Insurance Notes

LECTURE NOTES ON INSURANCE
Revised December 2008

WHAT LAWS GOVERN INSURANCE
1.
The laws governing insurance in the order of priority are (1) The Insurance Code
1
as amended by Batas Pambansa Blg. 874 2 (2) In the absence of applicable provisions,
the Civil Code (3) In the absence of applicable provisions in the Insurance Code and Civil
Code, the general principles on the subject in the United States.3
2.
H applied for insurance with S Company with offices in Montreal, Canada. The
application was mailed to S and on November 26, the insurer gave notice of acceptance
by cable. H never received the cable and he died on December 20. The Insurance Code
is silent as to acceptance by cable. Held: The Civil Code shall apply and under Article
1319, an acceptance made by letter shall not bind the person making the offer except
from the time it came to his knowledge. There was no valid contract as H died without
knowing the acceptance of his application. 4
2.1 B, a married man obtained a life insurance policy designating his common law
wife, C as beneficiary. Upon Bs death, his widow contested the right of C to receive the
proceeds. Held: Since the Insurance Code did not contain a specific provision applicable
to the case, the provisions of Article 2012 of the Civil Code provides, any person
forbidden from receiving any donation under Article 739 cannot be named as a
beneficiary of a life insurance policy by a person who cannot make a donation to him.
Article 739 declares as void those donations made between persons guilty of adultery
or concubinage at the time of the donation.
3.
Asia Life Insurance Co., an American corporation insured the life of Constantino.
The first premium covered the period up to September 26, 1942. After which no premium
payments were made. By reason of the Japanese occupation, the insurer had to close its
offices until 1945. Upon a subsequent claim, the insurer refused to pay due to non
payment of the premium. The beneficiary maintains that the non payment should be
excused by reason of war. Held: Since the law then did not provide for the situation and
the fact that the law on insurance and the civil code was largely copied from the civil
code of California, the court applied the United States Rule that declares that the
contract is not merely suspended as held by the New York Rule, but instead is abrogated
by reason of non payment of the premium, since payment of the same is peculiarly of
the essence of the contract.
WHAT IS A CONTRACT OF INSURANCE
1.
A Contract of Insurance is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event.
1
PD 1460, June 11, 1978

Approved on June 12, 1985
3
Constantino vs. Asia Life Insurance, 87 Phil 248
4
Enriquez vs. Sun Life Assurance of Canada, 41 Phil 269
2
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.
3.
Doing an insurance business or transacting an insurance business is: (a) making or
proposing to make as insurer, any insurance contract; (b)making or proposing to make,
as surety, any contract of suretyship as a vocation and not as merely incidental to any
other legitimate business or activity of the surety; (c) doing any business including a
reinsurance business, specifically recognized as doing an insurance business within the
meaning of the Code; (d) doing or proposing to do any business in substance equivalent
to any of the foregoing in a manner designed to evade the provisions of the Code.5
3.1 The fact that no profit is derived from making of insurance contracts, agreements
or transactions or that no separate or direct consideration is received shall not be
deemed conclusive to show that the making thereof does not constitute the doing or
transacting of an insurance business.
NATURE AND CHARACTERISTICS OF A CONTRACT OF INSURANCE
1.
It is an aleatory contract as the liability of the Insurer depends upon the happening
of a contingent event. It is not a wagering contract.
2.
It is a contract of indemnity if it is a non-life insurance contract as recovery must
be commensurate to the loss. It is an investment or a contract to pay a sum certain in
money upon death if it is a life insurance contract 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 life of the debtor.
2.1 An employee earns PHP 20,000 a month. Over a 10 year period, he will receive PHP
2,400,000.00. He obtains a 10 year life insurance policy for PHP 5,000,000.00. When the
employee dies, his beneficiary makes a claim on the policy but the insurer refused to
pay the full amount, instead it offers to pay the amount that the employee would have
earned had he not died. The refusal of the insurer to pay is not valid because life
insurance is not a contract of indemnity.
3.
It is a personal contract as an insurer contracts with reference to the character of
the insured and vice versa. It might be willing to make good the loss of a person by the
destruction of his property, while it would altogether be unwilling to insure the same
property if owned by another. On the other hand, the insurance taken by one person will
not apply to the interest of another person in the same property.
4.
It is an executory and conditional contract on the part of the insurer
because
upon happening of the event or peril insured against, the conditions having been met, it
has the obligation to execute the contract by paying the insured. On the other hand, it is
an executed contract on the part of the insured after the payment of the premium.
Section 2, Insurance Code
5.
It is a contract of perfect good faith for both insurer and insured, but more so for
the insurer, since its dominant bargaining position imposes a stricter
liability/responsibility.
6.
It is a contract of adhesion as insurance companies manage to impose upon the
insured prepared contracts which the insured cannot change.
6.1 The first rule of construction is: In case there is no doubt as to the terms of the
insurance contract, it is to be construed in its plain, ordinary and popular sense.
Illustration: P Bank obtained insurance against robbery which excluded loss by any
criminal act of the insured or any authorized representative. While transferring funds
from one branch to another, the insureds armored truck was robbed. The driver was
assigned by a labor contractor with the insured, while the security guard was assigned
by an agency contracted by the insured. Both driver and guard were found to be
involved. Can the loss be excluded? Held: The loss is excluded as while the driver and
guard are assigned by labor contractors, they are still within the term authorized
representative.6
Illustration 2: Personal Accident policies providing payment for loss of hand. The
Insurance policy defines it as amputation. Insured has an accident resulting in a
temporary total disability but hand is not amputated. Held: Insurer is not liable 7 Note
though in a case where the policy provided for loss of both legs by amputation, a claim
against the policy was allowed for a total paralysis to be excluded is contrary to public
policy, public good and sound morality, as it would force the insured to have his legs
amputated to be able to claim on the policy.8
6.2 The second rule of construction is: If the policy or its terms are doubtful,
ambiguous, or uncertain it is to be construed strictly against the insurer and 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.
Illustration: Warranty in a fire insurance policy prohibited storage of oils having a
flash point of below 300 Fahrenheit. Gasoline is stored. Is there a policy violation? Held:
The clause is ambiguous. In ordinary parlance oil means lubricants not gasoline. There
is no reason why gasoline could not be expressed clearly in the language the public can
readily understand.9
Illustration 2: An action to recover the amount of PHP 2,000.00 due to death by
drowning where the policy provided for indemnity in the amount of PHP 1,000.00 to PHP
3,000.00. Held: the interpretation of the obscure stipulation in contract must not favor
the one who caused the obscurity. Hence, judgment for an additional PHP 2,000.00 was
affirmed.10
Fortune Insurance vs. CA, 244 SCRA 308

Ty vs. First National Surety and Assurance Company, 17 SCRA 364
8
Panaton vs. Malayan, 2 Court of Appeals, 783
9
Qua Chee Gan vs. Law Union Rock Ins. Co. Ltd., 98 Phil 85
10
Del Rosario vs. Equitable Insurance and Casualty Company, 8 SCRA 343
7
Illustration 3: Denial of a claim on the ground that the insured vehicle was a
private owner type vehicle on the ground that the policy issued to the insured was a
Common Carriers Liability Insurance Policy which covers a public vehicle for hire. Held:
Insurer is liable as it was aware all along that the vehicle of the insured was a private
vehicle.11
Illustration 4: Denial of claim for benefit due to the death of Flaviano Landicho in a
plane crash under a GSIS Policy on the ground of non payment of the premium. HELD:
The policy contained a provision that the application for insurance is authority for GSIS
to cause the deduction of premium from the insureds salary12
6.3 The third rule of construction is:
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.
Illustration:
An insurance policy covers loss due earthquake shock to two
swimming pools and for which a premium was paid. In a rider entitled Earthquake
Endorsement it stated that in consideration of a premium, but without any amount filled
in, the company agrees to be liable for earthquake shock damage for other properties,
the policy provisions notwithstanding. The insured claims that the conflict between the
policy and the rider should be resolved in its favor. Held: Only the pools are insured
against earthquake shock. The rider cannot be construed to prevail over the policy. 13
WHAT ARE THE ELEMENTS OF AN INSURANCE CONTRACT
1.
The insured should possess an interest of some kind, susceptible of pecuniary
estimation known as insurable interest.
1.1 Generally a person has insurable interest in the subject matter insured when: He
has such a relation or connection with, or concern in, such subject matter that he will
derive pecuniary benefit or advantage from its preservation or will suffer pecuniary loss
or damage from its destruction, termination, or injury by the happening of the event
insured against.
1.2
A person has insurable interest in life, health and property.
1.3 It is necessary because its absence renders the contract of insurance void. This is
based on the principle that insurance is a contract of indemnity. If the insured has no
interest, he will not stand to suffer loss or injury by the happening of the event insured
against.
2.
The insured is subject to risk of loss through the destruction or impairment of that
interest by the happening of the designated risks.
3.
11
The insurer assumes the risk of loss
Fieldmans Insurance vs. De Songco, 25 SCRA 70

Landicho vs. GSIS, 44 SCRA 7
13
Gulf Resorts, Inc. vs. Phil. Charter Insurance Corp., 458 SCRA 550
12
4.
Such assumption is part of a general scheme to distributed actual loss among a
large group of persons bearing somewhat similar risks
5.
As a consideration for the insurers promise, the insured makes a ratable
contribution called a premium to the general insurance fund.
CONSENT REQUIREMENTS WHEN INSURANCE IS TAKEN
1.
Generally, the law does not require the consent of the person insured and such has
been considered as not essential to the validity of the contract as long as there is
insurable interest at the beginning.
2.
The consent of the husband is not necessary for the validity of an insurance policy
taken out by a married woman on her life or that of her children. She may exercise all
rights and privileges of an owner under a policy.14
2.1 She may also insure her separate property without the consent of her husband as
she has the right to administer her own property.15
3.
The provision of the law regarding a minor 18 years of age or more has been
rendered moot and academic by RA 6809 which reduced the age of majority to 18 years.
3.1 Regarding an unemancipated minor, he cannot enter into a contract of insurance
without the consent of his parents or guardian and when he does, the contract is
voidable.16 However, the insurance company cannot raise the incapacity of the minor to
contract as a defense17as the contract is voidable at the option of the insured but not of
the insurer.18
3.2 If the original owner of a policy covering the life of a minor will die ahead of the
minor, all rights, title and interest in the policy shall automatically vest in the minor
unless otherwise provided in the policy.
ON WHOSE LIFE AND HEALTH DOES A PERSON HAVE INSURABLE INTEREST IN

1.
Himself, his spouse and of his children.
2.
Any person on whom he depends wholly or in fact for education or support, or in
whom he has a pecuniary interest.
2.1
Article 195 of the Family Code specifies the persons obligated to support each
other.
2.2
14
A pecuniary interest exists as between partners or the employer and employee.

Article 145, Family Code
16
Articles 1327 and 1390, Civil Code
17
Article 1397, Civil Code
18
3 Couch 2d, 4.
15
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.19
4.1 When usufructuary X allows Y to receive fruits of the land of the former as long as
he is alive. Y has insurable interest in the life of X, because the death of X will terminate
his right and cause him damage.
WHAT IS THE BASIS OF INSURABLE INTEREST IN LIFE
1.
It exists when there is reasonable ground founded on the relation of the parties,
either pecuniary or contractual or by blood, or by affinity to expect some benefit from
the continuance of life of the insured.
WHEN MUST INSURABLE INTEREST IN LIFE EXIST
1.
Insurable interest in life must exist at the time of the effectivity of the policy and
need not exist at the time of the death of the insured as life insurance is not a contract of
indemnity.20
2.
However, insurable interest of a creditor on the life of a debtor must exist not only
at the time of effectivity but also at the time of the death of the debtor because in this
instance it is a contract of indemnity. The interest of the debtor is capable of pecuniary
estimation.
WHAT IS THE EXTENT OF INSURABLE INTEREST IN ONES LIFE
1.
A person has unlimited interest in his own life or that of another person regardless
of whether or not the latter has insurable interest. Provided, that if the beneficiary has
no insurable interest, there is no force or bad faith.
2.
However, if a person takes out a policy on the life of another and names himself as
the beneficiary, he must have an insurable interest in the life of the insured.
WHEN DOES A PERSON HAVE INSURABLE INTEREST IN PROPERTY
1.
A person has insurable interest in property as every interest in property, whether
real or person, 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. 21
WHAT IS THE TEST OR MEASURE OF INSURABLE INTEREST IN PROPERTY
19

21
20
1.
Whether one will derive pecuniary benefit or advantage from its preservation or
will suffer pecuniary loss or damage from its destruction. 22
WHAT DOES INSURABLE INTEREST IN PROPERTY CONSIST OF
1.
An existing interest.
1.1 By means of a conditional deed of sale, A sold his house to B for PHP 2,000,000.00.
B pays a down payment of PHP 500,000.00. Prior to full payment and execution of an
absolute sale, A has insurable interest in the house equivalent to the balance due him,
while B has insurable interest to the extent of the down payment because loss of the
house will mean that he suffers a loss of PHP 500,000.00
2.
An inchoate interest founded on an existing interest.
2.1 An inchoate interest has been defined as: 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.23
3.1 The expectancy must be founded on an actual right to the thing or a valid contract
for it.
3.2 A farmer has insurable interest on an anticipated harvest of the crops that he will
grow on land belonging to him at the time of the issuance of the policy.
4.
A carrier 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. 24
5.
But a mere contingent or expectant interest in anything, not founded on contract
or actual right to the thing is not insurable as there is no insurable interest.25
5.1 A son has no insurable interest on a building owned by father despite being
designated as an heir in the will as the will does not produce any effect before the
testators death.
MUST THE BENEFICIARY IN PROPERTY INSURANCE HAVE INSURABLE INTEREST
ON THE PROPERTY INSURED
22

24
25
23
1.
Yes, as no contract or policy of insurance on property shall be enforceable except
for the benefit of some person having insurable interest in the property insured.
1.1 The owner insures his building against fire naming his nephew as beneficiary. In
case of loss only the owner can recover what is not enforceable is the designation of
beneficiary not the entire policy itself.
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.26
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.27
2.1 The contemplated change is an absolute transfer of the insureds entire interest in
the property insured to one not previously interested or insured.
2.2 The reason for the rule is that insurance is a personal contract. The insurer may
not be willing to insure the same property if owned by another person.
2.3 The policy is revived by the assignment of the policy to the transferee with the
consent of the insurer or the reacquisition by the insured of his interest in the property.
2.4 If there is a prohibition against alienation or change of interest without the consent
of the insurer, the policy is not suspended but rather it is avoided. Hence, the
subsequent reacquisition of the interest will not revive the policy.
WHEN IS THE INSURANCE 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 indemnity as the occurrence of the loss will fix the
liability of the insurer.28
3.
A change of interest in one or more several distinct things, separately insured by
one policy, does not avoid the insurance as to the others.29
26

28
29
27
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.30
5.
A transfer of interest by one or several partners, joint owners, or owners in
common, who are jointly insured to the others, does not avoid insurance even though it
has been agreed that insurance shall cease upon an alienation of the thing insured.
5.1 The transfer contemplated is that to a stranger and if so, the policy is only
suspended to such equivalent extent as that transferred.
6.
When notwithstanding a prohibition, the consent of the insurer is obtained
7.
when the policy is so framed that it will inure to the benefit of whomsoever may
become the owner during the continuance of the risk.
DISTINGUISHING INSURABLE INTEREST IN LIFE FROM INSURABLE INTEREST IN
PROPERTY
1.
Insurable interest in life can be based on consanguinity, affinity, contract or a
pecuniary interest, while insurable interest in property is based on pecuniary interest.
2.
Insurable interest in life must exist only at the effectivity of the contract except
that taken by a creditor in the life of the debtor while insurable interest in property
must exist at the time of effectivity of the contract and when loss occurs, although it
may not exist in the meantime.
3.
The value of insurable interest in life is not limited unless taken by a creditor on
the life of the debtor while insurable interest in property is limited to the actual value of
the interest in the property.
WHAT ARE THE VOID STIPULATIONS IN A CONTRACT OF INSURANCE
1.
A stipulation for the payment of the loss whether the person insured has or has no
interest in the property insured because it is a contract of indemnity.
2.
A stipulation that the policy shall be received as proof of such interest because the
existence of insurable interest does not depend on the policy.
3.
Every policy issued by way of gaming or wagering shall be void because
those insured without insurable interest do not suffer a damage from the occurrence of
the event insured against, instead they will profit. Further, it brings a strong temptation
to bring about the occurrence of the event insured against.31
WHAT MAY BE INSURED AGAINST
30
31

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.
32
2.
Insurance against damage or liability arising from and unknown past event must
be expressly stipulated as in marine insurance where the insurance over the vessel
against perils of the sea will be paid lost or not lost.
3.
Insurable risks are: (a) one that may cause damage to the insured, or (b) one that
may create a liability against him.
WHAT CANNOT BE INSURED
1.
Insurance for or against the drawing of any lottery or for or against any chance or
ticket in a lottery drawing a prize cannot be acquired.33
2.
It cannot be insured because gambling results in profit, while the object of
insurance is indemnify the insured against loss.
WHO ARE THE PARTIES TO A CONTRACT OF INSURANCE
1.
The insurer- every person, partnership, association or corporation duly authorized
to transact insurance business as provided in the Code may be an insurer. 34
1.1 It is the party who agrees to indemnify another upon the happening of specified
contingency.
2.
The insured who is the party to be indemnified in case of a loss.35
2.1 Anyone except a public enemy or a nation at war with the Philippines and every
citizen or subject of such nation may be insured. The reason is that the purpose of war is
to cripple the power and exhaust the resources of the enemy, and it is inconsistent to
destroy its resources then pay it the value of what has been destroyed.
2.2 Both the mortgagor and mortgagee may take out separate policies with the same
or different companies. The mortgagor, up to the extent of the value of his property, the
mortgagee on the other hand, up to the extent of his credit.36
2.3 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
32

34
35
36
33
required to be done by the mortgagor may be performed by the mortgagee with the
same effect as if it has been performed by the mortgagor as when if notice of loss is
required, the mortgagee may give it (d) Upon the occurrence of the loss, the
mortgagee is entitled to recover to the extent of his credit, and the balance, if any, is to
be paid to the mortgagor, since such is for both their benefits (e) Upon recovery by the
mortgagee, his credit is extinguished. However, if the insurer assents to the transfer of
the insurance from the mortgagor to the mortgagee, and at the time of his assent,
imposes further qualifications on the assignee, making a new contract with him, the acts
of the mortgagor cannot affect the rights of the assignee. 37 This is known as the Union
Mortgage Clause which creates the relation of insured and insurer between the
mortgagee and the insurer independent of the contract of the mortgagor. In such case,
any act of the mortgagor can no longer affect the rights of the mortgagee. The insurance
contract is now independent of that with the mortgagor. On the other hand, if the
mortgagor still remains as a party, the policy is said to contain an Open Mortgage
Clause.
2.4 When the mortgagee procures the insurance without reference to the right of the
mortgagor, the consequences are: (a) the mortgagee may collect from the insurer upon
occurrence of the loss to the extent of his credit (b) unless, otherwise stated, the
mortgagor cannot collect the balance of the proceeds, after the mortgagee is paid (c)
The insurer, after payment to the mortgagee, becomes subrogated to the rights of the
mortgagee against the mortgagor and may collect the debt to the extent paid to the
mortgagee (d) the mortgagee after payment cannot collect anymore from the
mortgagor but if he is unable to collect in full from the insurer, he can recover from the
mortgagor (e) the mortgagor is not released from the debt because the insurer is
subrogated in place of the mortgagee.
3.
The Beneficiary who is the person who receives the benefits of an insurance policy
upon its maturity.
3.1 In life insurance, anyone, except those who are prohibited by law to receive
donations from the insured. Under Article 739 of the Civil Code, the following cannot be
designated as beneficiaries (a) those made between persons guilty of adultery or
concubinage at the time of the designation (b) those found guilty of the same criminal
offense in consideration thereof (c) those made to a public officer or his wife,
descendants / ascendants by reason of his office.
3.2 A prior conviction for adultery or concubinage is not required as it can be proven
by a preponderance of evidence in the same action nullifying the designation. The
common law wife of the insured who is married could not be named as a beneficiary. 38
Note where the insured designated his second wife as a beneficiary, the same was
upheld as the latter was not aware of the first marriage.39
3.3 The disqualification does not extend to the children of the adultery or concubinage
in view of the express recognition of the successional rights of illegitimate children. 40
37

Insular Life Assurance Co. Ltd. Vs Ebrado, 80 SCRA 181
39
SSS vs. Davac, 17 SCRA 863
40
Article 287, Civil Code, Article 176, Family Code
38
3.4 Generally, there is no requirement that the beneficiary have insurable interest in
the life of the insured as it is recognized that the insured may name anyone he chooses,
except those disqualified to receive donations, as a beneficiary in his life insurance, even
if he is a stranger and has no insurable interest in the life of the insured. The
designation, however, must be in good faith and without fraud or intent to enter into a
wagering contract as when: Jose obtains several life insurance policies that he cannot
afford. Named as beneficiary is Juan, the spouse or children of Jose are not named as
beneficiaries. The premiums are paid by Juan, who did not have insurable interest in the
life of Jose. In this case the policies are void because they were entered into as wagering
contracts.
3.5 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.41 If he has waived the right, the effect is to make the designation as irrevocable.
3.6 Note though that the designation of the guilty spouse as irrevocable beneficiary is
revocable at the instance of the innocent spouse in cases of termination of (a) a
subsequent marriage (b) nullification of marriage (c) annulment of marriage, and (d)
legal separation.42
3.7 When an irrevocable beneficiary us designated in a life insurance contract, the
beneficiary has a vested right that cannot be taken away without his consent. In fact
should the insured discontinue payment of the premium, the beneficiary may continue
paying. Neither can the insured get a loan or obtain the cash surrender value of the
policy without his consent.43Where the wife and minor children were named irrevocable
beneficiaries and the wife dies, the husband change of the beneficiaries with the
consent of the children, is not valid due to the minority of the children. 44
3.8 The interest of an irrevocable beneficiary in an endowment policy is contingent as
benefits are to be paid him only if the assured dies before the specified period. If the
insured outlives the period, the benefits are paid to the insured.
3.9 The effect of the failure to designate a beneficiary or when the beneficiary is
disqualified is that the benefits of the policy shall accrue to the estate of the insured.
3.10 When the beneficiary will predecease the insured, the effects are: (a) If the
designation is irrevocable, the legal representatives of the beneficiary may recover
unless it was stipulated that the benefits are payable only if living (b) if the
designation is revocable, and no change is made, the benefits passes to the estate of the
insured. The rule holds also if benefits were payable only if living or if surviving and
the beneficiary dies before the insured.
3.11 If the beneficiary is the principal, an accomplice or an accessory in the willful killing
of the insured, his interest is forfeited. The nearest relative of the insured will be entitled
41

Article 43, Family Code
43
Nario vs. Philamlife, 20 SCRA 434
44
Philamlife vs. Pineda, 170 SCRA 416
42
to the proceeds if not otherwise disqualified. 45 If not willful or felonious, the provision
does not apply.
CONCEALMENT
WHAT IS CONCEALMENT
1.
Concealment is a neglect to communicate that which a party knows and ought to
communicate.46
2.
Generally, a party must have knowledge of the fact concealed at the time of the
effectivity of the policy.
2.1 Note that even if a party did not know of the existence at the time of application
but before its effectivity, there is still concealment.
2.2 Information acquired after effectivity is not concealment and does not constitute
ground to rescind the policy, as after the policy is issued, information subsequently
acquired is no longer material as it will not affect or influence the party to enter into
contract. However, in case of the reinstatement of a lapsed policy, facts known after
effectivity but before reinstatement must be disclosed.
3.
The party claiming the existence of concealment must prove that there was
knowledge on the part of the party charged with concealment. If the insured stated that
there was no hereditary taint or illness that has affected members of the family 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.
4.
The materiality of the fact concealed or misrepresented is determined not by the
event, but solely by the probable and reasonable influence of the facts upon the party to
whom the communication is due, in forming his estimate of the disadvantages of the
proposed contract or in making his inquiries.47
4.1 The test of materiality is whether knowledge of the true facts could have
influenced a prudent insurer in determining whether to accept the risk or in fixing the
premiums
5.
Concealment need not, in order to be material, be of facts which bring about or
contribute to, or are connected of the insureds loss. It is immaterial that there is no
causal relationship between the fact concealed and the loss sustained. It is sufficient that
the non-revelation has misled the insurer in forming its estimate of disadvantage or in
45

47
46
fixing the premium as when the insured had concealed that he had kidney disease. He
later dies in plane crash. The insurer would not be liable due to concealment. 48
WHAT IS THE EFFECT OF CONCEALMENT
1.
Whether intentional or not, it entitles the injured party to rescind the contract of
insurance.49
1.1 Note though that the right to rescind is optional on the part of the injured party.
Rescission is an option because it misleads or deceives the insurer into accepting the
risk or accepting it at the rate of premium agreed upon.
2.
The provisions on concealment and representation finds basis in the fact that it is a
fundamental characteristic of a contract of insurance that it is one of perfect/utmost
good faith.
WHAT FACTS THEN MUST BE COMMUNICATED
1.
Each party to an insurance contract is bound to communicate to the other all facts
that meet the following requisites: (a) such facts that must be within his knowledge as
concealment requires knowledge of the fact concealed by the party charged with
concealment (b) fact/s must be material to the contract as it must be of such nature that
had the insurer known of it, it would not have accepted the risk or demanded a higher
premium (c) that the other party had no means of ascertaining such fact/s (d) that the
party with a duty to communicate makes no warranty. 50
1.1 The existence of a warranty makes the requirement to disclose superfluous but an
intentional and fraudulent omission on the part of the one insured to communicate
information on a matter proving or tending to prove the falsity of the warranty entitles
the insurer to rescind,51as when there is a warranty that the ship is seaworthy, the
intentional and fraudulent omission of the insured to state that the ships
communications equipment is out of order will entitle the insurer to rescind.
WHAT MATTERS NEED NOT BE COMMUNICATED
1.
Except in answer to the inquiries of the other, the following facts need not be
communicated:
1.1 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 insurer52 or when the insurer had surveyed the location and
48
Sunlife vs. Court of Appeals, 245 SCRA 269

50
51
52
Insular Life Assurance Co, Ltd vs. Feliciano, 74 Phil 468
49
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.
1.2 Those, which, in the exercise of ordinary care, the other ought to know, and of
which, the former has no reason to suppose him to be ignorant. The facts that the other
ought are: (a) 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 at war, or laws or political conditions in other
countries. Here, the source of information is equally open to the insurer, who is therefore
presumed to know them, and (b) all the general uses of trade such as the rules of
navigation, kinds of seasons, all the risks of navigation. 53
1.3 Those of which the other waives communication. A waiver takes place either, by
the terms of the insurance or by the neglect to make inquiries as to such facts where
they are distinctly implied in other facts of which information is communicated 54 as when
an application for insurance is made in writing and the questions therein are
unanswered or incompletely answered, and the insurer without further inquiries, issues
the policy. It thereby waives all right to a disclosure or to a more complete answer. If
question asks whether the insured has submitted himself to any infirmary, sanitarium or
hospital for consultation or treatment. Insured replies that he was confined at the
Quezon Memorial Hospital for five days due to influenza. There is no waiver and shall
constitute concealment as the answer was complete and could be relied upon by the
insurer. If the insured answered yes, the answer would have been incomplete and
ambiguous. This would constitute a waiver as the insured did not make any further
inquiry.55 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.56
1.4 Those which 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.
1.5 Those which relate to a risk exempted from the policy, and which are not otherwise
material.57 As when the policy covers against loss by theft. There is no need to disclose
that the area where the object is located is earthquake prone area if loss due to
earthquakes is not covered by the policy.
OTHER MATTERS THAT DO NOT NEED TO BE COMMUNICATED
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 specified if he is not the
53

55
Ng Gan Zee vs. Asian Crusader Life Insurance, 112 SCRA 461
56
Saturnino vs. Philam Life Assurance Co, 7 SCRA 316
57
54
absolute owner. Also a trustee, mortgagee or building contractor must communicate

his particular insurable interest in the property even if no inquiry is made.58
2.
Neither party to a contract is bound to communicate even upon inquiry any
information of his own opinion or judgment upon the matters question 59 as only material
facts are required not opinions, speculations or expectations, except in marine
insurance where the belief or the expectation of a 3 rd 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.60
REPRESENTATIONS
WHAT IS A REPRESENTATION
1.
A representation is an oral or written statement of a fact or a condition affecting
the risk made by the insured to the insurance company, tending to induce the insurer to
take the risk.61
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.62
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.63
3.1 Consequently, it need not be literally true and correct / accurate in every respect,
rather, it is sufficient that it is substantially or materially true. In the case of a promissory
representation, it is sufficient if it is substantially complied with. As when H bought a car
for PHP 2,800.00 and spent PHP 900.00 for repairs. H then gave it to W as a gift. W
secures insurance and says the price is around PHP 4,000.00, though the present actual
value is about PHP 3,000.00. Is W guilty of misrepresentation because she did not pay for
the car? No, because the literal truth is not necessary. The insurer can value the car
independently.
WHAT ARE THE FORMS AND KINDS OF REPRESENTATION
1.
Representations may be oral or written.
1.1 They can be affirmative when it is an affirmation of a fact existing when the
contract begins. As when the insured states that he is of good health at the time of the
contract.
58

60
61
62
63
59
1.2 They can be promissory when it is a statement by the insured concerning what is
to happen during the term of the insurance. As when the insured will install additional
fire extinguishers at a stipulated future date. A representation as to the future is to be
deemed a promise, unless it was merely a statement of belief or expectation.
2.
A representation does not form part of the contract as an express provision thereof
as it is a collateral inducement to the same.
2.1 While it does not form part of the contract, it may qualify an implied warranty.64 As
when under Section 113, it is implied that a ship is seaworthy. A representation by the
insured that its communication system is defective will qualify the warranty. Hence,
insured can still recover in case of loss.
CAN A REPRESENTATION BE WITHDRAWN OR ALTERED
1.
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.65 (Section 41).
TO WHAT DATE DOES A REPRESENTATION REFER
1.
It must be presumed to refer to the date on which the contract goes into effect. 66
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 is really undergoing maintenance, there
is no false representation if at issuance the vessel has completed maintenance.
2.1 Conversely, there is a false representation, if it is true at the time it is made but
false at the time the contract takes effect. As when: insured states that he has never
been affected with pneumonia at application, but if in the meantime, he is afflicted with
pneumonia before the policy takes effect, and he does not disclose , there is a false
representation.
WHEN IS A REPRESENTATION SAID TO BE FALSE
1.
A representation is said to be false when the facts fail to correspond with its
assertions or stipulations.67
MUST THE INSURED COMMUNICATE INFORMATION OF WHICH HAS NO PERSONAL
KNOWLEDGE BUT MERELY RECEIVES THE SAME FROM OTHERS
64

66
67
65
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.68 Hence, there can be no misrepresentation.
2.
However, when the information material to the transaction was acquired by an
agent of the insured, the same must be communicated, as knowledge of the agent is
also knowledge of the principal. As when: a ship captain is aware of a defect that affects
the seaworthiness, that defect must be communicated as the ship captain is under
obligation to disclose it to the owner.
WHAT IS THE EFFECT OF MISREPRESENTATION ON A MATERIAL POINT
1.
If it 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.
2.
However, the right to rescind is considered waived by the acceptance of premium
payments despite knowledge of the ground to rescind. 69 As when: insurer was aware of
the lack of extinguishers required by the policy.
2.1 There is no waiver, if the insurer had no knowledge of the ground at the time of the
acceptance of the premium.70
HOW IS MATERIALITY DETERMINED
1.
The materiality of a representation is determined like in concealment. 71 That is the
probable and reasonable influence of the facts upon the party to whom the
representation is made in forming his estimate of the advantage/disadvantages of the
contract or in making inquiries.
WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE EXERCISED
1.
The right to rescind must be exercised prior to the commencement of an action on
the contract.72
2.
The right to rescind is also qualified by the 2nd 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. This is known as the Incontestability
Clause.
2.1 The theory and object of the clause on the part of the insurer is that an insurer
has/should have a reasonable opportunity to investigate the statements which are made
by the applicant and that after a definite period, it should no longer be permitted to
68

70
Stokes vs. Malayan, 127 SCRA 766
71
72
69
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 a
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 / or last reinstatement.
3.1 The two year period within which to contest the policy is regardless of whether or
not the insured is still living within the period.73
3.2 The defenses that are not barred by the incontestability clause are (a) nonpayment of premiums (b) lack of insurable interest (c) that the cause of death was
excepted 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.74
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 REPRESENTATION
1.
Concealment is the neglect of one party to communicate to the other material
facts. The information he gives in compliance with his duty to reveal information is
representation. Representation therefore, is the communication required to comply with
the prohibition against concealment.
2.
Concealment is the passive and misrepresentation is the active form of the same
bad faith.
CONCEALMENT AND REPRESENTATION COMPARED
1.
In concealment, the insured withholds information of material facts, while in
representation, the insured makes erroneous statements.
2.
In concealment and misrepresentation both give the insurer the right to rescind the
contract of insurance
3.
The materiality of concealment and representation are determined by the same
rules
4.
Whether the concealment or representation is intentional or not, the injured party
can rescind.
73
74
Tan vs. Court of Appeals, 174 SCRA 403

5.
Since insurance contracts are of utmost good faith, the insurer is also covered by
the rules
POLICY
DEFINING A POLICY
1.
It is the written instrument in which a contract of insurance is set forth.75
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 it. As when: the claim of the beneficiary that since the insured
was illiterate and spoke Chinese only, she could not be held guilty of concealment
because the application and policy was in English was upheld.76
FORM OF THE POLICY
1.
It shall be printed and may contain blank spaces and any word, phrase, clause or
mark, sign, symbol, signature, or number necessary to complete it shall be written in the
blank spaces.77
2.
If there are riders, clauses, warranties or endorsements purporting to be part of the
contract of insurance and which are pasted or attached to the policy is not binding on
the insured unless the descriptive title of the same is also mentioned and written on the
blank spaces provided in the policy.
2.1 If pasted or attached 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 applicants 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 of reference where the insured contracts as to the
75

Tang vs. Court of Appeals, 90 SCRA 236
77
76
existence of facts, circumstances or conditions, the truth of which are essential to the
validity of the contract.
2.7 Endorsements are agreements not contained but may be written or attached to
policy to change or modify a part thereof.
WHAT MUST A POLICY SPECIFY
1.
A policy must specify (a) The parties between whom the contract is made (b) The
amount to be insured except in open or running policies (c) The premium, or if the
premium is to be determined at the termination of the contract, a statement of the basis
and rates upon which the final premium is to be determined (d)The property or life
insured (e) The interest of the insured in the property insured, if not the absolute owner
(f) The risks insured against (g) The period during which the insurance is to continue. 78
WHAT ARE COVER NOTES
1.
It is a written memorandum of the most important terms of a preliminary contract
of insurance intended to give protection pending investigation by the insurer of the risk
or until the issuance of the formal policy.79
2.
It is also known as a binding slip or binder.
3.
The effectivity of a cover note is 60 days, as within such period, a policy shall be
issued including in its terms the identical assurance found under the cover rate and the
premium therefore. It may however, be extended beyond 60 days and with the written
approval of the Insurance Commissioner if he determines that it does not violate the
Insurance Code.
3.1 The following rules have been promulgated by the Insurance Commissioner to
govern cover notes: (a) a cover note is valid for 60 days whether or not a premium is
paid but it may be cancelled by either party upon at least 7 day notice to the other party
(b) if the cover note is not cancelled, a regular policy must be issued within 60 days from
the date of issue of the cover note, including within its terms the identical insurance (c) It
may be extended with the written approval of the commissioner but may be dispensed
with by a certification of the Pres. VP or GM of the insurer that the risks involved and the
extension do not violate the code (d) Insurance companies may impose a deposit
premium equivalent to at least 25% of the estimated premium but in no case less than
PHP 500.00.
4.
A cover note will give adequate insurance protection when: it is considered as a
preliminary contract of present insurance and not a mere agreement to insure at a future
time, as on acceptance of the application or issuance / delivery of the policy. 80
4.1 As when: an agent issued a provisional policy acknowledging receipt of premiums
and stating that the insurance shall be effective upon approval and issuance of the policy
by the head office. There is no protection as it is a mere acknowledgment of the payment
78

80
44 CJS 958
79
of premiums as the effectivity of the insurance is expressly provided 81 or a binding slip

stated that it was subject to the approval of the insurer and the same was subsequently
disapproved.82
5.
Rules of Joyce83 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, then the receipt
will bind the company (b) where an agreement is made between the applicant and the
agent, whether by signing an application containing such condition, or otherwise, that no
liability shall attach until the principal approves the risk and a receipt is given by the
agent, such acceptance is merely conditional and subordinated to the act of the
company in approving or rejecting (c) where the acceptance of the agent is within the
scope of his authority, a receipt containing a contract of insurance for a specified time
which is not absolute but conditional, upon acceptance 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.84
7.
An application for insurance is nothing more than an offer to enter into a contract
of insurance. Such application, therefore, shall not become a contract until accepted by
the insurer. Such acceptance cannot be presumed from a delay on the part of the insurer
in passing upon the application.85 On the contrary, such delay for an unreasonable period
of time may be construed as a rejection of the application. 86
7.1 Acceptance is presumed when the insurer accepts and retains for an unreasonable
length of time87 the first premium covered by a cashiers 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.88
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.89
1.1 As when: (a) the designation of sister as sole beneficiary in a life insurance cannot
be defeated by the contention of the of plaintiff that proceeds belong to the estate of
81
Lim vs. Sunlife, 41 Phil 265

Grepalife vs. Court of Appeals, 89 SCRA 543
83
Joseph Joyce, Author of five volumes of Commentaries on Insurance
84
Pacific Timber export Corporation vs. Court of Appeals, 112 SCRA 199
85
American Life Ins. Co. vs. Hutcheson, C.A.A. Tenn., 109 F 2d, 424, 427
86
Vance, 2nd Ed., 227
87
30 days
88
Gloria, etal. vs. Philamlife, (CA) 73 OG 8660
89
82
the insured was disregarded as insurance is to be governed by special law, not by the
law covering donations or succession 90 (b) in an action to recover cost of repairs and
labor to a motor vehicle where the policy states loss is payable to H.S. Reyes, the
mortgagee of the vehicle who had no knowledge of the fact that Mara had it repaired
with Bonifacio Bros, the court ruled that H.S. Reyes is the one entitled to the proceeds
because a policy of insurance is a separate and independent contract between the
insured and the insurer, and that third persons have no right to the proceeds of the
insurance. 91
1.2 Unless otherwise specified in the policy, a 3 rd person may sue the insurer if (a) the
insurance contract contains a stipulation in favor of a 3rd person, the said 3rd though not
a party may sue to enforce before the contract is revoked by the parties. As when: the
insurance company undertook to indemnify any authorized driver who was driving the
motor vehicle insured. Coquia, while driving the insured motor vehicle, met an accident
and died. His heirs were allowed to sue the insurer, the policy being considered in the
nature of a contract pour autrui and therefore the enforcement thereof may be
demanded by a 3rd party for whose benefit it was made 92 (b) the insurance contract
provides for indemnity against liability to 3 rd persons. As when: the insured procured
insurance that would indemnify him against any and all sums which he may be legally
liable to pay in respect to the death or bodily injury to any person. A jeepney covered by
the insurance had bumped Guingon and had caused his death. The insurance was held
to be one for indemnity against liability to third persons, and therefore, such third
person is entitled to sue the insurer.93
1.3 The test to determine whether a 3rd person may directly sue the insurer od 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. On the other hand,
if the insurance is for indemnity against actual loss or payment, then the 3 rd 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. 94
2.1 If not indicated, it is as if the insurance is the taken out by the agent / trustee
alone, consequently the principal has no right against the insurer.
3.
If a partner or part owner effects insurance, it is necessary that the terms of the
policy should be such as are applicable to the joint or common interest so that it may be
applicable to the interest of his co-partners / owners.95
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
90
Del Val vs. Del Val, 29 Phil 534

Bonifacio Bros. Inc., vs. Mora, GR No. L-20853, May 29, 1967
92
Coquia vs. Fieldmens Ins. Co., 26 SCRA 179
93
Guingon vs. Del Monte, 20 SCRA 1043
94
95
91
intended to include him can claim the benefit of the policy. 96 As when: in a fire
insurance policy where the insured is Dela Cruz & Associates, X to be able to recover his
share must prove that he is a partner.
5.
When a policy is so framed that it will inure to the benefit of whomsoever, during
the continuance of the risk, may become the owner of the interest insured. 97
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. 98
6.1
Note the exceptions to this rule as found in Sections 20-24 and 57
WHAT ARE THE KINDS OF INSURANCE POLICIES

1.
The kinds of policies are: (a) Open (b) Valued, or (c) Running or Floating. 99
2.
An open policy is one in which the value of the thing insured is not agreed upon,
but is left to be ascertained in case of loss.100
2.1 What is mentioned as the amount is not the value of the property but merely the
maximum limit of the insurers liability. In case of loss, the insurer only pays the actual
cash value at the time of loss.
3.
A valued policy is one which expresses on its face that the thing insured shall be
valued at a specified sum.101
3.1 The valuation of the property insured is conclusive between the parties. In the
absence of fraud or mistake, such value will be paid in case of a total loss.
3.2 A valued policy distinguished from an open policy:(a) In a valued policy, proof of
value of the thing after the loss is not necessary. In an open policy, the insured must
prove the value of the thing insured (b) In a valued policy, the parties have conclusively
stipulated that that property insured is valued at a specified sum. In an open policy, the
value is not agreed but left to be ascertained upon loss. This does not violate the
principle that a contract of insurance is a contract of indemnity as long as the valuation
is reasonable and is bonafide.
4.
A running policy is one which contemplates successive insurances and which
provides that the object of the policy may be from time to time defined especially as to
the subjects of insurance, by additional statements or indorsements.102
96

98
99
100
101
102
97
4.1 This is also known as a 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 and quantity. As when: insurance procured by a retail establishment to cover
its inventory that fluctuates in quantity, or is located in several areas.
CAN THERE BE AGREEMENTS AS TO PRESCRIPTION OF AN ACTION OR LIMITATIONS ON
THE PERIOD OF TIME TO BRING AN ACTION
1.
There can be an agreement provided the period agreed upon should not be less
than one year.103 If period agreed upon is less than one year, the agreement is void.
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 insurers rejection of the
claim of the beneficiary or of the insured, since prior to the same there is no necessity to
bring suit.
2.2 If the insured will ask for reconsideration of the denial, the period is still counted
from the time the claim is denied at the first instance as to hold otherwise gives the
insured a scheme or devise to waste time until evidence that may be considered against
him can be destroyed. 104
2.3 In motor vehicle insurance, the period is also one year from denial of the claim, not
the date of the accident.105
3.
Note Section 3(6) of the provisions of the Carriage of Goods by Sea Act stating
that the carrier and the ship shall be discharged from all liability for loss or damage to
the goods if no suit is brought within 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. 106 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. 107
3.2 When no period is stipulated as in the case of Mayer Steel Pipe Corporation or the
stipulation is void, the period is within 10 years under Article 1144, Civil Code as the
policy is a written contract.108
4.
An action may be filed in the following: (a) Courts (b) Insurance Commissioner, who
has concurrent jurisdiction with courts for claims not exceeding PHP 100,000.00 (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.
103

Sun Insurance Office, Ltd. vs. Court of Appeals, 196 SCRA 193
105
Summit Guaranty & Ins. Co. Inc. vs. Cruz Arnaldo, 158 SCRA 332
106
Filipino Merchants Insurance Co. vs. Court of Appeals, 179 SCRA 638
107
Mayer Steel Pipe Corporation vs. Court of Appeals, 274 SCRA 432
108
Eagle Star vs. Chia Yu, 96 Phil 696, ACCFA vs. Alpha Insurance, 24 SCRA 151
104
CANCELLATION OF THE POLICY

1.
No policy other than life shall be cancelled by the insurer except upon prior notice
thereof to the insured.
2.
No notice of cancellation shall be effective if not based on the occurrence, after
effective date of one or more of the following grounds: (a) non-payment of premium (b)
conviction of a crime arising out of acts increasing the hazard insured against. As when:
insured has been convicted of arson or car theft (c) discovery of fraud or material
misrepresentation. As when: insured represents himself as the owner but is not actually
the owner (d) discovery of willful or reckless acts or omissions increasing the hazard
insured against. As when: there is storage of hazardous materials in the premises (e)
physical changes in the property insured which result in the property being uninsurable.
As when: a private vehicle is converted into a racing vehicle (f) determination by the
Insurance Commissioner that a continuation of the policy would place the insurer in
violation of the code. As when: policy was issued absent insurable interest.109
3.
As to form, the notice must be in writing, mailed or delivered to the name insured
at the address shown in the policy which shall state: (a) the grounds relied upon as per
Section 64, and (b) that upon written request of the named insured, the insurer will
furnish the facts on which cancellation is based.110
3.1 A fire insurance policy is cancelled on October 15, 1981. The insurers clerk
allegedly sent notice of cancellation by mail but there was no proof that it was actually
mailed and received. Insurer relies on the presumption of regularity. 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 insured111
3.2 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.112
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 forty five days
in advance of the end of the policy.113
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
109

111
Malayan Insurance Co. vs. Cruz Arnaldo, 154 SCRA 672
112
Saura Import & Export Co. Inc. vs. Phil. International Co., Inc., 8 SCRA 143
113
110
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.
WARRANTIES
DEFINED
1.
It is a statement or promise stated in the policy or incorporated therein by
reference, whereby the insured, expressly or impliedly 114 contracts as to the past,
present or future existence of certain facts conditions or circumstances, 115 the literal
truth of which is essential to the validity of the contract.
FORM
1.
No particular form of words is necessary to create a warranty. 116
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.
WHAT ARE THE KINDS OF WARRANTIES

1.
Affirmative warranties refer to those that relate to matters that exist at or before
the issuance of the policy.
2.
Promissory warranties refer to those where the insured promises or undertakes
that certain matters shall exist or will be done or will be omitted after the policy takes
effect.
2.1 It is a statement in the policy, which imports that it is intended to do or not to do a
thing which materially affects the risk, is a warranty that such act or omission shall take
place.117 As when: 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. As when: A description of the property as being a two
storey residence, there is no promissory warranty that it will be maintained as a
residence or there is a statement that there is a security guard on duty at night is not
a promissory warranty that a security guard will be maintained.
114

116
117
115
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.118
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. 119 This also includes a rider, it is a part of
the policy, it need not be signed unless the rider was issued after the original policy took
effect.
4.
Implied warranties are assertions or promises not expressly set forth in the policy
but because of the general tenor of the terms of the policy or from the very nature of
the insurance contract, a warranty is necessarily inferred or understood.
4.1
The law only provides for implied warranties only in contracts of marine insurance.
EFFECT OF VIOLATION OF A 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.120
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.
2.
The policy may declare that a violation of specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision does not avoid the policy.121
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 a 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.122
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 79 (b) or all premiums,
if the breach occurs at the inception of the contract, as such is void ab initio and had
never become binding.
118

120
121
122
119
4.
Note that a causal connection between a violation of the warranty and cause of the
loss is not necessary. Hence, even if the violation did not contribute to the loss, the other
party may still rescind. As when: A insured his building against fire. A warranty stated
that no hazardous goods would be stored. A stored fireworks. The building was burned
and the fireworks were discovered stored in the area not affected by the fire. The Insurer
was not held liable as the storage had increased the risk.123
5.
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. As
when: There is a warranty that a firewall will be constructed, but fire occurs before the
period for compliance (b) the performance becomes unlawful at the place of the
contract. As when: A law or ordinance prohibits the construction of the specified firewall
(c) the performance becomes impossible.As when: A severe lack of materials to
construct. 124
DISTINGUISHING IT FROM REPRESENTATIONS
1.
A warranty is part of the contract, while a representation is merely
inducement thereto.
collateral
2.
A warranty is expressly set forth in the policy or incorporated therein by reference
while a representation may be oral or written in another statement.
3.
A warranty must be strictly and literally performed while a representation must be
substantially true.
4.
A warranty is presumed material while a representation must be shown to be so.
5.
A breach of warranty is a breach of the contract itself while a misrepresentation is
ground to rescind the contract.
PREMIUM
DEFINED
1.
The agreed price for assuming and carrying the risk
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.
123
124
Young vs. Midland Textiles, 30 Phil 617

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 125 (b) when the insurer makes a written
acknowledgment of the receipt of premium, such is conclusive evidence of the payment
of the premium to make it binding notwithstanding any stipulation therein that it shall
not be binding until the premium is paid.126 Hence, the effect of an acknowledgment in a
policy or contract of insurance of the receipt of the premium, is that it is conclusive
evidence of its payment so far as to make the policy binding however it is not
conclusive for the purpose of avoiding the collection of the premium, and (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. 127
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. As when: there is a baseless refusal to accept a validly tendered
payment of the premium.128
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.129
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. 130
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. 131
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.132
WHEN IS THE INSURED ENTITLED TO A RETURN OF THE PREMIUMS PAID
1.
125
The insured will be entitled to a return of the premiums paid when:

127
128
Gonzales vs. Asia Life Ins. Co, 92 Phil 197
129
Gulf Resorts Inc. vs. Philippine Charter Insurance Corporation, 458 SCRA 550
130
Article 1249, Civil Code
131
Philippine Phoenix Surety and Ins. vs. Woodworks, Inc., 20 SCRA 1272, Makati Tuscany Condominium Corp. vs. Court of
Appeals, 215 SCRA 462
132
Tibay vs. Court of Appeals, 257 SCRA 126
126
1.1
To the whole premium, when no part of the interest in the thing insured is exposed
to any of the perils insured against. 133 As when: insurance is taken on a vessel for a
voyage that did not take place.
1.2 Where the insurance is made for a definite period of time and the insured
surrenders his policy before the expiration of the period. Here, the insured only recovers
a portion of the policy premiums corresponding to the unexpired time but it does not
apply if (a) a short period rate has been agreed upon. What will be recoverable is the
agreed percentage of premiums as stated in the policy. As when: the policy is returned
after a month, the insurer retains 20% of the premium because it has been agreed upon,
the insured then receives the 80% not the premiums equivalent to the 11 months
remaining on the term, or (b) the policy is a life insurance policy as the same is
indivisible but the insured is entitled to a cash surrender value.
1.3 When the contract is voidable on account of fraud or misrepresentation of the
insurer or the agent.134 As when: the insurer makes a representation regarding a loan
provision which is not contained in the policy that is issued.
1.4 Where the contract is
insured was ignorant without
who is ignorant of the fact
knowing that that his car has
voidable on account of facts, the existence of which the

his fault. 135 As when: the insurance is taken by the insured,
that he did not have insurable interest or a person, not
been totally damaged, procured insurance over it.
1.5 When by any default of the insured other than actual fraud, the insurer never
incurred any liability under the policy. 136 As when: a person insured his vessel for a trip,
but vessel is destroyed before the trip.
1.6 In case of over-insurance. Here the insurance is in excess of the amount of the
insurable interest of the insured and it is insured by several insurers, the insured is
entitled to a ratable return of premium, proportional to the amount by which the
aggregate sum insured in all the policies exceeds the insurable value. As when: The
insureds property is valued at PHP 1,500,000.00. He obtains a policy from 1 st company
for PHP 1,000,000.00, paying PHP 10,000.00 and a policy from the 2 nd company for PHP
2,000,000.00, paying PHP 20,000.00. Since the value of the property is the value of
the insurance, the insured is entitled to recover 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 ARE THEY NOT RECOVERABLE
1.
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. 137 As when:
133

135
136
137
134
the vessel is insured for a voyage that will take 5 days, 2 days into a voyage, the policy
is surrendered (b) in life insurance 138 because it is considered as an entire contract of
assurance for life, and (c) when the insured is guilty of fraud or misrepresentation. 139
LOSS AND NOTICE OF LOSS
WHAT ARE THE RULES TO DETERMINE WHETHER THE INSURER IS LAIBLE FOR THE LOSS
OF THE THING INSURED
1.
Loss of which a peril insured against is the proximate cause, although a peril not
contemplated by the contract may have been a remote cause but the insurer is not liable
for a loss of which the peril insured against was only a remote cause.140
1.1 The proximate cause is that which, in a natural and continuous sequence,
unbroken by any efficient intervening cause, produces an injury and without which the
injury would not have occurred.
1.2 As when: In life insurance that covers death by accident, if the insured sustains an
accident that renders him weak, while in said state, he contracts a cold that develops
into pneumonia. The proximate cause is the accident, while the remote cause is the
pneumonia, the insurer is liable.
1.3 As when: firemen train their hoses at the house of the insured, damaging windows
and furniture, though not necessary to put out the fire as the same was affecting the
house of the neighbor. The insured cannot claim loss due to fire as it is only a remote
cause.
1.4 Recognizing that there are problems in determining probable cause, note the
following principles: (a) if there is a single cause which is an insured peril, clearly it is the
proximate cause and there is liability. As when: Insurance is against fire and the property
insured is burned or insurance covers accidental death and the insured dies in an
accident (b)
if there are concurrent causes or those happening together, with no
excluded perils, there is liability if one of the causes is an insured peril, the others may
be ignored. As when: in accident insurance where the insured has a heart disease. He is
involved in an accident that causes injuries, which coupled with his weak heart causes
his death. The proximate cause is the accident. The insurer is liable (c) if there are
concurrent causes with an excepted peril or when the insured peril and excepted peril
operate together to produce the loss, the claim will be outside the scope of the policy. As
when: no liability in a claim for property stolen by rioters under a burglary policy, if the
policy exclude riot risks (d) but, if the results of the operation of the insured peril can be
clearly separated from the effects of the excepted peril, the insurer is liable. As when: a
personal accident policy will cover death by accident although the insured was suffering
from a disease excluded by the policy (e) where a number of causes operate one after
the other, and the original cause happens to be a peril insured against , there is liability.
As when: the insured is injured in an accident, he scratches an open wound, which gets
infected, which ultimately results in death, there is liability on the accident insurance
policy but if the direct chain of events can be traced to an excepted peril there is no
138
Section 79 (b), Insurance Code

140
139
liability. As when: an earthquake, if excepted, causes a fire that spreads, all resulting fire
damage is deemed caused by an excepted peril but again, if the chain of events is
broken by the intervention of a new an independent cause, liability will depend upon
whether the new cause is an insured or excepted peril. As when: the insured is treated
in the hospital for an accident but while there he contracts a disease, the disease is the
proximate cause, there will be no liability under the accident policy. However, if death by
disease is covered, then the insurer is liable.
2.
Loss caused by efforts to rescue the thing insured from a peril insured against that
would otherwise have caused a loss, if in the course of such rescue, the thing is exposed
to peril not insured against, which permanently deprives the insured of its possession, in
whole or in part, or where a loss is caused by efforts to rescue the thing insured from a
peril insured against.141
2.1 Here the principle of proximate cause is extended to loss incurred while saving the
thing insured.
2.2 As when: the thing insured is water damaged due to efforts to put out a fire, the
fire being a peril insured against or theft by 3rd persons while the goods are brought out
in the course of rescuing them from a fire, which is the peril insured against but there is
no liability for loss if the goods are left out and are lost as the same is now due to lack of
reasonable care and vigilance or while removing the contents of a burning house, they
were stolen or they were broken or damaged, theft or breakage not ordinarily being
perils insured against.
3.
Where a peril is especially excepted in a contract of insurance, a loss, which would
not have occurred but for such peril, is thereby excepted although the immediate cause
of the loss was a peril which was not excepted.142
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 not liable.
3.3 As when: a factory is insured against fire, but it excepts loss through explosion. If
an explosion occurs and results into a fire that creates a loss, the insurer is not liable. If
a fire occurs first, then an explosion is caused, the insurer is liable.
4.
An insurer is not liable for a loss caused by the willful act or through the
connivance of the insured; but he is not exonerated by the negligence of the insured, or
of the insureds agent or others.143
4.1 Consequently, if the insured was merely negligent, the insurer is still liable as one
of the principal reasons for procuring insurance is to protect himself against the
consequences of his own negligence or that of his agents.
141

143
142
4.2 As when: the insured carelessly used kerosene in lighting a stove, causing his
house to catch fire, the insurer is liable for loss but if the negligence is so gross so as to
be sufficient basis for fraudulent intent, it can amount to a 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.144
2.
This means that the insured has an absolute right to transfer his claim against the
insurer after the loss occurs, what is prohibited is a transfer prior to the loss. This is so
because such a stipulation after the loss occurs shall hinder the transmission of property.
Neither does it affect the insurer as its liability is already fixed and what is actually
assigned is the money claim or chose of action, not the contract itself.
3.
The exception is Section 173 that provides that the transfer of a fire insurance
policy to any person or company who acts as an agent for or otherwise represents the
issuing company is prohibited and is void insofar as it affects other creditors of the
insured.
NOTICE AND PROOF OF LOSS
WHEN MUST NOTICE OF LOSS BE GIVEN AND BY WHOM
1.
Notice of Loss must be given without unnecessary delay by the insured or some
person entitled to the benefit of the insurance. If not so given, the insurer is
exonerated.145
2.
The meaning of without unnecessary delay is within a reasonable time, depending
on circumstances of a peculiar case, although courts have construed the requirement
liberally in favor of the insured.
2.1 Note the specific application to fire insurance due to the nature of the loss and
urgent need to determine the cause thereof. The longer the period that lapses from the
time of loss, the greater is the opportunity of the insured to tamper with the evidence in
preparation for a fraudulent claim.
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.146
144

146
145
2.
If in the giving of preliminary proof of loss, a certification or testimony of a third
person other than the insured is required, it is sufficient for the insured to use
reasonable diligence to procure it. In case of refusal to give it, the insured can furnish
reasonable evidence to the insurer that such refusal was not induced by any just
grounds of disbelief in the facts necessary to be certified or testified. Once shown or
given, the requirement may be dispensed with.147
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. 148 As when: It is required to be sworn to but is
accepted by the insurer
2.
When the insurer denies liability on a ground other than the defect in the notice or
proof of loss. As when: denial of claim is based on nullity of the contract.
WHEN IS DELAY IN THE GIVING OF NOTICE WAIVED
1.
If it is caused by any act of the insurer. As when: the insurer accepts payment of
the premium with full knowledge that the premises have been lost or damaged will be
estopped from claiming delay in the giving of notice of loss.
2.
149
If the insurer omits to make an objection promptly and specifically on that ground.
As when: despite a delay, the insurer does not object
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.
1.1 The right of subrogation accrues upon payment of the insurance claim.
1.2 Note that subrogation takes effect by operation of law and does not require the
consent of the wrongdoer.150
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.
147

149
150
Firemans Fire Insurance vs. Jamilla and Company, 70 SCRA 328
148
3.
If the insured releases the wrongdoer from liability before payment by the insurer,
the insured destroys his right to collect from the insurer. 151 If the insured releases the
wrongdoer after receiving payment from the insurer, the insurer can recover from the
insured the proceeds paid.152
4.
Subrogation is discretionary on the part of the insurer. It may or may not exercise
the right.153 Hence, no one can force it to exercise the right even if it has paid the
insured.
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.154
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 is the same.
2.1 There is a provision as to double insurance to prevent over-insurance, thereby
preventing fraud.
151
Sy Keng vs. Queensland Insurance Co. Ltd., 54 OG 351

Manila Mahogany Mfg. Corp. vs. Court of Appeals, 154 SCRA 651
153
FF Cruz & Co. vs. Court of Appeals, 164 SCRA 731
154
152
EFFECTS OF OVER-INSURANCE BY DOUBLE INSURANCE

1.
Insured, unless the policy otherwise provides, may claim payment from the
insurers in such order as he may select up to the amount for which the insurers are
severally liable under their respective contracts. As when: A house is insured with X
Insurance for PHP 10,000.00, with Y Insurance for PHP 20,000.00, and with Z Insurance
for PHP 20,000.00. It is valued at PHP 20,000.00. 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 PHP 10,000.00 from X Insurance and another PHP
10,000.00 from either Y Insurance or Z Insurance
2.
Where the policy under which the insured claims is a valued policy, the insured
must give credit as against the valuation for any sum received by him under any policy
without regard to the actual value of the subject matter insured. As when: A owns a
house valued at PHP 40,000.00. He insured it with X Insurance for PHP 35,000.00 and
with Y Insurance for PHP 5,000.00. The value of the house with both companies is PHP
20,000.00. If it is lost, A can collect PHP 5,000.00 from Y Insurance. He cannot collect
PHP 35,000.00 from Y Insurance but only the difference between the value of the house,
PHP 20,000.00 and the value of the policy with Y Insurance, PHP 5,000.00.
3.
Where the policy under which the insured claims is an unvalued policy, he must
give credit, as against the full insurable value, for any sum received by him under any
policy. As when: A insured his house with X Insurance for PHP 40,000.00 and with Y
Insurance for PHP 30,000.00, and with Z Insurance for PHP 20,000.00. The policies are
open. The loss is PHP 70,000.00. If Y Insurance and Z Insurance have already paid PHP
50,000.00, X Insurance will only have to pay A, the difference between what he received
from Y and Z Insurance, PHP 50,000.00 and the amount of loss PHP 70,000.00 or PHP
20,000.00.
4.
Where the insured receives any sum in excess of the valuation in case of a valued
policy or the insurable value in case of an unvalued policy, he must hold such sum in
trust for the insurers, according to their right of contribution among them. As when: if A
collects PHP 35,000.00 from X Insurance and PHP 5,000.00 from Y Insurance when the
value of the house is only PHP 20,000.00, he must hold the PHP 20,000.00 excess in
trust. If the policies are open, if A can collect PHP 40,000.00 from X Insurance, PHP
30,000.00 from Y Insurance and PHP 20,000.00 from Z Insurance, when the actual loss is
only PHP 70,000.00, he must hold the excess recovery in trust for the insurers subject to
the application of the contribution clause.
5.
Each insurer is bound, as between himself and the other insurers to contribute
ratably to the loss in proportion to the amount for which it is liable under his contract.
This is referred to as the Principle of Contribution which has been incorporated in almost
all policies, that should there be other insurances covering the same property, the
liability of the company would be limited to its ratable proportion of the loss or
damage.155
5.1
155
This is also known as the contribution clause.
5.2 The formula is: Insurers Policy / Total Amount of policies multiplied by the amount
of loss equals the share of the insurer.
Example: 10K x 20K = 4,000 X Insurance
50K
20K x 20K = 8,000 Y Insurance
50K
20K x 20K = 8,000 Z Insurance
50K
If Z Insurance paid PHP 20,000.00 but since its share is only PHP 8,000.00, it may
collect PHP 4,000.00 from X Insurance and PHP 8,000.00 from Y Insurance, so that it
only pays its ratable share.
TEST TO DETERMINE EXISTENCE OF DOUBLE INSURANCE
1.
The test is: whether the insured, in case of happening of the risk, can be directly
benefited by recovering on both policies? If so, there is double insurance.
VALIDITY OF DOUBLE INSURANCE
1.
If there is an other insurance clause or one that prevents other insurance on the
property except with the consent of the company, then it will prevent the enforcement
of the policy, the policy then will be null and void.
2.
If there is no other insurance clause, then double insurance is allowed but the
provisions of Section 94 must be followed because property insurance is a contract of
indemnity.
DISTINGUISHING OVER INSURANCE FROM DOUBLE INSURANCE
1.
In double insurance, there must be 2 or more insurers. In over insurance, 1 insurer
is sufficient.
2.
In double insurance, the total amount of the policies need not exceed the value of
insurable interest. In over insurance, the value must always be in excess of the insurable
interest.
REINSURANCE
WHAT IS REINSURANCE
1.
Reinsurance occurs when an insurer procures a 3 rd person to insure him against
loss or liability by reason of such original insurance.156
WHEN REINSURANCE COMPULSORY
156
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. 157
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. 158
DISTINGUISH REINSURANCE FROM DOUBLE INSURANCE
1.
In double insurance, the insurer remains an insurer. In reinsurance, the insurer
becomes the insured.
2.
In double insurance, the subject matter is property. In reinsurance, the subject
matter is the insurers risk or liability
3.
In double insurance, the same interest and risk is insured with another. In
reinsurance, different risk and interest are insured,
WHAT MUST BE COMMUNICATED WHEN THE ORIGINAL INSURER OBTAINS REINSURANCE
1.
Except in automatic reinsurance treaties, it must communicate (1) all
representations of the original insured (2) all information or knowledge he possesses
whether previously or subsequently acquired, which are material to the risk. 159 As when:
after issuance of the policy, the original insured had a bad reputation and that he had
burned a building, the reinsurance is rendered void if it is not disclosed. Note though: the
fact that the representations on the original insured were untrue at the time of the
execution of the reinsurance will not affect liability of the insurer, provided they were
true at the time of the original contract.
1.1 An automatic reinsurance treaty is one where two or more insurance companies
agree in advance that they will reinsure a part of any line of insurance taken by the
other. Since such contracts are self-executing and the obligation attaches automatically,
the information required to be communicated herein could not influence the reinsurer in
deciding whether or not to accept the reinsurance because it is automatic.
WHAT KIND OF CONTRACT IS REINSURANCE
1.
It is presumed to be a contract of indemnity against liability, and not merely
against damage.160
1.1 As a rule, the reinsurer is not liable to the reinsured for a loss under an original
policy if the reinsured is not liable to the original policy holder. As when: A insured his car
against vehicular accidents with B Insurance. B Insurance reinsures the policy with C
Insurance. A violates the policy by allowing an unlicensed driver to use the vehicle. B
157

159
160
158
insurance cannot claim against C Insurance on the reinsurance as it was never liable to
A.
1.2 But when the reinsured becomes liable under the original policy, it may obtain
payment from the reinsurer even before paying the loss to the original insured. As when:
A insured his house with X Insurance. X Insurance reinsures with Z Insurance. The house
is burned, but X Insurance cannot pay because it is insolvent. X Insurance can still collect
from Z Insurance because it is a contract of indemnity against liability and not merely
against damage. The subject of the reinsurance contract is the insurers risk not the
property insured in the original policy. It is not necessary that the insurer first pay a
claim on the original policy before claiming from the reinsurer.
WHAT IS THE EXTENT OF THE LIABILITY OF THE REINSURER
1.
The liability of the reinsurer is measured by the liability of the reinsured to the
original policy holder provided, it does not exceed the amount of reinsurance. As when: A
insures his house valued at PHP 1,000,000.00 with X Insurance for PHP 1,500,000.00. X
Insurance then reinsured with Z Insurance for PHP 1,200,000.00. The house burns. The
liability of Z Insurance is only up to 1 million, 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
1.
The original insured has no interest in the contract of reinsurance. 161 Hence, only
the reinsured can claim against the reinsurer.
CLASSES OF INSURANCE
MARINE INSURANCE
WHAT IS MARINE INSURANCE
1.
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 shipment, while awaiting shipment or during delays,
storage, transshipment or reshipment incident thereto, including war risks, marine
161
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, and
(e)
Marine Protection and Indemnity insurance meaning insurance against, or
against legal liability of the insured for loss damage or expense incident to ownership,
operation, chartering, maintenance, use, repair or construction of any vessel, craft or
instrumentality in use in ocean or island waterways, including liability of the insured for
personal injury, illness or death or for loss or damage to the property of another
person.162
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
law.
It does not include normal motor vehicle insurance which is treated separately by
WHAT ARE THE DIVISIONS OF TRANSPORTATION INSURANCE

1.
The divisions
pertaining primarily
pertaining primarily
property shipped by
of transportation insurance are: (a) Ocean Marine Insurance

to sea perils of ships and cargoes, and (b) Inland Marine Insurance
to land or over land, but sometimes water transportation perils of
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,
and (d) floater- providing protection to personal property, such as precious stones,
jewelry, works of art, wherever it may be located subject always to the territorial limits of
the contract and need not necessarily be in the course of transportation.
162
2.
Note also that marine insurance may be in the form of property insurance,
indemnifying the insured for loss or damage to property 163 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.164
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 includes 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.
2.
Generally, perils of the ship are not covered. These are losses or damages that
result from (a) natural and inevitable action of the sea (b) ordinary wear and tear of the
ship (c) negligent failure of the ship owner to provide the vessel with the proper
equipment to convey the cargo under ordinary conditions. As when: (a) Insurance upon a
cargo of rice, when sea water entered the compartment where the rice was found
through a defective steel pipe (b) The insured loaded logs unto a barge. The logs are
covered by insurance. The barge sank due to improper loading and leaks because the
barge was not provided with tarpaulins that could have prevented the barge from
retaining sea water splashing into it during the voyage.
WHAT PERILS ARE INSURED IN AN ALL RISKS POLICY

1.
It is to be construed as creating a special insurance and extending to all risks than
are usually contemplated and will cover all losses except such that may arise from
intentional fraud, intentional misconduct, or that otherwise excluded. It may include all
losses whether arising from a marine peril or not, to include pilferage during a war. 165
2.
This can also be contained in an All Risks Clause which is one that covers any loss
other than a willful and fraudulent act of the insured and avoids putting upon the
insured the burden of establishing that the loss was due to a peril within the policys
coverage, whether arising from a marine peril or not provided the risk is not excluded.
163
Par. (1), Section 99

Par. (2), Section 99
165
Filipino Merchants Company vs. Court of Appeals, 179 SCRA 638
164
DEFINITION OF OTHER TERMS

1.
Barratry is a willful act of the master and crew in pursuance of some fraudulent or
unlawful purpose without the consent of the owner and to the prejudice of his interest,
such as the burning of the ship or unlawfully selling the cargo.
2.
Inchmaree Clause is a provision in marine insurance that it shall cover loss or
damage to the hull or machinery through the negligence of the master, charterers,
mariners, engineers or pilots through explosion, bursting of boilers, breakage of shafts or
through any latent defect in the hull or machinery. This is also known as the Negligence
Clause.
WHAT CONSTITUTES INSURABLE INTEREST IN OCEAN MARINE INSURANCE

1.
The owner of a vessel has insurable interest in the vessel, and such shall continue
even if the vessel has been chartered by one who covenants to pay the owner the value
of the vessel upon loss but in case of loss, the insurer is liable only for the part of the loss
which the insured cannot recover from the from the charterer. 166
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. 167
2.1 Bottomry and Respondentia are loans payable only if the vessel (bottomry) or the
goods (respondentia) given as security for said loan arrives safely at port from
contemplated voyage.
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.168
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. 169
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
166

168
169
167
board or there is contract to put them on board and the vessel and goods are ready for
the specified voyage.170
PERSONS/ PARTIES OTHER THAN THE OWNER WHO HAVE INSURABLE INTEREST
1.
One who has an interest in the thing from which profits are expected to proceed,
has insurable interest on the profits. 171 As when: owner of cargo transported on a vessel
not only has insurable interest on the cargo but also on the expected profits from a
future sale.
2.
The charterer of a ship has insurable interest to the extent that he is liable to be
damnified by its loss.172 As when: A charters Bs vessel on condition that A would pay B
in case of loss the amount of PHP 300,000.00. A has insurable interest to the extent of
PHP 300,000.00.
CONCEALMENT IN MARINE INSURANCE

1.
A party is bound to communicate, in addition to what is required by Section 28
referring to facts within his knowledge, material to the contract, other party has not the
means of ascertaining, as to which party with 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 30.173
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.
As when: 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.174
3.
While concealment as a rule entitles the injured party to rescind, the rule must
yield to Section 110 as it does not vitiate the contract but merely exonerates the insurer
from a loss resulting from the risk concealed when they relate to (a) the national
character of the insured (b) the liability of the thing insured to capture and detention (c)
the liability to seizure from breach of foreign laws of trade (d) the want of the necessary
documents (e) the use of false/simulated documents. As when: The vessel is seized due
170

172
173
174
171
to lack of documents, the insurer is exonerated. If the vessel is lost due to a storm, the
insurer is liable despite concealment of the lack of documents.
DISTINGUISHING ORDINARY CONCEALMENT FROM THAT IN MARINE INSURANCE
1.
In ordinary insurance, opinion or belief of a 3rd person or own judgment of the
insured is not material and need not be communicated. In marine insurance, the belief or
expectation of a 3rd person in reference to a material fact is material and has to be
communicated.
2.
In ordinary insurance, a causal connection between the fact concealed and cause
of loss is not necessary for the insurer to rescind, in marine insurance the concealment
of any of the matters stated in Section 110 merely exonerates the insurer from loss, if
the loss results from the fact concealed.
PRESUMPTION OF A PRIOR LOSS
1.
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. 175
REPRESENTATION IN MARINE INSURANCE

WHEN IS THE INSURER ENTITLED TO RESCIND
1.
If the representation is intentionally false in any material respect, or, in respect of
any fact on which the character and nature of the risk depends, the insurer may
rescind.176
2.
However, the eventual falsity of a representation as to an expectation does not, in
the absence of fraud, avoid the contract. 177 Such as statements as to time of sailing,
general nature of the cargo or amount of profits.
IMPLIED WARRANTIES IN MARINE INSURANCE
1.
In every contract of marine insurance upon a ship or freight, freightage or upon
anything which is the subject of marine insurance, there is an implied warranty that the
ship is seaworthy.178
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. 179
175

177
178
179
176
1.2
Note that 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 transshipped at an immediate port, in which case each vessel upon
which the cargo is shipped or transshipped must be seaworthy at the commencement of
each particular voyage180 (c) where different portions of the voyage contemplated in the
policy differ in respect to the things requisite to make the ship seaworthy, in which case
it must be seaworthy at the commencement of each portion.181
1.4 The warranty of seaworthiness extends not only to the condition of the structure of
the ship, but it requires that (a) it be properly laden or loaded with cargo (b) is provided
with a competent master, sufficient number of officers and seamen (c) it must have the
requisite equipment and appurtenances like ballasts, cables, anchors, cordage, sails,
food, water, fuel, lights and other necessary and proper stores and implements for the
voyage.182
1.5 Note that while a ship may be seaworthy for purposes of insurance on it, it may by
reason of being unfit to receive cargo, be unseaworthy for the purpose of insurance on
the cargo.183 As when: A cargo of wheat was laden on a ship which had a port hole not
securely fastened at the time of lading. The port hole was a foot above the water line,
and in the course of the voyage, water entered the cargo area and damaged the wheat.
The ship was deemed unseaworthy with reference to the cargo, hence the insurer of the
cargo was not liable.184
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 it
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 owners interest from any liability from any loss
arising therefrom.185 Hence, if loss is not one due to the defect or the peril was not
increased by the defect, the insurer is still liable.
180

182
183
184
Go Tiaco vs. Union Society of Canton, 40 Phil 40
185
Section 118, Insurance Cide
181
2.
It shall carry the requisite documents to show its nationality or neutrality and that
it shall not carry any document that will cast reasonable suspicion on the vessel.186
2.1 This warranty arises only when the nationality or neutrality of the vessel or the
cargo has expressly been warranted.
3.
That the vessel shall not make any improper deviation from the intended voyage.
3.1 The intended voyage is determined as follows: (a)

When it is described by
places of beginning and ending, the voyage is the course of sailing fixed by mercantile
usage between those places.187 (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.188
3.2 A deviation is a 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.189
3.3 A deviation is proper: (a)
When it is caused by circumstances over which
neither the master nor the owner of the ship has any control. As when: An ailment strikes
the crew of the vessel (b)
When necessary to comply with a warranty, or to avoid a
peril, whether or not the peril is insured against. As when: repairs are necessary or to
avoid getting caught in a conflict (c)
When made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a peril. As when: undertaken to avoid the eye
of a storm (d)
When made in good faith, for the purpose of saving human life or
relieving another vessel in distress. As when: assistance is given. Any deviation that is
not included is an improper deviation.190
3.4 When there is an improper deviation, the insurer is not liable for any loss
happening to the thing insured subsequent to an improper deviation. 191 This is so
whether the risk has been increased or diminished.
4.
That the vessel does not or will not engage in any illegal venture.
LOSSES IN MARINE INSURANCE

1.
Losses in marine insurance may be partial or total.192
1.1
A total loss may be actual or constructive.193
2.
A loss that is not total is partial.194
186

188
189
190
Sections 124, 125, Insurance Code
191
192
193
194
187
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.195
3.1 This liability extends to damages, expenses of discharging, storage, reshipment,
extra freightage and all other expenses incurred in saving the cargo reshipped up to the
amount insured, nothing however shall render the insurer liable for an amount in excess
of the insured value or if none, of the insurable value.196
ACTUAL TOTAL LOSSES

1.
If it is an actual total loss, it may be caused by: (a) total destruction of the thing
insured (b) the irretrievable loss of the thing by sinking or by being broken up (c) any
damage to the thing which renders it valueless to the owner for the purpose that he held
it (d) any other event which effectively deprives the owner of the possession, at the port
of destination, of the thing insured.197
1.1 As when: When palay was rendered valueless because they began to germinate,
thus it no longer remains as the same thing, it was held to be an actual total loss.198
2.
An actual total loss can be presumed from the continued absence of the ship
without being heard of.199
2.1 The length of time which is sufficient to raise this presumption depends on the
circumstances of the case.
3.
Upon an actual total loss, the insured is entitled to payment without notice of
abandonment200 and if the insurance is confined to an actual loss, it will not cover a
constructive loss, but it will cover any loss, which necessarily results in depriving the
insured of possession, at the port of destination of the entire thing insured. 201
3.1 This means that the policy can limit a claim for payment to an actual total loss
only.
CONSTRUCTIVE TOTAL LOSSES
195

197
198
Pan Malayan vs. Court of Appeals, 201 SCRA 382
199
200
201
196
1.
It is a constructive total loss when the person insured is given a right to
abandon.202
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.203
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 thereof in value is actually lost or would have to be expended
to recover it from the peril (b) if it is injured to such extent as to reduce its value by more
than of value (c) if the thing injured is a ship, and the contemplated voyage cannot
lawfully be performed without incurring either an expense to the insured of more than
the value of the thing abandoned or a risk which a prudent man would not take under
the circumstances (d) if the insured is freightage or cargo and the voyage cannot be
performed, nor another ship procured by the master, within a reasonable 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.204
3.
Abandonment when made must neither be partial or conditional. 205 Hence, it must
be total and 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.206
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.207
5.
Notice of abandonment is made by giving notice oral or written notice to the
insurer but if orally given, a written notice of such must be submitted within seven days
from giving oral notice.208
5.1 The notice must be explicit and specify the particular cause of the abandonment
but need state only enough to show that there is probable cause therefore and need not
be accompanied by proof of interest or loss.209
202

204
205
206
207
208
209
203
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. 210
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 The mere silence of the insurer for an unreasonable length of time after notice
shall be construed as acceptance.211
6.3 Once accepted, it is conclusive between the parties, The loss is admitted together
with the sufficiency of the abandonment.212
6.4 It is also irrevocable upon acceptance and upon its being made unless the ground
upon which it is was made proves to be unfounded.213 Thus, if the insurer accepts the
abandonment, it cannot raise any question as to insufficiency of the form under Section
143, time for giving notice under Section 141, or right to abandon under Section 139.
The exception is under Section 152 when the ground is unfounded which is defined in
Section 142, and/ or as related to Section 145.
7.
The effects of an 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. 214
Note though that if the insurer pays for a loss as if it were an actual total loss, he is
entitled to whatever may remain of the thing insured, or its proceeds or salvage as if
there has been a formal abandonment. 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 the risk of the insurer and for his benefit. 215 In effect, the
agents of the agents of the insured become agents of the insurer. This retroacts to the
date of the loss when abandonment is effectively made.
7.1 On an accepted abandonment involving a ship, freightage earned previous to the
loss belongs to the insurer of the freightage, that subsequently earned belongs to the
insurer of the ship.216 As when: The contemplated voyage for the transport of cargo is
from Point X to Point Y. In between, a loss occurs and the ship is abandoned. The
freightage already earned from Point X until the point of loss, belongs to the insurer of
the freightage. If the ship is subsequently repaired, and continues on to point Y, the
freightage due belongs to the insurer of the ship.
8.
If abandonment is not accepted despite its validity, the insurer is liable upon an
actual total loss, deducting from the amount any proceeds of the thing insured that may
210

212
213
214
215
216
211
have come to the hands of the insured. 217 This is due to the fact that under Section 149
which provides that if notice is properly given, it does not prejudice the insured, if the
insurer refuses to accept the abandonment.
9.
The fact that abandonment is not made or is omitted does not prejudice the
insured as he may nevertheless recover his actual loss.218
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 is a damage or expense caused
to the vessel or cargo which has not inured to the common benefit and profit of all
persons interested in the cargo or vessel. This damage or expense is borne ordinarily by
the owner of the vessel or cargo that gives rise to the expenses or suffered the damage.
As when: damage sustained by a cargo from the time it is loaded to the time it is
unloaded or additional expenses that are incurred by the vessel from the time it puts out
to sea until it reaches its destination (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 and cargo or both at the
occurrence of the average shall contribute to the loss. As when: cargo is jettisoned.
3.
As a rule, when it has been agreed that an insurance upon a particular thing or
class of things shall be free from a particular average, a marine insurer is not liable for a
particular average loss not depriving the insured at the port of destination, of the whole
such thing, or class of things, even though it becomes entirely worthless, but such
insurer is liable for his proportion of all general average loss assessed upon the thing
insured.219
IN CASE OF A GENERAL AVERAGE LOSS
1.
The insurer is liable for the loss falling upon the insured, through a contribution in
respect to the thing insured when required to be made by him towards a general average
loss called for a peril insured against but liability is limited to the proportion of the
contribution attaching to his policy value where this is less than the contributing value of
the thing insured.220
1.1 This means that the insured can hold his insurer liable for his contribution up to the
value of the policy.
RIGHT OF SUBROGATION
217

219
220
218
1.
When a person insured in a contract of marine insurance has a demand against the
others for contribution, he nay 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. As when: the cargo liable for
contribution has been removed from the vessel, nor (b) when the insured having the
right and opportunity to enforce contribution from others, has neglected or waived the
exercise of the right.221
2.
This means that the insured has a choice of recovery on the happening of a
general average loss. They are: (a) enforcing the contribution against interested parties,
or (b) claiming from the insurer. If it be the latter, subrogation takes place.
MEASURE OF INDEMNITY IN MARINE INSURANCE
1.
If the policy is valued:A valuation in the policy of marine insurance is conclusive
between the parties thereto in the adjustment of either a partial or total loss, if the
insured has some interest at risk and there is no fraud on his part.
1.1 If there is fraud in valuation, it would entitle the insurer to rescind by way an
exception to conclusiveness.222
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. As when: a person purchases a vessel subject to bottomry but he is not aware of
it , he may upon a loss show the real value of the vessel. The insurer cannot rescind.
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. 223 The effect is
that the insured is deemed a co-insurer if the value of the insurance is less than the
value of the property. This applies even in the absence of a stipulation in the contract as
is also known as the Average Clause. As when:A vessel valued at PHP 500,000.00 is
insured for PHP 400,000.00. The vessel is damaged to the extent of PHP 200,000.00.
The insurer is liable not for the PHP 200,000.00 but only for PHP 160,000.00. The formula
being:
Insurance x Loss = Liability
Value
1.4 The requisites for the application of the Average Clause are: (a) insurance is for
less than actual value (b) the loss is partial
1.5 Note that co-insurance exists as a general rule, only in marine insurance. In fire
Insurance, there is no co-insurance unless expressly stipulated. 224 In life insurance, there
is none as value is fixed in the policy.225
221

223
224
Sections 171, 172, Insurance Code
225
222
1.6 Section 157 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. 226 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. 227 As when: Goods are valued
at PHP 500,000.00, expected profits are PHP 50,000.00. Goods suffer a partial loss of PHP
100,000.00. The insured can recover PHP 10,000.00 on the insurance over profits.
Insurance of profits x loss = Amount Recoverable
Value of Goods
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.228
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. 229 As when:
goods are valued at PHP 500,000.00, if only PHP 250,000.00 are shipped and exposed to
the risk, the valuation is reduced by . In case of a total loss, the insured can only
demand of valuation or PHP 250,000.00.
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 ladem on board or
where that cost cannot be ascertained, its market value at the time and place of lading,
adding the charges incurred in purchasing and placing it on board, but without reference
to any loss incurred in raising money for its purchase or any drawback on its exportation
or fluctuation of the market at the port of destination or expenses incurred on the way or
on arrival. A drawback is government allowance upon duties on imported merchandise
when the importer re-exports instead of selling it.
2.2 The value of freightage is the gross freightage, exclusive of primage, without
reference to the cost of earning it. Primage is the compensation paid by the shipper to
the master of the vessel for his care and trouble bestowed on the goods of the shipper,
which he retains in the absence of a contrary stipulation with the owner of the vessel.
2.3
226
The cost of insurance is in each case to be added to the value thus estimated. 230

228
229
230
227
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 proportial of
the value which the market price at that port of the thing so damaged bears to the
market price it would brought if sound.231 Meaning if reduction in value is 1/5, then
amount of recovery on the insurance is also 1/5.
The formula is:
(a)
Market Price in sound state less Market Price in damaged state equals Reduction in
Value.
(b)
Reduction in Value divided by Market Price in sound state multiplied with the
Amount of Insurance equals the Amount of Recovery
3.
Regardless of whether the policy is value or open:
An insurer is liable (a) for all
the expenses attendant upon a loss that forces the ship into port to be repaired. These
refer to expenses for repairing the ship due to damages attributable to perils insured
against, as well as other expenses such as launching, towing, raising and navigating the
vessel. These expenses are also called Port of Refuge Expenses (b) If so stipulated, that
the insured shall labor for recovery of the property insured, the insurer is liable for
expenses incurred thereby. As when: the vessel is unlawfully detained. This is also known
as the Sue and Labor Clause.
3.1 In either case, said expenses are to be added to a total loss, if that afterwards
occurs.232
FIRE INSURANCE
WHAT IS INCLUDED IN FIRE INSURANCE
1.
Insurance against fire may include loss or damage due to lightning, windstorm,
tornado, earthquake or other allied risks when such risks are covered by extensions to
the fire insurance policy or under separate policies.233
1.1
Hence, while it is not limited to loss or damage due to fire, coverage as to other
risks is not automatic.
FIRE DEFINED
231

233
232
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. As when:
Damage caused by smoke from a lamp when no ignition occurred outside the lamp.
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 it (a) burns at a place where it is not intended to burn (b) starts
as a friendly fire but becomes hostile if it should escape from the place where it is
intended to burn and becomes uncontrollable (c) is a friendly fire which becomes hostile
by not escaping from its proper place but because of the unsuitable material used to
light it and it becomes inherently dangerous and uncontrollable as opposed to 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 to
which it is limited by the policy, made without the consent of the insurer, by means
within the control of the insured, and increasing the risk, which entitles the insurer to
rescind the contract of insurance.234
2.
From the foregoing definition, the following requisites must be present to
constitute an alteration so as to allow the rescission of the contract:
2.1 The use or condition of the thing insured is specifically limited or stipulated in the
policy. Note that the contract of insurance is not affected by an act of the insured
subsequent to the execution of the policy, which does not violate its provisions, even
though it increases the risk and is the cause of the loss. 235 As when: If the insured stored
thinner, paints and varnish. A fire subsequently occurs and there is no express
prohibition as to storage of such items, even if the risk is increased, the insurer is still
liable236 or the policy states that the 1 st floor is unoccupied, it is later occupied. There is
no alteration that entitles the insurer to rescind, the description of the house cannot be
said to be a limitation as to use.237
2.2
There is an alteration in the said use or condition
2.3
The alteration is without the consent of the insurer.
234

236
Bachrach vs. British Assurance, 17 Phil 555
237
Hodges vs. Capital Insurance, 60 OG 2227
235
2.4 The alteration is made by means within the insureds control. If the alteration be by
accident or means beyond the control of the insured, the requisite is not met. As when:
the alteration is made by a tenant with the consent or knowledge of the insured, the
insurer can rescind. If the alteration was undertaken by the tenant without the consent
or knowledge of the insured, the insurer cannot rescind.
2.5 The alteration increases the risk of loss. Note that any alteration in the use or
condition of the thing insured from that to which is limited by the policy, which does not
increase the risk does not affect the contract.238
3.
Rescission is due to the fact that payment of the premium is based on the risk as
assessed at the time of the issuance of the policy when the risk is increased without a
corresponding increase in premium, it is as if no premium is paid.
MEASURE OF INDEMNITY IN FIRE INSURANCE
1.
In an Open Policy, it is the expense it would be to the insured at the time of the
commencement of the fire to replace the thing lost or injured in the condition in which it
was at the time of the injury.
2.
In a Valued Policy, it is the same as in marine insurance, the valuation as agreed
upon by the parties is conclusive in the adjustment of either a partial or total loss in the
absence of fraud.239
HOW IS THE VALUATION MADE
1.
Whenever the insured would like to have a valuation stated in a policy insuring a
building or structure against fire, it may be made by an independent appraiser, who is
paid by the insured and the value may then be fixed between the insurer and the
insured.
2.
Subsequently, the clause is then inserted in the policy that said valuation has thus
been fixed.
3.
In case of loss, provided there is no change increasing the risk without the consent
of the insurer or fraud on the part of the insured, the insurer will pay the whole amount
so insured and stated in the policy is paid.
3.1
If it is a partial loss, the whole amount of the partial loss is paid.
3.2 In case there are 2 or more policies, each shall contribute pro-rata to the total or
partial loss but the liability of the insurers cannot be more than the amount stated in the
policy.
4.
Or the parties may stipulate that instead or payment, the option to repair, rebuild
or replace the property wholly or partially damaged or destroyed shall be exercised. 240
238

Section 171 Insurance Code
240
239
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.241
CASUALTY INSURANCE
CASUALTY INSURANCE DEFINED
1.
Generally, it is one that covers loss or liability arising from an accident or mishap,
excluding those that fall exclusively within other types of insurance like fire or marine.
2.
It includes Employers liability, workmens compensation, public liability, motor
vehicle liability, plate glass liability, burglary and theft ,personal accident and health
insurance as written by non-life companies, and other substantially similar insurance. 242
DEFINITIONS
1.
Employers liability is insurance obtained by the employer against liability to an
employee for damages caused or arising from injuries by reason of his employment
2.
Workmens compensation is insurance secured by an employer for the benefit of
his employees and laborers for loss resulting from injuries, disablement, or death through
industrial accident, casualty, or disease in connection with their employment. Note that
most if not all types of this insurance is underwritten by the GSIS or the SSS.
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 however 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.
241
242

SURETYSHIP
DEFINED
1.
An agreement whereby a party called the surety guarantees the performance by
another party called the principal or obligor of an obligation or undertaking in favor of a
3rd party called the obligee.243
1.1 This includes official recognizances, bonds or undertakings issued by any company
under Act No. 536, as amended by Act No. 2206 in relation to government transactions
by authorized companies.
WHAT IS THE LIABILITY OF THE SURETY
1.
It is joint and several or solidary with the obligor but limited to the amount of the
bond and determined strictly by the terms of the contract in relation to the principal
contract between obligor and oblige.244
IS A SURETYSHIP CONTRACT VALID AND BINDING WHERE THE PREMIUM HAS NOT YET
BEEN PAID
1.
Generally, payment of the premium is a condition precedent. Hence the bond is
not valid. An exception is when it is issued and accepted by the obligee, it is valid
despite non- payment of the premium.245
WHAT OTHER LAWS GOVERN A SURETYSHIP CONTRACT
1.
In the absence of specific provisions, the Civil Code will apply in a suppletory
character if necessary to interpret contract provisions. 246
DISTINGUISHED FROM GUARANTY
1.
Suretyship distinguished from guaranty: (a)
A surety assumes liability as a
regular party to the agreement, a guarantors liability depends on an independent
agreement to pay if primary debtor fails to pay (b) A surety is primarily liable, a
guarantor is secondarily liable (c) A surety is not entitled to exhaustion, a guarantor is
entitled to exhaustion.
243

245
246
244
LIFE INSURANCE
DEFINED
1.
It is insurance on human lives and insurance appertaining thereto or connected
therewith.247
WHEN IS IT PAYABLE
1.
An insurance upon life may be made payable on (a) death of the person, or (b) his
surviving a specified period, or (c) or 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 or sums
periodically during life or a certain period. Note that contracts for the payment of
endowment or annuities are considered as life insurance contracts.
5.1 Distinguishing Life Insurance from Payment of Annuity: (a) In the former, it is
payable upon the death of the insured, while in the latter, it is payable during the
lifetime of the annuitant (b) In the former, the premium is paid in installments, while in
the latter, annuitant pays a single premium (c) In the former, there is lump sum payment
upon death, while in the latter, annuities are paid until death.
EXERCISE BY THE MINOR OF HIS RIGHTS AS INSURED OR BENEFICIARY

1.
As far as a minor, who is the insured or a beneficiary in an insurance contract, in
the absence or incapacity of a Judicial guardian, the father, in default, the mother, may
act in behalf of the minor without need of bond or court authority when it involves the
247
exercise of any right under the policy, to include but not limited to obtaining a policy
loan, surrendering the policy, receiving the proceeds of the policy and giving the minors
consent to any transaction on the policy provided the interest of the minor does not
exceed PHP 20,000.00.248
WHAT RISKS ARE COVERED
1.
Generally, all causes of death are covered unless excluded by law, by the policy or
public policy.
2.
A cause is excluded by law as when the beneficiary is the principal, accomplice or
accessory in bringing death of the insured.
2.1 It is excluded by the policy as when it is stipulated that it does not cover assault,
murder or injuries inflicted intentionally by a 3rd person. Note though, that where the
insured is not the intended victim, the insurer is liable. 249 What must be considered is
that death or injury is not the natural or probable result of the insureds voluntary act 250
as opposed to an act of the insured to confront burglars.251
2.2 It is excluded by public policy as when the insured is executed for a crime that he
committed.
3.
Suicide, if committed after the policy has been in force for a period of two years
from date of issue or last reinstatement is compensable unless policy provides a shorter
period.
3.1 Notwithstanding, it will be compensable if committed in the state of insanity
regardless of date of commission.252
IS A LIFE INSURANCE POLICY TRANSFERABLE OR ASSIGNABLE
1.
Life insurance may pass by transfer, will or succession to any person, whether he
has insurable interest or not.253
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.254
248

Calanoc vs. Court of Appeals, 98 Phil 79
250
Finman General Assurance Corporation vs. Court of Appeals, 213 SCRA 493
251
Biagtan vs. Insular Life Assurance Company, 44 SCRA 58
252
Section 180-A, Insurance Code
253
254
249
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. 255
2.
Hence, a life insurance policy has been held to be a valued policy.
BUSINESS OF INSURANCE
ORGANIZATION
1.
The term insurer or insurance company shall include all individuals, partnerships,
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.256 However, before it is allowed to transact the law requires it to secure a license
from the Insurance Commissioner.257
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
255

Hendersons Estate, 17Cal.2d, 853, 112P.2d, 605, 609
257
256
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. 258
2.2 The insurance aspect of their operations being an incident and not the main
purpose of the organization, and the insurance feature is adopted, not for purpose of
gain, but with the object of benevolence.
2.3 Do not confuse with 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 a Protection and Indemnity Club. A protection
and Indemnity Club (P & I Club) is an association composed of ship owners in general
who band together for the specific purpose of providing insurance cover on a mutual
basis against liabilities incidental to ship owning that the members incur in favor of third
parties.259 It is a form of insurance against third party liability, where the third party is
anyone other than the P & I Club and its members. It is therefore, a mutual insurance
association engaged in the marine insurance business and must be duly licensed by the
Insurance Commission.260
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.261
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 or contingent event, or to indemnify or to compensate any person or
persons or other corporations for any such loss, damage or liability, or to guarantee the
performance of or compliance with contractual obligations or the payment of debts of
others.262
REQUIREMENTS FOR A CERTIFICATE OF AUTHORITY FROM THE INSURANCE COMMISSION
1.
The requirements for a certificate of authority are: (a) qualified by Philippine Laws
to transact insurance business (b) has a name that is not in anyway similar to another
company (c) if organized as a stock corporation, it should have a paid up capital of no
less than PHP 5,000,000.00 (d) If it is organized as a mutual company or one whose
capital funds are not contributed by stockholders but by policy holders it must have
available cash assets of at least PHP 5,000,000.00 above all liabilities for losses reported,
expenses, taxes, legal reserves and reinsurance of all outstanding risks, and the
contributed surplus fund equal to the amounts required of stock corporations, PHP
258

Hyopsung Maritime Co., Ltd. vs. Court of Appeals, 165 SCRA 258, 260, L-77369, August 31, 1988.
260
White Gold Marine Services, Inc. vs. Pioneer Insurance and Surety Corp., 464 SCRA 448.
261
262
259
1,000,000.00 if a life insurance company or PHP 500,000.00, 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.263
MARGIN OF SOLVENCY
1.
The margin of solvency is the excess of the value of insurance companys admitted
assets exclusive of its paid up capital, in case of a domestic insurance company 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.264
2.
The required margin in case of life insurance companies is two percent (2%) of the
total amount of its insurance in force as of the preceeding calendar year on all policies
except term insurance.
2.1 In case of non life insurance companies, at least ten percent (10%) of total amount
of its net premium during the proceeding calendar year.
3.
In no case shall the margin of solvency be less that PHP 500,000.00.
3.1 If the requirement is not met, the insurance company is (a) not permitted to take
on any new risk and no dividends can be declared by the deficient company. 265
COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

CONCEPT OF COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
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 266 brought about by
insurance losses due to padded claims for property damage. Hence, property damage is
now optional.
HOW IS THE COMPULSORY NATURE IS 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 (a) policy
263
Section 184-193, Insurance Code

265
266
PD 1814 and PD 1455
264
of insurance or contract of insurance against passenger or 3 rd party liability for death or

bodily injury arising from motor vehicle accidents,or (b) guaranty in cash, or (c) surety
bond, to indemnify the death or injury to a third party other than a passenger, excluding
a member of the household, or a member of the family of a motor vehicle owner or lane
transportation operator or his employee in respect to death, bodily injury or damage to
property arising out of and in the course of employment or passenger 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 vehicles operator or his agents to ride without fare arising from the use
thereof.267
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 of
registration without compliance with Section 374.268
3.
A violation of the provision is punishable by a fine of not less than PHP 500.00 but
not more than PHP 1,000.00 and or imprisonment for not more than 6 months.269
3.1 If a Land Transportation Operator violates the prescribed minimum limits of
coverage270 it is sufficient cause for revocation of a certificate of public convenience. 271
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.272
DISTINGUISHED FROM OWN DAMAGE COVERAGE AND COMPREHENSIVE MOTOR VEHICLE

INSURANCE
1.
Third Party Liability answers for liabilities arising from death or bodily injury to 3 rd
persons or passengers.
1.1 Own Damage Insurance answers for reimbursement of the cost of repairing the
damage to vehicle of the insured.
1.2 Comprehensive Insurance answers for all liabilities/damages arising from the
use/operation of a motor vehicle, it includes Third Party, Own Damage, Theft and
Property Damage.
WHEN DOES THE LIABILITY OF THE INSURER ACCRUE
1.
In an insurance policy that directly insures against liability, the insurers liability
accrues immediately upon the occurrence of the injury upon which liability depends, and
267
Section 373-374, Insurance Code

269
270
271
272
268
does not depend on the recovery of judgment by the injured party against the insured.
Hence, there is no need for the insured to wait for a decision of the court finding him
guilty of reckless imprudence.
2.
The occurrence of an injury for which the insured may be liable immediately gives
rise to insurer liability. In fact, since third-party liability insurance insures against liability
to third persons, the injured party for whom the contract is intended can directly sue the
insurer. The purpose is to enable the injured person to proceed directly against the
insurer so as to avoid the probable insolvency of the insured who had directly caused the
damage.273
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.274
EFFECT OF A CHANGE IN OWNERSHIP OR CHANGE IN ENGINE

1.
There is no need to issue a new policy until the next date of registration provided,
the insurer shall agree to continue the policy and such change shall be indicated in a
second duplicate which is filed with the Land Transportation Office.275
PAYMENT OF CLAIMS
1.
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.276
1.1
The failure to file a claim will be deemed a waiver.
1.2 If a claim is filed but denied, an action must be brought within 1 year from date of
denial with the Insurance Commissioner or the Court, otherwise the right of action will be
deemed as having prescribed.
WHAT SHALL INSURANCE COMPANY DO UPON FILING OF THE CLAIM
1.
It shall forthwith ascertain the truth and extent of the claim and make payment
within 5 working days after reaching an agreement. If no agreement is reached, it must
nevertheless pay the No Fault Indemnity277 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.
273
Shafer vs. Judge, 167 SCRA 326

Malayan Insurance Co. inc. vs. Court of Appeals, 165 SCRA 536
275
276
277
274
1.1 Note though that in case of dispute as to enforcement of policy provisions, the
adjudication shall be within the original and exclusive jurisdiction of the commissioner
subject to Section 416, which provides for concurrent jurisdiction but the filing with the
Insurance Commissioner shall preclude filing with the court.278
WHAT IS THE NO FAULT INDEMNITY
1.
A no fault indemnity claim is a claim for payment for death or injury to a passenger
or third party without necessity of proving fault or negligence.
2.
This is payable by the insurer provided (a) indemnity in respect of one person shall
not exceed PHP 5,000.00 (b) the necessary proof of loss under oath to substantiate the
claim is submitted, these are: police report of accident and either the death certificate
and sufficient evidence to establish the payee or the medical report and evidence of
medical or hospital disbursement in respect of which refund is made.
3.
A claim under the no fault indemnity clause may be made against one motor
vehicle insurer only as follows: (a) in case of an occupant of a vehicle- against the insurer
of the vehicle in which the occupant is riding, mounting or dismounting from (b) in any
other case, from the insurer of the directly offending vehicle (c) in all cases, the right of
the party paying the claim to recover against the owner of the vehicle responsible for the
accident shall be maintained.
3.1 The term occupant must be distinguished from a passenger who is any farepaying person being transported and conveyed in and by a motor vehicle for
transportation of passengers for compensation, including persons expressly authorized
by law or by the vehicles operator or his agents to ride without fare. 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.279
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 insureds 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.280
2.
Thus the authorized driver clause is interpreted to refer to the insured or any
person driving on the order of the insured or with his permission provided, such person is
permitted to operate a motor vehicle in accordance with our licensing laws or regulations
and who is not otherwise disqualified.
278

Perla Compania de Seguros, Ins. vs. Ancheta, 164 SCRA 144, 148.
280
Villacorta vs. Insurance Commission, 100 SCRA 469
279
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 drivers license or that the same had
expired at the time of the accident.281
3.
Note the following jurisprudence in relation to the interpretation and application of
the authorized driver clause:
3.1 If the license of the driver other than the insured has expired, such person is not
authorized to operate a motor vehicle. The renewal of the license a week after the
accident shall not cure the defect.282
3.2 When a driver is issued a Temporary Operators 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.283
3.3 A tourist with a license issued in his home country but in the Philippines for more
than 90 days, is not authorized to operate a motor vehicle because it is as if he has no
license.284
3.4 A drivers license that bears all the earmarks of a duly issued license is a public
document that is presumed genuine.285
3.5 When the driver is authorized to drive, the fact that the purpose of the trip was not
authorized will not affect the right of the insured to recover from the insurer should the
vehicle be damaged.
3.6 When a motor vehicle is covered by a policy that includes theft, the insurer is liable
for the damage sustained by the insured vehicle on occasion of or while the theft is being
committed by a thief without a license to drive. 286The same is true is the thief had an
expired license. 287
3.7 The unauthorized use of a motor vehicle for a joy-ride constitutes theft and a prior
criminal conviction is not necessary to enable the insured to recover under a
comprehensive insurance policy.
OTHER PROVISIONS
1.
The Insurance Commissioner has, 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 attorneys fees does
not exceed PHP 100,000.00.288
281
Palermo vs. Pyramid Insurance Co., Inc., 161 SCRA 677

Tanco vs. Philippine Guaranty Co., 15 SCRA 313
283
Gutierrez vs Capital Insurance Co., Inc., 130 SCRA 618, PEZA vs. Alikpala, 160 SCRA 31
284
Stokes vs. Malayan, 127 SCRA 766
285
CCC Insurance Corporation vs. Court of Appeals, 31 SCRA 264
286
Malayan Insurance Company vs. Court of Appeals, 146 SCRA 45
287
Perla Compania de Seguros, Inc. vs. Court of Appeals, 208 SCRA 487
288
282
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.289
3.
Decisions are appealable to the CA within 30 days by notice of appeal. This matter
is now open to question.
289
Go vs. Office of the Ombudsman, 413 SCRA 608

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LECTURE NOTES ON INSURANCE

Revised December 2008

PD 1460, June 11, 1978

Section 2, Insurance Code

Fortune Insurance vs. CA, 244 SCRA 308

A person has insurable interest in life, health and property.

The insurer assumes the risk of loss

Fieldmans Insurance vs. De Songco, 25 SCRA 70

ON WHOSE LIFE AND HEALTH DOES A PERSON HAVE INSURABLE INTEREST IN

Himself, his spouse and of his children.

A pecuniary interest exists as between partners or the employer and employee.

Section 3, Insurance Code

Section 10, Insurance Code

An inchoate interest founded on an existing interest.

Section 17, Insurance Code

WHEN IS THE INSURANCE NOT SUSPENDED

Section 19, Insurance Code

When notwithstanding a prohibition, the consent of the insurer is obtained

Section 23, Insurance Code

The insured who is the party to be indemnified in case of a loss.35

Section 3, Insurance Code

Section 9, Insurance Code

Section 11, Insurance Code

Section 12, Insurance Code

Sunlife vs. Court of Appeals, 245 SCRA 269

Section 32, Insurance Code

absolute owner. Also a trustee, mortgagee or building contractor must communicate

Representations may be oral or written.

Section 34, Insurance Code

Section 40, Insurance Code

Section 43, Insurance Code

Tan vs. Court of Appeals, 174 SCRA 403

It is the written instrument in which a contract of insurance is set forth.75

HOW TO CONSTRUE THE POLICY

Clauses are forms containing additional stipulations.

Section 49, Insurance Code

It is also known as a binding slip or binder.

Section 51, Insurance Code

of premiums as the effectivity of the insurance is expressly provided 81 or a binding slip

Lim vs. Sunlife, 41 Phil 265

Del Val vs. Del Val, 29 Phil 534

Note the exceptions to this rule as found in Sections 20-24 and 57

WHAT ARE THE KINDS OF INSURANCE POLICIES

Section 56, Insurance Code

Section 63, Insurance Code

CANCELLATION OF THE POLICY

Section 64, Insurance Code

No particular form of words is necessary to create a warranty. 116

In case of doubt, the statement is presumed to be a representation not a warranty.

WHAT ARE THE KINDS OF WARRANTIES

Section 67, Insurance Code

They can be affirmative or promissory warranties.

EFFECT OF VIOLATION OF A WARRANTY

Section 71, Insurance Code

A warranty is presumed material while a representation must be shown to be so.

The agreed price for assuming and carrying the risk

WHEN IS THE INSURER ENTITLED TO A PREMIUM

Young vs. Midland Textiles, 30 Phil 617

The insured will be entitled to a return of the premiums paid when:

Section 77, Insurance Code

voidable on account of facts, the existence of which the

Section 79, Insurance Code

Section 79 (b), Insurance Code

Section 85, Insurance Code