Insurance

San Beda College of Law
30
MEMORY AID
IN
COMMERCIAL LAW
INSURANCE CODE
(P.D. No. 1460)
I. GENERAL CONCEPTS
CONTRACT OF INSURANCE
An agreement whereby one undertakes
for a consideration to indemnify another
against loss, damage or liability arising
from an unknown or contingent event.
(Sec. 2, par. 2, IC)
DOING AN INSURANCE BUSINESS OR
TRANSACTING AN INSURANCE BUSINESS
(Sec. 2, par. 4)
1. Making or proposing to make, as
insurer, any insurance contract;
2. Making or proposing to make, as
surety, any contract of suretyship as a
vocation, not as a mere incident to
any other legitimate business of a
surety;
3. Doing
any
insurance
business,
including a reinsurance business;
4. Doing or proposing to do any business
in substance equivalent to any of the
foregoing
II. CHARACTERISTICS OF AN INSURANCE
CONTRACT (The Insurance Code of the
Philippines Annotated, Hector de Leon,
2002 ed.)
1. Consensual it is perfected by the
meeting of the minds of the parties.
2. Voluntary
the
parties
may
incorporate such terms and conditions
as they may deem convenient.
3. Aleatory it depends upon some
contingent event.
4. Unilateral imposes legal duties only
on the insurer who promises to
indemnify in case of loss.
5. Conditional It is subject to
conditions the principal one of which
is the happening of the event insured
against.
6. Contract of indemnity Except life
and accident insurance, a contract of
insurance is a contract of indemnity
whereby the insurer promises to make
good only the loss of the insured.
7. Personal each party having in view
the character, credit and conduct of
the other.
REQUISITES OF A CONTRACT OF
INSURANCE (The Insurance Code of the
2002 ed.)
1. A subject matter which the insured has
an insurable interest.
2. Event or peril insured against which
may be any future contingent or unknown
event, past or future and a duration for
the risk thereof.
3. A promise to pay or indemnify in a fixed
or ascertainable amount.
4. A consideration known as premium.
5. Meeting of the minds of the parties.
1. Insurable Interest
2. Principle of Utmost Good Faith
An insurance contract requires utmost
good faith (uberrimae fidei) between the
parties.
The applicant is enjoined to
disclose any material fact, which he knows
or ought to know.
Reason: An insurance contract is an
aleatory contract. The insurer relies on
the representation of the applicant, who is
in the best position to know the state of
his health.
3. Contract of Indemnity
It is the basis of all property insurance.
The insured who has insurable interest
over a property is only entitled to recover
the amount of actual loss sustained and
the burden is upon him to establish the
amount of such loss (Reviewer on
Commercial Law, Professors Sundiang and
Aquino)
Rules:
a. Applies only to property insurance
except when the creditor insures
the life of his debtor.
b. Life insurance is not a contract of
indemnity.
c. Insurance contracts are not
wagering contracts. (Sec. 4)
4. Contract of Adhesion (Fine Print Rule)
Most of the terms of the contract do not
result from mutual negotiations between
the parties as they are prescribed by the
insurer in final printed form to which the
insured may adhere if he chooses but
which he cannot change. (Rizal Surety and
Insurance Co., vs. CA, 336 SCRA 12)
5. Principle of Subrogation
It is a process of legal substitution where
the insurer steps into the shoes of the
insured and he avails of the latters rights
against the wrongdoer at the time of loss.
The principle of subrogation is a normal
incident of indemnity insurance as a legal
effect of payment; it inures to the insurer
without any formal assignment or any
express stipulation to that effect in the
policy. Said right is not dependent upon
nor does it grow out of any private
contract. Payment to the insured makes
the insurer a subrogee in equity. (Malayan
Insurance Co., Inc. v. CA, 165 SCRA 536;
see also Art. 2207, NCC)
Purposes: (The Insurance Code of the
2002 ed.)
1. To make the person who caused the
loss legally responsible for it.
2. To prevent the insured from receiving
a double recovery from the wrongdoer
and the insurer.
3. To prevent tortfeasors from being free
from liabilities and is thus founded on
considerations of public policy.
Rules:
1. Applicable only to property insurance.
5 CARDINAL PRINCIPLES IN INSURANCE

COMMERCIAL LAW COMMITTEE
CHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:
Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario (Transportation
Laws);
Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel Gatdula
(Banking Laws); Robespierre CU (Law on Intellectual Property)

31
MEMORY AID
IN
COMMERCIAL LAW
2. The insurer can only recover from the

third person what the insured could have
recovered.
3. There can be no subrogation in cases:
a. Where the insured by his own act
releases the wrongdoer or third party
liable for the loss or damage;
b. Where the insurer pays the insured the
value of the loss without notifying the
carrier who has in good faith settled the
insureds claim for loss;
c. Where the insurer pays the insured for a
loss or risk not covered by the policy.
(Pan Malayan Insurance Company v. CA,
184 SCRA 54)
d. In life insurance
e. For recovery of loss in excess of
insurance coverage
A mere acknowledgment on behalf of the

company that its branch office had
received from the applicant the insurance
premium and had accepted the application
subject to processing by the head office.
CONSTRUCTION
OF
INSURANCE
CONTRACT
The ambiguous terms are to be construed
strictly against the insurer, and liberally in
favor of the insured. However, if the terms
are clear, there is no room for
interpretation. (Calanoc vs. Court of
Appeals, 98 Phil. 79)
Riders
Printed stipulations usually attached to
the policy because they constitute
additional stipulations between the
parties. (Ang Giok Chip vs. Springfield, 56
Phil. 275)
In case of conflict between a rider and
the printed stipulations in the policy, the
rider prevails, as being a more deliberate
expression of the agreement of the
contracting parties. (C. Alvendia, The Law
of Insurance in the Philippines, 1968 ed.)
III. DISTINGUISHING ELEMENTS OF AN

INSURANCE CONTRACT
1. The insured possesses an insurable
interest susceptible of pecuniary
estimation;
2. The insured is subject to a risk of loss
through the destruction or impairment
of that interest by the happening of
designated perils;
3. The insurer assumes that risk of loss;
4. Such assumption is part of a general
scheme to distribute actual losses
among a large group or substantial
number of persons bearing somewhat
similar risks; and
5. The insured makes a ratable
contribution (premium) to a general
insurance fund.
A contract possessing only the first 3
elements above is a risk-shifting device. If
all the elements, it is a risk-distributing
device. (The Insurance Code of the
2002 ed.)
IV. PERFECTION OF AN INSURANCE
CONTRACT
An insurance contract is a consensual
contract and is therefore perfected the
moment there is a meeting of minds with
respect to the object and the cause or
consideration.
What is being followed in insurance
contracts is what is known as the
cognition theory. Thus, an acceptance
made by letter shall not bind the person
making the offer except from the time it
came to his knowledge. (Enriquez vs. Sun
Life Assurance Co. of Canada, 41 Phil. 269)
Binding Receipt
Cover Note (Ad Interim)

A concise and temporary written contract
issued to the insurer through its duly
authorized agent embodying the principal
terms of an expected policy of insurance.
Purpose: It is intended to give temporary
insurance protection coverage to the
applicant pending the acceptance or
rejection of his application.
Duration: Not exceeding 60 days unless a
longer period is approved by Insurance
Commissioner (Sec. 52).
Clauses
An agreement between the insurer and
the insured on certain matter relating to
the liability of the insurer in case of loss.
(Prof. De Leon, p.188)
Endorsements
Any provision added to the contract
altering its scope or application. (Prof. De
Leon, p.188)
POLICY OF INSURANCE
The written instrument in which a
contract of insurance is set forth. (Sec. 49)
Contents: (Sec. 51)
1. Parties
2. Amount of insurance, except in open
or running policies;
3. Rate of premium;
4. Property or life insured;
5. Interest of the insured in the property
if he is not the absolute owner;
6. Risk insured against; and
7. Duration of the insurance.
Persons entitled to recover on the
policy (sec. 53): The insurance proceeds
shall be applied exclusively to the proper
interest of the person in whose name or to
whose benefit it is made, unless otherwise
specified in the policy.
Kinds:
1. OPEN POLICY value of thing insured is
not agreed upon, but left to be
ascertained in case of loss. (Sec. 60)

Laws);

32
MEMORY AID
The actual loss, as determined, will
represent the total indemnity due the
insured from the insurer except only
that the total indemnity shall not
exceed the face value of the policy.
(Development Insurance Corp. vs. IAC,
143 SCRA 62)
2. VALUED POLICY definite valuation of
the property insured is agreed by both
parties, and written on the face of policy.
(Sec. 61)
In the absence of fraud or mistake,
the agreed valuation will be paid in
case of total loss of the property,
unless the insurance is for a lower
amount.
3. RUNNING POLICY contemplates
successive insurances and which provides
that the object of the policy may from
time to time be defined (Sec. 62)
V. TYPES OF INSURANCE CONTRACTS
1. Life insurance
a. Individual life (Secs. 179183, 227)
b. Group life (Secs. 50, last par., 228)
c. Industrial life (Secs. 229231)
2. Non-life insurance
a. Marine (Secs. 99166)
b. Fire (Secs. 167173)
c. Casualty (Sec. 174)
3. Contracts of bonding or suretyship
(Secs. 175178)
Note:
1. Health and accident insurance are
either covered under life (Sec. 180) or
casualty insurance. (Sec. 174).
2. Marine, fire, and the property aspect of
casualty insurance are also referred to as
property insurance.
VI. PARTIES TO INSURANCE CONTRACT
1. Insurer - Person who undertakes to
indemnify another.
For a person to be called an
insurance agent, it is necessary that
he should perform the function for
compensation. (Aisporna vs. CA,
113 SCRA 459)
2. Insured - The party to be indemnified
upon the occurrence of the loss. He must
have capacity to contract, must possess an
insurable interest in the subject of the
insurance and must not be a public enemy.
A public enemy- a nation with
whom the Philippines is at war and
it includes every citizen or subject
of such nation.
3. Beneficiary - A person designated to
receive proceeds of policy when risk
attaches.
Rules in the designation of the
beneficiary:
a. LIFE
i. A person who insures his own
life can designate any person
as his beneficiary, whether or
not the beneficiary has an
insurable interest in the life of
the insured subject to the
IN
COMMERCIAL LAW
limitations under Art. 739 and

Art. 2012 of the NCC.
Reason: in essence, a life
insurance policy is no different
form a civil donation insofar as
the beneficiary is concerned.
Both are founded on the same
consideration of liberality.
(Insular Life vs. Ebrado, 80
SCRA 181)
ii. A person who insures the life
of another person and name
himself as the beneficiary
must
have
an
insurable
interest in such life. (Sec. 10)
iii. As a general rule, the
designation of a beneficiary is
revocable unless the insured
expressly waived the right to
revoke in the policy. (Sec. 11)
iv. The interest of a beneficiary in
a life insurance policy shall be
forfeited when the beneficiary
is the principal accomplice or
accessory in willfully bringing
about the death of the insured
in which event, the nearest
relative of the insured shall
receive the proceeds of said
insurance if not otherwise
disqualified. (Sec. 12)
b. PROPERTY
The beneficiary of property
insurance must have an insurable
interest in such property, which
must exist not only at the time the
policy takes effect but also when
the loss occurs. (Sec. 13 and 18).
Effects of Irrevocable Designation Of
Beneficiary
Insured cannot:
1. Assign the policy
2. Take the cash surrender value of
the policy
3. Allow his creditors to attach or
execute on the policy;
4. Add new beneficiary; or
5. Change
the
irrevocable
designation to revocable, even
though the change is just and
reasonable.
The insured does not even retain the
power to destroy the contract by refusing
to pay the premiums for the beneficiary
can protect his interest by paying such
premiums for he has an interest in the
fulfillment of the obligation. (Vance, p.
665, cited in de Leon, p. 101, 2002 ed.)
VII. INSURABLE INTEREST
A. In General
A person has an insurable interest in the
subject matter if he is so connected, so
situated, so circumstanced, so related,
that by the preservation of the same he
shall derive pecuniary benefit, and by its
destruction he shall suffer pecuniary loss,
damage or prejudice.
B. Life

Laws);

33
MEMORY AID
Every person has an insurable interest in
the life and health:
a. of himself, of his spouse and of his
children;
b. of any person on whom he depends
wholly or in part for education or
support;
c. of any person under a legal
obligation to him to pay money or
respecting property or services, of
which death or illness might delay
or prevent performance; and
d. of any person upon whose life any
estate or interest vested in him
depends. (Sec. 10)
When it should exist: When the
insurance takes effect; not thereafter or
when the loss occurs.
Amount:
GENERAL RULE: There is no limit in the
amount the insured can insure his life.
EXCEPTION:
In
a
creditor-debtor
relationship where the creditor insures the
life of his debtor, the limit of insurable
interest is equal to the amount of the
debt.
Note: If at the time of the death of the
debtor the whole debt has already been
paid, the creditor can no longer recover on
the policy because the principle of
indemnity applies.
C. Property
Every interest in property whether real
or personal, or any relation thereto, or
liability in respect thereof, of such nature
that the contemplated peril might directly
damnify the insured (Sec. 13), which may
consist in:
1. an existing interest;
2. any inchoate interest founded
on an existing interest; or
3. an expectancy coupled with an
existing interest in that out of
which the expectancy arises.
(Sec. 14)
When it should exist: When the
insurance takes effect and when the loss
occurs, but need not exist in the
meantime.
Amount: The measure of insurable
interest in property is the extent to which
the insured might be damnified by loss or
injury thereof. (Sec. 17)
INSURABLE
INT
ER
ES
T
IN
LIF
E
Must exist only at the
time the policy takes
effect and need not
exist at the time of
loss
INSURABLE
INTEREST IN
PROPERTY
IN
Unlimited except in
life
insurance
effected by creditor
on life of debtor.
The expectation of
benefit to be derived
from the continued
existence of life need
not have any legal
basis whatever. A
reasonable
probability
is
sufficient
without
more.
The beneficiary need
not have an insurable
interest over the life
of the insured if the
insured
himself
secured the policy.
However, if the life
insurance
was
obtained
by
the
beneficiary,
the
latter must have
insurable
interest
over the life of the
insured.
COMMERCIAL LAW
Limited to actual
value of interest in
property insured.
An expectation of a
benefit
to
be
derived from the
continued
existence of the
property
insured
must have a legal
basis.
The
beneficiary
must
have
insurable interest
over
the
thing
insured.
SPECIAL CASES
1. In case of a carrier or depositary
A carrier or depository of any kind has an
insurable interest in a thing held by him as
such, to the extent of his liability but not
to exceed the value thereof (Sec. 15)
2. In case of a mortgaged property
The mortgagor and mortgagee each have
an insurable interest in the property
mortgaged and this interest is separate
and distinct from the other.
a. Mortgagor As owner, has an
insurable interest therein to the
extent of its value, even though the
mortgage debt equals such value. The
reason is that the loss or destruction
of the property insured will not
extinguish the mortgage debt.
b. Mortgagee His interest is only up
to the extent of the debt. Such
interest continues until the mortgage
debt is extinguished.
The lessor cannot be validly a
beneficiary of a fire insurance policy taken
by a lessee over his merchandise, and the
provision in the lease contract providing
for such automatic assignment is void for
being contrary to law and public policy.
(Cha vs. Court of Appeals, 227 SCRA 690)
STANDARD OR
UNION
MORTGAGE
CLAUSE
OPEN OR LOSS
PAYABLE
MORTGAGE
CLAUSE
Must exist at the

time the policy
takes effect and
when the loss
occurs

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34
MEMORY AID
Subsequent acts
of the mortgagor
cannot affect the
rights
of
the
assignee
Acts
of
the
mortgagor affect
the mortgagee.
Reason:
Mortgagor does
not cease to be a
party
to
the
contract. (Secs. 8
and 9)
Effects of Loss Payable Clause

a. The contract is deemed to be upon the
interest of the mortgagor; hence, he does
not cease to be a party to the contract.
b. Any act of the mortgagor prior to the
loss, which would otherwise avoid the
insurance affects the mortgagee even if
the property is in the hands of the
mortgagee.
c. Any act, which under the contract of
insurance is to be performed by the
mortgagor, may be performed by the
mortgagee with the same effect.
d. In case of loss, the mortgagee is
entitled to the proceeds to the extent of
his credit.
e. Upon recovery by the mortgagee to the
extent of his credit, the debt is
extinguished.
In case a mortgagee insures his own
interest and a loss occurs, he is entitled to
the proceeds of the insurance but he is not
allowed to retain his claim against the
mortgagor as the claim is discharged but it
passes by subrogation to the insurer to the
extent of the money paid by such insurer.
(Palileo vs. Cosio)
VIII. RISK
What may be insured against:
1. Future contingent event resulting in
loss or damage Ex. Possible future
fire
2. Past unknown event resulting in loss or
damage Ex. Fact of past sinking of a
vessel unknown to the parties
3. Contingent liability Ex. Reinsurance
IX. PREMIUM PAYMENTS
Consideration paid an insurer for
undertaking to indemnify the insured
against a specified peril.
Basis of the right of the insurer to collect
premiums: Assumption of risk.
GENERAL RULE: No policy issued by an

insurance company is valid and binding
until actual payment of premium. Any
agreement to the contrary is void. (Sec.
77)
EXCEPTIONS:
1. In case of life or industrial life
insurance, when the grace periods
applies; (Sec. 77)
2. When the insurer makes a written
acknowledgment of the receipt
premium; (Sec. 78)
3.
4.
5.
IN
COMMERCIAL LAW
Section 77 may not apply if the

parties have agreed to the payment
of the premium in installments and
partial payment has been made at
the time of the loss. (Makati Tuscany
Condominium Corp. v. CA, 215 SCRA
462)
Where a credit term has been agreed
upon. (UCPB vs. Masagana Telemart,
308 SCRA 259)
Where the parties are barred by
estoppel.
(UCPB
vs.
Maagana
Telemart, 356 SCRA 307)
Section 77 merely precludes the parties

from stipulating that the policy is valid
even if the premiums are not paid. (Makati
Tuscany Condominium Corp. v. CA, 215
SCRA 462)
Effect of Acknowledgment of Receipt of
Premium in Policy: Conclusive evidence of
its payment, so far as to make the policy
binding, notwithstanding any stipulation
therein that it shall not be binding until
the premium is actually paid. (Sec. 78)
ENTITLEMENT OF INSURED TO RETURN

OF PREMIUMS PAID
A. Whole:
1. If the thing insured was never
exposed to the risks insured
against; (Sec. 79)
2. If contract is voidable due to the
fraud or misrepresentation of
insurer or his agents; (Sec. 81)
3. If contract is voidable because of
the existence of facts of which the
insured was ignorant without his
fault; (Sec. 81)
4. When by any default of the insured
other than actual fraud, the
insurer never incurred liability;
(Sec. 81)
5. When rescission is granted due to
the insurers breach of contract.
(Sec. 74)
B. Pro rata:
1. When the insurance is for a
definite period and the insured
surrenders his policy before the
termination thereof;
Exceptions:
a. policy not made for a
definite period of time
b. short period rate is
agreed upon
c. life insurance policy
2. When there is over-insurance (Sec.
82);
Instances when premiums are not
recoverable:
1. When the risk has already attached
and the risk is entire and indivisible.
2. In life insurance.

Laws);

35
MEMORY AID
3. When the contract is rescindable or
rendered void ab initio by the fraud of
the insured.
4. When the contract is illegal and the
parties are in pari delicto.
PREMIUM
ASSESSMENT
Levied and paid to

meet
anticipated
losses.
Collected to meet
actual losses.
Payment
is
not
enforceable against
the insured.
Payment
is
enforceable once
levied
unless
otherwise
agreed
upon.
Not a debt.
It becomes a debt
once properly levied
unless
otherwise
agreed.
X. TRANSFER OF POLICY
1. Life Insurance
It can be transferred even without the
consent of the insurer except when there
is a stipulation requiring the consent of
the insurer before transfer. (Sec. 181)
Reason: The policy does not represent a
personal agreement between the insured
and the insurer.
2. Property insurance
It cannot be transferred without the
consent of the insurer.
Reason: The insurer approved the policy
based on the personal qualification and
the insurable interest of the insured.
3. Casualty insurance
It cannot be transferred without the
consent of the insurer. (Paterson cited in
de Leon p. 82)
Reason: The moral hazards are as great
as those of property insurance.
CHANE OF INTEREST IN THE THING
INSURED
The mere (absolute) transfer of the 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. (Sec. 58)
Reason: Insurance contract is personal.
GENERAL RULE: 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 the interests in
the thing and the interest in the insurance
are vested in the same person. (Sec. 20)
EXCEPTIONS:
1. In life, health and accident
insurance.(Sec. 20);
2. Change in interest in the thing
insured after occurrence of an
injury which results in a loss. (Sec.
21);
IN
COMMERCIAL LAW
3. Change in interest in one or more

of
several
distinct
things
separately insured by one policy.
(Sec. 22);
4. Change of interest, by will or
succession, on the death of the
insured. (Sec. 23);
5. Transfer of interest by one of
several partners, joint owners, or
owners in common, who are
jointly insured, to others. (Sec.
24);
6. When a policy is so framed that it
will inure to the benefit of
whomsoever,
during
the
continuance of the risk, may
become the owner of the interest
insured. (Sec. 57);
7. When there is an express
prohibition against alienation in
the policy, in case of alienation,
the contract of insurance is not
merely suspended but avoided.
(Art. 1306, NCC).
XI. ASCERTAINMENT AND CONTROL OF
RISK AND LOSS
A.
1.
2.
3.
4.
Four Primary Concerns of the Parties:

Correct estimation of the risk;
Precise delimitation of the risk;
Control of the risk;
Determining whether a loss occurred
and if so, the amount of such loss.
B. Devices used for ascertaining and

controlling risk and loss:
1. Concealment A neglect to
communicate that which a party knows
and ought to communicate (Sec. 26)
Requisites:
a. A party knows a fact which he
neglects to communicate or
disclose to the other.
b. Such party concealing is duty
bound to disclose such fact to the
other.
c. Such party concealing makes no
warranty as to the fact concealed.
d. The other party has not the means
of ascertaining the fact concealed.
e. Material
Effects: Entitles insurer to rescind, even
if the death or loss is due to a cause not
related to the concealed matter (Sec. 27).
Note: Good Faith is not a defense in
concealment. Sec. 27 clearly provides
that,
the
concealment
whether
intentional or unintentional entitles the
injured party to rescind the contract of
insurance.
Test of Materiality: 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 advantages
of the proposed contract, or in making his
inquiries (Sec. 31).
Exception to Sec. 31:

Laws);

36
MEMORY AID
a. Incontestability clause
b. Matters under Sec.110
insurance)
(marine
The waiver of medical examination in a

non-medical insurance contract renders
even more material the information
required of the applicant concerning the
previous conditions of health and diseases
suffered. (Sunlife v. Sps. Bacani, 246 SCRA
268).
The right to information of material
facts may be waived, either by the terms
of the insurance or by neglect to make
inquiries as to such facts where they are
distinctly implied in other facts of which
information is communicated. (Sec.33)
Where matters of opinion or judgment
are called for, answers made in good faith
and without intent to deceiver will not
avoid the policy even though they are
untrue. Reason: The insurer cannot rely on
those statements. He must make further
inquiry. (Philamcare Health Systems vs.
CA, G.R. No. 125678, March 18, 2002).
2. Representations Factual statements
made by the insured at the time of, or
prior to, the issuance of the policy to give
information to the insurer and induce him
to enter into the insurance contract. They
are considered an active form of
concealment.
Requisites of a false representation
(misrepresentation):
a. The insured stated a fact which is
untrue.
b. Such fact was stated with
knowledge that it is untrue and
with intent to deceive or which he
states positively as true without
knowing it to be true and which
has a tendency to mislead.
c. Such fact in either case is material
to the risk.
Characteristics:
a. It is not a part of the contract but
merely a collateral inducement to it.
b. It may be oral or written.
c. It is made at the same time of issuing
the policy or before but not after.
d. It may be altered or withdrawn before
the insurance is effected but not
afterwards.
e. It always refers to the date the contract
goes into effect.
Kinds:
a. AFFIRMATIVE affirmation of a fact
when the contract begins; and
b. PROMISSORY promise to be performed
after policy was issued.
Effect of Misrepresentation: the injured
party is entitled to rescind from the time
when the representation becomes false.
Test of Materiality: Same as that in
concealment.
IN
COMMERCIAL LAW
Where the insured merely signed the

application form and made the agent of
the insurer fill the same for him, it was
held that by doing so, the insured made
the agent of the insurer his own agent and
he was responsible for his acts for that
purpose. (Insular Life Assur. Co. vs.
Feliciano, 74 Phil. 469)
3. Warranties Statement or promise by
the insured set forth in the policy or by
reference incorporated therein, the
untruth or non-fulfillment of which in any
respect, and without reference to whether
insurer was in fact prejudiced by such
untruth or non-fulfillment, renders the
policy voidable by the insurer.
Purpose: To eliminate potentially
increasing hazards which may either be
due to the acts of the insured or to the
change to the condition of the property.
Kinds:
a. EXPRESS an agreement expressed in a
policy whereby the insured stipulates that
certain facts relating to the risk are or
shall be true, or certain acts relating to
the same subject have been or shall be
done.
b. IMPLIED - it is deemed included in the
contract
although
not
expressly
mentioned. Example: In marine insurance,
seaworthiness of the vessel.
Effects of breach of warranty:
a. Material
GENERAL RULE: Violation of material
warranty or of a material provision of a
policy will entitle the other party to
rescind the contract. (Sec. 74)
EXCEPTIONS:
a. Loss occurs before the time of
performance of the warranty.
b. The
performances
becomes
unlawful at the place of the
contract.
c. Performance becomes impossible.
(Sec. 73)
b. Immaterial (ex. Other insurance clause)
GENERAL RULE: It will not avoid the
policy.
EXCEPTION: When the policy expressly
provides or declares that a violation
thereof will avoid it. (Sec. 75)
WARRANTY
Part of the contract
Written on the
policy, actually or by
reference
REPRESENTATION
Mere collateral
inducement
May be written in
the policy or may
be oral.
Presumed material
Must be proved to
be material
Must be strictly
complied with
Requires only
substantial truth
and compliance
4. Conditions Events signifying in its

broadest sense either an occurrence or a
non-occurrence that alters the previously
existing legal relations of the parties to

Laws);

37
MEMORY AID
the contract. They may be conditions
precedent or conditions subsequent.
Effect of breach:
a. Condition precedent prevents the
accrual of cause of action
b. Condition subsequent avoids the
policy or entitles the insurer to
rescind
The insurer may also protect himself
against fraudulent claims of loss and this
he attempts to do by inserting in the
policy various conditions which take the
form of conditions precedent.
For
instance, there are conditions requiring
immediate notice of loss or injury and
detailed proofs of loss within a limited
period.
5. Exceptions Provisions that may
specify excepted perils. It makes more
definite the coverage indicated by the
general description of the risk by
excluding certain specified risk that
otherwise would be included under the
general language describing the risks
assumed.
Effect: Limit the coverage of the
contract.
RESCISSION
Grounds:
A. Concealment
B. Misrepresentation
C. Breach of material warranty
D. Breach of a condition subsequent
Waiver of the right to rescind:
Acceptance of premium payments despite
the knowledge of the ground for
rescission. (Sec. 45)
Limitations on the right of the insurer
to rescind:
1. Non-life such right must be exercised
prior to the commencement of an action
on the contract;
2. Life such right must be availed of
during the first two years from the date of
issue of policy or its last reinstatement;
prior to incontestability. (Sec. 48)
CANCELLATION OF NON-LIFE INSURANCE
POLICY
Right of the insurer to abandon the
contract on the occurrence of certain
grounds after the effectivity date of a nonlife policy.
Grounds:
1. Non-payment of premium;
2. Conviction of a crime out of acts
increasing the hazard insured against;
3. Discovery of fraud or material
misrepresentation;
4. Discovery of willful or reckless acts of
omissions increasing the hazard
insured against;
5. Physical changes in property making
the property uninsurable; and
6. Determination by the Insurance
Commissioner that the continuation of
the policy would violate the Insurance
Code. (Sec. 64)
IN
COMMERCIAL LAW
Requirements:
1. Prior notice of cancellation to the
insured;
2. Notice must be in writing, mailed
or delivered to the named insured
at the address shown in the policy;
3. Notice must state which of the
grounds set forth in Sec. 64 is
relied upon and upon request of
the insured, the insurer must
furnish facts on which the
cancellation is based;
4. Grounds should have existed after
the effectivity date of the policy.
XII. INCONTESTABILITY CLAUSE
Clause in life insurance policy that
stipulates that the policy shall be
incontestable after a stated period.
Requisites:
1. Life insurance policy
2. Payable on the death of the insured
3. It has been in force during the lifetime
of the insured for a period of at least
two years from the date of its issue or
of its last reinstatement
Note: The period of 2 years may be
shortened but it cannot be extended by
stipulation.
Incontestability only deprives the
insurer of those defenses which arise in
connection with the formation and
operation of the policy prior to loss. (Prof.
De Leon, p. 173 citing Wyatt and Wyatt,
p. 878)
BARRED
DEFENSES
OF THE INSURER
DEFENSES NOT
BARRED
1. Policy is void ab
initio
2. Policy
is
rescindable
by
reason
of
the
fraudulent
concealment
or
misrepresentation of
the insured or his
agent
1. That the person

taking the insurance
lacked
insurable
interest as required
by law;
2. That the cause of
the death of the
insured
is
an
excepted risk;
3. That
the
premiums have not
been paid (Secs. 77,
227[b],
228[b],
230[b]);
4. That
the
conditions of the
policy relating to
military or naval
service have been
violated
(Secs.
227[b], 228[b]);
5. That the fraud is
of a particularly
vicious type;
6. That
the
beneficiary failed to
furnish
proof
of
death or to comply
with any condition
imposed
by
the
policy after the loss
has happened; or

Laws);

38
MEMORY AID
7. That the action
was not brought
within
the
time
specified.
XIII.
A. OVER-INSURANCE results when the
insured insures the same property for an
amount greater than the value of the
property with the same insurance
company.
Effect in case of loss:
1. The insurer is bound only to pay to the
extent of the real value of the
property lost;
2. The insured is entitled to recover the
amount of premium corresponding to
the excess in value of the property;
B. DOUBLE INSURANCE exists where
same person is insured by several insurers
separately in respect to same subject and
interest. (Sec. 93)
Requisites:
1. Person insured is the same;
2. Two or more insurers insuring
separately;
3. Subject matter is the same;
4. Interest insured is also the same;
5. Risk or peril insured against is likewise
the same.
Effects: Where double insurance is
allowed, but over insurance results: (Sec.
94)
1.
The
insured, unless the policy otherwise
provides, may claim payment from the
insurers in such order as he may
select, up to the amount for which the
insurers are severally liable under
their respective contracts;
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
other policy without regard to the
actual value of the subject matter
insured;
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;
4.
Where the
insured receives any sum in excess of
the valuation in the case of valued
policies, or of the insurable value in
the case of unvalued policies, he must
hold such sum in trust for the insurers,
according to their right of contribution
among themselves;
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 he is liable under his
contract.
IN
COMMERCIAL LAW
Additional or Other Insurance Clause

A condition in the policy requiring the
insured to inform the insurer of any other
insurance coverage of the property
insured. It is lawful and specifically
allowed under Sec. 75 which provides that
(a) policy may declare that a violation of
a specified provision thereof shall avoid it,
otherwise the breach of an immaterial
provision does not avoid it.
A stipulation against double insurance.
Purposes:
1. To prevent an increase in the
moral hazard
2. To prevent over-insurance and
fraud.
To constitute a violation of the clause,
there should have been double insurance.
C. REINSURANCE a contract by which the
insurer procures a third person to insure
him against loss or liability by reason of an
original insurance (also known as
Reinsurance Cession). (Sec. 95)
In every reinsurance, the original
contract of insurance and the contract of
reinsurance are covered by separate
policies.
DOUBLE
INSURANCE
REINSURANCE
Involves the same

interest
Insurer remains in
such capacity
Involves
different
interest
Insurer becomes the
insured in relation
to reinsurer
Original insured has
no interest in the
reinsurance
contract.
Subject of insurance
is
the
original
insurers risk
Insureds
consent
not necessary
Insured is the party

in interest in the 2
contracts
Subject
of
insurance
is
property
Insured has to give
his consent
TERMS:
1. Reinsurance treaty Merely an
agreement
between
two
insurance
companies whereby one agrees to cede
and the other to accept reinsurance
business pursuant to provisions specified in
the treaty. (Prof. De Leon, p. 306)
2. Automatic reinsurance The reinsured
is bound to cede and the reinsurer is
obligated to accept a fixed share of the
risk which has to be reinsured under the
contract. (Prof. De Leon, p. 305)
3. Facultative reinsurance There is no
obligation to cede or accept participation
in the risk each party having a free choice.
But once the share is accepted, the
obligation is absolute and the liability
thereunder can be discharged only by
payment. (Equitable Ins. & Casualty Co.
vs. Rural Ins. & Surety Co., Inc. 4 SCRA
343)

Laws);

39
MEMORY AID
4. Retrocession A transaction whereby
the reinsurer in turn, passes to another
insurer a portion of the risk reinsured. It is
really the reinsurance of reinsurance.
(Prof. De Leon, p. 305)
XIV.
A. LOSS, IN INSURANCE
Injury or damage sustained by the
insured in consequence of the happening
of one or more of the accidents or
misfortune against which the insurer, in
consideration of the premium, has
undertaken to indemnify the insured.
(Bonifacio Bros. Inc. vs. Mora, 20 SCRA
261)
Loss for which
insurer is liable
Loss for which

insurer is not
liable
1. Loss
the
proximate cause of
which is the peril
insured
against
(Sec. 84);
2. Loss
the
immediate cause of
which is the peril
insured
against
except
where
proximate cause is
an excepted peril;
3. Loss
through
negligence
of
insured
except
where there was
gross
negligence
amounting to willful
acts; and
4. Loss caused by
efforts to rescue the
thing from peril
insured against;
5. If during the
course of rescue,
the thing is exposed
to a peril not
insured
against,
which permanently
deprives the insured
of its possession, in
whole or in part
(Sec. 85).
1. Loss
by
insureds
willful
act;
2. Loss due to
connivance of the
insured (Sec. 87);
and
3. Loss where the
excepted peril is
the
proximate
cause.
Proximate Cause An event that sets all

other events in motion without any
intervening or independent case, without
which the injury or loss would not have
occurred.
REQUISITES
FOR
RECOVERY
UPON
INSURANCE
1. The insured must have insurable
interest in the subject matter;
2. That interest is covered by the policy;
3. There must be a loss; and
4. The loss must be proximately caused by
the peril insured against.
NOTICE OF LOSS
In fire insurance
In other types of
insurance
IN
COMMERCIAL LAW
Required
Not required
Failure
to
give
notice will defeat
the right of the
insured to recover.
Failure
to
give
notice
will
not
exonerate
the
insurer,
unless
there
is
a
stipulation in the
policy requiring the
insured to do so.
B. CLAIMS SETTLEMENT
The indemnification of the loss of the
insured.
TIME FOR PAYMENT OF CLAIMS
NON-LIFE
LIFE POLICIES
POLICIES
a.
Maturing
upon
the
expiration of the
term
The
proceeds
are
immediately
payable to the
insured,
unless
they are made
payable
in
installments or as
annuity, in which
case,
the
installments
or
annuities shall be
paid
as
they
become due.
b. Maturing at
the death of the
insured, occurring
prior
to
the
expiration of the
term stipulated
The proceeds are
payable to the
beneficiaries
within 60 days
after presentation
and filing of proof
of death.
The proceeds shall

be paid within 30
days
after
the
receipt
by
the
insurer of proof of
loss,
and
ascertainment
of
the loss or damage
by agreement of the
parties
or
by
arbitration but not
later than 90 days
from such receipt of
proof
of
loss
whether
or
not
ascertainment
is
had or made.
In case of an unreasonable delay in the

payment of the insureds claim by the
insurer, the insured can recover: 1)
attorneys fees; 2) expenses incurred by
reason of the unreasonable withholding; 3)
interest at double the legal interest rate
fixed by the Monetary Board; and 4) the
amount of the claim. (Zenith Insurance
Corp. vs. CA, 185 SCRA 398)
XV. PRESCRIPTIVE PERIOD (Secs. 63 &
384)
Rules:
1. In the absence of an express stipulation
in the policy, it being based on a written
contract, the action prescribes in 10 years.
2. However the parties may validly agree
on a shorter period provided it is not less
than one year from the time the cause of
action accrues.

Laws);

40
MEMORY AID
3. The cause of action accrues from the
rejection of the claim of the insured and
not from the time of loss.
It shall commence from the denial of the
claim, not from the resolution of the
motion for reconsideration, otherwise it
can be used by the insured as a scheme or
device to waste time until the evidence
which may be used against him is
destroyed. (Sun Insurance Office, Ltd. v.
CA, 195 SCRA)
4. In CMVLI, the written notice of claim
must be filed within 6 months from the
date of the accident otherwise the claim is
deemed waived. The suit for damages
either with the proper court or with the
Insurance Commissioner should be filed
within 1 year from the date of the denial
of the claim by the insurer, otherwise
claimants right of action shall prescribe.
(Sec. 384)
PARTICULAR
CONTRACTS
KINDS
OF
INSURANCE
XVI. MARINE INSURANCE

Insurance against risks connected with
navigation, to which a ship, cargo,
freightage, profits or other insurable
interest in movable property, may be
exposed during a certain voyage or a fixed
period of time. (Sec. 99)
Coverage:
A.
1. Vessels,
goods,
freight,
cargo,
merchandise, profits, money, valuable
papers, bottomry and respondentia,
and interest in respect to all risks or
perils of navigation;
2. Persons or property in connection with
marine insurance;
3. Precious stones, jewels, jewelry and
precious metals whether in the course
of transportation or otherwise; and
4. Bridges, tunnels, piers, docks and
other
aids
to
navigation
and
transportation. (Sec. 99)
Cargo can be the subject of
marine insurance, and once it is
entered into, the implied warranty
of
seaworthiness
immediately
attaches to whoever is insuring the
cargo, whether he be the
shipowner or not. (Roque v. IAC,
139 SCRA 596)
B. Marine Protection and Indemnity
Insurance
Classes of inland marine insurance:
1. Property in transit provides
protection to property frequently
exposed to loss while it is
transportation form one location
to another.
2. Bailee liability - insurance for
those who have temporary custody
of the goods.
3. Fixed transportation property
they are so insured because they
are held to be an essential part of
IN
COMMERCIAL LAW
the transportation system such as

bridges, tunnels, etc.
4. Floater provides insurance to
follow the insured property
wherever it may be located,
subject always to the territorial
limits of the contract.
Insurable interest:
A.
1.Shipowner
a. Over the vessel to the extent
of its value, except that if
chartered, the insurance is
only up to the amount not
recoverable
from
the
charterer. (Sec. 100).
b. He also has an insurable
interest
on
expected
freightage. (Sec. 103).
c. No insurable interest if he
will be compensated by
charterer for the value of
the vessel, in case of loss.
2. Cargo owner
Over the cargo and expected
profits (Sec. 105).
3. Charterer
Over the amount he is liable to
the shipowner, if the ship is lost or
damaged during the voyage (Sec.
106).
B.
In loans on bottomry and respondentia
Repayment of the loan is subject to the
condition that the vessel or goods,
respectively, given as a security, shall
arrive safely at the port of destination.
1. Owner/Debtor
Difference between the value of
vessel or goods and the amount of
loan. (Sec. 101)
2. Creditor/lender
Amount of the loan
Note: If a vessel is hypothecated by
bottomry, only the excess is insurable,
since a loan on bottomry partakes of the
nature of an insurance coverage to the
extent of the loan accommodation. The
same
rule
would
apply
to
the
hypothecation
of
the
cargo
by
respondentia. (Pandect of Commercial
Law and Jurisprudence, Justice Jose
Vitug, 1997 ed.)
PERILS OF THE
PERILS OF THE
SEA
SHIP

Laws);

41
MEMORY AID
Includes only those
casualties due to
the:
1. unusual
violence; or
2. extraordinary
action of wind and
wave; or
3. Other
extraordinary causes
connected
with
navigation.
A loss which in the

ordinary course of
events,
results
from the:
1. natural
and
inevitable action of
the sea
2. ordinary wear
and tear of the ship
or
3.
Negligent
failure of the ships
owner to provide
the vessel with
proper equipment
to convey the cargo
under
ordinary
conditions.
Note: It is only perils of the sea which may

be insured against unless perils of the ship
is covered by an all-risk policy.
SPECIAL MARINE INSURANCE CONTRACTS
AND CLAUSES
A. All Risks Policy insurance against all
causes of conceivable loss or damage,
except: 1) as otherwise excluded in the
policy; or 2) due to fraud or intentional
misconduct on the part of the insured.
The insured has the initial burden of
proving that the cargo was in good
condition when the policy attached and
that the cargo was damaged when
unloaded from the vessel; thereafter, the
burden then shifts to the insurer to show
the exception to the coverage. (Filipinas
Merchants Insurance vs. Court of Appeals,
179 SCRA 638)
B. Barratry Clause
A clause which provides that there can
be no recovery on the policy in case of any
willful misconduct on the part of the
master or crew in pursuance of some
unlawful or fraudulent purpose without
consent of owners, and to the prejudice of
the owners interest. (Roque vs. IAC, 139
SCRA 596)
C. Inchamaree Clause
A clause which makes the insurer liable
for loss or damage to the hull or
machinery arising from the:
1. Negligence of the captain, engineers,
etc.
2. Explosions, breakage of shafts; and
3. Latent defect of machinery or hull.
(Bar Review Materials in Commercial
Law, Jorge Miravite, 2002 ed.)
D. Sue and Labor Clause
A clause under which the insurer may
become liable to pay the insured, in
addition to the loss actually suffered, such
expenses as he may have incurred in his
efforts to protect the property against a
peril for which the insurer would have
been liable. (Sec. 163)
IN
COMMERCIAL LAW
MATTERS ALTHOUGH CONCEALED, WILL

NOT VITIATE THE CONTRACT EXCEPT
WHEN THEY CAUSED THE LOSS (Sec. 110)
1. National character of the insured;
2. Liability of the thing insured to
capture or detention;
3. Liability to seizure from breach of
foreign laws;
4. Want of necessary documents; and
5. Use of false or simulated papers.
Note: This should be related to the
general
rule
regarding
material
concealment.
DISTINCTIONS
ON
CONCEALMENT
(Commercial Law Reviewer, A.F. Agbayani,
1988 ed.)
MARINE INSURANCE
OTHER
PROPERTY
INSURANCE
The information of the

belief or expectation
of 3rd persons is
material and must be
communicated
The information or
belief of a 3rd party
is not material and
need
not
be
communicated
unless it proceeds
form an agent of
the insured whose
duty it is to give
information
Concealment of any
material fact will
vitiate the entire
contract, whether
or not the loss
results for the risk
concealed.
The concealment of
any fact in relation to
any of the matters
stated in Sec. 110
does not vitiate the
entire contract but
merely exonerates the
insurer from a risk
resulting from the fact
concealed
IMPLIED WARRANTIES
1. Seaworthiness of the ship at the
inception of the insurance (Sec. 113);
2. Against improper deviation (Sec. 123,
124, 125);
3. Against illegal venture;
4. Warranty of neutrality: the ship will
carry the requisite documents of
nationality or neutrality of the ship or
cargo where such nationality or
neutrality is expressly warranted;
(Sec. 120)
5. Presence of insurable interest.
While the payment by the insurer for
the insured value of the lost cargo
operates as a waiver of the insurers right
to enforce the term of the implied
warranty against the assured under the
marine insurance policy, the same cannot
be validly interpreted as an automatic
admission of the vessels seaworthiness by
the insurer as to foreclose recourse against
the common carrier for any liability under
the contractual obligation as such common
carrier. (Delsan Transportation Lines vs.
CA, 364 SCRA 24)
Seaworthiness
A relative term depending upon the
nature of the ship, voyage, service and

Laws);

42
MEMORY AID
goods, denoting in general a ships fitness
to perform the service and to encounter
the ordinary perils of the voyage,
contemplated by the parties to the policy
(Sec. 114).
GENERAL RULE: The warranty of
seaworthiness is complied with if the ship
be seaworthy at the time of the
commencement of the risk. Prior or
subsequent unseaworthiness is not a
breach of the warranty nor is it material
that the vessel arrives in safety at the end
of her voyage.
EXCEPTIONS:
1. In the case of a time policy, the ship
must
be
seaworthy
at
the
commencement of every voyage she
may undertake
2. In the case of cargo policy, each vessel
upon which the cargo is shipped or
transshipped, must be seaworthy at
the commencement of each particular
voyage
3. In the case of a voyage policy
contemplating a voyage in different
stages, the ship must be seaworthy at
the commencement of each portion
Applicability of implied warranty of
seaworthiness to cargo owners:
It
becomes the obligation of a cargo owner
to look for a reliable common carrier,
which keeps its vessels in seaworthy
conditions. The shipper may have no
control over the vessel but he has control
in the choice of the common carrier that
will transport his goods (Roque v. IAC, 139
SCRA 596).
Deviation
A departure from the course of the
voyage insured, or an unreasonable delay
in
pursuing
the
voyage
or
the
commencement of an entirely different
voyage. (Sec.123)
Instances:
1. Departure of vessel from the course
of the sailing fixed by mercantile
usage
2. Departure of vessel from the most
natural, direct and advantageous
route if not fixed by mercantile
usage
3. Unreasonable delay in pursuing
voyage
4. Commencement of an entirely
different voyage (Secs. 121-123)
Kinds:
1. Proper a. When caused by circumstances outside
the control of the ship captain or ship
owner;
b. When necessary to comply with a
warranty or to avoid a peril;
c. When made in good faith to avoid a
peril;
d. When made in good faith to save human
life or to relieve another vessel in
distress (Sec. 124)
IN
COMMERCIAL LAW
Effect: In case of loss, the

insurer is still liable.
2. Improper - Every deviation not
specified in Sec. 124 (Sec. 125).
Effect: In case of loss or damage,
the insurer is not liable. (Sec.
126)
LOSS
1. Total:
a. Actual i. Total destruction;
ii. Irretrievable loss by sinking;
iii. Damage rendering the thing
valueless; or
iv. Total deprivation of owner of
possession of thing insured.
(Sec. 130)
b. Constructive i. Actual loss of more than of
the value of the object;
ii. Damage reducing value by
more than of the value of
the vessel and of cargo; and
iii. Expense
of
transshipment
exceed of value of cargo.
(Sec. 131, in relation to Sec.
139)
In case of constructive total
loss, insured may:
1. Abandon goods or vessel
to the insurer and claim
for whole insured value
(Sec. 139), or
2. Without abandoning
vessel, claim for partial
actual loss. (Sec. 155)
2. Partial: That which is not total (Sec.
128).
AVERAGE
Any extraordinary or accidental expense
incurred during the voyage for the
preservation of the vessel, cargo, or both,
and all damages to the vessel and cargo
from the time it is loaded and the voyage
commenced until it ends and the cargo
unloaded.
GENERAL
PARTICULAR
Has inured to the

common benefit and
profit of all persons
interested in the
vessel and cargo
To be borne equally
by all of the interests
concerned in the
venture.
Has not inured to the

common benefit and
profit of all persons
interested in the
vessel and her cargo.
To be borne alone by
the owner of the
cargo or the vessel,
as the case may be.
Requisites for the

right
to
claim
contribution:
1. Common
danger to the
vessel
or
cargo;
2. Part of the
vessel or cargo
was sacrificed
deliberately;

Laws);

43
MEMORY AID
3. Sacrifice must
be
for
the
common safety
or
for
the
benefit of all;
4. Sacrifice must
be made by
the master or
upon
his
authority;
5. It must be not
be caused by
any fault of
the
party
asking
the
contribution;
6. It
must
be
successful, i.e.
resulted in the
saving of the
vessel
or
cargo; and
Necessary.
RIGHT OF INSURED IN CASE OF GENERAL
AVERAGE
GENERAL RULE: The insured may either
hold the insurer directly liable for the
whole of the insured value of the property
sacrificed for the general benefit,
subrogating him to his own right of
contribution or demand contribution from
the other interested parties as soon as the
vessel arrives at her destination
EXCEPTIONS:
1. After the separation of interests liable
to contribution
2. When the insured has neglected or
waived his right to contribution
FPA Clause (Free From Particular
Average)
A clause agreed upon in a policy of marine
insurance in which it is stated that the
insurer shall not be liable for a particular
average, such insurer shall be free
therefrom, but he shall continue to be
liable for his proportion of all general
average losses assessed upon the thing
insured. (Sec. 136)
ABANDONMENT
The act of the insured by which, after a
constructive total loss, he declared the
relinquishment to the insurer of his
interest in the thing insured. (Sec. 138)
Requisites for validity:
1. There
must
be
an
actual
relinquishment by the person insured
of his interest in the thing insured
(Sec. 138);
2. There must be a constructive total loss
(Sec. 139);
3. The abandonment be neither partial
nor conditional (Sec. 140);
4. It must be made within a reasonable
time after receipt of reliable
information of the loss (Sec. 141);
5. It must be factual (Sec. 142);
6. It must be made by giving notice
thereof to the insurer which may be
IN
COMMERCIAL LAW
done orally or in writing (Sec. 143);

and
7. The notice of abandonment must be
explicit and must specify the
particular cause of the abandonment
(Sec. 144).
Effects:
1. It is equivalent to a transfer by the
insured of his interest to the insurer
with all the chances of recovery and
indemnity (Transfer of Interest)
(Sec.146)
2. Acts done in good faith by those who
were agents of the insured in respect
to the thing insured, subsequent to the
loss, are at the risk of the insurer and
for his benefit. (Transfer Of Agency)
(Sec.148)
If an insurer refuses to accept a valid
abandonment, he is liable upon an actual
total loss, deducting form the amount any
proceeds of the thing insured which may
have come to the hands of the insured.
(Sec.154)
CO-INSURANCE
A marine insurer is liable upon a partial
loss, only for such proportion of the
amount insured by him as the loss bears to
the value of the whole interest of the
insured in the property insured. (Sec. 157)
When the property is insured for less
than its value, the insured is considered a
co-insurer of the difference between the
amount of insurance and the value of the
property.
Requisites:
1. The loss is partial;
2. The amount of insurance is less than the
value of the property insured.
Rules:
1. Co-insurance applies only to marine
insurance
2. Logically, there cannot be co-insurance
in life insurance.
3. Co-insurance applies in fire insurance
when expressly provided for by the
parties.
CO-INSURANCE
REINSURANCE
A percentage in the
value of the insured
property which the
insured himself
assumes to act as
insurer to the extent
of the deficiency in
the insurance of the
insured property. In
case of loss or
damage, the insurer
will be liable only for
such proportion of
the loss or damage as
the amount of the
insurance bears to
the designated
Situation where the

insurer procures a 3rd
party called the
reinsurer to insure
him against liability
by reason of an
original insurance.
Basically, reinsurance
is an insurance
against liability which
the original insurer
may incur in favor of
the original insured.

Laws);

44
MEMORY AID
IN
COMMERCIAL LAW
3. The alteration is made without the

consent of the insurer;
4. The alteration is made by means
within the control of the insured;
5. The alteration increases the risk;
(Sec. 168) and
6. There must be a violation of a
policy provision. (Sec. 170)
percentage of the
full value of the
property insured.
(Bar Review
Materials in
Commercial Law,
Jorge Miravite, 2002
ed.)
XVII. FIRE INSURANCE

A contract by which the insurer for a
consideration agrees to indemnify the
insured against loss of, or damage to,
property by hostile fire, including loss by
lightning,
windstorm,
tornado
or
earthquake and other allied risks, when
such risks are covered by extension to fire
insurance policies or under separate
policies. (Sec. 167)
Prerequisites to recovery:
1. Notice of loss must be immediately
given, unless delay is waived expressly or
impliedly by the insurer
2. Proof of loss according to best
evidence obtainable. Delay may also be
waived expressly or impliedly by the
insurer
HOSTILE FIRE
FRIENDLY FIRE
One that escapes

from
the
place
where
it
was
intended to burn
and ought to be.
Insurer is liable
One that burns in a

place where it was
intended to burn
and ought to be
Insurer is not liable
Measure of Indemnity
1. Open policy: only the expense necessary
to replace the thing lost or injured in the
condition it was at the time of the injury
2. Valued policy: the parties are bound by
the valuation, in the absence of fraud or
mistake
Note: It is very crucial to determine
whether a marine vessel is covered by a
marine insurance or fire insurance. The
determination is important for 2 reasons:
1. Rules on constructive total loss
and abandonment applies only to
marine insurance;
2. Rule on co-insurance applies
primarily to marine insurance;
3. Rule on co-insurance applies to
fire insurance only if expressly
agreed upon. (Commercial Law
Reviewer, Aguedo Agbayani, 1988
ed.)
ALTERATION AS A SPECIAL GROUND FOR
RESCISSION BY INSURER
Requisites:
1. The use or condition of the thing is
specifically limited or stipulated in
the policy;
2. Such use or condition as limited by
the policy is altered;
Fall-of-building clause
A clause in a fire insurance policy that if
the building or any part thereof falls,
except as a result of fire, all insurance by
the policy shall immediately cease.
Option to rebuild clause
A clause giving the insurer the option to
reinstate or replace the property damaged
or destroyed or any part thereof, instead
of paying the amount of the loss or the
damage.
The insurer, after electing to rebuild,
cannot be compelled to perform this
undertaking by specific performance
because this is an obligation to do, not to
give. Remedy: Art. 1167, NCC.
XVIII.
CASUALTY
OR
ACCIDENT
INSURANCE
Insurance covering loss or liability arising
from accident or mishap, excluding those
falling under other types of insurance such
as fire or marine. (Sec. 174)
Classifications:
1. Insurance against specified perils which
may affect the person and/or property of
the insured. (accident or health insurance)
Examples:
personal
accident,
robbery/theft insurance
2. Insurance against specified perils which
may give rise to liability on the part of
the insured for claims for injuries to or
damage to property of others. (third party
liability insurance)
Insurable interest is based on the interest
of the insured in the safety of persons, and
their property, who may maintain an
action against him in case of their injury
or destruction, respectively.
Examples: workmens compensation,
motor vehicle liability
In a third party liability (TPL) insurance
contract, the insurer assumes the
obligation by paying the injured third
party to whom the insured is liable. Prior
payment by the insured to the third person
is not necessary in order that the
obligation may arise. The moment the
insured becomes liable to third persons,
the insured acquires an interest in the
insurance contract which may be
garnished like any other credit. (Perla
Comapnia de Seguro, Inc vs. Ramolete,
205 SCRA 487)
Aside from compulsory motor vehicle
liability insurance, the Insurance Code
contains no other provisions applicable to
casualty insurance. Therefore, such

Laws);

45
MEMORY AID
casualty insurance are governed by the
general provisions applicable to all types
of insurance, and outside of such statutory
provisions, the rights and obligations of
the parties must be determined by their
contract, taking into consideration its
purpose and always in accordance with the
general principles of insurance law.
In burglary, robbery and theft
insurance, the opportunity to defraud the
insurer the moral hazard is so great
that insurer have found it necessary to fill
up the policies with many restrictions
designed to reduce the hazard. Persons
frequently excluded are those in the
insureds service and employment. The
purpose of the exception is to guard
against liability should theft be committed
by one having unrestricted access to the
property. (Fortune Insurance vs. CA, 244
SCRA 208)
Right of a third party injured to sue the
insurer
1. Indemnity against liability A third
party injured can directly sue the insurer.
2. Indemnity for actual loss or
reimbursement after actual payment by
the insured A third party has no cause of
action against the insurer (Sec. 53,
Bonifacio Bros. v. Mora, 20 SCRA 261).
The insurer is not solidarily liable with
the insured. The insurers liability is based
on contract; that of the insured is based
on torts. Furthermore, the insurers
liability is limited by the amount of the
insurance coverage (Pan Malayan Insurance
Corporation v. CA, 184 SCRA 54).
INTENTIONAL vs. ACCIDENTAL AS

USED IN INSURANCE POLICIES
1. Intentional Implies the exercise of the
reasoning faculties, consciousness and
volition. Where a provision of the policy
excludes intentional injury, it is the
intention of the person inflicting the injury
that is controlling. If the injuries suffered
by the insured clearly resulted from the
intentional act of the third person, the
insurer is relieve from liability as
stipulated. (Biagtan v. the Insular Life
Assurance Co. Ltd., 44 SCRA 58, 1972)
2. Accidental That which happens by
chance or fortuitously, without intention
or design, which is unexpected, unusual
and unforeseen.
NO ACTION CLAUSE
A requirement in a policy of liability
insurance which provides that suit and
final judgment be first obtained against
the insured; that only thereafter can the
person injured recover on the policy.
(Guingon vs. Del Monte, 20 SCRA 1043)
IN
COMMERCIAL LAW
XIX. COMPULSORY MOTOR VEHICLE

LIABILITY INSURANCE (CMVLI)
A species of compulsory insurance that
provides for protection coverage that will
answer for legal liability for losses and
damages for bodily injuries or property
damage that may be sustained by another
arising from the use and operation of
motor vehicle by its owner.
Purpose: To give immediate financial
assistance to victims of motor vehicle
accidents and/or their dependents,
especially if they are poor regardless of
the financial capability of motor vehicle
owners or operators responsible for the
accident sustained (Shafer v. Judge, RTC,
167 SCRA 386).
Claimants/victims may be a passenger
or a 3rd party
It applies to all vehicles whether public
and private vehicles.
Note: It is the only compulsory insurance
coverage under the Insurance Code.
Method of coverage
1. Insurance policy
2. Surety bond
3. Cash deposit
Passenger Any fare-paying person being
transported and conveyed in and by a
motor vehicle for transportation of
passengers for compensation, including
persons expressly authorized by law or by
the vehicles operator or his agents to ride
without fare. (Sec. 373[b])
Third Party Any person other than the
passenger, excluding a member of the
household or a member of the family
within the second degree of consanguinity
or affinity, of a motor vehicle owner or
land transportation operator, or his
employee in respect of death or bodily
injury arising out of and in the course of
employment. (Sec. 373[c])
No-Fault Clause
A clause that allows the victim (injured
person or heirs of the deceased) to an
option to file a claim for death or injury
without the necessity of proving fault or
negligence of any kind.
Purpose: To guarantee compensation or
indemnity to injured persons in motor
vehicle accidents.
Rules:
1. Total indemnity - maximum of P5,000
2. Proofs of loss a. Police report of accident;
b. Death certificate and evidence
sufficient to establish proper payee;
c. Medical report and evidence of
medical or hospital disbursement.
3. Claim may be made against one motor

Laws);

46
MEMORY AID
vehicle only
4. Proper insurer from which to claim a. In case of an occupant: Insurer of
the vehicle in which the occupant is
riding, mounting or dismounting from;
b. In any other case: Insurer of the
directly offending vehicle. (Sec. 378)
The claimant is not free to choose from
which insurer he will claim the no fault
indemnity as the law makes it mandatory
that the claim shall lie against the insurer
of the vehicle in which the occupant is
riding, mounting or dismounting from.
That said vehicle might not be the one
that caused the accident is of no moment
since the law itself provides that the party
paying may recover against the owner of
the vehicle responsible for the accident.
(Perla Compania de Seguros, Inc. v.
Ancheta, 169 SCRA 144)
This no-fault claim does not apply to
property damage. If the total indemnity
claim exceeds P5,000 and there is
controversy in respect thereto, the finding
of fault may be availed of by the insurer
only as to the excess. The first P5,000
shall be paid without regard to fault.
The essence of the no-fault indemnity
insurance is to provide victims of vehicular
accidents or their heirs immediate
compensation although in limited amount,
pending final determination of who is
responsible for the accident and liable for
the victims injuries or death. (Ibid.)
SPECIAL CLAUSES
A. Authorized Driver Clause
A clause which aims to indemnify the
insured owner against loss or damage to
the car but limits the use of the insured
vehicle to the insured himself or any
person who drives on his order or with his
permission
(Villacorta
v.
Insurance
Commissioner)
The requirement that the person driving
the insured vehicle is permitted in
accordance with the licensing laws or
other laws or regulations to drive the
motor vehicle (licensed driver) is
applicable only if the person driving is
other than the insured.
B. Theft Clause
A clause which includes theft as among
the risks insured against.
Where the car is unlawfully and
wrongfully taken without the owners
consent or knowledge, such taking
constitutes theft, and thus, it is the theft
clause and not the authorized driver
clause that should apply (Palermo v.
Pyramids Ins., 161 SCRA 677).
C. Cooperation Clause
IN
COMMERCIAL LAW
A clause which provides in essence that

the insured shall give all such information
and assistance as the insurer may require,
usually requiring attendance at trials or
hearings.
XX. SURETYSHIP
An agreement whereby a surety
guarantees the performance by the
principal or obligor of an obligation or
undertaking in favor of an obligee. (Sec.
175)
It
is
essentially
a
credit
accommodation.
It is considered an insurance contract if
it is executed by the surety as a vocation,
and not incidentally. (Sec. 20
When the contract is primarily drawn up
by 1 party, the benefit of doubt goes to
the other party (insured/obligee) in case
of an ambiguity following the rule in
contracts
of
adhesion.
Suretyship,
especially in fidelity bonding, is thus
treated like non-life insurance in some
respects.
Nature of liability of surety
1. Solidary;
2. Limited to the amount of the bond;
3. It is determined strictly by the terms
of the contract of suretyship in
relation to the principal contract
between the obligor and the obligee.
(Sec. 176)
SURETYSHIP
PROPERTY
INSURANCE
Accessory contract
3 parties: surety,
obligor and oblige
Credit
accommodation
Surety can recover
from principal
Principal contract
2 parties: insurer and
insured
Contract
of
indemnity
Insurer has no such
right; only right of
subrogation
May be cancelled
unilaterally either by
insured or insurer on
grounds provided by
law
No need of
acceptance by any
third party
Bond can be
cancelled only with
consent of obligee,
Commissioner or
court
Requires
acceptance of
obligee to be valid
Risk-shifting device;
premium paid being
in the nature of a
service fee
Risk-distributing
device; premium paid
as a ratable
contribution to a
common fund
XXI. LIFE INSURANCE

Insurance on human lives and insurance
appertaining
thereto
or
connected
therewith which includes every contract or
pledge for the payment of endowments or
annuities. (Sec. 179)
Kinds: (Bar Review Materials in
Commercial Law, Jorge Miravite, 2002
ed.)
1. Ordinary Life, General Life or Old
Line Policy - Insured pays a fixed
premium every year until he dies.
Surrender value after 3 years.

Laws);

47
MEMORY AID
2. Group Life Essentially a single
insurance contract that provides
coverage
for
many
individuals.
Examples: In favor of employees,
mortgage redemption insurance.
3. Limited Payment Policy insured pays
premium for a limited period. If he
dies within the period, his beneficiary
is paid; if he outlives the period, he
does not get anything.
4. Endowment Policy pays premium for
specified period. If he outlives the
period, the face value of the policy is
paid to him; if not, his beneficiaries
receive the benefit.
5. Term Insurance insurer pays once
only, and he is insured for a specified
period. If he dies within the period,
his beneficiaries benefits. If he
outlives the period, no person benefits
from the insurance.
6. Industrial Life - life insurance entitling
the insured to pay premiums weekly,
or where premiums are payable
monthly or oftener.
Mortgage Redemption Insurance
A life insurance taken pursuant to a
group mortgage redemption scheme by the
lender of money on the life of a mortgagor
who, to secure the loan, mortgages the
house constructed from the use of the
proceeds of the loan, to the extent of the
mortgage indebtedness such that if the
mortgagor dies, the proceeds of his life
insurance will be used to pay for his
indebtedness to the lender assured and
the deceaseds heirs will thereby be
relieved from paying the unpaid balance of
the loan. (Great Pacific Life Assurance
Corp. vs. Court of Appeals, 316 SCRA 677)
LIABILITY OF INSURER IN CERTAIN CAUSES
OF DEATH OF INSURED
1. Suicide
Insurer is liable in the following cases:
1. If committed after two years from
the date of the policys issue or its
last reinstatement;
2. If committed in a state of insanity
regardless of the date of the
commission unless suicide is an
excepted peril. (Sec. 180-A)
3. If committed after a shorter
period provided in the policy
Any stipulation extending the 2-year
period is null and void.
2. At the hands of the law (E.g. by legal
execution)
It is one of the risks assumed by the
insurer under a life insurance policy in the
absence of a valid policy exception.
(Vance,p.572 cited in de Leon, p. 107)
Note: Justice Vitug believes that death by
suicide (if the insured is sane) or at the
hands of the law obviates against recovery
as being more in consonance with public
policy and as being implicit under Section
87, ICP. (Pandect of Commercial Law and
Jurisprudence, 1997 ed. P. 191)
IN
COMMERCIAL LAW
3. Killing by the beneficiary

GENERAL RULE: The interest of a
beneficiary in a life insurance policy shall
be forfeited when the beneficiary is the
principal accomplice or accessory in
willfully bringing about the death of the
insured, in which event, the nearest
relative of the insured shall receive the
proceeds of said insurance if not otherwise
disqualified. (Sec. 12)
EXCEPTIONS:
1. Accidental killing
2. Self-defense
3. Insanity of the beneficiary at the
time he killed the insured
If the premiums paid came from
conjugal funds, the proceeds are
considered conjugal. If the beneficiary is
other than the insureds estate, the source
of premiums would not be relevant. (Del
Val v. Del Val, 29 Phil 534)
The measure of indemnity in life or
health insurance policy is the sum fixed in
the policy except when a creditor insures
the life of his debtor. (Sec. 183)
IS THE CONSENT OF THE BENEFICIARY
NECESSARY TO THE ASSIGNMENT OF A
LIFE INSURANCE POLICY?
It depends. If the designation of the
beneficiary
is
irrevocable,
the
beneficiarys consent is essential because
of his vested right. If the designation is
revocable, the policy may be assigned
without such consent because the
beneficiary only has a mere expectancy to
the proceeds. (The Insurance Code of the
2002 ed.)
Cash Surrender Value
As applied to a life insurance policy, it is
the amount the insured in case of default,
after the payment of at least 3 full annual
premiums, is entitled to receive if he
surrenders the policy and releases his
claims upon it.
LIFE INSURANCE
FIRE INSURANCE
Contract
of
investment not of
indemnity
Valued policy
May be transferred
or assigned to any
person even if he
has no insurable
interest
Consent of insurer is
not essential to
validity of
assignment
Contingency that is
contemplated is a
certain event, the
only uncertainty
being the time when
it will take place
A long-term
contract and cannot
be cancelled by the
Contract of indemnity
Open or valued policy
The
insurable
interest
of
the
transferee
or
assignee is essential
Consent of insurer
must be secured in the
absence of waiver
Contingency insured
against may or may
not occur
May be cancelled by
either party and is
usually for a term of

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48
MEMORY AID
insurer
Beneficiary is under
no obligation to
prove actual
financial loss
one year
Insured is required to
submit proof of his
actual pecuniary loss
as a condition
precedent to
collecting the
insurance.
XXII. VARIABLE CONTRACT

Any policy or contract on either a group
or individual basis issued by an insurance
company providing for benefits or other
contractual payments or values thereunder
to vary so as to reflect investment results
of any segregated portfolio of investment.
IN
COMMERCIAL LAW
the same Code which grants the

Commissioner
adjudicatory
powers
(Philippine American Life Insurance Co. v.
Ansaldo, 234 SCRA 509).
2. ADMINISTRATIVE/REGULATORY
a. Enforcement of insurance laws
b. Issuance, suspension or revocation
of certificate of authority
c. Power to examine books and
records, etc.
d. Rule-making authority
e. Punitive
XXIII. INSURANCE COMMISSIONER

Main agency charged with the
enforcement of the Insurance Code and
other related laws.
Functions:
1. ADJUDICATORY/QUASI-JUDICIAL
a. Exclusive original jurisdiction Any
dispute in the enforcement of any policy
issued pursuant to Chapter VI (CMVLI).
(Sec. 385, par. 2)
b. Concurrent original jurisdiction
(with the RTC) Where the maximum
amount involved in any single claim is
P100,000 (Sec. 416), except in case of
maritime insurance which is within the
exclusive jurisdiction of the RTC. (BP 129;
admiralty & maritime jurisdiction)
Where the amount exceeds
P100,000, the RTC has jurisdiction.
The Insurance Commissioner has no

jurisdiction to decide the legality of a
contract of agency entered into between
an insurance company and its agent. The
same is not covered by the term doing or
transacting insurance business under Sec
2, ICP, neither is it covered by Sec. 416 of
Laws);

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5 CARDINAL PRINCIPLES IN INSURANCE

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2. The insurer can only recover from the

A mere acknowledgment on behalf of the

III. DISTINGUISHING ELEMENTS OF AN

Cover Note (Ad Interim)

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limitations under Art. 739 and

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Must exist at the

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Effects of Loss Payable Clause

GENERAL RULE: No policy issued by an

Section 77 may not apply if the

Section 77 merely precludes the parties

ENTITLEMENT OF INSURED TO RETURN

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Levied and paid to

3. Change in interest in one or more

Four Primary Concerns of the Parties:

B. Devices used for ascertaining and

COMMERCIAL LAW COMMITTEE

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The waiver of medical examination in a

Where the insured merely signed the

4. Conditions Events signifying in its

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1. That the person

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Additional or Other Insurance Clause

Involves the same

Insured is the party

COMMERCIAL LAW COMMITTEE

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Loss for which

Proximate Cause An event that sets all

The proceeds shall

In case of an unreasonable delay in the

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XVI. MARINE INSURANCE

the transportation system such as

COMMERCIAL LAW COMMITTEE

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A loss which in the

Note: It is only perils of the sea which may

MATTERS ALTHOUGH CONCEALED, WILL

The information of the

COMMERCIAL LAW COMMITTEE

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Effect: In case of loss, the

Has inured to the

Has not inured to the

Requisites for the

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done orally or in writing (Sec. 143);