to or in connection with any and all risks or perils of
navigation, transit or transportation or while being assembled, packed, crated, baled
compresses or similarly prepared for the shipment, while awaiting shipment or during
delays, storage, transshipment or reshipment incident thereto, including war risks,
marine builders risk and all personal property floater risks. This types of insurance follow
the property wherever it may be.
b. Person or property in connection with or appertaining to marine, island marine, transit
or transportation insurance, including liability for loss or in connection with the
construction, repair, operation, maintenance, use of the subject matter of the insurance
but not including life insurance or surety bonds, nor insurance against loss by reason of
bodily injury to any person arising out of the ownership, maintenance and use of
automobiles.
c. Precious stones, jewels, jewelry, precious metals whether in the course of
transportation or otherwise
d. Bridges, tunnels or other instrumentalities of transportation and communications
(excluding buildings, their furniture and furnishings, fixed contents, and supplies held in
storage), piers, wharves, docks, slips, and other aids to navigation and transportation,
including dry docks, marine railways, dams and appurtenant facilities for the control of
waterways
1.1. “Marine Protection and Indemnity insurance” – insurance against, or against legal liability of
the insured for loss, damage, or expense incident to ownership, operation, chartering,
maintenance, use, repair, or construction of any vessel, craft, or instrumentality in use in
 ocean or island waterways, including liability of the insured for personal injury, illness, or
death, or for loss or damage to the property of another person
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:
a. Ocean Marine Insurance – pertains 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
b. Inland Marine Insurance – pertains primarily to land or over land, but sometimes water
transportation perils of property shipped by railroads, motor trucks, airplanes and other
means of transportation
1.1. These includes four basic policies:
a. Property in transit - providing protection to property frequently exposed to loss
while in transport from one place to another
b. Bailee Liability – providing protection to persons who have temporary custody of
goods or personal property of others
c. Fixed transportation property – providing protection to fixed property considered
aids to the movement of property, like bridges and tunnels
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
2. Note also that 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

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, princess and people of what
nation, condition or quality, 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 (Sundiang and Aquino)

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 (Bar 2011)
b. Ordinary wear and tear of the ship
c. Negligent failure of the ship owner to provide vessel with the proper equipment to convey
cargo under ordinary conditions.
 Ex. Insurance upon a cargo of rice, when sea water entered the compartment where the rice
was found through defective steel pipe.
The insured loaded logs unto a barge. The logs are covered by insurance. The barge sank due to
improper loading and leaks because the barge was not provided with tarpaulins that could have
prevented the barge from retaining sea water splashing into it during the voyage.
2.1. In the absence of stipulation, the risks insured against are only perils of the sea. (Go Tiaco y
Hermanos v Union Insuranc)
2.2. However, in an all risky 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. (Filipino Merchants v
CA)

What perils are insured in an “all risk policy”

1. It is to be construed as creating a special insurance and extending to all risks that are usually
contemplated and will cover losses except such that may arise form intentional fraud,
intentional misconduct, or that otherwise excluded. It may include all losses whether arising
from a marine peril or not, to include pilferage during a war. (Filipino Merchants Co. v CA)
2. This can also be contained in an All Risk Clause
ALL RISK CLAUSE – One that covers any loss other than a willful and fraudulent act of the insured
and avoids putting upon the insured the burden of establishing that the loss was due to a peril
within the policy’s coverage, whether arising from a marine peril or not, provided the risk is not
excluded.

Definition of other terms

1. Barratry – willful act of the master and crew in pursuance of some fraudulent or unlawful
purpose without the consent of the owner and to the prejudice of his interest, 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, charters, 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. 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 at port from contemplated voyage.
NOTE: BOTTOMRY AND RESPONDENTIA DISTINGUISHED
Bottomry Respondentia
Nature Loan obtained for the value of Loan obtained as security for
the vessel on a voyage and the the value of the crgo to be
lender is repaid only if the transported and the lender is
subject vessel arrives safely at repaid only if the cargo arrives
its destination safely at its destination
Insurable Interest The difference between the
amount of the loan and the
value of the boat.
2.2. 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 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 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.
Ex. Owner of cargo transported on a vessel not only has insurable interest on the cargo, but also
on the expected profits from a future sale.
2. The character of a ship has insurable interest to the extent that he is liable to be damnified by its
loss.
Ex. A charters B’s vessel on condition that A would pay B in case of loss the amount of P300,
000. A has insurable interest to the extent of P300, 000.

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, which other party does not have the means of
ascertaining, as to which party with a duty to communicate makes no warranty, information
that he possesses, that are material to the risk and, to state the exact and whole truth in relation
to all matters that he represents, or upon inquiry discloses or assumes to disclose, except those
that the insurer knows or those in the exercise of ordinary care, the other ought to know, and
which the former has no reason to suppose him to be ignorant under section 30.
1.1. Note that 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.
Ex. If an agent fails to notify principal of the loss of the cargo and the latter, after the loss
but ignorant thereof, secured insurance lost or not lost, the insurance will be void due to
concealment.
2. A party is also bound to communicate, the information belief or expectation of a 3 rd person, in
reference to a material fact, is material.
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 injured
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/stimulated documents
Ex. 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 concealment in marine insurance

Ordinary Marine Insurance
Opinion or belief of a 3rd person Not material; need not be If in reference to a material fact,
communicated it is material and needs to be
communicated
Concealment effect A casual connection between Concealment of any of the
the fact concealed and cause of matters stated in Sec 112
loss is not necessary for the merely exonerates the insurer
insurer to rescind from loss, if the loss results
from the fact concealed

Presumption of 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 insurer entitled to rescind:
1. If the representation is intentionally false in any material respect, or, in respect of any fact in
which the character and nature of the risk depends, the insurer may rescind.
2. However, the eventful falsity of a representation as to an expectation does not, in the absence
of fraud, avoid the contract. Such as statements as to time of sailing, general nature of the cargo
or amount of profits.

Implied Warranties in Marine Insurance

1. The ship is seaworthy to make the voyage and/or to take in certain cargoes
1.1. A ship is seaworthy when it is reasonably fit to perform the service and to encounter the
ordinary perils of the voyage contemplated by the parties to the policy
1.2. Seaworthiness is relative and is made to depend on the 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 required 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, an hors,
cordage, sails, food, water, fuel, lights and other necessary and proper stores and
implements for the voyage.
1.5. Note that while a ship may be seaworthy for purposes of insurance on it, it may be by
reason of being unfit to receive cargo, be unseaworthy for the purpose of insurance on the
cargo.
Ex. 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 water line, and in the course of the voyage,
water entered the cargo area and damaged the wheat. The ship was deemed unworthy with
reference to the cargo, hence, the insured of the cargo was not liable. (Go Tianco v Union
Society of Canton)
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.
2. The ship shall not deviate from the voyage insured
2.1. 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
2.2. A deviation is a departure from the course of the voyage as defined by law or an
unreasonable delay in pursuing the voyage or the commencement of an entirely different
voyage.
2.3. 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.
Ex. 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.
 Ex. Repairs are necessary to avoid getting caught in a conflict
c. When made in good faith, and upon reasonable grounds or belief in its necessity to
avoid a peril
Ex. 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
Ex. Assistance is given.
2.4. Any deviation not included is an improper deviation.
2.5. 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 the risk has been
increased or diminished.
3. The ship shall carry the necessary documents to show nationality or neutrality and that it will
not carry documents which will cast reasonable suspicion
3.1. This warranty arises when the nationality or neutrality of the vessel or the cargo has
expressly been warranted.
4. The ship shall not carry contraband, especially if it is making voyage through belligerent waters

LOSS AND ABANDONMENT

Losses in Marine Insurance

1. May be partial or total
1.1. A total loss may be actual or constructive
2. A loss that is not total is partial
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.

Actual Total Losses

1. 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 involved
Ex. 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 loss. (Pan Malayan v CA)
2. An actual 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 the presumption depends on the
circumstances of the case.
3. Upon an actual loss, the insured is entitled to payment without notice of abandonment and of
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 total loss only

Constructive Total Loss

1. It is a constructive total loss when the person insured is given a 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 favor of his interest in the thing insured.
2. A person insured by a contract of marine insurance may abandon the thing insured, or any
particular portion thereof separately valued by the policy, or otherwise separately insured and
recover a total loss, when the cause of 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 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 ma would not take under the circumstance
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.
3. Abandonment when made must neither be partial or conditional. It must be total or absolute.
4. Abandonment must be made within a reasonable time after receipt of reliable information of
the loss. But where the information is of doubtful character, the insured is entitled to a
reasonable time to make an inquiry.
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 oral or written notice to the insurer. If made orally, a
written notice of such must be submitted within 7 days from oral notice.
5.1. Notice must be explicit and specify the particular cause of the abandonment but need state
only enough to show that there is probable cause therefore and need not be accompanied
by proof of interest or loss.
5.2. The requirement as the explicitness of the notice is due to the fact that abandonment can
only be sustained upon the cause specified in the notice.
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.
6.2. 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 that if the insurer pays for a loss as if it were an actual
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 on 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 risk of the insurer and for his benefit. In effect, the
agents of the agents of the insured becomes 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.
Ex. 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.
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 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.

AVERAGE: LIABILITY FOR AVERAGES

1. An Average is any extraordinary or accidental expense incurred during the voyage for the
preservation of the vessel, cargo, or both, and all damages to the vessel or cargo from the time
it is loaded and the voyage commenced until it ends and the cargo is unloaded.
2. The kinds of averages are:
a. Particular or Simple – a damage or expense cause to the vessel or cargo which has mot
inured to the common benefit and profit of all persons interested in the cargo and 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.
 Ex. 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 outs out to sea until it
reaches its designation
b. General or Gross – is an expense or damage suffered deliberately in order to save the vessel
or its cargo or both from a real or known risk. Thus, all persons having an interest in the
vessel or cargo or both at the occurrence of the average shall contribute to the loss.
Ex. Cargo is jettisoned.
3. 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 upon the thing insured.

In case of general average loss

1. The insurer is liable for the loss failing 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,

Rights of Subrogation
1. When a person insured in a contract of marine insurance has a demand against the others for
contribution, he may claim the whole loss from his insurer subrogating the insurer to his own
right to contribution, but no such claim can be made upon the insurer if:
a. There is separation of the interest liable to contribution
Ex. 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. Thus 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, and b.) Claiming from
the insurer. If it be the latter, subrogation takes place.

Measure of Indemnity
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 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 of an exception
to conclusiveness
1.2. If, however, the subject of insurance is hypothecated by bottomry or respondentia, before
insurance and without knowledge of the person securing it, he may show the real value.
Ex. A person purchases a vessel subject to bottomry but he is not aware of it, he may, upon
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 contract as is also known as the Average Clause.
Ex. A vessel valued at P500, 000 is insured for P400, 000. The vessel is damaged to the
extent of P200, 000. Therefore, the insurer is not liable not for the P200, 000 but only for
P160, 000.
Formula: 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. Loss is partial
1.5. Co-insurance exists as a general rule, only in marine insurance. In fire Insurance, there is no
co-insurance unless expressly stipulated. In life insurance, there is none as value is fixed in
the policy.
NOTE: WHEN DOES CO-INSURANCE EXIST?
a. 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.
b. This will apply only of the loss is partial
c. Also known as the “average clause”
 1.6. Section 159 is further qualified as in case of a partial loss of the ship or its equipment, the
old materials are to be applied towards the payment of the new and unless stipulated in the
policy, the insurer is liable only for 2/3 of the remaining cost or repairs after the deduction
except that anchors are paid in full. 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.
Ex. Goods are valued at P500, 000, expected profits are P50, 000. Goods suffer a partial loss
of P100, 000. The insured can recover P10, 000 on the insurance over profits.

Note that 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.
Ex. Goods are valued at P500, 000. If only P250, 000 are shipped and exposed to the risk, the
valuation is reduced by 1/2 . In case of total loss, the insured can only demand ½ of
valuation, or P250, 000.

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 it purpose or any drawback on its exportation or fluctuation of
the market at the port of destination or expense incurred on the way or on arrival. 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 matter 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 bring if sound. Meaning, if reduction in value is 1/5, the amount recoverable is also
1/5.
Formula:
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 value or open: An insurer is liable
a. Port of Refuge Expenses - For all the expenses attendant upon a loss that forces the ship into
port to be repaired. These refer to expenses for repairing the ship due to damages
attributable to perils insured against, as well as other expenses such as launching, towing,
raising, and navigating the vessel.
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. Ex. The vessel is
unlawfully detained.
3.1. In either case, said expenses are to be added to a total loss, if that occurs afterwards.

FIRE INSURANCE
- 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.
- 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, it is defined as the active principle of burning, characterized by heat and light
combustion. Combustion without visible light or glow is not fire.
 Ex. Damage caused by smoke from a lamp when mo ignition occurred outside the lamp.
1.1. Fire cannot be considered a natural disaster or calamity since it almost always arises from
acts of man or by human means. It cannot be and act of God, unless caused by lightning or a
natural disaster or casually not attributable to human agency. (Phil Home v CA)
2. To allow recovery, it must be the proximate cause of the damage or loss and the fire must be
hostile.
2.1. The fire is hostile if:
a. It burns at a place where it is not intended to burn
b. It 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. It is a friendly fire which becomes hostile, not by 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 that the policy itself may limit or restrict coverage to losses under ordinary conditions
but not those due to extra-ordinary circumstances or abnormal conditions like war, invasion,
rebellion, civil war, or similar causes. In these cases, recovery is still possible.

Alteration; defined
1. An alteration is a change in the use or condition of a thing insured from that 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 ff requisites must be present to constitute an alteration so as
to allow the rescission of the contract:
a. 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.
Ex. The insured stored thinner, paints and varnish. A fire subsequently occurs and there is no
express prohibition as to storage of such items, even if the risk is increased, the insurer is
still liable. (Bachrach v British Assurance)
The policy states that the 1st floor is unoccupied and it is later occupied. There is no
alteration that entitles the insurer to rescind, the description of the house cannot be said to
be a limitation as to use. (Hodges v Capital Insurance)
b. There is an alteration in the said use or condition
c. The alteration is without the consent of the insurer
d. The alteration is made by means within the insured’s control
Ex. The alteration is made by a tenant with the consent or knowledge of the insured, the
insurer can rescind. If the alteration was undertaken by the tenant without the consent or
knowledge of the insured, the insurer cannot rescind.
e. The alteration increased the risk of loss. Note that any alteration in the use or condition of
the thing insured from that to which is limited by the policy, which does not increase the
risk, does not affect the contract.
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, the indemnity 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 is valuation made

1. Whenever the insured would like to have a valuation stated in a policy insuring a building or
structure against fire, it may be made by an independent appraiser, who is paid by the insured
and the value may then be fixed between the insurer and the insured.
2. Subsequently, the clause is then inserted in the policy that said valuation has thus been fixed
 3. In case of loss, provided there is no change increasing the risk without the consent of the insurer
or fraud on the part of the insured, the insurer will pay the whole amount so insured and stated
in the policy is paid.
3.1. If it is a partial loss, the whole amount of the partial loss is paid.
3.2. In case there are two 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. 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.

CASUALTY INSURANCE
- It is one that covers loss or liability arising from an accident or mishap, excluding those that fall
exclusively within other types of insurance like fire or marine.
- It includes Employer’s liability, workmen’s compensation, public liability, motor vehicle liability,
plate glass liability, burglar and theft, personal accident and health insurance as written by non-
life companies, and other substantially similar insurance.

Definitions
1. Employer’s liability is insurance obtained by the employer against liability to an employee for
damages caused or arising from injuries by reason of his employment.
2. Workmen’s compensation is insurance secured by an employer for the benefit of his employees
and laborers for loss resulting from injuries, disablement, or death through industrial accident,
casualty, or disease in connection with their employment. Note that most, if not all, types of this
insurance is underwritten by the GSIS or the SSS
3. Public liability is insurance against liability of the insured to pay damages for accidental bodily
injury or damage to property arising from an activity of the insured defined in the policy.
4. Motor vehicle liability is insurance against loss or injury arising from the use of a motor vehicle
by its owner, as opposed loss or damage to the vehicle itself. Coverage for both may be
contained in one policy.
5. Plate glass is insurance that indemnifies the insured against loss caused by the accidental
breaking of plate glass, windows, doors, or show cases.
6. Burglary and Theft is insurance against loss of property through burglary or theft
7. Personal accident is insurance against expense, loss of time, and suffering from accidents that
cause a physical injury
8. Health is insurance for indemnity for expenses or loss occasioned by sickness or disease

SURETYSHIP
- An agreement whereby a party called the surety guarantees the performance by another party
called the principal or obligor of an obligation or undertaking in favor of a 3 rd party called the
obligee.
- This includes official recognizances, bonds, or undertakings issued by any company under Act
536, as amended by Act 2206 in relation to government transactions by authorized companies.

Liability of the Surety

- It is joint and several/solidary with the obligor, but limited to the amount of the bond and
determined strictly by the terms of the contract in relation to the principal contract between
obligor and obligee.

Is a suretyship contract valid and binding where the premium has not yet been paid?
GR: Payment of the premium is a condition precedent. Hence, the bond is not valid.
Exc: When it is issued and accepted by the obligee, it is valid despite non-payment of the premium.

What other laws govern a Suretyship Contract

- In the absence of specific provisions, the Civil Code will apply in a supplementary character if
necessary to interpret contract provisions.
Distinguished from Guaranty
Suretyship Guaranty
Nature of liability Surety Assumes liability as a Guarantor’s liability depends on
regular party to the agreement an independent agreement to
pay if primary debtor fails to
pay
Level of liability Primary liable Secondarily liable
Entitlement to exhaustion Not entitled Entitled

LIFE INSURANCE
- Insurance on human lives and insurance appertaining thereto or connected therewith.

When payable
- An insurance upon life may be made payable:
a. On death of the person
b. His surviving a specified period
c. Otherwise, contingently on the continuance or cessation of life

Common Kinds of Life Insurance

1. Whole Life/Ordinary Life/Straight Life – premiums are payable for life and the insurer agrees to
pay the face value upon the death of the insured.
2. Limited Payment Life – Insured pays premiums for a limited period after which he stops with a
guarantee by the insurer that upon death, the face amount is to be paid. If death occurs while
payment is not complete, beneficiary receives face amount.
3. Term Policy – Insurer is liable only upon death of the insured within the agreed term or period. If
insured survives, the insurer is not liable.
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 the end of the period, it is paid to
the beneficiaries.
5. Annuity – where the insured or a named person/s is paid a sum/s periodically during life or a
certain period. Note that contracts for the payment of endowment or annuities are considered
as life insurance contracts.

Distinguishing Life Insurance from Payment of Annuity

Life Insurance Payment of Annuity
When payable Upon death of insured Payable during lifetime of the
annuitant
How paid In installments Pays a single premium
When paid Lump sum payment Paid until death

Exercise by the minor of his rights as insured or beneficiary

- As far as a minor, who is insured or a beneficiary in an insurance contract, in the absence or
incapacity of a judicial guardian, the father, in default, the mother, may act in behalf of the
minor without need of bond or court authority when it involves the exercise of any right under
the policy, to include, but not limited to, obtaining a policy loan, surrendering the policy,
receiving the proceeds of the policy and giving the minor’s consent to any transaction on the
policy provided the interest of the minor does not exceed P20, 000

What risks are covered

1. Generally, all causes of death are covered unless excluded by law, policy, or public policy
2. A cause is excluded by law as when the beneficiary is the principal, accomplice, of accessory in
bringing death to 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 though, that where the insured is not the
intended victim, the insurer is liable. (Calanoc v CA) What must be considered is that death
or injury is not the natural or probably result of the insured’s voluntary act (Finman v CA) as
opposed to an act of the insured to confront burglars. (Biagtan v Insular)
2.2. It is excluded by public policy as when the insured is executed for a crime that he
committed.
 3. Suicide is generally not compensable unless committed after the policy has been in force for a
period of two years from date of issue or last reinstatement, or a shorter period if provided, or if
committed in a state of insanity, regardless of date of commission.

Is a Life Insurance Policy transferrable 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 that 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.
4. The consent of the irrevocable beneficiary would be required as he has acquired a vested right.

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. 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
b. Cash surrender value
c. Paid up insurance
d. Automatic loan clause
e. Reinstatement

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

Concept
1. It is to provide protection or coverage to answer for bodily injury or property damage that may
be sustained by another arising from the use of a motor vehicle
2. Note that what is now compulsory is death or bodily injury arising from motor vehicle accidents
as per amendment of the Insurance Code brought about by insurance losses due to padded
claims for property damage. Hence, property is now optional.

How is the compulsory nature enforced

1. The compulsory nature of the insurance is enforced by prescribing that any land transportation
operator or owner/s or motor vehicles for transportation of passengers for compensation,
including school buses or owner of a motor vehicle, referring to the actual legal owner of a
motor vehicle in whose name the vehicle is registered with the LTO would be considered as
unlawfully operating a motor vehicle unless there is a.) Policy of insurance or contract of
insurance against passenger or 3rd party liability for death or bodily injury arising from motor
vehicle accidents, b.) Guaranty in cash, or c.) Surety bond, to indemnify the death or 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 motor vehicle for
transportation of passengers for compensation, including persons expressly authorized by law or
by the vehicle’s operator or his agents to ride without fare arising from the use thereof.
2. Compliance by the motor vehicle owner or the land transportation operator is monitored as the
Land Transportation Office shall not allow registration or renewal or registration without
compliance with Section 390.
3. A violation of the provision is punishable by a fine of not less than P500, but not more than
P1, 000 and/or imprisonment of not more than 6 months
3.1. If a Land Transportation Operator violates the prescribed minimum limits of coverage, it is a
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 Motor Vehicle

Third Party Liability Own Damage Comprehensive
Insurance
Nature Answers for liabilities Answers for Answers for all
arising from death or reimbursement of the liabilities/damages
bodily injury to 3rd cost of repairing the arising from the
persons or passengers damage to vehicle of use/operation of a
the insured motor vehicle.
It in includes Third
Party, Own Damage,
Theft and Property
Damage

How “Theft Clause” interpreted

- In the case of Paramount Insurance Corporation v Sps 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 Motor Vehicle Insurance Policy that allows for recovery in cases of
theft, petitioner is liable under the policy for the loss of respondent’s vehicle under the “Theft
Clause”

When does the liability of the insurer accrue

1. In an insurance policy that directly insured 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 guilt 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 liability to third persons, the
injured party 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. (Shafer v Judge)
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. (Malayan Insurance v CA)

Effect of change in ownership or change in engine

- There is no need to issue a new policy until the next date of registration, provided the insurer
shall agree to continue the policy and such change shall be indicated in a second duplicate which
is filed with the LTO

Payment of Claims
- A claim for payment is to be filed without any unnecessary delay, within 6 months from the date
of accident by giving written notice setting forth the nature, extent, and duration of the injuries
as certified by a duly licensed physician
- The failure to file a claim will be deemed a waiver
- If a claim is filed but denied, an action must be brought within 1 year from date of denial with
the Insurance Commissioner or the Court. Otherwise, the right of action will be deemed as
having prescribed.
What shall Insurance Company do upon filing of the claim
- It shall forthwith ascertain the truth and extent of the claim and make payment within 5 working
days after reaching an agreement. If no agreement is reached, it must nevertheless pay the No
Fault, No Indemnity without prejudice to a further pursuit of the claim. In which case, he shall
not be required or compelled to execute a quit-claim or release from liability.
- Note that in case of dispute as to enforcement of policy provisions, the adjudication shall be
within the original and exclusive jurisdiction of the commissioner subject to Section 439, which
provides for concurrent jurisdiction, but the filing with the Insurance Commissioner shall
preclude filing with the Court.

What is the No Fault Indemnity

1. It is a claim for payment for death or injury to a passenger or third 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
b. The necessary proof of loss under oath to substantiate claim is submitted. These are; police
reports of accident, and either the death certificate and sufficient evidence to establish the
payee, or the medical report and evidence of medical or hospital disbursement in respect of
which refund is made.
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 which the occupant is
rising, 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. (Perla Compania v Ancheta)

Interpretation of the Authorized Driver Clause

1. The purpose of the authorized driver clause is 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 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 has no driver’s license or that the same had expired at the
time of the accident.
3. Jurisprudence in relation to the interpretation and application:
a. 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. (Villacorta v Insurance Commission)
b. 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. (Palermo v Pyramid)
c. 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 he has no license. (Tanco v Phil
Guaranty)
d. A driver’s license that bears all the earmarks of a duly license is a public document that is
presumed genuine. (Gutierrez v Capital Insurance)
e. 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. (Stokes v Malayan)
f. 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. (CCC v CA) The same is true if the thief had
an expired license. (Malayan Insurance v CA)
g. 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. (Perla Compania v CA)

BUSINESS OF INSURANCE
Organization
1. The term insurer or insurance company shall include all individuals, partnership, associations or
corporations, including government-owned and controlled corporations 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 members receive benefits as a matter of right. Commonly, a fraternal or social
organization that provides insurance for members on an assessment basis. (Henderson’s Estate)
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 the purpose of gain, but with the
object of benevolence.
2.3. Do not confuse with a Mutual Insurance Company, which is defined as a cooperative
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 what is known as “Protection and indemnity Club”. It is an association
composed of ship owners in general who band together for the specific purpose of providing
insurance cover on mutual basis against liabilities incidental to ship owning that the
members incur in favor of third parties. (Hyopsung Maritime v CA) It is, therefore, a mutual
insurance association engaged in the marine insurance business and must be duly licensed
by the Insurance Commission. (White Gold Marine v Pioneer)
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. An Insurance Corporation is 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
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 paid a capital of no less than P1, 000, 000
d. If it is organized as a mutual company or one whose capital funds are not contributed by
stockholders but by policy holder, it must have available cash assets of at least P5, 000, 000
or above all liabilities for losses reported, expenses, taxes, legal reserves and reinsurance of
all outstanding risks, and the contributed surplus fund equal to the amounts required of
stock corporations, P1, 000, 000if a life insurance company or P500, 000 if a non-life
insurance company
2. If it is a foreign insurance company, it must appoint a resident agent, deposit securities and
maintain a legal reserve.

Margin of Solvency
1. It is the excess of the value of insurance company’s admitted assets exclusive of its paid up
capital, in case of a domestic insurance company 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
2.1. In case of non-life insurance companies, at least 10% of total amount of its net premium
during the proceeding calendar year
3. In no case shall the margin of solvency be less than P500, 000
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 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 policyholders and creditors.
The conservator will take charge of the management of the insurance company. (Section 255)

Revocation of Certificate of Authority

- The Certificate of Authority issued to the domestic or foreign company by the Commission may
be revoked or suspended by the Insurance Commissioner for any of the following grounds (Sec
254):
a. The company is in an unsound condition
b. It has failed to comply with the provisions of law or regulations obligatory upon it
c. Its condition or method of business is such as to render its proceedings hazardous to the
public or its policyholders
d. 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. 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 resorted 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 tue basis therefor, for the next three succeeding years.

OTHER PROVISIONS

BANCASSURANCE
- RA 10607 introduced governing bancassurance
- It means 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 such rules and regulations which the Commissioner and the BSP may
promulgate.
- To engage in 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 of 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
- 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.

INSURANCE COMMISSIONER
Jurisdiction and Adjudicatory Powers
 1. The insurance commissioner had, among other functions, concurrent jurisdiction with courts for
claims under any kind of policy or contract of insurance where the amount of the loss, damage
or liability, excluding interest, costs and attorney’s fees does not exceed P100, 000
1.1. Note that with the increase in the jurisdictional amounts for the courts, that of the
Insurance Commissioner was not increased. Hence, the court with which he has 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. (Go v
Office of the Ombudsman)
3. Decisions are appealable to the CA within 30 days by notice of appeal. This matter is now open
to question.

The Insurance 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 is considered an
“action” or “suit”, the filing of which would have the effect of tolling the suspending the running of the
prescriptive period.

1. Concurrent jurisdiction (with regular civil courts) over cases where any single claim does mot
exceed P5, 000, 000 involving liability arising from:
a. Insurance contract
b. Contract of Suretyship
c. Reinsurance contract
d. Membership certificate issued by members of mutual benefit association.
2. Primary and exclusive jurisdiction over claims for benefits involving pre-need plans where the
amount of benefits does not exceed P100, 000. (Sec 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 oath and
affirmation, subpoena witnesses, 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 Insurance Commissioner has no jurisdiction to decide the legality of a
contract of agency entered into between an insurance company and its agent. The same is not
covered by the term “doing of transacting insurance business” under Section 2. Neither is it
covered by section 439, which grants the Commissioner adjudicatory powers. (Suanding and
Aquino)