COMMERCIAL LAW INSURANCE LAWS
Note: A contract of insurance is still a contract, thus it
C ONTRACT OF I NSURANCE
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, Insurance Code)
Governing Laws (Art. 2011, NCC)
Primary
Special Laws
Insurance Code of 1978 (P.D. 1460, as amended)
Revised Government Service Insurance Act of 1977
(P.D. 1146, as amended)
Social Security Act of 1954 (RA 1161, as amended)
Government Property Insurance Law (RA 656, as
amended by PD 245
Philippine Deposit Insurance Corporation Law (RA
3591, as amended)
Code of Commerce (Dizon, The Insurance Code of the
Philippines, 2009 ed.).
Suppletory
Civil Code
General principles prevailing on the subject in the United
States, particularly in the State of California and New
York where our Insurance Code was based.
Elements of the Contract (PARIS):
Payment of Premium the consideration for the
insurers promise to undertake the risk of loss;
Assumption of risk the insurer undertakes to assume
the risk of loss;
Risk of loss The happening of designated events,
either unknown or contingent, past or future, will subject
such interest to some kind of loss, whether in the form
of injury, damage or liability;
Insurable interest The insured has an insurable
interest in the life or thing insured, i.e. pecuniary
interest;
Scheme to distribute the losses the assumption of
risk is part of a general scheme to distribute the loss
among a large number of persons exposed to similar
risks.
must have all the essential elements of a valid contract as
enumerated in Art. 1318 of the NCC.
Nature of Insurance Contract (CVA-UCCP-PROU)
Consensual It is perfected by the meeting of the minds
of the parties (Art. 1315, NCC).
Cognition Theory applies: The contract is perfected
the moment the offeror learns of the acceptance of his
offer by the other party (Art. 1319, NCC).
Voluntary The parties may incorporate such terms or
conditions as they may deem convenient, provided
they are not contrary to law morals, good customs,
pubic order, or public policy (Art. 1306, NCC).
Aleatory The insurers obligation is dependent on the
happening of an event, which is uncertain, or which is
to occur at an indeterminate time (Art. 2010, NCC).
5. Unilateral Imposes legal duties only on the insurer
who promises to indemnify another in case of loss;
executed as to the insured after payment of premium
and executory on the part of the insurer until payment
for a loss.
6. Conditional It is subject to conditions, the principal
one of which is the happening of the event insured
against.
7. Contract of Indemnity Except life and accident
insurance where the result is death, a contract of
insurance is a contract of indemnity whereby the
insurer promises to make good only the loss of the
insured
8. Personal Each party having in view the character,
credit and conduct of the other.
9. Property Since an insurance policy is a contract, as
such, it is property in legal contemplation.
10. Risk Distributing Device The insurers assumption
of risk is part of a general scheme to distribute the loss
among a large number of persons exposed to similar
risks, who contributes to a common fund from which
the losses incurred are compensated.
11. Onerous There is valuable consideration called the
premium.
12. Uberrimae Fidae The contract of insurance is one
of perfect good faith which requires both the insurer
and the insured to disclose conditions affecting the risk
of which he is aware, or material fact, which the
applicant knows, and those he ought to know.
Classes of Insurance Contract (SC-C-LMF)
Life Insurance
Insurance on human lives and insurance appertaining
thereto or connected therewith which includes every
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contract or pledge for the payment of endowments or
annuities (Sec. 179 & Sec. 180).
Non-Life Insurance
Marine Insurance
An 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, Ibid).
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, Ibid).
Casualty 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, Ibid).
Compulsory Motor Vehicle Liability Insurance
(CMVLI)
A specie 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.
Suretyship
A contract of suretyship shall be deemed to be an
insurance contract, within the meaning of the Code,
only if made by a surety who or which, as such, is
doing an insurance business (Sec. 2, Insurance
Code).
Doing an Insurance Business:
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 and not as merely incidental
to any legitimate business or activity of the surety;
3. Doing any kind of business, including reinsurance
business, specifically recognized as constituting the
doing of an insurance business within the meaning of
the code;
4. Doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed
to evade the provisions of this Code.
Note: The fact that NO profit is derived from the making of
insurance contracts, agreements or transactions or that no
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separate or direct consideration is received therefor, shall
NOT be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an
insurance business (Sec.2, par.4, Insurance Code).
Requisites of an Insurance Contract
1. Consent of the contracting parties;
2. Object certain which is the subject matter of the
contract;
3. Cause of the obligation which is established; and
Insurable Interest - Relation between the insured and
the thing insured, to such extent that its loss thru the
risk insured against shall directly damnify the insured
(Dizon, supra).
Cardinal Principles in Insurance: (GIAS)
Principle of utmost Good faith (uberrimae fidae)
Each party takes into consideration the character,
conduct and/or credit of the other and in making the
contract, each is enjoined by law to deal with the other
in utmost good faith. A violation of this duty gives the
aggrieved party the right to rescind the contract. Thus,
both must not only perform their obligations in good
faith but they must also avoid material concealment or
misrepresentations. The caveat emptor rule is generally
inapplicable.
Contract of Indemnity 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. Otherwise, the
contract becomes an instrument of unjust enrichment
(Solutio Indebiti, Art. 2154, NCC).
Contract of Adhesion (Fine Print Rule) The policy is
presented to the insured already in its printed form, so
that he either takes it or leaves it. 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 & Insurance Co. v. CA, G.R. No. 112360,
July 18, 2000). It is for this reason that any ambiguity
therein is resolved in favor of the insured and against
the insurer.
Note: Under Art. 1377, NCC, the interpretation of
obscure words or stipulations in a contract shall not
favor the party who caused the obscurity. Thus, the
insurer is under the obligation to make the meaning of
the contract clear if it desires to limit or restrict the
operation of the general provision of the contract.
Principle of Subrogation It is the process of legal
substitution where the insurer steps into the shoes of
the insured, when he paid the indemnity for the injury or
 COMMERCIAL LAW
loss, and he avails of the latters rights against the
wrongdoer.
If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall
be entitled to recover the deficiency from the person
causing the loss or injury (Art. 2207, NCC).
Note: 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, G.R. No. L-36413, September 26, 1988).
Incapacity of the insured will not affect the capacity of
the subrogee because capacity is personal to the holder
(Lorenzo Shipping v. Chubb and Sons, Inc, G.R. No.
147124, June 8, 2004).
Purposes of Subrogation:
1. To make the person who caused the loss legally
responsible for it;
2. To prevent the insured from receiving double recovery
from the wrongdoer and the insurer; and
3. To prevent the tortfeasors from being free from
liability and is thus founded on considerations of public
policy.
Rules on Subrogation:
1. Applicable only to property insurance
Reason: The value of human life is regarded as
unlimited and therefore, no recovery from a third party
can be deemed adequate to compensate the insureds
beneficiary.
2. The insurer can only recover from the third person
what the insured could have recovered.
Subrogation is NOT Applicable:
1. Where the insured by his own act RELEASES the
wrongdoer or third party liable for the loss or damage;
Note: The insurer can only be subrogated to only such
rights as the insured may have (Manila Mahogany Mfg.
Corp. v. CA, G.R. No. L-52756, October 12, 1987).
2. 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;
INSURANCE LAWS
3. Where the insurer PAYS the insured for a loss or risk
not covered by the policy (Pan Malayan Insurance
Company v. CA, G.R. No. 77397, April 3, 1990);
4. In life insurance;
5. For recovery of LOSS IN EXCESS of insurance
coverage;
What may be Insured Against/ Risk:
1. Any contingent or unknown event, whether past or
future, which may damnify a person having an insurable
interest or creates a liability against him may be insured
against (Sec. 3, Insurance Code);
2. A past event may be insured provided the loss is
unknown to both parties and they expressly stipulated
that prior loss is insured by the policy. A past event that
may be insured against is peculiar to Marine Insurance.
Under Sec. 109 of the Insurance Code, a person
insured by a contract of marine insurance is presumed
to have knowledge, at the time of insuring, of a prior
loss, if the information might possibly have reached him
in the usual mode of transmission and at the usual rate
of communication;
3. Contingent liability e.g. Reinsurance.
Note: Insurance for or against the drawing of any lottery,
or for or against any chance or ticket in a lottery drawing a
price is not allowed (Sec. 4, Insurance Code). It may
result in profit which is not true in insurance which only
seek to indemnify the insured against losses.
Requisites for Recovery Upon Insurance (CLIP):
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.
Construction of Insurance Contract
1. The terms in an insurance policy which are
ambiguous, equivocal, or uncertain are to be construed
strictly and most strongly against the insurer, and
liberally in favor of the insured so as to effect the
dominant purpose of indemnity or payment to the
insured.
Reason: The insured usually has no voice in the
selection or arrangement of the words employed and
that the language of the contract is selected with great
care and deliberation by experts and legal advisers
employed by, and acting exclusively in the interest of,
the insurance company (Calanoc v. CA, et al., G.R. No.
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L-8218, December 15, 1955). If the terms are clear,
there is no room for interpretation.
Provisions, conditions or exceptions in policies which
tend to work a forfeiture of insurance policies should be
construed most strictly against those for whose benefits
they are inserted, and most favorably toward those
against whom they are intended to operate (Geagonia
v. CA, G.R. No. L-114427, February 6, 1995).
2. Intentional as used in an accident policy excepting
intentional injuries inflicted by the insured or any other
person, etc. implies the exercise of reasoning,
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 (Biagtan v.
The Insular Life Assurance Company, Ltd., G.R. No.
25579, March 29, 1972).
3. The terms accident and accidental, as used in
insurance contracts have not acquired any technical
meaning, and are construed in their ordinary and
common acceptation. Thus, the terms mean those that
which happen by chance or fortuitously, without
intention or design, and which is unexpected, unusual,
and unforeseen.
An accident is an event that takes place without ones
foresight or expectation an event that proceeds from
an unknown cause or is an unusual effect of a known
cause and therefore, not expected (Finman General
Assurance Corp. v. CA, G.R. No. 94588, July 2, 1992).
4. An Authorized Driver clause limits the use of the
insured vehicle to two persons only, namely: (1) the
insured himself; or (2) any person on his (insureds)
permission (Villacorta v. Insurance Commissioner, G.R.
No. 54171, October 28, 1980).
Perfection of an Insurance Contract (Offer and
acceptance)
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.
Delay in acceptance
Mere delay by the insurer, although unreasonable, in
acting upon the application raises no implication of
acceptance nor does it estop the insurer to deny the
existence of the contract (Aquino, supra. p. 17).
Delivery of Policy
The delivery of a policy is not, however, a prerequisite to
a valid contract of insurance. The contract may be
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completed prior to the delivery of the policy depending on
the intention of the parties.
Insurance contracts through correspondence follow the
cognition theory an acceptance made by letter shall not
bind the person making the offer except from the time it
came to his knowledge (Enriquez v. Sun Life Assurance
Co. of Canada, G.R. No. L-15774, November 29, 1920).
P ARTIES TO THE C ONTRACT
1. Insurer The party who assumes or accepts the risk
of loss and undertakes for a consideration to indemnify
the insured or to pay him a certain sum on the
happening of a specified contingency or event. Every
person, partnership, association, or corporation duly
authorized to transact insurance business may be an
insurer (Sec. 6, Insurance Code; Secs.184-187,
Insurance Code)
May be:
A Foreign or Domestic Insurance Company;
An individual partnership or association; or
A natural person.
Insurance Corporation Corporation formed or
organized to save any person 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
corporation for any such loss, damage, or liability or to
guarantee the performance of or compliance with
contractual obligations or the payment of debt of others
(Sec. 185, Insurance Code).
It must have sufficient capital and assets required under
the Insurance code and the pertinent regulations
issued by the Commission (Sec. 186, Insurance
Code).
It must have certificate of authority to operate issued by
the Insurance commission which should be renewed
every year.
Foreign insurance corporations may be authorized
by the commission to engage in insurance business in
the Philippines.
2. Insured The person in whose favor the contract is
operative and who is indemnified against, or is to
receive a certain sum upon the happening of a specified
contingency or event. Anyone EXCEPT a public enemy
may be insured (Sec. 7, Insurance Code).
 COMMERCIAL LAW
Public enemy Citizen or subject of a nation at war
with the Philippines and does not include robbers
thieves and other criminals.
Reason: The purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is
inconsistent that one country should destroy its enemys
property and repay in insurance the value of what has
been so destroyed, or that it should in such manner
increase the resources of the enemy, or render it aid
(Filipinas Cia de Seguros v. Christern Huenfeld & Co.,
Inc., G.R. No. L-2294, May 25, 1951).
Insurance by a minor has been rendered moot and
academic by R.A. 6809 which reduced the majority age
from 21 to 18 years of age. Hence, a person who is 18
years or more may enter into any kind of insurance
contract because he is already of legal age. (Sec. 3,
par. 3, Insurance Code)
Insurance by a married woman
A married woman may take out an insurance on her life
or that of her children without the consent of her
husband (Sec. 3[2], Insurance Code), or that of her
husband, having an insurable interest in the latter (Sec.
10, Insurance Code).
Note: However, while either spouse may exercise any
legitimate profession, occupation, business or activity
without the consent of the other, the latter may object on
valid, serious and moral grounds (Art. 73, Family
Code).
3. Cestui que vie and Beneficiary Cestui que vie is
the person on whose life the insurance is written. The
beneficiary is the person designated to receive the
proceeds of the policy when the risk attaches (De Leon,
supra.).
Illustration: A husband may take out a policy on his
wifes life, proceeds payable to their son. The husband
is the insured, the wife is the cestui que vie, and the son
is the beneficiary.
Kinds of Beneficiary:
a. Insured himself;
b. Third person who paid a consideration; or
c. Third person through mere bounty of insured.
In the second and third cases, the beneficiary is not a
party to the contract. Art. 1311 [2nd par.], NCC allows the
contracting parties to include a stipulation in favor of a
third person not a party to the contract.
INSURANCE LAWS
Persons who cannot be named Beneficiaries
Any person who is forbidden from receiving any donation
under Art. 739 cannot be named beneficiary of a LIFE
INSURANCE POLICY by the person who cannot make
any donation to him (Art. 2012, NCC), to wit:
a. Those who are guilty of adultery or concubinage
with the insured at the time of designation;
b. Those who were found guilty with the insured of
the same criminal offense, committed in consideration
of the designation;
c. A public officer or his wife, descendants and
ascendants designated by reason of his office (Art. 739,
NCC).
Note: This prohibition will apply ONLY to life insurance
policies (Art. 2012, NCC).
The designation of persons mentioned in Art. 739 is void
but the policy is binding. The estate will get the proceeds.
Right to change Beneficiary (Sec. 11)
General Rule:
The insured shall have the right to change the beneficiary
he designated in the policy.
The beneficiary acquires NO vested right but only an
expectancy of receiving the proceeds under the
insurance.
The right may be exercised in the manner provided in the
policy. The right ceases upon the insureds death. It may
not be exercised by his representatives.
Exception: If the right to change the beneficiary is
EXPRESSLY WAIVED in the policy, then the insured has
no power to make such change without the consent of the
beneficiary.
The beneficiary acquires a vested right in the policy. Such
beneficiary, to whom a policy of insurance upon life or
health has passed by transfer, will or succession, may
recover upon it whatever the insured might have
recovered (Sec. 181, Insurance Code).
If the insured refuses to pay the premiums, the designated
irrevocable beneficiary may continue the policy by paying
premiums that are due (Art. 1236, NCC).
Exception to the Exception:
Under Arts. 43[4], 50 & 64 of the Family Code, the
innocent spouse may revoke the designation of the other
spouse who acted in bad faith as beneficiary in any
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insurance policy, EVEN if such designation be stipulated
as irrevocable. This is to prevent circumvention of Art. 739
of the NCC.
Forfeiture of the Rights of a Beneficiary
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, Insurance Code).
Note: The disqualification arises due to a willful act of the
beneficiary.
Revocation of Designation of an Offending Spouse as
Beneficiary after the Decree of Legal Separation
Under Art. 106 par. 4 of the Family Code, after the decree
of legal separation has become final, the innocent spouse
may revoke the designation of the offending spouse as a
beneficiary in any insurance policy, even if such
designation be stipulated as irrevocable.
The revocation shall take effect only upon written
notification thereof to the insured (Art. 106 par. 4 Family
Code).
When the beneficiary dies before the insured:
1. Should the beneficiary predecease the insured
and such beneficiary is irrevocable, and hence has a
vested interest in the policy, the legal representatives of
such beneficiary are entitled to the proceeds of the
insurance as assets of his or her estate, unless the
proceeds were made payable to the beneficiary only if
living.
2. On the other hand, where the beneficiary is
REVOCABLE and therefore does not have vested
interest in the policy at the time of his death, his estate
or legal representatives derive no interest from or
through him, but the proceeds passes to the estate of
the insured.
3. In case of an insurance policy taken out by an
original owner on the life or health of a MINOR, all
rights, title and interest in the policy shall automatically
vest in the minor upon the death of the original owner,
unless otherwise provided for in the policy (Sec. 3, par.
5).
Note: In property Insurance, the beneficiary must have
insurable interest on the property. (Reviewer on
Commercial Law, Insurance Code, Sundiang, Sr.,
Aquino, 5th ed., 2011, p. 91.)
I NSURABLE I NTEREST
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Insurable Interest
The relation between the insured and the event insured
against such that the occurrence of the event will cause
substantial loss or harm of some kind to the insured.
1. Life Insurance Insurable interest in life exists when
there is reasonable ground founded on the relation of
the parties, either pecuniary or contractual or by blood
or affinity, to expect some benefit or advantage from the
continuance of the life of the insured.
2. Property Insurance Every interest in property,
whether real or personal, or any relation thereto, or
liability in respect thereof, of such nature that a
contemplated peril might directly damnify the insured.
Purposes of Insurable Interest Requirement
1. Based upon considerations which render wager
policies invalid. Without such insurable interest, the
contract would in effect be a mere wager or gambling
contract which is void;
2. Measure of the upper limit of his provable loss under
the contract.
Insurable Interest in Life Insurance
1. Where the insured is also the cestui que vie
(Insurance upon ones life)
A person has an insurable interest in his own life and
health (Sec. 10[a], Insurance Code). The insured can
make it payable to anyone he chooses, regardless of
whether or not such beneficiary has an insurable
interest in his (insureds) life.
Upon the insureds death, the beneficiary shall be
entitled to the full face value of the policy. It is assumed
that the insured would not designate as his beneficiary
a person whom he would not trust his life.
2. Where the insured is not the cestui que vie but is
the beneficiary (insurable interest in the life of
another)
Where a person names himself beneficiary in a policy
he takes on the life of another, he must have insurable
interest in the life of the latter.
Note: The purpose of the law in requiring that the
person procuring the insurance must have an insurable
interest in the life of the insured is to take off all the
temptation to destroy the life of the insured because of
 COMMERCIAL LAW
his life insurance. This also prevents the contract from
becoming a wagering contract (Dizon, supra).
Sec. 10 specifies the person in whose life the
insured has an insurable interest, to wit:
a. On himself, of his spouse, and of his children the
insured beneficiary need not prove insurable interest
because he is presumed to have an insurable interest
on the life his spouse or his children.
The husband and wife as well as parent and child do
have some pecuniary interest in each others life
since they are legally obliged to support each other.
b. Of any person on whom he depends wholly or in part
for education or support, or in whom he has
pecuniary interest where the relationship is not as
close as those mentioned above, the insured-
beneficiary will be like any other stranger i.e. he will
have to prove that he has some pecuniary interest in
the life of the cestui que vie, otherwise the policy will
be void.
c. Of any person under legal obligation to him for the
payment of money, or respecting property or services
of which death or illness might delay or prevent
performance.
d. Of any person upon whose life or estate vested in him
depends.
3. Creditor of insured as beneficiary
A creditor may name himself as beneficiary in a policy
he takes on the life of his debtor. The death of the
debtor may either prevent payment if his estate is not
sufficient to pay his debts or delay such payment if an
administrator has to be appointed to settle his estate.
Hence, the creditors recovery upon the death of the
debtor should be limited to the amount of his interest,
i.e. the amount owing to him.
BUT if the debtor is the insured and the creditor is
named beneficiary, the creditor will be entitled to the
WHOLE proceeds of the policy upon the debtors death,
though his credit may be much less.
4. Business associate or employer of insured
A person may take a policy on the life of his business
partner because the latters death may result in an
interruption of business operations which can in turn
cause financial loss.
INSURANCE LAWS
A business firm can take out a policy on the life of its
officers or employees whose services proved valuable
to the business. The proceeds are not taxable income
but constitute indemnity to the employer for the loss
which the business suffers because of the death of a
valued officer or employee.
Consent of the Cestui que vie:
1. First View Consent is essential to the validity of
policy. It is believed that all such contracts (without the
consent of the insured) are contrary to public policy and
void.
2. Second View Under our law (Sec. 10, Insurance
Code), the consent of the person insured is not
essential to the validity of the policy. So long as it could
be proved that the assured has a legal insurable
interest at the inception of the policy, the insurance is
valid even without such consent. (De Leon, The
Insurance Code of the Philippines Annotated, Hector
De Leon, 2010 ed.)
Time of Existence
General Rule: Insurable interest in life or health must
exist when the insurance takes effect, but need not exist
thereafter or when the loss occurs (Sec. 19, Insurance
Code).
Exceptions:
1. When taken by the creditor on the life of the debtor,
the creditor is required to have an insurable interest not
only at the time of the contract but also at the time of
the debtors death because in this case, it is considered
as a contract of indemnity, the insurance pertaining
solely on the unpaid debt of the deceased.
2. When the insurance is taken by the employer on the
life of the employee (El Oriente Fabrica de Tabacos,
Inc. v. Posadas, G.R. No. 34774, September 21, 1931).
Note: The test is whether or not the person is interested in
the preservation of the insured life despite the insurance.
Insurable Interest in Property
An insurable interest in property may consist in:
1. An existing interest The existing interest in the
property may be legal title or equitable title.
Examples of insurable interest arising from legal
title:
a. Trustee, as in the case of the seller of
property not yet delivered;
b. Mortgagor of the property mortgaged;
c. Lessor of the property leased
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Examples of insurable interest arising from
equitable title
a. Purchaser of property before delivery or
before he has performed the conditions of the sale;
b. Mortgagee of property mortgaged;
c. Mortgagor, after foreclosure but before the
expiration of the period within which redemption is
allowed.
2. An inchoate interest founded on an existing
interest
Example: A stockholder has an inchoate interest in the
property of the corporation of which he is a stockholder,
which is founded on an existing interest arising from his
ownership of shares in the corporation.
3. An expectancy, coupled with an existing interest
in that out of which the expectancy arises
Expectancy to be insurable must be coupled with an
existing interest (Sec. 14, Insurance Code) or founded
on an actual right to the thing or upon any valid contract
for it (Sec. 16, Insurance Code).
Example: Expected profits
One who has an interest in the thing from which profits
are expected to proceed has an insurable interest in the
profits (Sec. 105, Insurance Code).
Where profits are separately insured in a contract of
marine insurance, the insured is entitled to recover, in
case of loss, a proportion of such profits equivalent to
the proportion which the value of the property lost bears
to the value of the whole (Sec. 158, Insurance Code).
When profits are valued and insured by a contract of
marine insurance, a loss of them is conclusively
presumed from a loss of the property out of which they
are expected to arise, and the valuation fixes their
amount (Sec. 160, Insurance Code).
Measure of Insurable Interest in Property
The measure of insurable interest in property is the
EXTENT to which the insured might be damnified by loss
or injury thereof (Sec. 17, Insurance Code).
Insurable interest in property does not necessarily imply a
property interest in, or a lien upon, or possession of, the
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INSURANCE LAWS
subject matter of the insurance, and neither title nor a
beneficial interest is requisite to the existence thereof. It is
sufficient that the insured is so situated with reference to
the property that he would be liable to loss should it be
injured or destroyed by the peril against which it is
insured. Anyone has an insurable interest in property who
derives a benefit from its existence or would suffer loss
from its destruction (Gaisano Cagayan, Inc. v. Insurance
Company of North America, G.R. No. 147839, June 8,
2006).
Time of Existence
An interest in property insured must exist when the
insurance takes effect AND when the loss occurs, but
need not exist in the meantime (Sec. 19).
Insurable Interest in
Insurable Interest in Life
Property
Extent
Insurable interest is Insurable interest in life is
limited to the actual unlimited (save in life
value of the interest insurance effected by a
thereon creditor on the life of the
debtor)
Existence of insurable interest
Must exist when the It is enough that interest
insurance takes effect exist at the time the policy
AND when the loss takes effect and need not
occurs, but need not exist at the time of the loss.
exist in the meantime.
Basis of expectation
There must be legal Expectation of the benefit
basis derived need not have legal
basis
Insurable Interest
The beneficiary must If the insured secured the
have an insurable policy, the beneficiary need
interest in the thing not have insurable interest
insured. over the life of the insured;
if secured by the
beneficiary, the latter must
have insurable interest in
the life of the insured.
Special Cases:
1. In case of a carrier or depository
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,
Insurance Code).
 COMMERCIAL LAW INSURANCE LAWS

Reason: The loss of the thing by the carrier or Standard or

depository may cause liability against him to the extent
of its value.
2. In case of a mortgaged property
The mortgagor and mortgagee each has an insurable
interest in the property mortgaged and this interest is
separate and distinct from the other. Therefore,
insurance taken by one in his name only and in his
favor alone does not inure to the benefit of 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.
Reason: The loss or destruction of the property
insured will not extinguish the mortgage debt.
Exception: Loan on Bottomry or Respondentia.
Reason: The nature of a bottomry loan is that the
payment of the loan is conditional, subject to the safe
arrival of the vessel at the port of destination. In the
case of respondentia loan, the collateral is not the
vessel but the goods loaded thereon. Furthermore,
Sec. 101 of the Insurance Code provides that the
insurable interest of the owner of the ship
hypothecated by bottomry is only the excess of its
value over the amount secured by bottomry.
b. Mortgagee His interest is only up to the extent
of the debt. Such interest continues until the
mortgage debt is extinguished.
Reason: The property relied on as mortgaged is only
a security. In insuring the property, he is not insuring
the property itself but his interest or lien thereon.
Note: In case of an insurance taken by the mortgagee
alone and for his benefit, the mortgagee, after recovery
from the insurer, is not allowed to retain his claim
against the mortgagor but it passes by subrogation to
the insurer to the extent of the insurance money paid
(Palileo v. Cosio, G.R. No. L-7667, November 28,
1955).
The lessor cannot validly be 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 v. CA, G.R.
No. 124520, August 18, 1997).
Open or Loss Payable
Union Mortgage
Mortgage Clause
Clause
Subsequent acts Acts of the mortgagor affect the
of the mortgagor mortgagee.
CANNOT affect
the rights of the Reason: Mortgagor does not
assignee. cease to be a party to the
contract (Secs. 8 and 9,
Reason: It is as if Insurance Code).
the insurer made
a new and
independent
contract with the
mortgagee.
Effects of Loss Payable Clause:
1. The contract is deemed to be upon the interest of the
mortgagor; hence, he does not cease to be a party to
the contract;
2. 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;
3. 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;
4. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit;
5. Upon recovery by the mortgagee to the extent of his
credit, the debt is extinguished.
Note: The rule on subrogation by the insurer to the right of
the mortgagee does not apply in this case.
Reason: Premium payment has been made by the
mortgagor and not by the mortgagee.
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 mortgages the house constructed 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 and the deceaseds heirs
will thereby be relieved from paying the unpaid balance of
the loan (Great Pacific Life Assurance Corp. v. CA, G.R.
No. 113899, October 13, 1999).
Transfer or Interest, Policy or Claim
In Insurance, the following may be transferred or
assigned:

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a. The thing insured (Sec. 20, Insurance Code);
b. The policy itself (Sec. 58, Insurance Code);
c. The claim itself (Sec. 83, Insurance Code).
1. Change of Interest
General Rule:
A change of interest in any part of the thing insured,
unaccompanied by a corresponding change of interest
in the insurance, SUSPENDS the insurance to an
equivalent extent, until the interest in the thing and the
interest in the insurance are vested in the same person
(Sec. 20, Insurance Code).
Rationale: Insurance contract is personal.
Exceptions:
a. In cases of life,
accident, and health insurance (Sec. 20, Insurance
Code).
Reason: They are not regarded as contracts of
indemnity and therefore, insurable interest need exist
only at the time the insurance is effected.
b. Change of interest in
the thing insured after occurrence of an injury which
results in a loss (Sec. 21, Insurance Code).
Reason: After the loss has happened, the liability of
the insurer becomes fixed. Therefore, the insured has
the right to assign his claim against the insurer as any
other money claim.
c. Change in interest in
one or more of several distinct things separately
insured by one policy (Sec. 22, Insurance Code).
Reason: The contract is divisible.
d. Change of interest, by
will or succession, on the death of the insured (Sec.
23).
Reason: Art. 1311 of the NCC (Relativity of
Contracts)
Whoever takes the property of the decedent will
automatically become the owner of the policy.
e. Transfer of interest by
one of several partners, joint owners, or owners in
common, who are jointly insured, to others (Sec. 24,
Insurance Code).
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Reason: No new party was introduced into the co-
ownership. It is the alienation to a stranger that will
suspend the policy not to a co-owner because the
former was not originally a party to the contract.
f. 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, Insurance Code).
Reason: Art. 1306 of the NCC (Autonomy of
Contracts)
g. When there is a
prohibition against alienation or change of interest
without the consent of the insurer, in which case, the
policy is not merely suspended but avoided (Sec. 25,
Insurance Code).
2. Transfer of Policy
In Life Insurance the policy may be transferred
without the consent of the insurer (Sec. 181, Insurance
Code).
Reason: The policy does not represent a personal
agreement between the insured and the insurer.
Exception: When notice to an insurer of a transfer is
expressly required in the policy (Sec. 182, Insurance
Code).
In Property Insurance the policy may NOT 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.
Effect of Transfer without Consent: The insurance
policy will be suspended and will not be avoided until
the interest in the thing and the interest in the insurance
are vested in the same person.
In Casualty Insurance the policy may NOT be
transferred without the consent of the insurer.
Reason: The moral hazards are as great as those of
property insurance.
3. Transfer of Claim
Claim of insured after loss is transferable, and any
stipulation to the contrary is void.
 COMMERCIAL LAW
Reasons:
a. Agreement hinders free transmission of property;
b. Transfer does not involve a personal contract,
but a money claim or right of action;
c. Transfer involves no moral hazard.
D EVICES FOR A SCERTAINING
AND C ONTROLLING R ISK AND
Four Primary Concerns of the Insurer (EDCA)
1. Correct estimation of risk which enables insurer to
determine if he will approve the policy application and if
so at what premium rate (Concealment and
Representation);
2. Precise delimitation of the risk which determines the
extent of the contingent duty to pay undertaken by the
insurer (Exception);
3. Control of risk to guard against increase of risk
(Warranties and Conditions);
4. Determine if loss occurs, and if so, the amount
thereof (Condition).
Devices Used for Ascertaining and Controlling Risks
and Loss (CREW-C)
1. Concealment Neglect to communicate that which a
party knows and ought to communicate (Sec. 26,
Insurance Code).
2. Representation An oral or written statement of a
fact or condition affecting the risk made by the insured
to the insurance company at the time or before the
issuance of the policy, tending to induce the insurer to
assume the risk.
3. Warranties Statements or promises by the insured
set forth in the policy itself or incorporated in it by proper
reference, the untruth or non-fulfillment of which in any
respect, and without reference to whether the insurer
was in fact prejudiced by such untruth or non-fulfillment
render the policy voidable by the insurer. The same
may be expressed, implied, affirmative or promissory.
4. Exception Exceptions make more definite the
coverage indicated by the general description of the risk
by excluding certain specified risks that otherwise would
be included under the general language describing the
risks assumed.
5. Condition The insurer must also protect himself
against fraudulent claims of loss and this he attempts to
do by inserting in the policy various conditions which
make the form of either conditions precedent or
subsequent.
CONCEALMENT
Requisites:
INSURANCE LAWS
1. A party knows a fact (a material fact) which he
neglects to communicate or disclose to the other party;
2. Such party concealing is duty bound to disclose such
fact to the other;
3. Such party concealing makes no warranty as to the
fact concealed; and
4. The other party has no means of ascertaining the fact
concealed.
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, Insurance
Code).
Distinguished from Materiality in Marine Insurance:
Rules on concealment are stricter, due to the difference in
the character of the property, and the greater facility the
insurer possesses in obtaining information as to its
conditions and surrounding circumstances which are often
insured when absent or afloat (Armena v. The Atlantic Fire
Ins. Co., 90 N.Y. 450. cited in the Insurance Code of the
Philippines Annotated, Hector De Leon, 2010ed)
Thus, in addition to material facts, each party must
disclose ALL the information he possesses which are
material to the information of the belief or expectation of a
third person, in reference to a material fact.
As a general rule, the fact of concealment on the part of
the insured gives the insurer the right to rescind the
contract of insurance.
BUT a concealment in a marine insurance in any of the
following matters enumerated under Sec. 110, ICP does
NOT vitiate the entire contract, the insurer is exonerated
only if the facts concealed is the cause of the loss. If the
cause is something else, the insurer will still be liable
(Dizon, supra.).
Effect of Concealment
If there is concealment under Sec. 27, the remedy of the
insurer is rescission.
Important notes:
1. The party claiming the existence of concealment must
prove that there was knowledge of the fact concealed
on the part of the party charged with concealment.
2. Good faith is not a defense in concealment.
Concealment, whether intentional or unintentional
entitles the injured party to rescind the contract of
insurance (Sec. 27).
3. The matter concealed need not be the cause of loss.
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4. To be guilty of concealment, a party must have
knowledge of the fact concealed at the time of the
effectivity of the policy.
5. Failure to communicate information acquired AFTER
the effectivity of the policy will NOT be a ground to
rescind the contract.
Reason: Information is no longer material as it will no
longer influence the other party to enter into such contract.
Matters that need not be disclosed:
Neither party to a contract of insurance is bound to
communicate information of the following matters,
EXCEPT in answer to inquiries of the other: (KOWEE)
1. Those which the other knows;
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 ignorant;
3. Those of which the other waives communication;
4. Those which prove or tend to prove the existence of a
risk excluded by a warranty, and which are not
otherwise material;
5. Those which relate to a risk excepted from the policy
and which are not otherwise material (Sec. 30,
Insurance Code).
Note: Neither party is bound to communicate, even upon
inquiry, information of his own judgment.
The parties are bound to know all the general causes
which are open to his inquiry, equally with the other, and
all general usages of trade.
The right to information of material facts may be
WAIVED:
1. By the terms of the contract;
2. By failure to make an inquiry as to such facts,
where they are distinctly implied in other facts from
which information is communicated.
Matters that must be disclosed even in the absence of
inquiry: (M-No means-No war)
1. Those material to the
contract (Sec. 31, 34, 35, Insurance Code);
2. Those which the other has
no means of ascertaining (Sec. 30, 32, 33, Insurance
Code);
3. Those as to which the
party with the duty to communicate makes no warranty.
(Secs. 67-76, Insurance Code).
REPRESENTATIONS
Kinds of Representation:
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1. Affirmative An affirmation of fact existing when the
contract begins;
2. Promissory Statement by the insured concerning
what is to happen during the term of the insurance;
3. Oral or Written
Requisites of a False Representation
(Misrepresentation):
1. The insured stated a fact which is untrue.
2. 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.
3. Such fact in either case is material to the risk.
Although false, a representation of the expectation,
intention, belief, opinion, or judgment of the insured will
not avoid the policy if there is no actual fraud in
inducing the acceptance of the risk, or its acceptance
at a lower rate of premium, and this is likewise the rule
although the statement is material to the risk, if the
statement is obviously of the foregoing character, since in
such case the insurer is not justified in relying upon
such statement, but is obligated to make further
inquiry (Philamcare Health Systems, Inc. v. CA, G.R. No.
125678, March 18, 2002).
Test of materiality The same as concealment (Sec. 31,
Insurance Code).
Effect of Misrepresentation:
1. The injured party entitled to rescind from the TIME
when the representation becomes false (Sec. 45,
Insurance Code).
2. When the insurer accepted the payment of premium
with the knowledge of the ground for rescission, there is
a waiver of such right.
3. There is no waiver of the right of rescission if the
insurer had no knowledge of the ground therefor at the
time of acceptance of premium payment (Stokes v.
Malayan Insurance Co., Inc. G.R. No. L-34768,
February 24, 1984).
Characteristics of misrepresentation:
1. Not a part of the contract but merely a collateral
inducement to it;
2. Oral or written;
3. Made at the time of, or before issuing the policy and
not after;
Exception: The insured wants the insurer to make a
modification of the policy.
4. Altered or withdrawn before the insurance is effected
but not afterwards;
 COMMERCIAL LAW INSURANCE LAWS

5. Refers to the date the contract goes into effect. a. Loss occurs before the time arrives for the
performance of the warranty;
Concealment Misrepresentation b. The performance becomes unlawful at the place of
Act involved the contract; and
c. Performance becomes impossible (Sec. 73,
The insured withholds The insured makes Insurance Code).
information of material erroneous statements of
facts from the insurer. facts with the intent of 2. Immaterial (e.g. Other insurance clause)
inducing the insurer to General Rule:
enter into the insurance It will not avoid the policy.
contract.
Materiality Exception:
Same rules apply to determine materiality When the policy expressly provides or declares that a
violation thereof will avoid it (Sec. 75, Insurance Code).
Effect
Same effect and gives the insurer the right to rescind Warranty Representation
the contract, whether the concealment or
misrepresentation be intentional or not Nature
Part of the contract Mere collateral inducement
Note: Where the insurer merely signed the application Form
form and made the agent of the insured file the same for Written on the policy, May be written in the policy
her, it was held by doing so, the insured made the agent actually or by reference or may be oral.
of the insurer her own agent.
Materiality
Warranties Presumed material Must be proved to be
Purpose: To eliminate potentially increasing hazards material
which may either be due to the acts of the insured or to Compliance
the change of the condition of the property.
Must be strictly Requires only substantial
complied with truth and compliance
Basis: The insurer took into consideration the condition of
the property at the time of effectivity of the policy. Effect of falsity/ non-fulfillment
Falsity or non-fulfillment Falsity renders the policy
Kinds: operates as a breach of void on the ground of fraud
1. Express An agreement expressed in a policy contract
whereby the insured stipulates that certain facts relating
to the risk are or shall be true, or certain acts relating to Conditions
the same subject have been or shall be done. Effects of Breach:
2. Implied It is deemed included in the contract 1. Condition precedent Prevents the accrual of
although not expressly mentioned. cause of action
2. Condition subsequent Avoids the policy or entitles
Example: In marine insurance, seaworthiness of the the insurer to rescind
vessel, non-deviation from the agreed voyage or non-
indulgence in illegal ventures. The insurer may also protect himself against fraudulent
claims of loss by inserting in the policy various conditions
Effects of breach of warranty: which take the form of conditions precedent. For
1. Material instance, there are conditions requiring immediate notice
General Rule: Violation of material warranty or of a of loss or injury and detailed proofs of loss within a limited
material provision of a policy will entitle the other party period.
to rescind the contract (Sec. 74, Insurance Code).

Exception:
Condition Warranty

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Effects
Limitation to the Does not have that effect
attachment of the risk
Non-performance of Does not suspend or defeat
which, although in form the operation of the
executed by the parties contract
and delivered, does not
spring into life.
The occurrence of breach temporarily renders the
entire contract voidable.
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 risks that otherwise would be included under the
general language describing the risk assumed.
An insurer seeking to defeat a claim because of an
exception or limitation in the policy has the burden of
proving that the loss comes within the purview of the
exception or limitation. If a proof is made of a loss
apparently within a contract of insurance, the burden is
upon the insurer to prove that the loss arose from a cause
of loss which is excepted or for which it is not liable, or
from a cause which limits its liability (DBP Pool of
Accredited Insurance Companies v. Mindanao Network,
G.R. No. 147039, January 27, 2006).
Note: Breach of warranty or of a condition renders the
contract defeasible at the option of the insurer; but if he so
elects, he may waive his privilege and power to rescind by
the mere expression of an intention so to do. In that event
his liability under the policy continues as before
(Prudential v. Trans-Asia, G.R. 151890, June 20, 2006).
Grounds (FAB-BreC):
1. Concealment;
2. False representation;
3. Breach of material warranty;
4. Breach of a condition subsequent;
5. Alteration of the thing insured.
Rescission in non-life policy
The insurer must exercise the right to rescind the contract
BEFORE the insured has filed an action to collect the
amount of insurance.
A defense to an action to recover insurance that the policy
was obtained through false representation, fraud and
deceit is NOT in the nature of an action to rescind and
therefore not barred by the provision (Sec. 45).
There is no limit for interposing this defense.
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INSURANCE LAWS
Rescission in life policy
The defenses mentioned are available only during the first
two years of a life insurance policy, provided that after a
policy of insurance made payable on the death of the
insured shall have been in force during the lifetime of the
insured for a period of 2 years from the date of its issue or
its last reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindable by the reason of
fraudulent concealment or misrepresentation of the
insured or his agent (Incontestability Clause) (Sec. 48,
Insurance Code).
Purpose of Incontestability Clause
To assure that after the specified period, the policy owner
may rely upon the insurance company to carry out the
terms of the contract, regardless of irregularities in
connection with the application which may later be
discovered.
Requisites (LiP-2):
1. It must be a Life insurance policy;
2. It must be Payable on the death of the insured; and
3. It must be in force during the lifetime of the insured
for at least 2 years from its date of issue or of its last
reinstatement.
The period of two years may be shortened but it cannot
be extended by stipulation.
The incontestability clause precludes the insurer from
raising the defense of false representations or
concealment of material facts insofar as health and
previous diseases are concerned if the insurance has
been in force for at least two years during the insureds
lifetime (Tan v. CA, G.R. No. 48049, June 29, 1989).
Defenses not barred by incontestability clause: (FELT-
Vicious-PMs)
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;
4. That the conditions of the policy relating to military or
naval service have been violated;
5. That the fraud is of a particular vicious type;
6. That the beneficiary failed to furnish proof of death or
to comply with any conditions imposed by the policy
after the loss has happened;
7. That the action was not brought within the time
specified.
T HE P OLICY
 COMMERCIAL LAW
Policy of Insurance
The written instrument in which a contract of insurance is
set forth (Sec. 49, Insurance Code). It is not necessary for
the perfection of the contract.
Note: An insurance contract may be verbal or in writing,
or partly in writing and partly verbal. However, the law
provides that no policy of insurance shall be issued or
delivered unless in the form previously approved by the
Insurance Commission (Sec. 226, Insurance Code).
Contents of Policy (R2AP2ID):
1. Parties;
2. Amount of insurance, except in open or running
policies;
3. Rate of premium;
4. Property or the life insured;
5. Interest of the insured in the property if he is NOT the
absolute owner;
BUT if he is the absolute owner, information of the
nature or amount of his interest need not be
communicated unless in answer to an inquiry (Sec. 34,
Insurance Code).
6. Risk insured against;
7. Duration of the insurance.
Rider
An attachment to an insurance policy that modifies the
conditions of the policy expanding or restricting its benefits
or excluding certain conditions from the coverage
Requisites:
The rider, clause, warranty or endorsement is attached to
the policy;
The descriptive title or name of the rider, clause, warranty
or endorsement is mentioned and written on the blank
spaces provided in the original printed policy form; and
If not applied for by the insured or owner, the rider, clause,
warranty or endorsement shall be countersigned by the
insured.
Counter-signature of the insured on a rider,
endorsement, clause, or warranty
If the rider, endorsement, clause or warranty was issued
SIMULTANEOUSLY with the policy, the counter-signature
of the insured is NOT necessary. However, the
descriptive title or name of the rider must be written on the
blank spaces provided in the policy.
INSURANCE LAWS
The rider, endorsement, clause, or warranty was issued
AFTER the issuance of the policy:
If the insured applied for the rider, endorsement, clause,
or warranty, his counter-signature is NOT necessary;
If the same is not applied for by the insured, riders and the
like shall be countersigned by the insured or owner.
Note: When the requirements for a rider are complied
with, it is considered as part of the policy.
x x x any rider, clause, warranty or endorsement pasted or
attached to the policy is considered part of such policy or
contract of insurance (CIR v. Lincoln Philippine Life
Insurance, G.R. No. 119176, March 19, 2002).
Rule in Case of Conflict between Rider and Printed
Stipulations of a Policy
When there is an inconsistency 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. This principle applies to the
interpretation of clauses, warranties, or indorsements
which are attached to policies to vary their terms (De
Leon, The Insurance Code of the Philippines Annotated,
2006 ed).
Binding Receipt
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.
Cover Note (Ad Interim)
A concise and temporary written contract issued by 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.
Rules on Cover Notes:
1. The cover note is valid for 60 days, after which the
policy must be issued.
2. The period may be extended or renewed beyond 60
days with the written approval of the Commissioner if he
determines that such extension is not contrary to and is
not for the purpose of violating any provisions of the
Code.
The approval of the Insurance Commissioner may be
dispensed with upon the certification of the
president, vice-president, or general manager of the
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insurance company concerned that the risk involved,
the values of such risks and/ or the premiums
therefor has not yet been determined or
established, or such extension or renewal is not
contrary to and is not for the purpose of violating
any provisions of the Insurance Code, or of any
rulings, instructions, or circulars of the Insurance
Commissioner (Ins. Memo Cir. No. 3-75, dated
September 29, 1975, effective Oct. 21, 1976).
3. No separate premiums are intended or required to be
paid on a cover note because cover notes do not
contain particulars of the property insured that would
serve as basis for the computation of premiums. Thus,
no premium could be fixed and paid on the cover note
(Pacific Timber Export Corporation v. CA, G.R. No. L-
38613, February 25, 1982).
4. Cover notes should not be treated as separate
policies but should be integrated to the regular policies
subsequently issued so that the premiums on the
regular policies include the consideration for the cover
notes (Pacific Timber Export Corporation v. CA, G.R.
No. L-38613, February 25, 1982).
Kinds of Insurance Policies:
1. Open Policy One in which the value of the thing
insured is not agreed upon, but is left to be ascertained
in case of loss (Sec. 60, Insurance Code).
2. Valued Policy One which expresses on its face
agreement that the thing insured shall be valued at a
specified sum (Sec. 61, Insurance Code).
3. Running Policy One which contemplates
successive insurances and which provides that the
object of the policy may be from time to time defined,
especially as to the subjects of insurance, by additional
statements or endorsements (Sec. 62, Insurance
Code).
General Rule: The insurance proceeds shall be applied
exclusively to the proper interest of the person in whose
name or for whose benefit it is made. A third person may
not sue the insurer directly.
Exception: If the insurance contract was intended to
benefit third persons (Art. 1311, NCC), the latter may
directly claim from the insurer. Thus:
1. If the insurance contract contain some stipulation in
favor of a third person (stipulation pour autrui), the latter
although not a party to the contract may enforce the
stipulation in his favor before it is revoked by the
contracting parties (Coquia v. Fieldmens Ins. Co., et al,
G.R. No. L-23276, November 29, 1968).
2. A third person has no right in law or equity to the
proceeds of an insurance unless there is a contract or
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INSURANCE LAWS
trust, express or implied, between the insured and third
person (Bonifacio Bros., Inc. v. Mora, G.R. No. L-
20853, May 29, 1967).
3. Where the contract insurance provides for indemnity
against liability to third persons, then third persons, to
whom the insured is liable, can sue the insurer
(Guingon v. del Monte, et al., G.R. No. L-21806, August
17, 1967).
Insurance Procured by an Agent
The insurance inures to the benefit of the principal.
Requisites:
1. Agent must be authorized;
2. Must act within the scope of his authority;
3. Must disclose his principal;
4. Indicate by appropriate words that he is acting in a
representative capacity.
Test to determine whether a Third Person may directly
Sue the Insurer of the Wrongdoer
Where the contract provides for INDEMNITY AGAINST
LIABILITY to third persons, then the latter to whom the
insured is liable, can directly sue the insurer.
On the other hand, where the insurance is for INDEMNITY
AGAINST ACTUAL LOSS OR PAYMENT, then third
persons cannot proceed against the insurer, the contract
being solely to reimburse the insured for liability actually
discharged by him through payment to third persons, said
third persons recourse being, thus limited to the insured
alone (Guingon v. Del Monte, Ibid).
Cancellation of Non-life Policy
The right of the insurer to cancellation of a policy of
insurance other than life is covered by Secs. 64 and 65 of
the Insurance Code.
Requisites (WANG):
1. Prior notice of cancellation to the insured;
2. Notice must be based on the occurrence after the
effective date of the policy of one or more of the
grounds mentioned;
3. Notice must be in writing, mailed or delivered to the
insured at the address shown in the policy;
4. Notice must state the grounds relied upon provided in
Sec. 64 of the Insurance Code and upon request of the
insured to furnish facts on which cancellation is made.
Grounds (NC-FraPV):
1. Non-payment of premiums;
2. Conviction of a crime out of acts increasing the
hazard insured against;
3. Fraud or material misrepresentation;
 COMMERCIAL LAW
4. Willful or reckless acts or omissions increasing the
risk insured against;
5. Physical changes in the property insured making it
uninsurable;
6. Determination by the Insurance Commissioner that
the policy would violate the Insurance Code.
P REM IUM
General Rule:
Cash and Carry Rule - No insurance policy issued or
renewal is valid and binding until actual payment of the
premium. Any agreement to the contrary is void (Sec. 77,
Insurance Code).
Reason: The insurer upon issuance of the policy, is
immediately exposed to liability for the risks insured
against, hence it is entitled to be paid premium for
extending protection to the insured immediately upon such
exposure.
Exceptions (LACIE):
1. In case of life and industrial life whenever the grace
period provision applies (Sec. 77, Insurance Code).
2. Where there is an acknowledgment in the contract or
policy of insurance that the premium had already been
paid (Sec. 78, Insurance Code).
3. 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 v. CA, G.R. No. 95546, November 6,
1992).
4. Where a credit term was agreed upon (UCPB
General Insurance, Inc. v. Masagana Telamart, G.R.
No. 137172, April 4, 2001).
5. Where the parties are barred by estoppel.
Note: Sec. 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,
supra).
Effect of Acknowledgment of Receipt of Premium in
Policy: Conclusive evidence of its payment, in 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).
Reason: When the policy contains such written
acknowledgement, it is presumed that the insurer has
waived the condition of prepayment. It hereby creates a
legal fiction of payment.
INSURANCE LAWS
Note: The conclusive presumption extends only to the
question on the binding effect of the policy. As far as the
payment of the premium itself is concerned, the
acknowledgment is only a prima facie evidence of the fact
of such payment. The insurer may still dispute its
acknowledgment but only for the purpose of receiving the
premium due and unpaid (De Leon, supra).
Effect of acceptance of premium
Acceptance of premium within the stipulated period for
payment thereof, including the agreed grace period,
merely assures continued effectivity of the insurance
policy in accordance with its terms.
Where an insurer authorizes an insurance agent or broker
to deliver a policy to the insured, it is deemed to have
authorized said agent to receive the premium in its behalf.
The insurer is bound by its agents acknowledgment of the
receipt of payment of premium.
The acceptance by the insurer of premium payments after
he has knowledge of a ground for rescission will bar him
from rescinding the policy (Sec. 2, B.P. 874).
Payment of the premium by post-dated check
Delivery of a promissory note or a check will not be
sufficient to make the policy binding until the said note or
check has been converted into cash. This is consistent
with Art. 1249 of the NCC.
Note: Payment by means of a check or note, accepted by
the insurer, bearing a date PRIOR to the loss, assuming
availability of the funds thereof, would be sufficient even if
it remains unencashed at the time of the loss. The
subsequent effects of encashment would retroact to the
date of the instrument and its acceptance by the creditor
(Vitug, Pandect of Commercial Law and Jurisprudence,
2006ed).
Entitlement of insured to return of premiums paid:
1. Whole
a. If the thing insured was never exposed to the
risks insured against (Sec. 79, Insurance Code);
b. If contract is voidable due to fraud or
misrepresentation of the insurer or his agents (Sec.
81, Insurance Code);
c. If contract is voidable because of the existence of
facts of which the insured was ignorant without his
fault (Sec. 81, Insurance Code);
d. When by any default of the insured other than
actual fraud, the insurer never incurred liability (Sec.
81, Insurance Code); and
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 COMMERCIAL LAW
e. When rescission is granted due to the insurers
breach of contract (Sec. 74, Insurance Code).
2. Pro rata
a. When the insurance is for a definite period and
the insured surrenders his policy before the
termination thereof;
Exceptions:
i. Policy not made for a definite period of time;
ii. Short period rate is agreed upon;
iii. Life insurance policy
b. When there is over-insurance
i. In case of over-insurance by double
insurance, the insurer is not liable for the total
amount of the insurance taken, his liability being
limited to the property insured. Hence, the insurer
is not entitled to that portion of the premium
corresponding to the excess of the insurance over
the insurable interest of the insured.
ii. In case of over-insurance by several
insurers, the insured is entitled to a ratable return of
the premium, proportioned to the amount by which
the aggregate sum insured in all the policies
exceeds the insurable value of the thing at risk
(Sec. 82, Insurance Code).
Devices Used to Prevent the Forfeiture of a Life
Insurance after the Payment of the First Premium:
1. Grace period After the payment of the first
premium, the insured is entitled to a grace period of
thirty days within which to pay the succeeding
premiums.
2. Cash Surrender Value The amount the insurer
agrees to pay to the holder of the policy if he surrenders
it and releases his claim upon it.
3. Extended Insurance Where the insurance
originally contracted for is continued for such period as
the amount available therefor will pay when it will
terminate. In such a case, the insurance will be for the
same amount as the original policy but for a period
shorter than the period in the original contract.
4. Paid Up Insurance No more payments are
required, and consist of insurance for life in such an
amount as the sum available therefore, considered as a
single and final premium, will purchase. It results to a
reduction of the original amount of insurance, but for the
same period originally stipulated.
5. Automatic Loan Clause A stipulation in the policy
providing that upon default in payment of premium, the
same shall be paid from the loan value of the policy until
that value is consumed. In such a case, the policy is
continued in force as fully and effectively as though the
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premiums had been paid by the insured from funds
derived from other sources.
6. Reinstatement Provision that the holder of the
policy shall be entitled to reinstatement of the contract
at any time within three years from the date of default in
the payment of premium, unless the cash surrender
value has been paid, or the extension period expired,
upon production of evidence of insurability satisfactory
to the company and the payment of all overdue
premiums and any indebtedness to the company upon
said policy (Perez, Reviewer on Insurance, Insolvency
and Code of Commerce, 2000 ed).
7. Estoppel Bars insurer from taking refuge under
Sec. 77, since respondent relied in good faith on such
practice.
D OUBLE I NSURANCE
Double insurance exists where the same person is
insured by several insurers separately, in respect to the
same subject and interest (Sec. 93, Insurance Code).
Requisites (TIRIS):
1. Same insured person;
2. Same subject matter;
3. Same interest insured;
4. Same risk or peril insured against; and
5. Two or more insurers insuring separately.
Over-Insurance
Exists when the insured insures the same property for an
amount GREATER than the value of that property.
Effect in case of loss:
1. The insurer is bound only to pay 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.
Effects of over insurance by double insurance (Sec.
94, Insurance Code):
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;
 COMMERCIAL LAW INSURANCE LAWS

3. Where the policy under which the insurable interest policies issued does not
insured claims is an unvalued policy, he must give exceed the insurable
credit, as against the full insurable value, for any sum interest of the insured
received by him under any policy;
Number of insurers
4. Where the insured receives any sum in
excess of the valuation in the case of valued policies, or There may only be one There are always several
of the insurable value in the case of unvalued policies, insurer involved insurers
he must hold such sum in trust for the insurers,
according to their right of contribution among The ratable contribution of each insurer will be determined
themselves; based on the following formula:
5. Each insurer is bound, as between
himself and the other insurers, to contribute ratably to Amount of policy
the loss in proportion to the amount for which he is X loss = liability of insurer
liable under his contract. Total insurance taken

Principle of Contribution or Contribution Clause Reinsurance

It is required that each insurer contribute ratably to the A contract by which the insurer procures a third person to
loss or damage considering that the several insurances insure him against loss or liability by reason of an original
cover the same subject matter and interest against the insurance (Sec. 95, Insurance Code) also known as
same peril. Reinsurance Cession.

Additional or Other Insurance Clause In every reinsurance, the original contract of insurance
A condition in the policy requiring the insured to inform the and the contract of reinsurance are covered by separate
insurer of any other insurance coverage of the property policies.
insured. It is lawful and specifically allowed under Sec. 75
which provides that (a) policy may declare that a violation Limit of Single Risk
of a specified provision thereof shall avoid it, otherwise No insurance company other than life, shall retain any risk
the breach of an immaterial provision does not avoid it. on any one subject of insurance in an amount exceeding
20% of its net worth (Sec. 215, Insurance Code).
Purpose
Double Insurance is not prohibited by law. The reasons Double Insurance Reinsurance
why it may be required that its existence be disclosed are: Interest
1. To prevent an increase in the moral hazard; and
2. To prevent over-insurance and fraud. Involves the same interest Involves different interest
Subject
x x x the prohibition applies only in case of double Subject of insurance is Subject of insurance is the
insurance. The Court ruled that in order to constitute a property original insurers risk
violation of the clause, the other insurance must be upon
Insurer
the same subject matter, the same interest therein, and
the same risk. Thus, even though the multiple insurance Insurer remains in such Insurer becomes the
policies involved were all issued in the name of the same capacity insured in relation to
assured, over the same subject matter and covering the reinsurer
same risk, it was ruled that there was no violation of the Insured
other insurance clause since there was no double Insured is the party in Original insured has no
insurance (Malayan Insurance Co., Inc. v. Philippine First interest in the 2 contracts interest in the reinsurance
Insurance Co., G.R. No. 184300, July 11, 2012). contract (Sec. 98,
Insurance Code)
Over-Insurance Double Insurance
Insureds consent
Amount of insurance
Insured has to give his Insureds consent not
When the amount of the There may be no over- consent necessary
insurance is beyond the insurance as when the sum Other Terms:
value of the insureds total of the amounts of the

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 COMMERCIAL LAW
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.
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.
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. v. Rural Ins. & Surety Co., Inc., G.R. No.
L-17436, January 31, 1962).
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 (De Leon, supra).
L OSS
Loss in Insurance
The injury, damage or liability sustained by the insured in
consequence of the happening of one or more of the
perils against which the insurer, in consideration of the
premium, has undertaken to indemnify the insured. It may
be total, partial, or constructive in Marine Insurance
(Secs. 127-131, Insurance Code).
Loss is Satisfied (PaReRe)
1. Payment of loss;
2. Reinstatement (repair or restoration) of the property
lost or damaged;
3. Replacement (substitution) with another or similar
property.
When Insurer is Liable for Loss (PIN-RP)
1. Loss the proximate cause of which is the peril insured
against (Sec. 84, Insurance Code);
2. Loss the immediate cause of which is the peril
insured against except where the proximate cause is an
excepted peril (Sec. 86, Insurance Code);
3. Loss through the negligence of the insured except
where there was gross negligence amounting to willful
act (Sec. 87, Insurance Code);
4. Loss caused by efforts to rescue the thing insured
from a peril insured against (Sec. 85, Insurance Code);
5. Loss caused by a peril NOT insured against to which
the thing insured was exposed in the course of rescuing
the same from the peril insured against (Sec. 85,
Insurance Code).
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INSURANCE LAWS
When the Insurer is not Liable (WCE)
1. Loss by the insureds willful act or gross negligence;
2. Loss due to the connivance of the insured (Sec. 87,
Insurance Code); and
3. Loss where the excepted peril is the proximate cause.
Proximate Cause
That which in a natural and continuous sequence,
unbroken by any new independent cause, produces an
event and without which the event would not have
occurred.
Notice of Loss
Purposes:
1. To give the insurer information by which he may
determine the extent of his liability;
2. To afford the insurer a means of detecting any fraud
that may have been practiced upon him;
3. To operate as a check upon extravagant claims.
In fire insurance In other types of
/CMVLI insurance
Required Not required
Effect of failure to furnish
Failure to give notice will
Failure to give notice not exonerate the insurer,
will defeat the right of unless there is a stipulation
the insured to recover. in the policy requiring the
insured to do so.
Defects in the notice or proof of loss are waived when
the insurer:
1. Writes to the insured that he considers
the policy null and void as the furnishing of notice or
proof of loss would be useless;
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy;
4. Joins in the proceedings for determining the amount
of the loss by arbitration, making no objections on
account of notice and preliminary proof; or
5. Makes objection on any ground other than formal
defect in the preliminary proof.
Claims Settlement
The indemnification of the loss of the insured
In case of an unreasonable delay/denial 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;
 COMMERCIAL LAW INSURANCE LAWS

3. Interest at double refusal or failure to pay is based on the ground that the
the legal interest rate fixed by the monetary board; and claim is fraudulent (Ibid; Secs. 242, 243, Insurance Code).
4. Amount of the
claim (Zenith Insurance Corp. v. CA, G.R. No. 85296,
May 14, 1990; Sec. 244). P RESCRIPTIVE P ERIOD

Time for Payment of Claims Rules:

Life Policies Non-Life Policies 1. The parties to a contract of insurance may validly
a. Maturing upon the The proceeds shall be paid agree that an action on the policy should be brought
expiration of the within 30 days after the within a limited period of time, provided such period is
term The receipt by the insurer of NOT less than 1 year from the time the cause of action
proceeds are proof of loss, and accrues. If the period agreed upon is less than 1 year
immediately ascertainment of the loss or from the time the cause of action accrues, such
payable to the damage by agreement of agreement is void (Sec. 63, Insurance Code).
insured, except if the parties or by arbitration a. The stipulated prescriptive period shall begin to
proceeds are but not later than 90 days run from the date of the insurers rejection of the
payable in from such receipt of proof claim filed by the insured or beneficiary and not from
installments or of loss, whether or not the time of the loss.
annuities, which ascertainment is had or b. In case the claim was denied by the insurer but
shall be paid as made (Sec. 243, Insurance the insured filed a petition for reconsideration, the
they become due. Code). prescriptive period should be counted from the date
the claim was denied at the first instance and not
b. Maturing at the from the denial of the reconsideration (Sun Life
death of the Office, Ltd. v. CA, G.R. No. 89741, March 13, 1991).
insured, occurring
prior to the 2. If there is no stipulation or the stipulation is void, the
expiration of the insured may bring the action within 10 years in case the
term stipulated contract is written.
The proceeds are 3. In CMVLI, the written notice of claim must be filed
payable to the within 6 months from the date of the accident;
beneficiaries within otherwise, the claim is deemed waived even if the same
60 days after: is brought within one year from its rejection (Vda. De
presentation of Gabriel v. CA, G.R. No. 103883, November 14, 1996).
claim and filing of 4. The suit for damages, either with the proper court or
proof of death (Sec. with the Insurance Commissioner, should be filed within
242, Insurance 1 year from the date of the denial of the claim by the
Code). insurer; otherwise, claimants right of action shall
prescribe (Sec. 384, Insurance Code).
Effect of Refusal or Failure to Pay the Claim within the
Time Prescribed
General Rule: Secs. 242, 243 and 244 of the Insurance
Code provide that the insurer shall be liable to pay interest
twice the ceiling prescribed by the Monetary Board
which means twice 12% per annum (legal rate of interest
prescribed in CB No. 416) or 24% per annum interest on
the proceeds of the insurance from the date following the
time prescribed in Secs. 242 or 243, until the claim is fully
satisfied (Prudential Guarantee and Assurance, Inc v.
Trans-Asia Shipping Lines, Inc. G.R. No. 151890, June
20, 2006).

Exception: Refusal or failure to pay the loss or damage

will entitle the assured to collect interest UNLESS such

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 COMMERCIAL LAW
S PECIAL K INDS OF I NSURANCE
M ARINE I NSURANCE
Sec. 99. Marine Insurance includes:
Insurance against loss of or damage to:
Vessels, craft, aircraft, vehicles, goods, freights,
cargoes, merchandise, effects, disbursements,
profits, moneys, securities, choses in action,
evidences of debts, valuable papers, bottomry, and
respondentia interests and all other kinds of property
and interests therein, in respect to, appertaining to or
in connection with any and all risks or perils of
navigation, transit or transportation, or while being
assembled, packed, crated, baled, compressed or
similarly prepared for shipment or while awaiting
shipment, or during any delays, storage,
transshipment, or reshipment incident thereto,
including war risks, marine builder's risks, and all
personal property floater risks;
Person or property in connection with or appertaining to
a marine, inland marine, transit or transportation
insurance, including liability for loss of or damage
arising out of or in connection with the construction,
repair, operation, maintenance or use of the subject
matter of such insurance (but not including life
insurance or surety bonds nor insurance against loss
by reason of bodily injury to any person arising out of
ownership, maintenance, or use of automobiles);
Precious stones, jewels, jewelry, precious metals,
whether in course of transportation or otherwise;
Bridges, tunnels and other instrumentalities of
transportation and communication (excluding
buildings, their furniture and furnishings, fixed
contents and supplies held in storage); piers,
wharves, docks and slips, and other aids to
navigation and transportation, including dry docks
and marine railways, dams and appurtenant facilities
for the control of waterways.
"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
of ocean or inland waterways, including liability of the
insured for personal injury, illness or death or for loss of
or damage to the property of another person.
Note: Marine Insurance is not limited to insurance that
secures vessels and its cargoes against the perils of
navigation.
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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 ship owner or not (Roque v. IAC, G.R.
No. L-66935, November 11, 1985).
MARINE PROTECTION AND INDEMNITY INSURANCE
Measure of Indemnity:
Valued policy The parties are bound by the valuation, if
the insured had some interest at risk and there is no
fraud.
Exception: When a thing has been hypothecated by
bottomry or respondentia, before its insurance, and
without the knowledge of the person actually procuring
the insurance, he may show the real value (Sec. 156,
Insurance Code).
Open policy The following rules shall apply in
estimating a loss:
a. Value of the ship value at the beginning of the risk;
b. Value of the cargo actual cost when laden on board
or market value at the time and place of lading;
c. Value of freightage gross freightage exclusive of
primage;
d. Cost of insurance in each case, to be added to the
estimated value (Sec. 161, Insurance Code).
Major divisions of transportation insurance:
1. Ocean Marine Insurance
Scope:
a. Ships Or Hulls
b. Goods Or Cargoes
c. Earnings Such As Freight
d. Liability Incurred By Reason Of Maritime Perils
2. Inland Marine Insurance
Classes:
a. Property in transit provides
protection to property frequently exposed to loss
while it is being transported from one location to
another.
b. Bailee liability insurance for
those who have temporary custody of the goods.
c. Fixed transportation property
they are so insured because they are held to be an
essential part of the transportation system such as
bridges, tunnels, etc.
d. Floater provides insurance to
follow the insured property wherever it may be
 COMMERCIAL LAW INSURANCE LAWS

located, subject always to the territorial limits of the

contract.

Insurable Interest Perils of the Sea Perils of the Ship

1. Ship Owner
Includes only those A loss which in the ordinary
a. Over the vessel to the extent of its value, provided casualties due to the: course of events, results
that if chartered, the recovery is only up to the 1. Unusual violence; from the:
amount not recoverable from the charterer; or 1. Natural and inevitable
b. He also has an insurable interest on expected 2. Extraordinary action of the sea;
freightage (Sec. 103, Insurance Code); action of wind and 2. Ordinary wear and tear
c. No insurable interest if he will be compensated by wave; or of the ship; or
charterer for the value of the vessel, in case of loss.
3. Other extraordinary 3. Negligent failure of the
causes connected ships owner to provide
2. Cargo owner
with navigation. the vessel with proper
a. Over the cargo and expected profits (Sec.
equipment to convey the
105, Insurance Code). cargo under ordinary
conditions.
3. Charterer
Over the amount he is liable to the ship owner, if the
ship is lost or damaged during the voyage (Sec. 106, Special Marine Insurance Contracts and Clauses
Insurance Code); 1. All-Risks Policy insurance against all causes of
Over his expected profits or freightage if he accepts conceivable loss or damage.
cargoes from other persons for a fee;
Over his own cargo or his clients cargo. Except:
As otherwise excluded in the policy; or
4. Owner/ Debtor (where the vessel or cargo is
Due to fraud or intentional misconduct on the part of the
hypothecated by bottomry or respondentia) insured (Choa Tiek Seng v. CA, G.R. No. 84507,
Difference between the value of vessel or goods and March 15, 1990).
the amount of loan (Sec. 101, Insurance Code).
In loans on bottomry and respondentia, repayment of The insured has the initial burden of proving that the
the loan is subject to the condition that the vessel or cargo was in good condition when the policy attached
goods, respectively, given as a security, shall arrive and that the cargo was damaged when unloaded from
safely at the port of destination. the vessel; thereafter, the burden shifts to the insurer to
If a vessel is hypothecated by bottomry, only the excess show the exception to the coverage (Filipino Merchants
is insurable, since a loan on bottomry partakes of the Insurance v. CA, G.R. No. 85141, November 28, 1989).
nature of an insurance coverage to the extent of the
loan accommodation. The same rule would apply to 2. Barratry Clause
the hypothecation of the cargo by respondentia A clause which provides that there can be no recovery
(Vitug, supra.). on the policy in case of any willful misconduct on the
part of the master or crew in pursuance of some
5. Creditor/ Lender
unlawful or fraudulent purpose without consent of
Amount of the loan (Dizon, supra.). owners, and to the prejudice of the owners interest
(Roque v. IAC, Ibid).
Risk Insured Against
It is only perils of the sea which may be insured against 3. Inchmaree Clause
unless perils of the ship are covered by an all-risk policy. A clause which makes the insurer liable for loss or
damage to the hull or machinery arising from the:
a. Negligence of the captain, engineers, etc.
b. Explosions, breakage of shafts; and
c. Latent defect of machinery or hull (Miravite,
supra.).

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4. 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, Insurance Code).
Note: Such clause constitutes an exception to the
principle that an insurance contract is one of indemnity
(where the insurer promises to make good only the loss
of the insured) since the insurer is liable to pay
additional expenses for the protection of the property
against an insured peril.
Matters, although concealed, will NOT vitiate the
contract except when they caused the loss
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 of
trade;
4. Want of necessary documents; and
5. Use of false or simulated papers (Sec. 110,
Insurance Code).
Distinctions on Concealment
Other Property
Marine Insurance
Insurance
Information of 3rd persons
The information or the The information or belief of
belief or expectation of a 3rd party is not material
3rd persons in reference and need not be
to a material fact is communicated, unless it
material and must be proceeds from an agent of
communicated. the insured whose duty is
to give information.
Effect of concealment
The concealment of any Concealment of any
fact in relation to any of material fact will vitiate the
the matters stated in entire contract, whether or
Sec. 110 does not vitiate not the loss results from the
the entire contract but risk concealed.
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, Insurance Code);
2. Against improper deviation (Sec. 123, 124, 125,
Insurance Code);
3. Against illegal venture;
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INSURANCE LAWS
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, Insurance Code); and
5. Presence of insurable interest.
Note: 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 insured 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 v. CA, G.R. No.
127897, November 15, 2001).
Seaworthiness
A relative term depending upon the nature of the ship,
voyage, service and 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, Insurance Code).
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 during the period of the coverage.
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 stage of the voyage.
Implied warranty of seaworthiness applied to cargo
owner 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, G.R. No. L-66935, Ibid).
Deviation
Departure from the course of the voyage insured, or an
unreasonable delay in pursuing the voyage, or the
 COMMERCIAL LAW
commencement of an entirely different voyage (Sec.123,
Insurance Code).
Instances:
1. Deviation from the agreed voyage;
2. Departure of vessel from the course of the sailing
fixed by mercantile usage;
3. Departure of vessel from the most natural, direct and
advantageous route if not fixed by mercantile usage;
4. Unreasonable delay in pursuing voyage; and
5. Commencement of an entirely different voyage
(Secs. 121-123, Insurance Code).
Kinds of Deviation:
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 (real peril);
c. When made in good faith to avoid a peril (non-
existing/ assumed peril);
d. When made in good faith to save human life or to
relieve another vessel in distress (Sec. 124,
Insurance Code).
Effect: In case of loss, the insurer is still liable.
2. Improper - Every deviation not specified in Sec. 124
(Sec. 125, Insurance Code).
Effect: In case of loss or damage subsequent to an
improper deviation, the insurer is not liable (Sec. 126,
Insurance Code).
Loss
A. Total
1. Actual
a. Total destruction;
b. Irretrievable loss by sinking or by being broken up;
c. Damage rendering the thing valueless to the owner
for the purpose for which he held it; or
d. Other event which effectively deprives the owner
of the possession, at the port of destination, of the
thing insured (Sec. 130, Insurance Code).
2. Constructive one which gives to a person
insured a right to abandon:
a. Actual loss of more than of the value of the
object;
b. Damage reducing, by more than , the value of the
vessel and of cargo; and
INSURANCE LAWS
c. Expense of transshipment exceeds of value of
cargo (Sec. 131, in relation to Sec. 139, Insurance
Code).
In case of constructive total loss, insured may:
a. Abandon goods or vessel to the insurer and claim
for whole insured value (Sec. 139, Insurance
Code); or
b. Without abandoning vessel, claim for partial actual
loss (Sec. 155, Insurance Code).
B. Partial Loss- that which is not total (Sec. 128,
Insurance Code).
Abandonment
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, Insurance Code).
Requisites for validity (PEN FACT):
1. There must be an actual relinquishment by the
person insured of his interest in the thing insured (Sec.
138, Insurance Code);
2. There must be a constructive total loss (Sec. 139,
Insurance Code);
3. The abandonment must be neither partial nor
conditional (Sec. 140, Insurance Code);
4. It must be made within a reasonable time after receipt
of reliable information of the loss (Sec. 141, Insurance
Code);
5. It must be factual (Sec. 142, Insurance Code);
6. It must be made by giving notice thereof to the
insurer which may be done orally or in writing (Sec.
143, Insurance Code); and
7. The notice of abandonment must be explicit and must
specify the particular cause of the abandonment (Sec.
144, Insurance Code).
Effects:
1. Transfer of Interest It is equivalent to a transfer by
the insured of his interest to the insurer with all the
chances of recovery and indemnity (Sec.146, Insurance
Code).
2. Transfer of Agency 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 (Sec.148, Insurance
Code).
If an insurer refuses to accept a valid abandonment, he
is liable upon an actual total loss, deducting from the
amount any proceeds of the thing insured which may
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have come to the hands of the insured (Sec. 154, caused by any fault of
Insurance Code). the party asking the
contribution;
Average 6. It must be
Any extraordinary or accidental expense incurred during successful, i.e.
the voyage for the preservation of the vessel, cargo, or resulted in the saving
both, and all damages to the vessel and cargo from the of the vessel or
time it is loaded and the voyage commenced until it ends cargo; and
and the cargo unloaded. 7. It must be
necessary.
Kinds of Averages:
Simple or Particular Average Includes all expenses Right of the Insured in case of General Average
and damages caused to the vessel or cargo which have General Rule:
not inured to the common benefit of all persons When the parties agree that the insurance shall be free
interested in the vessel or cargo. Insurer has no liability from a particular average, the insurer is liable only for a
if the parties stipulated that his liability is for general general average loss, unless such particular average loss
average only. Unless such particular average loss has has the effect of depriving the insured of possession at the
the effect of depriving the insured of the possession at port of destination of the whole of the thing insured (Sec.
the port of destination of the whole of the thing insured. 136, Insurance Code)
General or Gross Average Includes all the damage
and expenses which are deliberately caused in order to The insured may either hold the insurer directly liable for
save the vessel, its cargo or both, from real and known the whole of the insured value of the property sacrificed
risks. Liability of insurer is his portion. for the general benefit, subrogating him to his own right of
contribution, or demand contribution from the other
General Average v. Particular Average interested parties as soon as the vessel arrives at her
General Particular destination (Sec 165, Insurance Code).
To whom inures
Has inured to the Limit of Liability
Has not inured to the
common benefit and The insurers liability for the general average loss is
common benefit and profit
profit of all persons limited to the proportion of contribution attaching to his
of all persons interested in
interested in the vessel policy value where this is less than the contributing value
the vessel and her cargo.
and cargo of the thing insured (Sec. 164, Insurance Code).
By whom borne
To be borne equally by The liability of the insurer shall be less than the amount of
To be borne alone by the
all of the interests the insurance. In case the required contributory value
owner of the cargo or the
concerned in the exceeds that policy value, the insured is liable to
vessel, as the case may be.
venture. contribute ratably with the insurer to the indemnity of the
Requisites general average (De Leon, supra.).
Requisites for the right
to claim contribution: The insurer is liable for any general average loss (Sec.
1. Common danger to 136, Insurance Code) where it is payable or has been
the vessel or cargo; paid by the insured in consequence of a peril insured
2. Part of the vessel or against, as fixed in the policy.
cargo was sacrificed
deliberately; The insurer shall be liable upon a partial loss, only for
3. Sacrifice must be such proportion of the amount insured by him as the loss
for the common bears to the value of the whole interest of the insured on
safety or for the the property insured (Sec. 157, Insurance Code).
benefit of all;
4. Sacrifice must be The valuation in the policy is conclusive between the
made by the master parties thereto in the adjustment of either a partial or total
or upon his authority; loss, if the insured has some interest at risk and there is
5. It must be not be no fraud on his part (Sec. 156, Insurance Code).

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 COMMERCIAL LAW INSURANCE LAWS

Except that when a thing has been hypothecated by Value

bottomry or respondentia, before its insurance, and
without the knowledge of the person actually procuring the Co-Insurance
insurance, he may show the real value. But a valuation The insured procure
fraudulent in fact entitles the insurer to rescind the insurance at less than the
contract (Ibid). value of the insured
property and is deemed to
Exceptions: be co-insurer as to the
1. After the separation of interests liable to contribution; deficiency. In case of loss,
and the insured and insures
2. When the insured has neglected or waived his right to shares the same pro rata.
contribution (Sec. 165, Insurance Code).
Reinsurance
The insurer procures a 3rd
person to insure him
against loss or liability by
reason of such original
insurance. In case of loss,
the reinsurer will pay the
insurer for the risk
reinsured (Miravite, Bar
Review Materials in
Commercial Law, 2007 ed.)

FPA Clause (Free From Particular Average) F IRE I NSURANCE

A clause agreed upon in a policy of marine insurance in
which it is stated that the insurer shall not be liable for a A contract by which the insurer for a consideration agrees
particular average, and such insurer shall be free to indemnify the insured against loss of, or damage to,
therefrom, but he shall continue to be liable for his property by hostile fire, including loss by lightning,
proportion of all general average losses assessed upon windstorm, tornado or earthquake and other allied risks,
the thing insured (Sec. 136, Insurance Code). when such risks are covered by extension to fire
insurance policies or under separate policies (Sec. 167,
Exception: When there is a total deprivation on the part Insurance Code).
of the insured of the possession of the thing insured.
Note: The liability of an insurer is to pay for direct loss
Co-Insurance only. The insurer may be liable to pay for consequential
A marine insurer is liable upon a partial loss, only for such losses if covered by extension to such fire policies or
proportion of the amount insured by him as the loss bears insured under separate policy.
to the value of the whole interest of the insured in the
property insured (Sec. 157, Insurance Code). Hostile Fire Friendly Fire
One that escapes from
When the property is insured for less than its value, the One that burns in a place
the place where it was
insured is considered a co-insurer of the difference where it was intended to
intended to burn and
between the amount of insurance and the value of the burn and ought to be
ought to be.
property. Insurer is liable Insurer is not liable

Requisites: Risks Covered:

1. The loss is partial; 1. Direct losses
2. The amount of 2. Indirect or Consequential losses:
insurance is less than the value of the property insured. a. Physical damages
b. Loss of Earnings
Rules: c. Extra Expenses
Co-insurance applies only to marine insurance
Logically, there cannot be co-insurance in life insurance; Note: Only if expressly covered by the policy
Co-insurance applies in fire insurance ONLY when
expressly stipulated by the parties. Business Interruption Insurance Loss suffered
consisting of loss of earnings comprising of the net
The formula to determine the extent of the insurers profits that could have been realized had the business
liability is: continued and expenses that continue despite the
interruption of the business
Loss
X Insurance = Insurers Liability

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 COMMERCIAL LAW INSURANCE LAWS

Extra Expense Insurance Covers extraordinary
expenses that may be incurred in an effort to avoid any
interruption of service
Rent Insurance Protects the insured from loss of rental
income
Prerequisites to Recovery:
1. Notice of loss Must be immediately given, unless
delay is waived expressly or impliedly by the insurer;
and
2. Proof of loss According to best evidence
obtainable. Delay may also be waived expressly or
impliedly by the insurer.
Clause in a fire insurance policy that if the building or any
part thereof falls, except as a result of fire, the policy shall
immediately cease.
Option to Rebuild Clause
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.

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 C ASU ALTY AND A CCIDENT
2. Valued policy The parties are bound by the I NSURANCE
valuation, in the absence of fraud or mistake

Note: It is VERY CRUCIAL to determine whether a Insurance covering loss or liability arising from accident or
marine vessel is covered by a marine insurance or fire mishap, excluding those falling under other types of
insurance. The determination is important for 3 reasons: insurance such as fire or marine (Sec. 174, Insurance
1. Rules on constructive total loss and Code).
abandonment Applies only to marine insurance;
2. Rule on co-insurance Applies Classifications:
primarily to marine insurance; 1. Accident or health insurance Insurance against
specified perils which may affect the person and/or
3. Rule on co-insurance Applies to fire
property of the insured.
insurance ONLY if expressly agreed upon
(Commentaries and Jurisprudence on the Commercial
Examples: Personal accident, Robbery/Theft insurance
Laws of the Philippines Agbayani, 1988ed).
2. Third party liability insurance Insurance against
Alteration as a special ground for rescission by
specified perils which may give rise to liability on the
insurer
part of the insured for claims for injuries to or damage to
Requisites:
property of others.
1. The use or condition of the thing is specifically limited
a. Insurable interest is based on the interest of the
or stipulated in the policy;
insured in the safety of persons, and their property,
2. Such use or condition as limited by the policy is
who may maintain an action against him in case of
altered;
their injury or destruction, respectively.
3. The alteration is made without the consent of the
b. In a third party liability (TPL) insurance contract,
insurer;
the insurer assumes the obligation by paying the
4. The alteration is made by means within the control of
injured third party to whom the insured is liable. Prior
the insured;
payment by the insured to the third person is not
5. The alteration increases the risk (Sec. 168, Insurance
necessary in order that the obligation may arise. The
Code); and
moment the insured becomes liable to third persons,
6. There must be a violation of a policy provision (Sec.
the insured acquires an interest in the insurance
170, Insurance Code).
contract which may be garnished like any other credit
(Perla Compania de Seguros, Inc v. Ramolete, G.R.
Fall-of-Building Clause
No. L-60887, November 13, 1991).

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 COMMERCIAL LAW
c. Aside from compulsory motor vehicle liability
insurance, 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.
d. 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 v. CA,
G.R. 115278, May 23, 1995).
e. Right of a third party injured to sue the insurer of
party at fault depends on whether the contract of
insurance is intended to benefit third persons also or
only the insured.
Tests applied:
1. Indemnity against third party liability
Injured third party can directly sue the insurer.
Purpose: To protect injured person against the
insolvency of the insured who causes such injury.
2. Indemnity against actual loss or
payment Third party has no cause of action against
the insurer. The third persons recourse is limited to the
insured alone (Sec. 53; Bonifacio Bros. v. Mora, G.R.
No. L-20853, May 29, 1967).
Note: 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, G.R. No.
77397, April 3, 1990).
Intentional v. Accidental as Used in Insurance the Insurance Code.
Policies
Not given any technical meaning and construed in their
ordinary and common acceptation.
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
INSURANCE LAWS
intentional act of the third person, the insurer is relieved
from liability as stipulated (Biagtan v. the Insular Life
Assurance Co. Ltd., supra).
2. Accidental That which happens by chance or
fortuitously, without intention or design, which is
unexpected, unusual and unforeseen.
No Action Clause
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 v. Del Monte, G.R.
No. L-21806, August 17, 1967).
A no action clause must yield to the provisions of the
Rules of Court regarding multiplicity of suits (Shafer v.
RTC, G.R. No. 78848, November 14, 1988).
C OM PULSORY M OTOR V EHICLE
L IABILITY I NSURANCE (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, Ibid).
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
Methods of coverage:
1. Insurance policy;
2. Surety bond; or
3. Cash deposit
Passenger
Any fare-paying person being transported and conveyed
in and by a motor vehicle for transportation of passengers
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 COMMERCIAL LAW
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]).
Coverage
In accordance with Sec. 377 of the Insurance Code, IMC
No.4-2006, dated July 26, 2006 provides for third party
liability coverage of P100,000 with an additional P100,000
coverage for passenger liability for public utility vehicle.
This means that the maximum liability per accident is now
P100,000 (plus another P100,000 if a common carrier)
irrespective of the number of victims. The parties may
however enter into an insurance contract which provides
for a bigger coverage.
The circular likewise provides a schedule of indemnity for
death and bodily injuries. Death indemnity is P70,000
while the indemnity for burial and funeral expenses is
P30,000.
No Fault Clause
Clause that gives the victim (injured person or heirs of the
deceased) 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. No Fault Indemnity: P15,000.00 for all
motor vehicles (Insurance Memorandum Circular No. 4-
2006, July 26, 2006);
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
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;
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INSURANCE LAWS
b. In any other case: Insurer of the directly
offending vehicle (Sec. 378);
5. 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.
Note: 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,
G.R. No. L-49699, August 8, 1988).
This no-fault claim does NOT apply to property damage. If
the total indemnity claim exceeds P15,000.00 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
P15,000.00 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.
Special Clauses
1. 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, G.R. No. 54171, October 28, 1980).
2. Theft Clause A clause which includes theft as
among the risks insured against.
x x x the taking of a vehicle by another person without
the permission or authority from the owner thereof is
sufficient to place it within the ambit of the word theft as
contemplated in the policy, and is therefore,
compensable (Paramount Insurance Corp. v.
Remondeulaz, G.R. No. 173773, November 28, 2012).
3. Cooperation Clause 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.
Claims Settlement
Any person having any claim upon the CMVLI policy shall
without unnecessary delay present to the insurance
 COMMERCIAL LAW INSURANCE LAWS

company concerned a written notice of claim within six (6)

months from the date of the accident, otherwise the claim
will be deemed waived. An agreement whereby a surety guarantees the
performance by the principal or obligor of an obligation or
Sec. 384 of the Insurance Code provides for two (2) undertaking in favor of an oblige (Sec. 175, Insurance
periods: Code).
1. Six (6) months
Period for the filing of the notice of claim; It is considered an insurance contract if it is executed by
2. One (1) year the surety as a vocation, and not incidentally (Sec. 20,
Period for bringing an action or suit in the proper Insurance Code).
cases.
Nature of liability of surety
There is absolutely nothing in the law which mandates 1. Solidary;
that the two periods must always concur, as the law 2. Limited to the amount of the bond;
makes use of the phrase in the proper cases. 3. It is determined strictly by the terms of the
contract of suretyship in relation to the principal contract
1. In agreement - The between the obligor and the obligee (Sec. 176,
insurance company shall ascertain the truth and extent Insurance Code).
of the claim and make payment within five (5) working
days. Suretyship Property Insurance
2. No agreement Insurer to Classification
pay only under the no fault indemnity without prejudice Accessory contract Principal contract
of the claimant for pursuing his claim further. Number of parties
He shall not be required to execute any quit claim or 3 parties: surety, obligor 2 parties: insurer and
document releasing it from liability under the policy of and oblige insured
insurance or surety bond issued. Nature
Credit accommodation Contract of indemnity
Cancellation of CMVLI Recovery
No cancellation of the policy shall be valid unless written Surety can recover from Insurer has no such right;
notice therefor is given to the Land Transportation principal only right of subrogation
Commission (Sec. 380[1], Insurance Code).
Cancellation
Bond can be cancelled May be cancelled
Cancellation by Insurer Upon receipt of notice the LTC
only with consent of unilaterally either by insured
shall order the immediate confiscation of plates of the
obligee, Commissioner or insurer on grounds
motored vehicle, unless it receives evidence of either
or court provided by law
revival of the cancelled policy or upon the presentation
Acceptance
of a new policy issued.
Cancellation by insured He shall secure a similar Requires acceptance of No need of acceptance by
policy of insurance or surety bond to secure that which obligee to be valid any third party
was cancelled before the latter becomes ineffective, Scheme
and without any gap file with the LTC and notify the Risk-shifting device; Risk-distributing device;
insurance company concerned of the cancellation. premium paid being in premium paid as a ratable
the nature of a service contribution to a common
Change of Ownership fee fund
Transfer of ownership does not suspend the policy
provided that: Sec. 175 of the Insurance Code defines a suretyship as a
The insurance company shall agree to continue such contract or agreement whereby a party, called the surety,
policy; guarantees the performance by another party, called the
The change of ownership or of the engine shall be principal or obligor, of an obligation or undertaking in favor
indicated in an endorsement by the insurer; of a third party, called the obligee. It includes official
Signed duplicate of the endorsement filed with the LTC. recognizances, stipulations, bonds or undertakings issued
under Act 536, as amended.

S URETYSHIP

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 COMMERCIAL LAW
Although the contract of a surety is in essence secondary
only to a valid principal obligation, the surety becomes
liable for the debt or duty of another although it possesses
no direct or personal interest over the obligations nor does
it receive any benefit therefrom. And notwithstanding the
fact that the surety contract is secondary to the principal
obligation, the surety assumes liability as a regular party
to the undertaking (First Lepanto-Taisho Insurance
Corporation v. Chevron Philippines, Inc., G.R. No.
177839, January 18, 2012).
L IFE I NSURANCE
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:
1. Ordinary Life, General Life or Old Line Policy
Insured pays a fixed premium every year until he dies.
Surrender value after 3 years.
2. 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.
3. Endowment Policy Insured 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.
4. Term Insurance Insurer pays once only, and he is
insured for a specified period. If he dies within the
period, his beneficiaries benefit. If he outlives the
period, no person benefits from the insurance.
5. Industrial Life Life insurance entitling the insured
to pay premiums weekly, or where premiums are
payable monthly or more often (but not less than
weekly), if the face value is P2,000 or less, and the
words industrial policy printed upon the policy.
6. Variable Contract Policy or contract on either
group/ 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
(Miravete, supra.).
Liability of Insurer in Certain Causes of Death of
Insured
1. Suicide
Insurer is liable in the following cases:
a. If committed after two years from the date of the
policys issue or its last reinstatement;
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INSURANCE LAWS
b. If committed in a state of insanity regardless of
the date of the commission unless suicide is an
excepted peril (Sec. 180-A, Insurance Code);
c. If committed after a shorter period provided in the
policy.
Note: 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, supra).
Miravite also opines that the beneficiary of an insured
who is executed for a crime he committed cannot
recover from the insurer for 2 reasons:
His death is caused through his connivance, and
Any stipulation to render the insurer liable under these
circumstances would be contrary to public policy (Miravite,
supra).
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,
Insurance Code).
Exceptions:
a. Accidental killing;
b. Self-defense;
c. 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, G.R. No. L-
9374, February 16, 1915).
The proceeds of life insurance policy payable to the
insured persons estate, on which the premiums were paid
by the conjugal partnership, constitute community
property, and belong one-half to the husband exclusively
and the other half to the wife, exclusively. If the premiums
were paid partly with paraphernal and partly conjugal
funds, the proceeds are in like proportion paraphernal in
 COMMERCIAL LAW
part and conjugal in par (Bank of the Philippine Islands v.
Posadas, G.R. No. L-9374, February 16, 1915).
Reason: A natural person cannot be placed in the same
footing as a juridical person.
Accidental Death Benefit Clause
Gives the beneficiaries additional benefits if the death of
the insured is through accidental means
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.
G OVERNM ENT R EGULATION OF
I NSURANCE B USINESS
Requisites Prior to Operation:
1. Certificate of authority and payment of fees
No insurance company, whether domestic or foreign,
can transact any business in the Philippines until after it
shall have obtained a certificate of authority for that
purpose from the Insurance Commissioner upon
application therefor and payment by the company
concerned of the fees prescribed by the Code (Sec.
187, Insurance Code).
The Insurance Commissioner has the discretion to
refuse the issuance of a certificate of authority on the
very broad ground that such refusal will best promote
the interest of the people of this country.
No certification can be granted until the
Commissioner is satisfied that:
a. The applicant is qualified under
Philippine laws to transact business in the country;
b. The grant of such authority of
the organizers and administrators, the financial
organization and the amount of capital reasonably
assure the safety and interests of the policy holders
and the public.
2. Capital Requirements
(Department of Finance D.O. No. 27-06)
3. Life or Non-life Insurance Companies
Capitalization of One Billion (P1,000,000,000.00) paid in
cash, of which at least 50% consists of paid up capital
and the remaining portion thereof as contributed surplus
INSURANCE LAWS
which in no case shall be less than Two Hundred Million
(P200,000,000.00)
Reinsurance Companies Capitalization of Two
Billion (P2,000,000,000.00) paid in cash, of which at
least 50% consists of paid up capital and the remaining
portion thereof as contributed surplus which in no case
shall be less than Four Hundred Million
(P400,000,000.00)
2. Filing of Necessary
Documents
A certified copy of the last annual statement showing
the condition and affairs of such company
If incorporated under Philippine laws, a copy of the
articles of incorporation and by-laws, and amendments
thereto, certified by the SEC to be a copy of that which
is filed in its office.
3. Additional requirements for
foreign corporations
In addition to the requirements imposed on domestic
insurance companies, the following requirements must
be fulfilled by foreign corporations:
a. Secure a license from the SEC to do
business in the Philippines by following the
requirements of the Corporation Code;
b. File a copy of the SEC certificate
showing that it is duly registered in accordance with
paragraph 1;
c. If incorporated, it must file a certified
copy of its articles of incorporation and its by-laws,
certified by the SEC as a copy of that filed in its office;
d. If not incorporated, file a certificate
setting forth the nature and character of the business,
the location of its principal office, the names of the
persons composing the partnership or association,
the amount of the capital employed and the names of
the persons who are managing the business. The
certificate must be verified by the affidavit of the chief
officer, or the manager or agent of the company
accompanied by a copy of the written articles of said
company, if any;
e. Must fulfill the same capital
requirements as domestic companies and in addition,
must deposit with the Commissioner securities for the
benefit and security of its policyholders and creditors.
Security deposits shall be (1) answerable for all the
obligations of the depositing insurer under its
insurance contracts; (2) at all times free from any
liens or encumbrance; and (3) exempt from levy by
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 COMMERCIAL LAW
any claimant (Republic v. Del Monte Motors, G.R. No.
156956, October 9, 2006).
The right to lay claim on the fund is dependent on the
solvency of the insurer and is subject to all other
obligations of the company arising from its insurance
contracts. Thus, claimants interest is merely
inchoate. Being a mere expectancy, it has no
attribute of property (Ibid).
f. Must set aside an amount corresponding to
the legal reserves of the policies written in the
Philippines and invest the same only in such classes
of Philippine securities as described by the Code
which securities cannot be taken out of the country
without the written consent of the Commissioner;
g. File with the Commissioner a written power
of attorney designating some person who must be a
resident of the Philippines as its general agent, on
whom any notice or summons or legal processes may
be served It must also sign an agreement that in case
it shall be without any agent, the service upon the
Insurance Commissioner shall have the same effect
as if made on the company.
Requisites for Continuance in Business:
1. Reserve Requirements
a. Every life insurance company must make an
annual valuation of its policies, unpaid dividends and
other obligations outstanding on December 31 of the
preceding year. The aggregate net value so
ascertained of the policies of the company is deemed
its reserve liability to provide for which it must hold
funds in secure investments equal to such net value.
b. Every non-life insurance company must ascertain
reserve for unearned premiums on its outstanding
policies equal to 40% of the gross premiums received
on policies having not more than 1 year to run and
pro rate on all gross premiums received on policies
having more than 1 year to run.
2. Margin of Solvency
Margin of solvency is the excess value of an Insurance
companys admitted assets exclusive of its paid up
capital, in case of a domestic company, or an excess of
the value of its admitted assets in the Philippines,
exclusive of its security deposits, in case of a foreign
company, over the amount of its liabilities, unearned
premiums and reinsurance reserves in the Philippines
(Sec. 194).
I NSURANCE C OMMISSIONER
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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 P100,000.00 (Sec. 416), EXCEPT in case of
maritime insurance which is within the jurisdiction of
the MTC or the RTC depending on the value involved
(BP 129; admiralty & maritime jurisdiction).
Where the amount exceeds P100,000.00, the RTC
has jurisdiction.
The filing of a complaint with the Commissioner shall
preclude civil courts form taking cognizance of the case.
A decision which has become final may be the subject
of a writ of execution which may be served and
enforced by a Sheriff (Sec. 416).
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 the same Code which grants the
Commissioner adjudicatory powers (Philippine
American Life Insurance Co. v. Ansaldo, G.R. No.
76452, July 26, 1994).
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; and
e. Punitive