INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y.
2016-2017
CHAPTER 1. THE CONTRACT OF INSURANCE
THE POLICY
Section 63. Accrual of cause of action
Section 63. A condition, stipulation, or agreement in any policy of insurance,
limiting the time for commencing an action thereunder to a period of less than one
(1) year from the time when the cause of action accrues, is void.
AGREEMENT LIMITING TIME FOR COMMENCING ACTION
GR: A clause in the policy to the effect that an action upon a policy by the insured
must be brought within a certain period is valid.
XPN: If the period fixes less than one year from the time the cause of action
accrues, the stipulation would be void.
Industrial life insurance
However, in the case of a policy of industrial life insurance, the period cannot be
less than six years after the cause of action accrues.
Question: Contract states that the insured must commence his action against the
insurer within the period of 6 months, otherwise he can no longer file an action.
Is the agreement valid?
A: No. The period shall not be less than one year. Consequently, since that
stipulation is void, the proper action may be brought within the statutory period of
limitation for written contracts without any agreement – within 10 years from the
accrual of the cause of action.
Question: Supposing X insured his house and in the policy it was agreed that he
has to file an action within one year from the time of accrual of the cause of action,
is that agreement valid?
A: Yes. One year is not less than one year.
WHEN CAUSE OF ACTION ACCRUES
Important: The cause of action in an insurance contract accrues when the
insured’s claim is finally rejected by the insurer.
Elements of a cause of action in insurance
1. Right on the part of the insured to be indemnified
2. Insurer duty bound to give indemnification upon the happening of the peril
insured against
3. Violation by insurer of insured’s right due to refusal on his part to indemnify
Void stipulations
1. Stipulation that prescriptive period begins from the happening of a loss is
void.
2. Stipulation that prescriptive period begins from filing of claim.
TN: This is because both the loss and the filing of claim occur before the rejection
of the insurer’s claim. Take note that the cause of action does not accrue until the
insured’s claim is finally rejected by the insurer.
Condition precedent
The condition that claims must be presented within a certain period after rejection
is in the nature of condition precedent to the liability of the insurer.
Where action is brought against insurer’s agent
Bringing the action against the agent of the insurer is a procedural mistake. This
cannot have any legal effect except notifying the insurer of the claim. This is
because the insured’s cause of action is against the insurance company and not
the agent.
Right to collect v. Right to file an action
A. Right to collect – accrues immediately after the happening of the loss.
B. Right to file action – accrues only when insured’s claim is finally rejected by
the insurer.
Question: X insured his house. During the existence of the contract of insurance,
X’s house is gutted by fire, fire being a peril insured against. May X immediately
seek indemnification from the insurer?
A: Yes. The happening of the loss entitles insured to collect from the insurer.
However, insured cannot go straight to the courts. He must first establish that his
cause of action already accrued – that is, there is already a rejection by the insurer
of his claim.
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Section 64. Cancellation of non-life insurance policy
Section 64. No policy of insurance other than life shall be cancelled by the insurer
except upon prior notice thereof to the insured, and no notice of cancellation shall
be effective unless it is based on the occurrence, after the effective date of the
policy, of one or more of the following:
(a) Non-payment of premium;
(b) Conviction of a crime arising out of acts increasing the hazard insured
against;
(c) Discovery of fraud or material misrepresentation;
(d) Discovery of willful or reckless acts or omissions increasing the hazard
insured against;
(e) Physical changes in the property insured which result in the property
becoming uninsurable;
(f) Discovery of other insurance coverage that makes the total insurance in
excess of the value of the property insured; or
(g) A determination by the Commissioner that the continuation of the policy
would violate or would place the insurer in violation of this Code.
Section 65. All notices of cancellation mentioned in the preceding section shall
be in writing, mailed or delivered to the named insured at the address shown in
the policy, or to his broker provided the broker is authorized in writing by the policy
owner to receive the notice of cancellation on his behalf, and shall state:
(a) Which of the grounds set forth in Section 64 is relied upon; and
(b) That, upon written request of the named insured, the insurer will furnish the
facts on which the cancellation is based.
Cancellation
It is the termination by either the insurer or the insured of the policy of insurance
before its expiration.
A. By the insurer – Sections 64 and 65
B. By the insured – By surrendering the policy to the insurer. Such surrender
entitles him to the return of the premiums on the customary short-rate basis.
Forms and sufficiency of notice of cancellation by the insurer
The conditions under which the right may be exercised are:
1. There must be prior notice of cancellation to the insured
2. The notice must be based on the occurrence, after the effective date of the
policy, of one or more of the grounds in Section 64.
3. It must be in writing, mailed or delivered to the named insured at the address
shown in the policy, or to his authorized broker and
4. It must state which of the grounds set forth is relied upon.
Important: It is the duty of the insurer upon written request of the named insured
to furnish the facts on which the cancellation is based. The premium referred must
be premium paid subsequent to the first since it mentions of non-payment “after
effective date.”
Prior notice of cancellation to the insured
The purpose of provisions for notice of the insured is to prevent the cancellation
of the policy without allowing the insured ample opportunity to negotiate for other
insurance in its stead for his own protection.
Important: The notice should be personal to the insured and not to or through
any unauthorized person by the policy. However, the notice need not be delivered
personally. It may be mailed (Section 65).
Section 66. Renewal of non-life insurance policy
Section 66. In case of insurance other than life, unless the insurer at least 45
days in advance of the end of the policy period mails or delivers to the named
insured at the address shown in the policy notice of its intention not to renew the
policy or to condition its renewal upon reduction of limits or elimination of
coverages, the named insured shall be entitled to renew the policy upon payment
of the premium due on the effective date of the renewal. Any policy written for a
term of less than 1 year shall be considered as if written for a term of 1 year. Any
policy written for a term longer than 1 year or any policy with no fixed expiration
date shall be considered as if written for successive policy periods or terms of 1
year.
Renewal of non-life insurance policy
The rule on whether the renewal gives rise to a new contract or not depends on
whether there is a provision for renewal in the policy.
A. If there is a renewal provision – the renewal is not a new contract but an
extension of the old one.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

B. If there is no renewal provision – the renewal is a new contract on the (b) Certain acts relating to the same subjects have been or shall be
same terms as the old one. done.

Rights of the parties 2. Implied warranty

Warranty which from the very nature of the contract or from the general
GR: The insured in a non-life insurance policy is given the right to renew the
tenor of the words, although no express warranty is mentioned, is
contract with the same terms and conditions as that of the original policy upon
necessarily embodied in the policy as part of thereof and which binds the
payment of the premium due on the effective date of the renewal.
insured as though expressed in the contract.
XPN: Unless the insurer at least 45 days in advance of the end of the period mails
or delivers the insured notice of its intention not to renew the policy or to condition
Ex: The seaworthiness of a ship in a marine insurance. (TN: It is only in
marine insurance that the law provides for implied warranties)
its renewal upon reduction of its amount or elimination of some coverages.
3. Affirmative warranty
Discussion: The insured is allowed to renew the insurance policy unless the
insurer gives a notice to the insured that he will not be allowed to renew anymore. One which asserts the existence of a fact or condition at the time it is made.

Period for giving notice of non-renewal by insurer Ex: That the building is free of materials causing fire at the time of issuance.
A. A policy written for a term of less than one year – considered as if written Question: When is warranty considered continuing?
for a term of one year. A: Warranty is continuing if it is one that must be satisfied during the entire
coverage period of the insurance.
B. A policy written for a longer term or with no fixed expiration date –
considered as if written for successive policy periods terms of one year. 4. Promissory warranty

Important: Thus, where the term of the policy is 5 years, the notice must be One where the insured stipulates that certain facts or conditions pertaining
given at least 45 days before the anniversary date of any given policy year. If the to the risk shall exist or that certain things with reference thereto shall be
45-day rule is not complied with, the insurer may not refuse to renew a policy done or omitted.
upon payment of the premium due.
Ex: That there shall be installation of fire protection devices in the building
Question: Insurance policy term is 2015-2029. Supposing you gave your notice insured.
in 2020, will that be sufficient? You did not give notice in 2016,17,18,19, because
you know the policy will expire some time in 2029. Affirmative v. Promissory warranty
An affirmative warranty already exists during the time of the contract, while a
A: There is no need for the insurer to give the insurer such notification on a yearly promissory warranty need not exist yet but there is an agreement that it should
basis. It is enough that the insurer will send at least 1 notification 45 days prior to done after the issuance of the policy.
the expiration. You treat it as if it is on a yearly basis. Thus, if you give notification
in Nov 2016, that will be sufficient to cover until 2029. Warranty is presumed affirmative
Unless the contrary intention appears, the courts will presume that the warranty
Discussion: Supposing you did not give any notification from 2016 until 2028, is merely affirmative.
and 45 days prior to expiration, the insurer was able to spot that the contract was
about to expire. The insurer may still give such notification in Nov of 2029. As long Examples:
as it is made prior to the expiration of the policy. You have to remember that this
notification is a right given to the insurer. What is not allowed for a contract longer 1. Where the policy describes the property as being “a two-storey structure
than 1 year, is that the insurer will give at any time. There is just a period within used as a residence” there is no warranty that such structure would continue
which the insurer has to give such notification. to be used.

Question: Supposing the contract is drawn for a period of 20 days. When are you
supposed to give your notice?
A: The law provides that any policy written for a term of less than 1 year shall be
considered as if written for a term of one year. However, in this case, the period
of the contract is only 20 days, which is even less than the 45-day notification
period required by law. Thus, the notice of non-renewal shall be made on the date
of the issuance of the policy.
(a) If policy is for a period of 45 days – on the date of the issuance of the policy
(b) If policy is for a period of 60 days – 45 days prior to end of the contract.
WARRANTIES
Section 67. Warranty may be express or implied
2. The statement “watchman on premises at night” made in the policy was held
to refer only to the time of making the contract and not to be a warranty
that a watchman would be kept continuously on the premises thereafter.
Important: But the answer “Yes” to the question “Will you keep your book of
accounts in an iron safe or secure in another building?” was held a promissory
warranty, and the breach of which precluded recovery.
Section 68. Past, present, future warranty
Section 68. A warranty may relate to the past, the present, the future, or to any
or all of these.
Time to which the warranty refers
It refers to a past, present or future time.

Section 67. A warranty is either expressed or implied. Examples:

Warranty Warranty that relates

That the insured never suffered any ailment
A statement of promise by the insured contained in the policy itself or incorporated to the past
in or attached to it by proper reference. Warrant that relates
That the building is occupied as a dwelling
to the present
Important: The falsity or non-fulfillment of the warranty regardless of whether Warranty that relates That the insured would employ a
the insurer has suffered loss or damage as a result thereof renders the policy to the future watchman or install fire extinguishers
voidable at the insurer’s election.
Important: Although the provision employs the term “warranty” in general, in
Kinds of warranties case of a promissory warranty, the same may refer only to future events.

1. Express warranty
An agreement contained in the policy or clearly incorporated therein where
the insured stipulates that:
(a) Certain facts relating to the risk are or shall be true or

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INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

there is no more need for an internal hydrant considering that inside there
Section 69. Intention of parties to create warranty
were equipment present.
Section 69. No particular form of words is necessary to create a warranty.
Section 70. Express warranty
Intention of the parties governs
Section 70. Without prejudice to Section 51, every express warranty, made at or
The word “warranty” in the policy does not necessarily constitute warranty.
before the execution of a policy, must be contained in the policy itself, or in another
Whether the statement made by the insured in the policy is a warranty depends
instrument signed by the insured & referred to in the policy as making a part of it.
upon the intention of the parties.

Rule in case of doubt Express warranty

In case of doubt, the statement will be construed as a representation rather than
GR: In order that a stipulation may be considered a warranty, it must not only be
a warranty especially if such statement is contained in any instrument other than
clearly shown that the parties intended as such, but it must also:
a policy like an application which is, in itself, collateral merely to the contract of
(a) Form part of the contract itself, or
insurance. The parties must intend a statement to be a warranty and it must be
(b) If contained in another instrument, must be signed by the insured and
included as a part of the contract.
referred to in the policy as making a part of it
Example: An applicant’s statement that he is not afflicted with any specified XPN: Express warranty contained in a rider – need not be signed by the insured
disease is presumed to be a representation, if not, then a mere statement of
nor referred to in the policy as making part of it because a rider attached to a
opinion. Its incorrectness does not invalidate the contract unless the opinion was
policy is already part of the contract.
fraudulently given.

Important: But if such statement is warranted to be true in every respect, then
the incorrectness will wholly avoid the policy even if the insured acted in perfect
faith.
Warranties distinguished from representations
Warranties
Considered part of the contract
Always written on the face of the
policy, actually or by reference,
Must be strictly complied with
Representations
Are but collateral
inducements to it
May be written in a totally
disconnected paper
or may be oral
Substantial truth only is required
Section 71. Express warranty must refer to a fact
Section 71. A statement in a policy, of a matter relating to the person or thing
insured, or to the risk, as fact, is an express warranty thereof.
Statement must refer to a fact
It must not be an opinion, or belief, to constitute an express warranty.
Where statement in the nature of an opinion
A statement in the policy which, from the very nature of the subject matter of the
inquiry, can only be an expression of an opinion is not, a warranty of its
truthfulness. Such a statement, if deemed a warranty at all, is merely a limited
warranty as to the honesty and good faith of the insured.
Important: Where the statements in the application are qualified with words “to
the best of my knowledge” or “near correct as I remember,” the right to recover
on the policy will not be defeated unless some answers are consciously incorrect.

The falsity of a representation renders
Falsity or non-fulfillment of a the policy voidable or rescissible on
warranty operates as a breach of the ground of fraud.
contract
Insurer must show the materiality of a
Presumed material representation on order to defeat an
action on the policy.
Must be absolutely true Require only substantial truth
Important: Before a representation will be considered a warranty, it must be
expressly included or incorporated by clear reference in the policy and the contract
must clearly show the intention of the parties to that effect. In short, statements
are considered representations unless they are clearly intended to become
warranties.
American Home Assurance Company v. Tantoco Enterprises
Facts: Petitioner contends that respondent violated the express terms of the Fire
Extinguishing Appliances Warranty. It argues that the warranty clearly obligates
the insured to maintain all the appliances specified. The breach occurred when
respondent failed to install internal fire hydrants inside the burned building as
warranted. This fact was admitted by the oil mill’s expeller operator. Was the
respondent guilty of breach of the warranty?
Ruling: No. The respondent was not guilty of breach of warranty.
1. Respondent was not required to provide for all the extinguishing appliances
enumerated in the policy. What the warranty mandates is that he should
maintain, in efficient working condition within the premises of the insured
property, fire-fighting equipment such as, but not limited to, those identified
in the list, which will serve as the oil mill’s first line of defense in case any
part of it bursts into flame.
2. Respondent complied with the warranty. Within the vicinity of the oil mill can
be found the following devices: numerous portable fire extinguishers, two
fire hoses, fire hydrant, and an emergency fire engine. All of these equipment
were in efficient working order when the fire occurred.
3. Warranties are strictly construed. They are not just interpreted strictly but
also with reasonableness. The reasonableness should be ascertained in the
light of the factual conditions prevailing in each case. Here, the SC finds that
Question: X said that he is 35 years old, when in truth and in fact, he is just 45
years old. Is this an express warranty?
A: It depends. If such facts was stated in the policy itself, it is considered as an
express warranty. However, if such was merely said by X during the application
for insurance, the same is merely an affirmative misrepresentation.
Question: Policy says that X believes he is a good driver.
A: Not an express warranty as the statement merely refers to a belief or opinion.
Section 72. Promissory warranty
Section 72. A statement in a policy, which imparts that it is intended to do or not
to do a thing which materially affects the risk, is a warranty that such act or
omission shall take place.
Promissory warranty
This section refers to a promissory warranty. Breach of promises or agreements
as to future acts will not avoid a policy unless said promises are material to the
risk.
When an act or omission is material to the risk
An act or omission is material to the risk if it increases the risk. Under the law, only
substantial increase of risk works forfeiture of the policy which is avoided for
increase in hazard.
Examples:
1. If it is stipulated in a policy requiring owner occupancy that the house shall
not be occupied by a tenant, there is a warranty that such condition shall
not take place.
2. If stipulated that insured will not store flammable materials, there is a
warranty that such act will not be committed.
Question: In an insurance policy, the parties agreed that insured will insure his
other building within two months from the effectivity of the original policy. If he
did not insure such building, then a fire broke out which gutted the building insured
in the original policy, can he claim the proceeds of the policy?
A: Yes the insured can still claim. This is a promissory warranty and the breach of
promises or agreements as to future acts will not avoid a policy, unless said

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INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
promises are “material to the risk”. Here, the promise to insure the other building
is not material to the risk for the omission of which will not increase the risk on
the insured building.
Question: The contract also provides that the insured will repaint the house from
bloody red to shocking pink. Before he can paint the house, the house was gutted
by fire. Can he ask for the proceeds?
A: Yes, because the repainting of the house will not in any way increase the risk.
Section 73. Breach which does not avoid the policy
Section 73. When, before the time arrives for the performance of a warranty
relating to the future, a loss insured against happens, or performance becomes
unlawful at the place of the contract, or impossible, the omission to fulfill the
warranty does not avoid the policy.
BREACH OF WARRANTY WHICH DOES NOT AVOID THE POLICY
1. When loss occurs before time of performance.
Ex: Insured warrants that within 5 days from the execution of the contract,
he will install fire extinguishers. On the second day, fire broke out.
2. When performance becomes unlawful.
Ex: Warranty of making the rented house a private dwelling for the family
within three months but a law is later passed prohibiting the ejectment of
tenants within 1 year.
3. When performance becomes impossible (legal or physical).
Ex: Insured warrants that he will further fortify the insured building using
the mahogany trees in his backyard. Later, a storm hit destroying all the
trees.
Important: In these three cases, while there is breach in the warranty, the
policy is not avoided.
WHERE INSURER BARRED BY WAIVER OR ESTOPPEL
GR: Breach of warranty operates to discharge the insurer from liabilities.
XPNs: If the insurer is liable because of a waiver of the warranty or estoppel.
Waiver
An intentional relinquishment of a known right. It may be:
(1) Express
(2) Implied – said conduct must be clearly indicative of a clear intent of the
insurer to waive its right under the policy.
Important: Failure on the part of the insurer to assert a forfeiture upon breach
of warranty or condition, after knowledge thereof, amounts to a waiver or
estoppel.
Ex: If the insured warranted that he will not put combustible materials, particularly
LPG, in his building. However, the insured placed LPG in his building. When the
building was gutted by fire, the insurer paid the insured nonetheless.
Estoppel
The insurer is precluded, because of some action or inaction on its part, from
relying on an otherwise valid defense as against the insured who has been induced
to enter into the contract by the insurer’s representation or conduct.
Estoppel v. Waiver
A. Estoppel – the conduct of the insurer prevents it from avoiding the liability
B. Waiver – the failure of the insurer to assert a defense prevent it from
asserting that defense in the event of a claim filed by the insured
Important: But whether it is estoppel or waiver that comes into play, the result
is much the same. Actually, waiver is a type of estoppel.
Examples:
1. Other insurance clause violated – Insurer knowing that the insured has
violated the clause on prohibition of making other insurances on the same
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property without giving notice to the insurer, preferred to continue the policy
by demanding and collecting premium.
2. Premium not paid – An extension of time of payment amounts to a waiver
of the insurer’s right to require payment of premium on the due date.
3. Warranty clause violated – Insurer was aware even before policy was issued
that in premises insured, the number of fire hydrants was less than that
demanded. Nevertheless it issued a policy and accepted premiums.
4. Insured vehicle not a common carrier – Insurer knew all along that insured
owned a private vehicle and not a common carrier when it issued a common
carrier’s accident insurance.
Far Eastern Surety and Insurance Co. v. Vda. De Misa
Facts: Under the common carrier’s accident insurance policy issued by the insurer,
the recovery of the insured (taxicab company) is limited to “all sums including
claimant’s (passenger in the taxicab in this case) cost and expense which the
insured shall become legally liable” in the “event of accident caused by or arising
out of the use of the motor vehicle.” The taxicab of the insured collided with a
gravel and a sand truck.
The lower court, while holding that the collision was due to the fault of the driver
of the truck, nevertheless held the taxicab operator liable to the passengers on the
strength of its representation that its passengers were insured against accidents
and adjudged the insurer answerable to the insured in the view of its third party
liability contract.
Issue: Is the insurer liable to the insured under the policy?
Ruling: No. The indemnity awarded to the passengers was not because of the
accident but was exclusively predicated on estoppel – on the representation made
by the insured. Had it not been for this representation, the insured would not have
been liable at all. It does not appear, however, that the insurer authorized or
consented to or even knew of, the representation by the insured. It follows that
the insurer may not be held liable for such damages for recovery is limited by the
terms and conditions of the policy.
Section 74. Violation of material warranty - rescission
Section 74. The violation of a material warranty, or other material provision of a
policy, on the part of either party thereto, entitles the other to rescind.
Right to rescind
The violation of the terms of the contract of insurance entitles either party to
terminate the contractual relations.
A. Rescission by the insured
The insured can sue for rescission for breach of contract due to refusal of
the insurer to grant loan applied for although this was expressly agreed
upon in the policy and he can recover the full amount of premiums paid by
him up to the filing of the action.
B. Rescission by the insurer
The insurer is entitled to rescind for violation of a warranty only if said
warranty is material. Otherwise the breach will not avoid the policy.
Important: The right of the insurer to rescind exists even though the violation
was not the direct cause of the loss.
Section 75. Violation of immaterial provision
Section 75. A policy may declare that a violation of specified provisions thereof
shall avoid it, otherwise the breach of an immaterial provision does not avoid the
policy.
When violation of immaterial provisions shall avoid policy
GR: Breach of a provision which is not material will not avoid the policy.
XPN: If expressly stipulated by the parties – that the violation of a particular
provision (although immaterial) in the policy shall avoid it. By such stipulation, the
parties convert an immaterial warranty into a material one.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

Discussion: An example is when a fire insurance policy expressly states that the Difference between conditions and warranties
insured have to repaint the building from bloody red to shocking pink otherwise,
it will avoid the policy. While the color of the paint is immaterial, it will avoid the Condition Warranty
policy because it is expressly provided for in the contract. Precedent

One without the

Section 76. Effect of breach
performance of Does not suspend or defeat the
Section 76. A breach of warranty without fraud merely exonerates an insurer which, the contract operation of contract; a breach
from the time that it occurs, or where it is broken in its inception, prevents the does not spring into affords the remedy expressly
policy from attaching to the risk. life; limitation to the provided in the contract or that
attachment of the furnished by law.
As to effect risk.
EFFECT OF BREACH OF WARRANTY

Fraud not essential for breach of warranty

This has nothing to do with the
Falsity, not fraud, is the basis of liability of a warranty. Thus, fraud is not essential Contract will never
effectiveness of the contract. The
before the insurer may be entitled to rescind the contract on the ground of breach be effective unless
contract is already effective until
of warranty. the condition is
such time that there will be
complied with.
violation / breach of the warranty.
Effect if breach is with or without fraud

The policy is avoided only from the time of breach Effect of Insurer is entitled to
No contract at all.
and the insured is entitled to: breach rescind the contract.

Without fraud (a) The return of premium at a pro rata rate

from the time of the breach.
(b) All the premiums, if it is broken during the
inception of the contract. (void ab initio)
The policy is void ab initio and the insured is not
With fraud
entitled to the return of the premium paid.
Example:
Warranty stipulates that insured will not store flammable materials in the building.
(a) Policy is issued on June 10, 2016
(b) Insured violates the warranty on June 25, 2015.
The insurer is exonerated only from June 25, 2016. Consequently, he liable only
for loss arising before June 25, 2016, but not thereafter. In this case, the insurer
is entitled to retain the premium up to June 25, 2016, the time of the breach.
If the insured, without fraud, makes a false warranty at the time he signs the
contract, he cannot recover for any loss arising thereafter because the breach
prevents the policy from attaching to the risk. In other words, the contract is void
ab initio but all the premiums should be returned to the insured.
CONDITIONS
Condition defined
A condition is an event signifying in its broadest sense either an occurrence or a
non-occurrence that alters the previously existing legal relations of the parties to
the contract.
EXCEPTIONS
Exceptions defined
They are inserted in a policy for the purpose of withdrawing from the coverage of
the policy, as delimited by the general language describing the risk assumed, some
specific risks the insurer declares himself unwilling to undertake.
Ex: Insurer issues policy covering a store and its contents against loss by fire may
cut down the meaning of contents, by excepting money and securities, or restrict
the peril of fire, by excepting fire caused by lightning.
Distinguished from warranties and conditions
Policy contains warranted statement that insured
Warranty
building is occupied
Policy declares that “this entire policy shall be void if the insured
Condition
building becomes vacant or unoccupied for more than 30 days”
Policy provides that insurer will not be liable for loss, while the
Exception insured building is vacant or unoccupied
EFFECTS OF BREACH ON LEGAL RELATIONS OF PARTIES
On binding force of contract
Occurrence of breach of warranty or condition even though such breach may be
temporary renders the entire contract defeasible or voidable and even though such
breach may not have affected the risk or contributed to the loss in any way.
Important: But the occurrence of an excepted peril (vacancy of a house) does
not in the least affect the binding force of a contract.

Important: Insurer may impose whatever conditions they please upon their A. If loss happens during such vacancy – it falls outside the coverage of the
obligations, as long as they are not contrary to law, morals, good customs, public policy and the insurer is not liable
order, or public policy.
B. If no loss occurs (house is reoccupied) – the contract relations continue to
A. Condition precedent be unchanged
Calls for the happening of some event or the performance of some act after
On liability where there is waiver
the terms of the contract have been agreed upon, before the contract shall
Such a breach of warranty or condition may be waived without consideration.
be binding on the parties.
Important: But the insurer does not become liable for an excepted loss by waiver
Examples:
unless such waiver amounts to a new contract on valuable consideration. The
1. Policy shall not take effect until the delivery and payment of the first insurer cannot, by a naked waiver, assume a non-existent duty, nor is the defense
premium during the good health of the applicant. that the loss is excepted barred by the incontestable clause.

2. In life insurance policy, the contract will only be effective upon the
submission of the insured’s medical records, evidencing good health.
B. Condition subsequent
That which pertains not to the attachment of the risk and the inception of
the policy, but to the contract of insurance after the risk has attached and
during the existence thereof.
Example: Condition requiring notice and proof of loss in case loss upon an
insurance against fire.
Question: X got a fire policy for a period of 5 years which says that fire caused
by lightning is an excepted peril. On its third year, the building was gutted by fire
due to lightning. X tried to claim the proceeds, however the insurer said it is an
excepted peril. X then went back to the insurer, saying that he cannot use his
defense of excepted peril, because the policy became incontestable already.
A: The insurer may not be compelled to pay the proceeds, because it is an
excepted peril. The principle of incontestability applies only to life insurance
policies.

5|U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

Chief distinctions:
PREMIUM

Section 77-78. Premium and Assessment Premium Assessment

Levied and paid to meet
Section 77. An insurer is entitled to payment of the premium as soon as the thing Collected to meet actual losses
anticipated losses
insured is exposed to the peril insured against. Notwithstanding any agreement to The payment of the premium, after
the contrary, no policy or contract of insurance issued by an insurance company is Are legally enforceable once levied,
the first, is not enforceable against
valid and binding unless and until the premium thereof has been paid, except in unless otherwise agreed
the insured
the case of a life or an industrial life policy whenever: A debt, unless otherwise
Generally not a debt
expressly agreed
(a) The grace period provision applies
(b) Under the broker and agency agreements with duly licensed intermediaries, Payment of premium ordinarily not a debt
a ninety (90)-day credit extension is given.
GR: Premiums are levied and paid to meet anticipated losses. These are not
No credit extension to a duly licensed intermediary should exceed ninety (90) days enforceable against the insured. Premium is not a debt.
from date of issuance of the policy.
XPNs:
Section 78. Employees of the Republic of the Philippines, including its political
subdivisions and instrumentalities, and government-owned or -controlled 1. In fire, casualty, and marine insurance – The premium paid becomes a debt
corporations, may pay their insurance premiums and loan obligations through as soon as the risk attaches and in suretyship, as soon as the contract or
salary deduction: Provided, that the treasurer, cashier, paymaster or official of the bond is perfected and delivered to the obligor.
entity employing the government employee is authorized, notwithstanding the
provisions of any existing law, rules and regulations to the contrary, to make 2. In life insurance – The premium becomes a debt only when:
deductions from the salary, wage or income of the latter pursuant to the
agreement between the insurer and the government employee and to remit such (a) The contract has become binding – in case of the first premium
deductions to the insurer concerned, and collect such reasonable fee for its (b) When the insurer has continued the insurance after maturity – in case
services. of subsequent premiums in consideration of the insured’s express or
implied promise to pay.
PREMIUM AND ASSESSMENT
EFFECT OF NONPAYMENT OF PREMIUM
Premium
The agreed price for assuming and carrying the risk. It is the consideration paid to A. Non-payment of first premium
an insurer for undertaking to indemnify the insured against a specific peril. Prevents the contract from becoming effective and binding notwithstanding
the acceptance of the application nor the issuance of the policy, unless
Important: Where only one premium is paid for several things not separately waived.
valued or separately insured, making for only one cause or consideration, the
insurance contract is entire or indivisible as to the items insured. It is immaterial B. Non-payment of the balance of the first premium
that they are shipped or transported separately. Does not prevent the contract from being binding and effective. A contrary
rule would place exclusively in the hands of the insured the right to decide
Assessment whether the contract should stand or not.
Sum specifically levied by mutual insurance companies or associations, upon a
fixed and defined plan, to pay losses and expenses. C. Non-payment of subsequent premiums
Does not prevent the contract of insurance from becoming binding and
A policy issued on the assessment plan is one where the payment of the benefit is effective.
in any manner or degree dependent upon the collection of an assessment upon
persons holding similar policies. XPN: Expressly agreed upon by the parties in the contract of insurance that
the nonpayment of the subsequent premiums will prevent the contract from
Discussion: becoming effective and binding among them or will lead to the
extinguishment of the insurance policy.
Mutual insurance companies
Discussion: If the insurer already received the first premium, and after
It is not uncommon for persons to form associations for a mutual benefit. demanding from the insured, the insured no longer wants to pay, insurer has the
option to go to court either to:
Ex: Paluwagan system in the provinces. Neighbors will contribute Php 500 on a (1) Demand payment, or
weekly basis and then the money will be placed in a pot and it will be given to a (2) Ask for rescission
particular person. Next week, they will contribute another Php 500 and give it to
another person. It is common for human beings to associate ourselves with some But if from the very start, the premiums on the policy were not paid by the insured,
other human beings for a benefit. and the insured building is gutted by fire, the insurer is not at all liable, not a single
cent of the proceeds shall be given to the insured.
Same with mutual insurance companies or associations.
Important: Once a policy has been issued, the presumption lies that the premium
Ex: If they agree that if someone will die in their clan, each family will contribute has been duly paid, and where the nonpayment is attributable to the fault or
Php 5,000 to defray all the monetary expenses to bury the dead. In that sense, misrepresentation of the insurer, the insured is entitled to recover in case of loss.
they are not paying any premium but they are contributing something in the form
of an assessment. Question: May government employees pay premium through salary deduction?

Important: In mutual insurance companies or associations, there is an
agreement among the members that if something happens, they will contribute to
the general fund to pay off whatever damage is sustained by a certain member.
This is the concept of assessment. We do not apply this in ordinary insurance
because in insurance, you pay premium and not assessment.
Premium v. Assessment
In theory, all payments of premiums and assessments are but contributions from
all members of the insuring organization to make good the losses of individual
members.
A: Yes. Sec. 78 provides that government employees may pay their premiums
and loan obligations through salary deduction.
Requisites:
1. Treasurer, cashier, paymaster or official of the entity employing the
government employee is authorized to make deductions
2. Pursuant to the agreement between the insurer and the government
employee
3. Treasurer or other authorized official shall remit such deductions to the
insurer concerned and collect such reasonable fee for its services.

6|U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
EXCUSES FOR NONPAYMENT OF PREMIUMS
Fortuitous events will not prevent forfeiture
Even the acts of God, rendering the payment of the premium by the insured wholly
impossible, will not prevent the forfeiture of the policy when the premium remains
unpaid.
Important: The nonpayment does not merely suspend the contract, it puts an
end to it “since the time of payment is peculiarly of the essence of the contract.”
Question: The contract of insurance provides that the policy will not become valid
and binding unless there is full payment of premium. The insured is willing and
ready to tender the full amount of the premium which is 10M. However, on the
day when the insured was supposed to give the manager’s check to the insurer,
there was a strong earthquake. The insurer was not able to get the 10M. Also,
the property subject to the insurance was destroyed. Assuming that the
earthquake is a peril insured against, may the insured recover the proceeds? May
an act of god excuse the nonpayment of premium?
A: An act of God does not excuse the payment of premium because the time of
the payment of premium is the essence of the insurance contract.
XPNs: Conditions, conduct or default of insurer
No excuse will avail to prevent forfeiture, except only when:
1. Where the insurer has become insolvent and has suspended business, or has
refused without justification a valid tender of premiums.
2. Where the failure to pay was due to the wrongful conduct of the insurer as
when the insurer induced the beneficiary under a policy to surrender it for
cancellation by falsely representing that the insurance was illegal and void,
and returning the premiums paid.
3. Where the insurer has in any wise waived his right to demand payment.
TN: The insurer will not be deemed to have waived his privilege of forfeiture by
mere inaction or silence if the ground be default in the payment of premiums. But
the insurer cannot force the insured to make payments.
Question: May a condition, conduct or default of the insurer excuse non-payment
of premium?
A: Yes, because it is the fault of the insurer in the first place. So for as long as the
insured, in good faith, wants to pay the insurer and the insurer is the cause of
such non-payment, then non-payment can be excused.
GENERAL RULE, EXCEPTIONS
General rule: Under Section 77, notwithstanding any agreement to the contrary,
no policy or contract of insurance issued by an insurance policy is valid and binding
unless and until the premium thereof has been paid.
Statutory exceptions:
When policy valid and binding notwithstanding nonpayment of premium.
1. In the case of a life or an industrial policy whenever the grace period
provision applies (Section 77).
Grace Periods:
Individual life or endowment
Either 30 days or 1 month
insurance and group life insurance
Industrial life insurance 4 weeks
Industrial life insurance & the
Either 30 days or 1 month
premiums are payable monthly
2. Whenever under the broker and agency agreements with duly licensed
intermediaries, a 90-day extension is given (Section 77).
Illustration: If there is an agreement between you and the broker or agency
that you cannot pay the premium on a specific day, there can be a credit
extension given for only 90 days. You have to pay the premium within the
90 days.
3. When there is an acknowledgement in the policy or contract of insurance of
receipt of premium even if there is a stipulation therein that shall not be
binding until the premium is actually paid. (Section 79).
7|U N I V E R S I T Y O F S A N C A R L O S
Exceptions provided by jurisprudence
1. When there is an agreement allowing the insured to pay the premium in
installments and partial payment has been made at the time of the loss.
(Makati Tuscany Condo v. CA)
Discussion: The ruling in Makati Tuscany is a judicial legislation. Section 77
was clear as to not subjecting the rule on payment of premium to the
agreement of the parties – “notwithstanding any agreement to the contrary”.
The rule that the Supreme Court provided in Makati Tuscany case deviates
from the clear text of the law.
2. When there is an agreement to grant the insured credit extension for the
payment of the premium and loss occurs before the expiration of the credit
term. (UCPB v. Masagana)
3. When estoppel bars the insurer from invoking Section 77 to avoid recovery
on a policy providing credit term for the payment of the premiums, as against
the insured who relied in good faith on such extension.
Important: The insurance code only provides for 3 exceptions. But the Supreme
Court added three more (credit extension, agreement on installment, and
estoppel). So these are the exceptions: (3) statutory exceptions and (3)
jurisprudential exceptions.
RELEVANT JURISPRUDENCE
South Sea Surety v. CA
Facts: Insured obtained a marine insurance cargo policy for its logs loaded on the
vessel. Insured gave check payment to Victorino Chua. A day after, the vessel
sank. South Sea cancelled the insurance policy alleging non-payment of premiums.
Issue: Is Victorino Chua an agent of the insurer and therefore payment was
accepted.
Ruling: Yes. Victorino Chua is an agent of the insurer. Under the Code, an
insurance company which delivers to an agent or broker a policy or contract of
insurance shall be deemed to have an authorized agent or broker to receive
payment on its behalf of premiums which is due.
Re: Validity of policy in case of credit extension.
UCPB vs. Masagana
Facts: UCPB insured Masagana’s properties. Two months before expiration of the
policy, UCPB gave written notice to Masagana for non-renewal of the policies. Then
the property insured was razed by fire. A month after, Masagana gave a check for
payment of the premium and the following day filed a complaint to claim the
proceeds of the policy.
Ruling:
1991 – The SC ruled that the insurance policies had expired. Because an insurance
policy other than life is not valid and binding until actual payment of the premium,
any agreement to the contrary is void. The parties may not agree expressly or
impliedly on the extension of the credit time to pay the premium and consider the
policy binding before actual payment.
1992 – The SC ruled that Sec. 77 merely precludes that the policy is valid even if
premiums are not paid. But it does not expressly prohibit an agreement granting
credit extension. Likewise this case mentions about the exceptions to Sec. 77, that
the policy is valid and binding notwithstanding non-payment of the premium:
1) Granting credit extension and
2) Estoppel
Makati Tuscany Condominium Corp. v. Court of Appeals
Facts: The insurer issued an insurance policy for the properties of Makati Tuscany,
which was renewed 3 times and premiums were paid in installments. On its 3rd
year, Makati failed to pay the subsequent premiums and they contended that they
are no longer required to pay for the subsequent premiums alleging that the
insurance policy never took effect and is not binding, because full payment of the
premiums must be paid in order for the insurance policy to take effect.
Ruling: Section 77 merely precludes the parties from stipulating that the policy is
valid even if premiums are not paid, but does not expressly prohibit an agreement
granting credit extension. Such an agreement is not contrary to morals, good
customs, public order or public policy. An understanding to allow insured to pay
premiums in installments is not so proscribed. At the very least, both parties should
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
be deemed in estoppel to question the arrangement they have voluntarily
accepted. Supreme Court also said that the risk already attached upon payment of
the first installment or premium.
It is submitted that a credit extension agreement is valid.
Principles:
1. If under Section 79, the mere acknowledgement in the policy of receipt of
premium makes the policy binding although in fact it has not been paid,
there is a stronger reason to accord validity to a policy where there is a
clear agreement to grant the insured credit extension of the premium due.
In both cases, the insurer waives the condition of prepayment in full and
has a right to recover the premium due and unpaid.
2. Credit extension of the premium due may be granted. If done by express
agreement, the policy is void. If done merely by an acknowledgement of
receipt of premium which is actually unpaid, the policy is valid. In other
words, the principle is that what the law prohibits to be done directly can
be done indirectly.
3. The new rule is susceptible to the constitutional objection that it unduly
restricts the freedom of contract particularly of the insured who may be the
innocent victim on an unscrupulous insurer desiring to collect the whole
premium for a reduced period of coverage.
4. The ruling of the SC in UCPB General Insurance Co. is unduly favorable to
the insurer who may grant an extension to the insured and easily lull the
latter into a false sense of security and then deny liability should the event
insured against takes place. But the insurer may choose to demand the
payment of the premium before the loss has occurred if he desires to
maintain or continue the contract of insurance.
Question: The subject of the insurance is a building, the insurance to last for a
period of one year. The value of the premium is P10M. The insured paid 5M as
partial payment, which was received by the insurer. However the contract provides
that the insurance policy will not become binding and effective as between the
parties until and unless there is full payment of the insurance premiums.
Sometime in May, the building was destroyed. The insured went to the insurer and
he prepared a manager’s check in 5M. He then tendered the 5M to the insurer and
he wanted now to collect the proceeds which is 100M. Is that allowed?
A: No. See Tibay v. CA.
Tibay v. CA – Fortune insurance
Facts: Sps. Tibay insured their property with Fortune insurance. The premium was
for P2,900, but only 600 were paid by the insured. The building insured was razed
by fire. Two days later Violeta Tibay paid for the balance of the premium and on
the same day, filed a claim against Fortune insurance.
Issue: Is the policy valid and binding upon partial payment of premium?
Ruling: No, SC ruled that premium must be paid in full in order for the policy to be
valid and binding. This case is different from Makati Tuscany, because in the
Makati, there was a practice that payment shall be in installments. Neither is there
any stipulation granting any credit extension. Likewise, payment of premiums is
the elixir vitae of insurance business because the insurer must maintain a legal
reserve fund to meet its contingent liabilities.
Discussion: In this case, Phoenix and Makati Tuscany were also cited. But the SC
said that the facts in Phoenix and Makati Tuscany are not applicable in this case.
Here, the insurer is not compelled to release the proceeds of the insurance contract
because it is clearly provided and stipulated in the contract that it will not become
binding nor effective as between the parties if and when there is no full payment
of the premium. This is true even if there is already partial payment made by the
insured and even if the insurer gladly accepted the same. The agreement between
the parties is not subject to any interpretation as it is very clear.
8|U N I V E R S I T Y O F S A N C A R L O S
Section 79. Effect of acknowledgement of receipt of premium
Section 79. An acknowledgment in a policy or contract of insurance of the receipt
of premium is conclusive evidence of its payment, so far as to make the policy
binding, notwithstanding any stipulation therein that it shall not be binding until
the premium is actually paid.
EFFECT OF ACKNOWLEDGEMENT OF RECEIPT OF PREMIUM
Waiver of condition of pr epayment
Where the policy contains an acknowledgement of receipt of premium, the insurer
cannot deny the truth of receipt of the premium in an action against him on the
policy even if:
(1) It is actually unpaid, or
(2) There is a stipulation making prepayment of the premium a condition
precedent to the binding effect of the policy.
The law establishes a legal fiction of payment.
Important: Reason: When the policy contains such written acknowledgement, it
is presumed that the insurer has waived the condition of prepayment, the
acknowledgement being declared by law to be conclusive evidence of premium
payment.
Presumption: When conclusive and when prima facie
A. The conclusive presumption extends only to the question of the binding
effect of the policy.
B. As far as the payment of the premium itself is concerned, the
acknowledgement is only a prima facie evidence of the fact of such
payment.
Important: In other words, the insurer may still dispute its acknowledgement but
only for the purpose of recovering the premium due and unpaid. Whether the
payment was indeed made is a question of fact.
Question: There is a statement in the policy that there was already payment
when in truth there was none. May the insurer deny liability?
A: No. It is conclusive as to the binding effect of the contract. The contract is
considered binding as between the parties because of that statement in the policy
that there was already payment of premium. However, if there was really non-
payment, the insurer can go after the insured for the collection of the unpaid
premium. A statement in the policy as to the actual payment of premium is only a
prima facie evidence, not a conclusive evidence.
EFFECT OF ACCEPTANCE OF PREMIUM
Acceptance of premium within the stipulated period for payment thereof, including
the agreed period of grace, merely assures continued effectivity of insurance policy
in accordance with its term.
Important: Such acceptance does not stop the insurer from interposing any valid
defense under the terms of the insurance policy, where such insurer is not guilty
of any inequitable act or representation.
Sections 80-83. When insurer entitled to recover premiums
Section 80. A person insured is entitled to a return of premium, as follows:
(a) To the whole premium if no part of his interest in the thing insured be
exposed to any of the perils insured against;
(b) Where the insurance is made for a definite period of time and the insured
surrenders his policy, to such portion of the premium as corresponds with
the unexpired time, at a pro rata rate, unless a short period rate has been
agreed upon and appears on the face of the policy, after deducting from the
whole premium any claim for loss or damage under the policy which has
previously accrued: Provided, that no holder of a life insurance policy may
avail himself of the privileges of this paragraph without sufficient cause as
otherwise provided by law.
Section 81. If a peril insured against has existed, and the insurer has been liable
for any period, however short, the insured is not entitled to return of premiums,
so far as that particular risk is concerned.
Section 82. A person insured is entitled to a return of the premium when the
contract is voidable, and subsequently annulled under the provisions of the Civil
Code; or on account of the fraud or misrepresentation of the insurer, or of his
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
agent, or on account of facts, or the existence of which the insured was ignorant
of without his fault, or when by any default of the insured other than actual fraud,
the insurer never incurred any liability under the policy.
A person insured is not entitled to a return of premium if the policy is annulled,
rescinded or if a claim is denied by reason of fraud.
Section 83. In case of an over insurance by several insurers other than life, 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.
When insured entitled to recover premiums
1. When no part of the thing insured has been exposed to any of the perils
insured against
2. When insurance is for a definite period and insured surrenders his policy
before termination
3. When contract is voidable and is subsequently annulled because of fraud or
misrepresentation of the insurer or his agent
4. When contract is voidable, because of existence of facts which insured was
ignorant without his fault
5. When insurer never incurred any liability under the policy because of the
default of the insured other than actual fraud
6. When there is over-insurance
7. When rescission is granted due to the insurer’s breach of contract.
1. WHEN RISK NEVER ATTACHED
Premiums are paid in consideration of the assumption of specified risks by
insurers, and no premium is due unless the risk attaches. Thus, the insurer
cannot claim or retain the premium paid if the risk insured against never
attached, or if no part of the interest is subject to any of the specified perils.
Approval of application or acceptance of policy absent
No premium can be recovered where the application for a policy was not
approved.
A. With respect to a policy requiring acceptance to be effective – the
insured cannot be held liable for accruing premiums if the policy is not
accepted.
B. If the premium has previously been paid – it must be returned as no
risk whatsoever has ever attached.
Important: If no risk attaches or contract results, there is no meeting of
the minds of the parties on the subject matter of the insurance.
Loss occurs before effective date
Where the insured pays in advance the annual premium on a certain property
insured by him, the insurance to take effect on a certain date and the loss
occurs before said date, the insured is entitled to a return of the whole
premium.
Ex: Insured pays premiums in advance for an insurance to take effect on a
later date (15 days from receipt). On the 5th day, the insured building was
gutted by fire. Here, the insured can ask for the return of the premium.
However, he cannot receive the proceeds of the insurance.
Where the thing insured was not exposed to any peril
Ex: I have 5 tons of mangoes. I entered into a contract of insurance for the
transportation of said mangoes. I thought that such will be placed inside a
vessel so I insured the transportation of my mangoes in that particular
vessel. I did not know that my manager in Jolo contracted an airline company
to ship my mangoes from Jolo to Cebu city later on to be sold only for 5 peso
per kg. Premiums already paid may be recovered as it was not exposed to
the perils of shipping.
Insured and insurer become public enemies
War abrogates insurance contracts between citizens of belligerent states,
and therefore, the insured is not entitled notwithstanding the payment of
premiums, to indemnity for loss occurring after such declaration of war.
However, premiums paid after the declaration of war between the belligerent
states be returned to the insured.
2. SURRENDER OF THE POLICY BY THE INSURED BEFORE TERMINATION.
Conditions for Sec. 80b to apply:
1. Policy must be for a definite period
2. Must be a non-life insurance policy
3. Not a short period rate (a table or proportion is stipulated)
9|U N I V E R S I T Y O F S A N C A R L O S
GR: If the insured cancels his insurance policy and he surrenders the policy
before the term ends, the insured will receive a pro rata reimbursement out
of the premium already paid.
Example: X insures his house for 2 years and pays premium of 24,000. After
6 months, he surrenders the policy. He shall be entitled to collect ¼ or 6,000.
XPN: Where short period rate has been stipulated. Here, the pro rata return
of premium will not be followed, because the contract itself provides for
computation.
Example: The contract is for one year, and it provides for the following
stipulation:
1. If the insured surrenders the policy after a month, the insured can
recover 80% of the premiums already paid.
2. If the insured surrenders the policy after 3 months, the insured can
recover 60% of the premiums already paid.
Here, there is no need to compute the pro rata rate for the reimbursement
because the contract already provides for the rate the insured is entitled as
reimbursement.
Question: Can you recover premiums in a life insurance policy?
A: No. Recovery of premiums paid is not allowed in life insurance if the
insured surrenders his policy. This is because life insurance is not a divisible
contract. Each installment paid is part of the consideration of the entire life
insurance. The value of assurance for one year of a man’s life when he is
young is not the same when he is old and decrepit.
Important: However, the insured will be entitled to receive the “cash
surrender value” of his policy “after 3 full annual premiums shall have been
paid.”
Question: A insured the life of her 7-year old son and paid yearly
contribution of P50,000 for 7 years until the son reached the age of 45. She
stopped however paying the insurer because she has no means of paying
the same. The son is already candidate of tokhang. If the policy is
surrendered, will A not be able to recover anything out of the premium paid
in life insurance?
A: No, while the insured is not entitled to the return of the premium, the
insured is entitled to receive the “cash surrender value” of the policy after 3
full annual premiums shall have been paid.
Where risk has attached
The whole premium is considered as earned. The insurance granted is the
entire consideration for the premium received. Hence, if the risk has attached
by reason of the contract’s becoming binding upon the insurer, the whole
premium must be considered as earned and, therefore, cannot be
apportioned in case the risk terminates before the end of the term for which
the insurance was granted.
Important: Thus, in the absence of any agreement to the contrary, “if a
peril insured against has existed, and the insurer has been liable for any
period, however short, the insured is not entitled to return of premiums so
far as that particular risk is concerned.”
Where insurance divisible
If the contract of insurance is divisible, consisting of several distinct risks for
which different amounts of premiums have been paid, the premium paid for
any particular risk is not earned until that risk has attached.
3. VOIDABLE BECAUSE OF FRAUD OF INSURER OR HIS AGENT.
If the policy is induced by the fraud or misrepresentation of the insurer, or
his agent, the insured may, by timely action, rescind the contract and
demand the return of the premiums paid by him.
Example: Insured is induced upon representation of the insurer’s agent that
policy is issued to him within one month. He can refuse and recover
premiums paid if not issued within said period.
4. VOIDABLE BECAUSE OF IGNORANCE BY INSURED WITHOUT HIS FAULT.
The insured is also entitled to a return of the premiums when the contract is
voidable on account of facts, the existence of which the insured was ignorant
without his fault.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
Example: Insured pays premiums on his vessel not knowing it has already
been lost.
Important: The insured is not entitled to a return of the premium paid if
the policy is annulled by reason of fraud or misrepresentation by him. Section
82 impliedly prohibits the return of the premium where the policy is annulled
by reason of fraud of the insured.
5. INSURER NEVER INCURRED ANY LIABILITY UNDER THE POLICY BECAUSE
OF THE DEFAULT OF THE INSURED OTHER THAN THE ACTUAL FRAUD.
Example: Insured pays in advance premiums. The vessel is still under repair,
however due to reasons other than actual fraud, the repair of vessel is not
completed when voyage is about to start. The insured can recover the
premiums paid.
6. WHEN THERE IS OVER-INSURANCE.
Question: When is there over-insurance?
A: Over-insurance exists when the amount of the insurance is beyond the
value of the insured’s insurable interest.
The insurer is not liable for the total amount of insurance taken, his liability
being limited to the amount of the insurable interest on the property insured.
Hence, he is not entitled to that portion of the premium corresponding to the
excess of the insurance over the insurable interest of the insured.
Rule in case of over-insurance by several insurers
The premiums to be returned where there is over-insurance by several
insurers shall be proportioned to the amount by which the aggregate sum
insured in all the policy exceeds the insurable value of the thing at risk.
Discussion: Supposing a rich man owns an aircraft with a value of P2B. He
got three insurers insuring the aircraft at P2B each.
Insurer Amount Premium
A 2B 50M
B 2B 10M
C 2B 15M
Total insurance – insurable interest = over-insurance
Over-insurance/Total insurance = ratio
In this case, the ratio is equal to 4/6. Thus, the total recoverable amount of
each insurer is equal to 4/6 of the premium paid to them.
WHERE INSURANCE IS ILLEGAL
GR: Where the insurance is void because it is illegal, the premiums can still be
recovered by the innocent insured as when he was ignorant of the facts which
rendered the insurance illegal.
XPNs: When the parties are in pari delicto (both are equally guilty).
Important: It is also held that where one, having no insurable interest in the life
insured, paid premiums in the bona fide belief induced by the fraudulent statement
of the insurer, that such insurance is valid, he may recover the premiums paid
despite the fact that the contract was illegal.
BASIS OF RIGHTS TO RECOVER PREMIUMS
With regard to return of premium for short interest, over-insurance, and double
insurance, the basis is this:
A. Insurer could have been called to pay the whole sum insured
If the insurer could at any time, and under any conceivable circumstances,
have been called on to pay the whole sum on which he has received
premium, in such case the whole premium is earned and there shall be no
return.
B. Insurer could have been called to pay only part of the whole sum
insured
If he is not called on to pay the whole, but only a part of his subscription
(half or a fourth), he ought not retain a larger proportion than one-half or
one-fourth of the premium and must return the residue.
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Section 84. Payment in addition to regular premiums
Section 84. An insurer may contract and accept payments, in addition to regular
premium, for the purpose of paying future premiums on the policy or to increase
the benefits thereof. TAECSD
Payment in addition to regular premiums
The insured is duty bound to make prompt payment of only the insurance
premiums due under the policy. However, payments in addition to regular
premiums may be had pursuant to Section 84.
TITLE 9. LOSS
Section. Claim in insurance defined
Section 85. An agreement not to transfer the claim of the insured against the
insurer after the loss has happened, is void if made before the loss except as
otherwise provided in the case of life insurance.
Insurance claim
A demand for the satisfaction of a loss suffered within the purview of an insured’s
policy. It may be made by:
(1) The party insured
(2) The insurer with the right of subrogation
(3) A non-party but with a right against the insured
Effect of agreement not to transfer claim of insured after loss
A. Before a loss occurred
An insurance policy, except a life insurance policy, is not assignable without
the consent of the insurer on the theory that the policy is a personal contract
between the insured and the insurer.
B. After a loss occurred
The insured has an absolute right to transfer or assign his claim against the
insurer. A stipulation which attempts to prohibit such transfer is void.
Reasons:
1. Hinders free transmission of property
2. It is not the personal contract which is being assigned, but a money
claim or right of action
3. Transfer involves no moral hazard, it cannot increase the insurer’s risk
for a loss that has already occurred
Important: Section 173, however, prohibits the transfer of a policy of fire
insurance to any person or company who acts as an agent for or otherwise
represents the issuing company and declares such transfer void insofar as it may
affect other creditors of the insured.
Section 86. Loss in insurance defined
Section 86. Unless otherwise provided by the policy, an insurer is liable for a loss
of which a peril insured against was the proximate cause, although a peril not
contemplated by the contract may have been a remote cause of the loss; but he
is not liable for a loss of which the peril insured against was only a remote cause.
Loss in insurance defined
The injury, damage, or liability sustained by the insured in consequence of the
happening of one or more perils against which the insurer, in consideration of the
premium, has undertaken to indemnify the insured.
Scope of loss: Bodily injury, including death, or property damage or destruction. It
also includes loss of income or profits and legal liability to a third party.
Loss with reference to reinsurance
The reinsurer’s share of the loss on risks ceded either automatically or facultatively.
LIABILITY OF INSURER FOR LOSS
Extent of loss
How much the insurer will pay depends upon whether the insured suffers a loss
and the extent of that loss. As to extent, loss may be total, partial, or constructive.
How loss is satisfied
1. Payment of the loss
2. Reinstatement of the property lost or damage
3. Replacement with another similar property
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

Important: A contract of insurance is a contract of indemnity. Thus, it proscribes A: Still, X cannot recover for the same reason.
the insured from recovering greater than his loss. To profit from his loss will
constitute unjust enrichment. 3. Suppose there was an earthquake and as a result, fire broke out in his
neighbor’s house which razed his house as well. Can X recover?
Burden of proof where loss has occurred
A: Yes, X can recover. The proximate cause is the earthquake which is not
A. Insured – has the burden to prove the occurrence of the loss.
an excepted peril and the immediate cause is the fire which is the peril
B. Insurer – has the burden to prove that the loss occurred under an excepted
insured against.
peril in the policy.
Rules on proximate cause vis-a-vis immediate cause
PROXIMATE, IMMEDIATE, REMOTE CAUSE
1. If the proximate cause is the peril insured against – insurer is liable
Cause of loss, rules
2. If the proximate cause is an excepted peril – insurer is not liable
A. The insurer assumes liability only for a loss proximately caused by the perils
3. If the proximate cause is neither a peril insured against nor an excepted peril
insured against although a peril insured against may have been a remote
– determine the immediate cause.
cause of the loss.
B. But the insurer is still liable even if the proximate cause is not the peril
(a) If immediate cause is the peril insured against – insurer is liable
insured against if the immediate cause is the peril insured against.
(b) If immediate cause is an excepted peril – insurer is not liable
(c) If immediate cause is the peril insured against but the proximate cause
Proximate cause
is an excepted peril – insurer is not liable
That which, in a natural and continuous sequence, unbroken by any new
independent cause, produces an event and without which the event would not
4. Disregard the remote cause in determining the liability of the insurer.
have occurred.
HOSTILE AND FRIENDLY FIRES EXPLAINED
The proximate cause is the efficient cause, the one that sets others in motion, to
which the loss is to be attributed, although other and incidental causes may be
In determining the liability of the insurer against damage by fire, it is necessary to
nearer in time to the result and operate more immediately in producing the loss.
make a distinction between:
1. Friendly fires
The question that needs to be asked is: If the event did not happen, could the
2. Hostile fires
injury have resulted? If the answer is no, then the event is the proximate cause.
Important: Fire insurance provides indemnification for losses caused by a hostile
Important: Proximate cause is not equivalent to immediate cause.
fire, but not for damage or loss due to friendly fire.
Examples: A. If hostile fire – insured can recover
B. If friendly fire – insured cannot recover
1. If the fire causes an explosion which results in a loss, fire is the proximate
cause of the loss while explosion is the immediate cause. The insurer is Friendly fire
liable where either peril is covered by the policy. So long as a fire burns in a place where it was intended to burn, and ought to be,
it is to be regarded as merely an agency for the accomplishment of some purpose.
2. If a house is insured against fire and it is damaged by the falling of a wall It is a friendly fire.
of a neighboring building which is on fire, the fire is the proximate cause
although no part of the insured house is actually on fire. Ex: A fire burning in a furnace, or a stove, or a lamp, is considered a friendly fire;
and damage that may be caused by such fires, due to their negligent management,
3. Even if the fire results only after the fall of the building and as a is not considered to be within the terms of the policy.
consequence of such, nevertheless, the damage, so far as it is attributable
to the fire and not merely to the falling of the building, is a loss by fire. Hostile fire
Here, the fire is the immediate cause of the loss. It is hostile fire when it occurs outside of the usual confines or begins as a friendly
fire and becomes hostile by escaping from the place where it ought to be to some
4. If, however, the fall of the building, although it occurs after a fire, is not place where it ought not to be.
the result of the fire, the loss is not covered by the policy. In this case, fire
is just the remote cause of the loss for which an insurer is not liable. Examples:

5. An accidental injury resulting in hernia which forced the insured, as last
resort, to submit to a surgical operation which turns out to be unsuccessful,
is the proximate cause of the death and not the surgical operation. Here,
there is an unbroken chain of causation between the accident and the death
without the intervention of any new and independent cause so that the
death is the direct and natural consequence of the accident.
1. When a fire in the chimney, due to the ignition of soot there, caused soot
and smoke to issue from the stove so as to damage the property insured.
The fire was intended to burn in the stove and not in the chimney.
2. A flame escaping through a crack of a stove releasing a sprinkle head above
is a hostile fire and insurer was held liable for the loss.

Immediate cause 3. A fire caused by a lighted cigarette on a rug is a hostile fire.

The direct cause of the loss.
Question: Suppose you own a manuscript valued at 100M. You insured it in the
Remote cause same amount. One night, you were cooking and at the same time reading the
A cause which is far remote from the injury caused, because of a supervening manuscript. Unfortunately, the manuscript fell in the fire. Can you recover?
event.
A: No, because it is a friendly fire. The policy shall not to be construed to protect
Questions: the insured from injury consequent upon his negligent use or management of fire.

1. X insured his building against fire. In the contract, it is specifically provided Important: Even though the fire remains entirely within its proper place, it may
that lightning is an excepted peril. One night, there was a strong lightning become a hostile fire if it, by accident, becomes so excessive as to be beyond
and it hit the neighbour of X. As a result, fire occurred which affected X’s control.
house. Can X recover?

A: X cannot recover. While the immediate cause was the fire, the proximate
cause however, was the lightning which is an excepted peril. Under the Code,
the insurer is not liable if the proximate cause which is an excepted peril
from the policy caused the immediate cause which is not an excepted peril.

2. Suppose his building was destroyed because the building close to it, when
struck by lightning crumbled and the debris scattered all over his building
causing the damage.

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INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

Example: In a fire insurance policy which excludes loss through explosion, if an

Section 87. Extension of principle of proximate cause
explosion occurs first and causes a fire which results in a loss, the insurer is not
liable. In this case, the proximate cause of the loss is the “explosion” which is an
Section 87. An insurer is liable where the thing insured is rescued from a peril
excepted peril; “fire” is the immediate cause but not the “proximate” cause.
insured against that would otherwise have caused a loss, if, in the course of such
rescue, the thing is exposed to a peril not insured against, which permanently
However, if a hostile fire occurs and causes an explosion, then “fire” is the
deprives the insured of its possession, in whole or in part; or where a loss is caused
proximate cause and the insurer is liable for the loss caused by the “explosion”
by efforts to rescue the thing insured from a peril insured against.
notwithstanding the exception.

Extension of principle of proximate cause Important: It has been held that the insurance company has the burden of
Under Section 87, the insurer is liable in two cases. proving that the loss is caused by the risks excepted and for want of such proof,
the company is liable.
1. Where the loss took place while being rescued from the peril insured against.
2. Where the loss is caused by efforts to rescue the thing insured from a peril
Question: X insured his building against fire, but fire caused by lightning is an
insured against.
excepted peril. Another building is struck by lightning and razed by fire. This
affected X’s building. Can X ask for the proceeds?
Where the loss took place while being rescued from the peril insured
against
A: No. The proximate cause of the fire is the lightning which struck the building.
The insurer is liable when the insured is permanently deprived of the possession,
The fire which gutted his building is the immediate cause. Under the Code, the
in whole or in part, of the thing insured by a peril not insured against provided it
insurer is not liable if the proximate cause which is an excepted peril from the
is shown that the said property would have been lost by the peril insured against
policy caused the immediate cause which is not an excepted peril.
had there been no attempt to rescue it.

Question: Suppose a millionaire insured his painting collection against fire. One Section 89. Loss by willful act or through connivance of insured
night, his house was gutted by fire. He tried to rescue his paintings and placed the
Section 89. An insurer is not liable for a loss caused by the willful act or through
paintings in the street. When he went back to the house, he learned later that the
the connivance of the insured; but he is not exonerated by the negligence of the
paintings were stolen by persons who took advantage of the fire. Can he recover
insured, or of the insurance agents or others.
from insurer?

A: Yes. Insurer is liable where the thing insured is rescued from a peril insured
against that would otherwise have caused a loss, if, in the course of such rescue,
the thing is exposed to a peril not insured against, which permanently deprives the
insured of its possession, in whole or in part.
Where the loss is caused by efforts to rescue the thing insured from a
peril insured against
It is the efforts to rescue the thing that caused the loss.
Examples:
1. Damage to goods by being trampled on or thrown about in the efforts to put
out the fire are covered by the policy of fire insurance.
2. Loss caused by preparing the goods for removal from the premises although
they are not actually carried out if at the time the work of removal is begun,
the property is in such danger of fire that a reasonably prudent man would
attempt to protect it.
LOSS BY WILLFUL ACT OR THROUGH CONNIVANCE OF INSURED
The insurer is not liable for the loss caused by intentional act of the insured or
through his connivance. Such loss is not within the contemplation of the contract
where one of the requisites is that the risk should not be subject in any wise to
the control of the parties.
Question: A person insured his building for fire. He asked another person to set
the building on fire. Can the insured recover?
A: No. Insured is not liable for the loss. This is because the loss was done by the
willful act or through the connivance of the insured with another person.
Rule in case loss occurs before the conspiracy could be carried out
Question: The insured conspired with another to destroy the property insured.
The property was burned before such conspiracy could be carried out. Can the
insured recover?

A: Yes, if the loss happens before such conspiracy or design could be carried out,
3. Damage to the insured property caused by water during attempt to save it
the insurer will still be liable since the loss was not “caused by the willful act or
from fire is generally regarded as resulting directly from the fire itself and as
through the connivance of the insured.”
making the insurer liable.
Important: If the loss was caused by one of the co-insured, the innocent co-
4. But if house and its contents are under a fire policy and the house caught
insured can still recover because it would not benefit the wrongdoer. The
fire, the furniture that were carried out and left in the yard which some of
intentional destruction of the co-insured should not be interpreted to deny recovery
them were stolen is not covered by the policy. The insured cannot recover
by the other co-insured unless specifically stated in the policy.
loss since the later loss is not covered “in the course of such rescue” nor
“caused by the efforts to rescue from a peril insured against.”
Question: A and B co-insured a particular property. A willfully destroyed the
property without the knowledge and consent of B. May A recover?
Important: But the insured is bound to exercise a reasonable degree of care in
removing the goods. The necessity for removal is to be determined not by the
A: No. A cannot recover because he is the guilty insured who willfully destroyed
result alone but by the circumstances as they appear to the interested persons at
the property. B, however, may recover as he has no part in the fraud.
the time of the fire.
LOSS CAUSED BY NEGLIGENCE OF INSURED
Question: Suppose the paintings were not brought out but it was destroyed when
the insured used a fire extinguisher to put out the fire. Can he recover?
Important: The negligence must exist prior to the peril insured against.
A: Yes. The insurer is liable where loss is caused by efforts to rescue the thing
Where there is ordinary negligence
insured from a peril insured against.
It is the basic rule in insurance that the carelessness and negligence of the insured
or his agents constitute no defense on the part of the insurer. The doctrine of
Section 88. Where proximate cause is an excepted peril contributory negligence does not in any way apply to rights under a contract of
insurance.
Section 88. Where a peril is especially excepted in a contract of insurance, a loss,
which would not have occurred but for such peril, is thereby excepted although Example: Insured lit some straw under the barn to smoke out bees, but the fire
the immediate cause of the loss was a peril which was not excepted. rapidly spread and destroyed the property.

WHERE PROXIMATE CAUSE IS AN EXCEPTED PERIL Where there is gross negligence

Gross negligence or recklessness on the part of the insured, the consequence of
The insurer is not liable if the proximate cause of the loss is a peril excepted from which must have been palpably obvious to him at that time, will relieve the insurer
the policy although the immediate cause is a peril not excepted. from liability. It is the utter lack of prudence on the part of the insured to take
good care of the thing insured.

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INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
Examples:
1. Where the insured, in his own house, sees the burning coals in the fireplace
roll down on his wooden floor and does not brush them up.
2. Where the insured sees a small fire start and makes no attempt to put it out.
3. Where the insured placed his painting insured against fire on top of the
stove.
Important: The extent of the insured’s negligence to be gross must be evaluated
in the light of the circumstances surrounding each case.
SUMMARY OF RULES ON CAUSE OF LOSS
BY: ATTY SOLENG
Proximate cause
A. If the proximate cause of the loss is a peril insured against – can recover
B. If the proximate cause of the loss is an excepted peril – cannot recover
C. If the proximate cause of the loss is neither a peril insured against or an
excepted peril – determine the immediate cause
Immediate cause
A. If immediate cause is a peril insured against – can recover
Important: If proximate cause is an excepted peril even if the immediate
cause is a peril insured against – cannot recover.
B. If immediate cause is an excepted peril – cannot recover.
NOTICE OF LOSS
Sections 90-91. Conditions before loss
Section 90. In case of loss upon an insurance against fire, an insurer is
exonerated, if written notice thereof be not given to him by an insured, or some
person entitled to the benefit of the insurance, without unnecessary delay. For
other non-life insurance, the Commissioner may specify the period for the
submission of the notice of loss.
Section 91. When a preliminary proof of loss is required by a policy, the insured
is not bound to give such proof as would be necessary in a court of justice; but it
is sufficient for him to give the best evidence which he has in his power at the
time.
CONDITIONS BEFORE LOSS
As a condition precedent to the right of recovery, there must be compliance on the
part of the insured with the terms of the policy. If he has violated or failed to
perform the conditions of the contract, and such a violation or want of performance
has not been waived by the insurer, then the insured cannot recover.
Example: If a fire insurance policy requires the insured to give notice of other
insurance, if any, upon the same property, in the absence of such notice,
notwithstanding that there are other insurance policies on the property, the policy
is null and void and the insured cannot recover.
A. Condition precedent – A condition that must be satisfied before the
performing party has a duty to perform. The satisfaction of the condition will
trigger the performing party’s duty to perform.
B. Condition subsequent – An express condition that occurs after the duty
to perform has begun. The satisfaction of the condition will release the
performing party from his duty to perform.
CONDITIONS AFTER LOSS
Notice and proof of loss
Sections 90 and 91 establish conditions concerning matters after the loss that must
be fulfilled before the insured becomes entitled to the benefit of a fire insurance
policy, namely:
1. Written notice of loss must be given to the insurer
2. When required by the policy, a preliminary proof of loss must likewise be
given
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Question: Is notice of loss a condition precedent or condition subsequent?
A: It is both. A notice of loss is a condition precedent to the right of recovery.
However, it is also in the nature of a condition subsequent such that, the breach
of which affects a right that has already accrued. Until a loss occurs, through a
peril covered by the policy, the insurer’s liability under his contract is altogether
contingent, but with the happening of the capital fact of loss, his liability arises
and becomes properly fixed.
Construction
All those conditions in the policy-making requirements of the insured after the loss
are intended merely for evidential purposes and do not properly form any part of
the conditions of liability. They shall be construed with much less strictness than
those conditions that operate prior to the loss.
Important: Substantial and not strict compliance with the requirements is
deemed sufficient.
NOTICE OF LOSS
Notice of loss
More or less the formal notice given the insurer by the insured or claimant under
a policy of the occurrence of the loss insured against.
Purpose
1. It is to apprise the insurance company with the occurrence of the loss, so
that it may gather information and make proper investigation while the
evidence is still fresh, and take such action as may be necessary to protect
its interest from fraud or imposition.
2. In the case of property insurance, to prevent further loss to the property.
Discussion: Big, if not all, insurance companies would require the insured to
immediately submit the notice of loss within reasonable time after the happening
of the loss. The reason is for the insurer to also validate the claim by conducting
an investigation. Thus, after receiving a notice of loss, the insurer usually sends
its adjusters to investigate on the cause of the loss.
Necessity of loss
It is obvious that the insurer cannot be held liable to pay a claim unless he receives
notice of that claim. The insurer is exonerated if the notice was not given without
unnecessary delay.
Form of notice
A. Fire insurance –written notice.
B. Other non-life insurance – no requirement as to form.
Important: In the absence of a stipulation in the policy, notice or proof may be
given orally or in writing. However, it is advisable to give the notice or proof in
writing for the protection of the insured or his beneficiary.
Question: Is a formal notice of loss still necessary if the insurer already has actual
notice?
A: Yes. If you are the insured, you do not assume that the insurer knows of the
situation, except maybe when the insured building is in front of the insurer’s
building. But prudence will require that a written of loss be submitted so that the
insurer will have no grounds to deny the claim.
Time for giving notice of loss
A. Fire insurance – The notice of loss must be given “without necessary delay.”
It has been held that a requirement of the policy that notice of loss be given
immediately or forthwith requires the giving of notice within a reasonable
time.
Important: What constitutes a reasonable time for giving notice depends
on the circumstances although the courts construe the requirement of
immediate notice liberally in favor of the insured. Thus, it will be considered
given “without necessary delay” of it has been given “as soon as
circumstances permitted the insured, in the exercise of reasonable diligence,
to communicate.”
B. Non-life insurance – Other than fire, the Commissioner may specify the
period for the submission of the notice of loss.
Question: May the insurance contract provide for the time within which to file the
notice of loss?
A: Yes. The contract may provide that the notice of loss shall be given within a
stated time and that failure to give the notice within such time shall preclude
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
recovery. Such provision is valid, provided the time so fixed is not unreasonably
short. In other words, the parties may stipulate period within which notice of loss
must be given.
PROOF OF LOSS
Proof of loss
More or less formal evidence given the company by the insured or claimant under
a policy of the occurrence of the loss, the particulars thereof and the data
necessary to enable the company to determine its liability and the amount thereof.
Purpose
The requirement of notice is intended merely to give insurer information upon
which he may act promptly in protecting the property from further loss. The proof
of loss is, however, a very much more formal requirement and intended to:
1. To give the insurer information by which he may determine the extent of his
liability
2. To afford him a means of detecting any fraud that may have been practiced
upon him
3. To operate as a check upon extravagant claims
TN: The insurer may avail of the services of adjusters in effecting the settlement
of the insurance claim.
Discussion: So that the insured can substantiate his claims. This is to protect the
insurer in cases of fraud or when the insured merely bloated the figures.
Nature
It is not what is known in the law of evidence as “proof” or “evidence” for the
consideration of the trial court, and it does not stand for proof in court. Loss and
its amount may be determined on the basis of such proof as may be offered by
the insured which need not be of such persuasiveness as is required in judicial
proceedings.
Burden of proof of loss in court action
A. Insured – has the burden and in life insurance, death of the insured must be
proven.
B. Insurer – Once the insured makes out a prima facie case in his favor, the
burden of evidence shifts to the insurer to controvert the insured’s prima
facie case, and show that it falls under an exception or limitation in the policy.
Excuses for non-compliance with conditions
Timely compliance with the conditions is required as a condition precedent to the
right to recover under the policy, however, failure on the part of the insured to
comply strictly with their terms will be excused when the circumstances were such
as to make strict compliance impossible.
Section 92. When defects in notice or proof deemed waived
Section 92. All defects in a notice of loss, or in preliminary proof thereof, which
the insured might remedy, and which the insurer omits to specify to him, without
unnecessary delay, as grounds of objection, are waived.
When defects in notice or proof deemed waived
The insurer must be satisfied when the insured has done all his power to furnish
the information stipulated for in the policy. It is the duty of the dissatisfied insurer
to indicate the defects in the proofs of loss as given, so that the deficiencies may
be supplied. His retention of the defective proofs constitutes a waiver of his
objections. Thus, there is waiver where the insurer:
1. Writes to the insured that he considers the policy null and void as the
furnishing of the notice or proof of loss would be vain and 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
5. Makes objection on any ground other than a formal defect in the
preliminary proof
Important: It has been held that a general statement that proofs are defective
is not sufficient to impose on the insured the duty to supply defects not pointed
out.
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Section 93. When delay in presentation of notice deemed waived
Section 93. Delay in the presentation to an insurer of notice or proof of loss is
waived if caused by any act of him, or if he omits to take objection promptly and
specifically upon that ground.
When delay in presentation of notice or proof deemed waived
By the provisions of Section 91, waiver of delay in the presentation of notice or
proof of loss may be made:
(1) By an act of the insurer
(2) By failure to take objection promptly and specifically upon that ground.
Example: An insurance company, by accepting payment of premium with full
knowledge that the premises had been injured or destroyed by fire, is estopped
from claiming that notice of the fire was not given forthwith to the insurer by the
insured as required by the terms of the policy.
Section 94. Effect of failure to secure testimony of third person
Section 94. If the policy requires, by way of preliminary proof of loss, the
certificate or testimony of a person other than the insured, it is sufficient for the
insured to use reasonable diligence to procure it, and in case of the refusal of such
person to give it, then to furnish reasonable evidence to the insurer that such
refusal was not induced by any just grounds of disbelief in the facts necessary to
be certified or testified.
Effect of failure to secure certificate or testimony of third person
If the policy requires, by way of preliminary proof of loss, the certificate or
testimony of a person (like a notary public) other than the insured – such
requirement must be complied with by the insured as part of the contract.
However, the insured is only required to exercise due diligence to procure it.
Important: In the event of the refusal of such person to give the certificate or
testimony, the insured must furnish reasonable evidence to the insurer that the
person’s refusal was not induced by any just grounds of disbelief of said person in
the truth of the facts necessary to be certified or testified but, because of other
grounds.
Question: May the policy require submission of testimony of third persons, other
than the insured, as part of proof of loss?
A: Yes, and it is sufficient for the insured to use reasonable diligence to procure it.
DOUBLE INSURANCE
Section 95. Definition
Section 95. A double insurance exists where the same person is insured by
several insurers separately in respect to the same subject and interest.
Double insurance
Also called additional insurance or other insurance although there is technical
difference in meaning. In double insurance, there is co- insurance (Sec. 157) by
two or more insurers, hence it is also known as co- insurance.
Requisites of double insurance
1. The person insured is the same
2. Two or more insurers insuring separately
3. There is identity of subject matter
4. There is identity of interest insured. and
5. There is identity of risk or peril insured against.
Question: Supposing I have a building, the value of which is 10 M. I got a fire
insurance policy for 5 million and a second fire insurance policy for 5 million from
another insurer. Is there a double insurance?
A: Yes. Consent of the other insurer need not be obtained, except if there is a
stipulation that the insurer should be informed of the second insurance.
Is double insurance prohibited?
A: Double Insurance is not prohibited per se. But if you read the policy of almost
all insurers, you can always find that clause on double insurance. That in case you
insure the same property on the same risk, you have to endorse the policy or get
the consent of the first insurer otherwise the contract will be avoided. That is a
valid stipulation such that when you enter into a contract and the policy provides
for that particular clause, before you can enter into a valid contract with another
entity; this insurance company must first be informed, that you will be insuring
again the property.
 INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

Double Insurance v. Over-insurance Principle of contribution

Being a contract of indemnity, the insured can recover no more than the amount
Double insurance Over-insurance of his insurable interest whether the insurance is contained in one policy or in
There may be no over- insurance as several policies.
when the sum of the total amounts Amount of the insurance is
of the policies issued does not beyond the value of the insured’s The section enunciates the principle of contribution which requires the insurer to
exceed the insurable interest of the insurable interest. contribute ratably to the loss or damage considering that the several insurances
insured. cover the same subject matter and interest against the same peril.
There may be only
There are always several insurers. Par (e) governs the liability of the insurers among themselves where the total
one insurer involved.
insurance exceeds the loss. If the loss is greater than the sum total of all the
Important: Both may exist at the same time or neither may exist at all. Double policies issued, each insurer is liable for the amount of policy.
insurance is the term used instead of co- insurance when the sums insured exceed
the insurable interest. In such case there is “over- insurance” by “double- Question: When does principle of contribution apply?
insurance”. A: In cases of over insurance by double insurance.

Example of over-insurance by double insurance: Example: Supposing X owns a house valued at 5 M. X Insured with the house with
A for 5 M, with B for 10 M, and with C for 15 M.
There is a building, the value of which is 1 million. A fire insurance policy of 600,000
was obtained from Company X while another one, for the same amount (600,000) 1. Is there double insurance? Yes.
was procured from Company Y. The insurance is for the same building for the same 2. Is there over-insurance? Yes.
risk. In this case, there is an over-insurance of 200,000. 3. Is there over insurance by double insurance? Yes. Hence, the principle of
contribution applies.
Question: What is the liability of insurers in cases where there is over insurance by 4. From whom can X recover? X can recover from either A, B or C and from all
double insurance? of them in proportion to their contribution.
A: The insurers are jointly and severally liable- solidarily liable. The insured can 5. Can X recover from A P1, from B P1, and 4,999,998 from C? Yes. He can
therefore go after any of the insurer for the amount of the insurable interest. also get the entire 5 million from A or the entire 5 million from B, or the
entire 5 million from C. Or 1 M from A, 2 million from B and 2 million from
Binding effect of stipulation against double insurance C. Because their liability is solidary in character.
A policy which contains no stipulation against additional insurance is not invalidated
by procuring such insurance. Stated otherwise, if there is a stipulation prohibiting Exception: When each insurer is liable only to pay in proportion to the loss.
such, policy may be invalidated. (CONTRIBUTION CLAUSE)

1. Additional insurance obtained by the insured Contribution clause

A stipulation which provides that the insurer shall not be liable to pay or contribute
It is valid and reasonable, and in the absence of consent, waiver or estoppel more than its ratable portion of the loss or damage. Such that even if the liability
on the part of the insurer, a breach thereof will prevent recovery on the policy. is solidary in character, if there is a contribution clause, the insured may not impose
on the said insurer to get the entire amount. The insurer therefore is only liable
2. Additional insurance obtained by a third person up to the ratable contribution pertaining to the said insured.
Good or bad faith of the insured usually is immaterial. If without knowledge
or consent of the insured, it will not affect his rights under the policy in the Illustrations for this provision:
absence of ratification.
1. Supposing the house is unvalued. From whom can X recover?
Purpose of prohibition against double insurance
To prevent over-insurance and thus avert the perpetration of fraud as there is a In cases of unvalued policies, X can recover from either A, B, C. You can
great temptation upon dishonest persons, whose property is insured up to its full recover the total amount of loss, which in this case is 5 million. In unvalued
value or above it, to bring about its destruction; and the same considerations policies or open valued policy, the total amount recovered is the actual loss.
undoubtedly tend to lessen the care that may be exercised.
2. Supposing X decides to get the entire 5 million from A, may A recover from
B and C? May A be compelled to pay the entire 5 million?
Sec. 96. Rules for payment of claims when there is over-insurance
Yes, provided there is no contribution clause.
Section 96. Where the insured in a policy other than life is over insured by double
insurance:
3. 3 insurers; A=5million, B=10 million and C=15million
Value of the property is 5million
(a) 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
Supposing there is no contribution clause, when loss happens and the
the insurers are severally liable under their respective contracts;
insured recovers 5million from A, may A recover from B and C?
(b) Where the policy under which the insured claims is a valued policy, any
The insured can recover the 5million from A. He cannot refuse to pay the
sum received by him under any other policy shall be deducted from the
whole 5million in the absence of a contribution clause.
value of the policy without regard to the actual value of the subject matter
insured;
A may recover from B and C.
(c) Where the policy under which the insured claims is an unvalued policy, any
Basis is Sec96 (e). “Each insurer is bound, as between himself and the other
sum received by him under any policy shall be deducted against the full
insurers, to contribute ratably to the loss in proportion to the amount for
insurable value, for any sum received by him under any policy;
which he is liable under his contract.”
(d) Where the insured receives any sum in excess of the valuation in the case
of valued policies, or of the insurable value in the case of unvalued policies, How much can A recover from B and C?
he must hold such sum in trust for the insurers, according to their right of
contribution among themselves;

(e) Each insurer is bound, as between himself and the other insurers, to
contribute ratably to the loss in proportion to the amount for which he is
(f) liable under his contract.

15 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

VALUE OF REINSURANCE

From the standpoint of the insurer

INSURANCE PROPORTION ACTUAL LIABILITY Every insurance company, in accordance with its financial strength, establishes a
limit on the maximum claim it wishes to pay out of its own resources (such limit is
called retention). When applications are for a sum over the company’s retention,
A 5M 5/30 833,333.33
it handles the excess by means of insurance.
B 10M 10/30 1,666,667.00
C 15M 15/30 2,500,000.00 Retention Net-Retention
TOTAL 30M A limit on the maximum claim The portion of the risk retained by
an insurer wishes to pay out of the primary insurer
its own resources
4. In the same example the insured X recovered 5million from A, may X be
allowed to recover 10million from B and 15million from C? Important: The Insurer sets its own retention limit.

X cannot recover because it will be in excess of the insurable interest. Question: Insurer A has a total assets amounting to 2 billion pesos. Supposing
Insurance is a contract of indemnity. Insurer A wants at least 25% retention, how much is that?

5. Supposing X was able to recover 5million from A and he was able to fool B
and recovered 5 million and another 5million from C. what is the effect?
X will hold such excess amount in trust for the other insurers and X will give
these back to the insurers according to their pro-rata rate. He will hold the
10million excess in trust for the insurers ABC not just BC.
A: 500 million is the retention
Sir: Any business man in his or her right mind always want to have a retention, to
avoid overexposing yourself to risks. In the above example, if your assets is 2
billion but your exposure is 3 billion (meaning the value of the insurance you have
issued to people is at 3 billion) that is bad business.

AMOUNT TO BE Supposing the insurer sets a 75% retention or 1.5 billion, and the total value of
NET PAID (Payment to RETURNED BY X
AMOUNT the insurance policies he already issued is 1.6 billion, he is overexposed by 100
INSURANCE PROPORTION ACTUAL LIABILITY X less amount returned (10M x contribution
PAID to X
by X) ratio) million. In order to cater to the extra 100 million, without spending above the
retention limit, the insurer reinsures the value of 100 million.
A 5M 5M 5/30 833,333.33 3,333,333.00 1,666,667.00
B 10M 5M 10/30 1,666,667.00 1,666,667.00 3,333,333.00
From the standpoint of the insured
C 15M 5M 15/30 2,500,000.00 - 5,000,000.00
a. It gives insurance companies that practice in greater financial stability and
TOTAL 30M thus makes the insured’s policy more reliable.

Insurers will pay each other so that they can only pay their corresponding
liabilities.
C will have to pay P2.5M to A so that the net amount paid by A should only
be P833, 333. It will no longer be shared with B because B has already paid
the net amount that he is liable.
b. The insured may obtain large amount of insurance without negotiating with
numerous companies.
c. It enables the insured to obtain protection promptly, without the delay that
would be required to divide and distribute the amount among many
companies.
d. All the insurance can be written under identical contract provisions.

REINSURANCE e. Small companies are encouraged to divide large exposures for safety and
enabled to accept a wide variety of applicants.
Section 97. Definition of Reinsurance
Section 97. A contract of reinsurance is one by which an insurer procures a third From the standpoint of the insuring public
person to insure him against loss or liability by reason of such original insurance. It is plainly beneficial to the public inasmuch as it promotes both efficiency and
stability in the conduct of the reinsurance business.
Reinsurance
It is a contract whereby the reinsurer, agrees to indemnify another, the reinsured Section 98. Duty to communicate
(original insurer), either in whole or in part, against loss or liability which the latter
Section 98. Where an insurer obtains reinsurance, except under automatic
may sustain or incur under a separate and original contract of insurance with a
reinsurance treaties, he must communicate all the representations of the original
third party, the original insured. This is referred as “an insurance of an insurance”.
insured, and also all the knowledge and information he possesses, whether
previously or subsequently acquired, which are material to the risk.
Retrocession
The reinsurance of a reinsurance is called retrocession.
Duty to disclose all material facts
TN: It may not be for a greater amount than the original insurance, although it The duty to disclose all material facts is no less than the similar duty imposed on
may be easily for a less amount. a person seeking an original insurance; the duty in both cases is one of the strictest
good faith.
Double insurance v. Reinsurance
Important: Thus, a policy may be avoided where the insured conceals the fact
Double insurance Reinsurance that a loss has taken place or that the property is over- insured where he has
knowledge thereof.
Insurer remains as the insurer Insurer becomes the insured, insofar as
of the original insured. the reinsurer is concerned.
TN: This covers information possessed by the insurer “whether previously or
The subject matter of The subject matter is the
subsequently acquired, which are material to the risk.”
insurance is property. original insurer’s risk.
It is an insurance of the Such is insurance of a
Question: Why include those material facts which are known subsequent to the
same interest. different interest.
issuance of the policy?
The original insured has no interest in the
The insured is the party in contract of reinsurance which is A: Because the contract of reinsurance is a new insurance contract, and a
interest in all the contracts. independent of the original contract of subsequent fact after the issuance of the original policy is actually already a prior
insurance. fact or already existing fact at the time the contract of reinsurance is entered into.
The consent of the original insured (who is That means that fact would affect the amount of premium which the reinsurer
The insured has to hardly even aware of the reinsurance would impose upon the reinsured
give his consent. transaction) is not necessary.

16 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
Example: A gasoline station was built next to a building insured against fire prior
to the issuance of the policy. That is a material fact which the insurer has to
disclose to the reinsurer. After the issuance of the policy, another gasoline station
was built on a vacant lot nearby. The insurer is likewise obliged to disclose it to
the reinsurer.
Important: The effect if the insurer fails to disclose such material facts is that the
policy may be avoided, the reinsurer may rescind the contract.
CEDANT
Is the ceding insurer or the “reinsured”, or as the class calls it, “original insurer”.
Methods of ceding insurance
1. Automatic reinsurance treaties
The ceding company (reinsured) is bound to cede (give off by way of
insurance) and the insurer is obligated to accept a fix share of the risk which
has to be insured under the contract.
TN: Duty under Section 98 does not apply in these cases.
Advantage to insurer: Avoidance of any delay in issuing its policy.
Protection to reinsurer: By agreeing to accept business automatically, the
reinsurer is relying on the underwriting judgment of the insurer and is bound
to accept a case even though it may not agree with the underwriting
decision. The reinsurer is protected by the requirement that the original
insurer retains its full retention limit, which assures a measure of self-
interest.
2. Facultative Insurance
Covers liability on individual risk, there is no obligation either to cede or to
accept participation in the risk insured, each party having a free choice.
But once the share is accepted, the obligation is absolute and the liability
assumed thereunder can be discharged by one and only way- payment of
the share of the losses. There is no alternative or substitute prestation.
Advantage to insurer: Insurer receives the reinsurer’s underwriting opinion
before the policy is issued.
Question: Supposing the insurer has a capital of 2 billion and sets a 75% retention
or 1.5 billion, and the total value of the insurance policies he already issued is 1.4
billion. Here comes a client wanting to insure his machineries and equipment to
the amount of 500 million pesos. So that the resulting exposure would amount to
1.9 billion. How does this Automatic reinsurance treaty or Facultative insurance
come into play in that situation?
A: If there is an automatic reinsurance treaty between the parties, then the insurer
would be obliged to cede or insure the 400 million, which is the excess of my
retention limit, with the reinsurer. There was a prior agreement between the
reinsurer and the reinsured to cede and to accept.
If a facultative Insurance governs their relationship, then the insurer can do
whatever he wants. He may choose to bear the 400 million, or he may cede only
a part of the excess. On the other hand, the reinsurer has the choice also to refuse.
Reinsurance treaty v. Reinsurance policy
Reinsurance treaty Reinsurance policy
Merely an agreement between two It is a contract of indemnity one
insurance companies whereby one insurer makes with another to protect
agrees to cede and the other to the first insurer from a risk it has
accept reinsurance business pursuant already assumed.
to provisions specified in the treaty.
Contracts for insurance Contracts of insurance
17 | U N I V E R S I T Y O F S A N C A R L O S
Section 99. Presumption of contract of indemnity against liability
Section 99. A reinsurance is presumed to be a contract of indemnity against
liability, and not merely against damage.
Important: The subject of the contract of reinsurance is the primary insurer’s risk
and not the property insured under the original policy.
NATURE OF CONTRACT OF REINSURANCE
1. Contract, one of indemnity against liability
Reinsurer agrees to indemnify the insurer, not against actual payment made
but against liabilities incurred.
TN: Payment by insurer of the loss accruing is not a condition precedent to
his demanding payment of the reinsurer. Hence, insolvency of the insurer
does not in any wise affect the right of the insurer to demand payment in
full under a reinsurance. Such is true even if the original insured should
decide not to enforce his claim against the insurer.
Question: I own a building worth 50 million and acquired an insurance
policy worth 50 million also. My insurer reinsured the policy in the amount
of 30 million, maintaining 20 million. Exposing insurer’s liability only to 20
million.
Suppose the building is destroyed in a peril insured against, can the insurer
immediately go after the reinsurer for payment? Supposing the insurer has
defences against the original insured, still the original insurer may now claim
the proceeds from the reinsurer. While with respect to the claim of the
insured, the original insurer is trying to resist giving defences to evade
liability. Whereas the original insurer is already collecting 30 million from the
reinsurer. Is this correct?
Sir: In reality, the original insured and the insured work together. The
insured will immediately inform the insurer as to the happening of a loss or
damage for the insurer to check the validity of the claim. The original insurer
then, on the other hand, will immediately inform the reinsurer. The reinsurer
will likewise validate the claim.
The insurer will not get in advance payment from the reinsurer until there is
actual liabilities declared. The adjusters of both the insurer and reinsurer will
assist one another.
But as a contract of indemnity against liability, if the original insurer becomes
liable, the reinsurer will have to pay the proceeds of the contract of
reinsurance.
2. Contract, separate from original insurance policy
Both are independent and separate contracts.
3. Contract based on original policy
The reinsured risk must be the same as that covered by the original policy.
The rights of the parties and the terms and conditions are based as well in
the original policy.
4. Insurable interest requirement applicable
Therefore, the primary insurer is not entitled to contract for reinsurance
exceeding the limits of the policy ceded to the reinsurer. Similarly, the
reinsurer cannot provide coverage for risks beyond the scope of the coverage
provided by the primary insurer.
5. Rule on subrogation applicable
Reinsurer, on payment of a loss, acquires the same rights by subrogation as
are acquired in similar cases where the original insurer pays a loss.
In an action on a contract of insurance, the reinsurer is entitled to avail of
every defense which the reinsured might urge in an action by the person
originally insured.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
Question: X, insurer, issued an insurance contract worth 2 billion. When loss
occurred, X immediately paid Y the 2 billion. X went to the reinsurer and it turned
out X is not supposed to be liable as the loss is an excepted peril. May X be allowed
to recover from the reinsurer?
A: X cannot recover. The reinsurer can also raise defences as against the original
insurer. If in the contract if insurance, the original insurer is not liable, then such
defence can be used by the reinsurer.
Section 100. Original insured not a privy to the reinsurance
Section 100. The original insured has no interest in a contract of reinsurance.
Reinsurance is a contract between the reinsured and the reinsurer
By which the latter agrees to protect the former from risks already assumed. There
is no privity of contract between the original reinsured and the reinsurer.
The insured, unless the contract so provides, has no concern with the contract of
reinsurance, and the insurer is not liable to the insured either as a surety or
otherwise.
Liability of reinsurer to reinsured
As a general rule, the reinsurer is entitled to avail itself of every defense which the
reinsured might urge in action by the person originally insured.
Thus, the reinsurer is not liable to the reinsured for a loss under an original policy
if the latter is not liable to the original insured or for an amount more than the
sum actually paid to the insured.
Liability of reinsurer to original insured
The original insured may stand in any three relations towards the reinsurer:
1. Contract of reinsurance solely between insurer and reinsurer
The original insured is not a privy to the contract and is a stranger to it.
2. Contract of reinsurance with stipulation in favor of the original insured
The reinsurer who has promised to pay the losses accruing under the original
policy will be liable to a suit by the original insured under the contract of
reinsurance. The remedy of the insured is both against the insurer and the
reinsurer.
3. Contract of reinsurance amounting to novation of original contract
This operates to discharge the contract of insurance and the original insurer
from all obligations thereunder, provided the insured agreed with the insurer
and the reinsurer to the novation. In such case, the original insured may
maintain an action directly against the reinsurer.
Such agreement is carried into effect by a surrender of the original policy
and issuance of a new one including the same terms and conditions, by the
so- called reinsurer.
Important: Such a transaction is not one of technical reinsurance, for here,
the reinsurer is but substituted for the original insurer and hence, becomes the
immediate insurer of the subject of the original policy.
CHAPTER 2. CLASSES OF INSURANCE
MARINE INSURANCE
Section 101. Marine insurance defined
Section 101. Marine Insurance includes:
(a) Insurance against loss of or damage to:
(1) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise,
effects, disbursements, profits, moneys, securities, choses in action,
instruments 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, transhipment, or
reshipment incident thereto, including war risks, marine builder’s risks,
and all personal property floater risks;
18 | U N I V E R S I T Y O F S A N C A R L O S
(2) 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);
(3) Precious stones, jewels, jewelry, precious metals, whether in course of
transportation or otherwise; and
(4) 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.
(b) 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.
Definition
A part of property insurance which is concerned with the perils of property in (or
incidental to) transit as opposed to property perils at a generally fixed location.
Major divisions of transportation insurance
1. Ocean Marine Insurance – Has to do primarily with insurance of sea perils;
one of the oldest written forms of insurance
2. Inland Marine Insurance – Covers primarily the land or over the land
transportation perils of property shipped by railroads, motor trucks,
airplanes, and other means of transportation. It also covers risks of lake,
river, or other inland waterway transportation and other waterborne perils
outside of those risks that fall definitely within the ocean marine category;
comparatively of recent origin.
TN: It may be in the form of a property insurance or a liability insurance.
Presumption that goods are shipped under deck
GR: If goods are shipped on deck, they are not covered by the policy
XPN: There is a specified notice of stowage and he accepts the enhanced risk.
OCEAN MARINE INSURANCE
Scope
1. Ships or hulls
2. Goods or cargoes
3. Earnings such as freight, passage money, commissions, or profits
4. Liability (known as “protection and indemnity insurance”) incurred by the
owner or any party interested in or responsible for the insured property by
reason of maritime perils
Risks or losses covered
All risks or losses except such as are repugnant to public policy or positively
prohibited.
A general marine insurance policy which does not state the risks assured is valid
and covers the usual marine risks and in a marine policy, the general enumeration
of “all other perils” etc., extends only to marine damage of like kind to those
enumerated.
Of course, to sustain recovery on a marine policy, the loss must have been
occasioned by a risk or peril insured against.
Perils of the sea, explained.
1. Perils covered- only those casualties due to the unusual violence or
extraordinary action of wind and wave, or to other extraordinary causes
connected with navigation.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

Examples:
a. Shipwreck, foundering, stranding, collision, and every specie of
damage done to ship or goods at sea by the violent action of the wind
and waves
b. Losses occasioned by the jettisoning of cargo if it is made for the
purpose of saving a vessel rendered unworthy during the voyage, not
through the fault of the captain
c. Barratry which in American Insurance Law is “any willful misconduct
on the part of the master or crew in pursuance of some unlawful or
fraudulent purpose without the consent of the owners, and to the
prejudice of the owner’s interest”.
2. Perils not covered- losses resulting from ordinary wear and tear or other
damage usually incident to the voyage.
Important: Not a peril of the sea. Not covered in the general marine
insurance.
B. Jettison – Intentional casting overboard, of any part of a venture exposed
to a peril, in the hope of saving the rest of the venture. “covered under perils
of the sea”
Important: Peril of the sea in view of the fact a peril of the seas is
responsible for causing the ship to be at risk.
C. Tempest – A violent windy storm. Not unusual or unexpected.
Important: It is not a peril of the sea.
Questions:

Example: Violence of a tempest which is not unusual or unexpected 1. Sail that was carried away by tempest?

Perils of the sea distinguished from perils of the ship A: Not liable. Tempests are not unusual nor is the loss of a sail.

Perils of the sea Perils of the ship 2. Mast that was carried away?
A loss in the ordinary course of events A: Liable. Such damage is due only to unusual violence in the elements, and
which results from: is not ordinarily to be expected as incident to navigation.
To include only such losses as
(a) The natural and inevitable action of
are of extraordinary nature or
the sea 3. A marine vessel traversing the high seas, encountered a very strong storm.
arise from some overwhelming
(b) The ordinary wear and tear of the The mast of the ship was destroyed, the captain decided to jettison the
power which cannot be
ship goods. Is the insurer liable?
guarded against by the
(c) The negligent failure of the ship’s
ordinary exertion of human
owner to provide the vessel with A: Liable. The reason for casting overboard the goods was because of a peril
skill or prudence.
proper equipment to convey the of the sea—the violent weather condition (proximate cause of the loss).
cargo under ordinary conditions.
4. If the vessel was shipwrecked instead. But it was hijacked by the pirates
Important: The purpose of an ocean marine policy is to secure an indemnity where the ship was shipwrecked. Piracy is an excepted peril.
against accidents which may happen not against event which must happen.
Everything which happens through the inherent vice of the thing, or by the act of A: It was broken by the act of piracy which has nothing to do with shipwreck,
the owner, master or shipper shall not be reputed a peril if not otherwise borne in and nothing to do with the storm. The sequence is discontinuing in character.
the policy. The proximate cause is the loss due to piracy. As an excepted peril, insurer
is NOT liable.
Question: Are “perils of the ship” included in an all-risk policy?
All risks marine insurance policy
A: Yes. Because an all-risk insurance covers all perils unless such is specifically Insures against all causes of conceivable loss or damage, except as otherwise
stipulated as an excepted peril. excluded in the policy or due to fraud or intentional misconduct on the part of the
insured.
Question: Who is the burden of proof in an all-risk policy?
1. Initial burden on part of the insured to establish that danger or loss occurred.
A: Initially, the burden of proof is on the insured that there is a loss. After such, 2. Burden of proof is on the insurer to establish that the damage or loss is
the burden of proof is shifted to the insurer to prove that the peril which caused excluded from the coverage.
the loss is an excepted peril under the policy.
INLAND MARINE INSURANCE
Question: A ship was shipwrecked to a particular area. However, that particular
area was infested by pirates. The pirates then hijacked the ship. The contract The Nationwide Definition merely defines what can be classified as marine
provides that piracy is an excepted peril. What is the proximate cause? Is the insurance, as distinguished from fire and casualty insurance. It does not distinguish
insurer liable? between ocean marine and inland marine insurance.The definition is less important
today because multiple- line laws now permit a single insurer to write all types of
A: The proximate cause is piracy and not the shipwreck. This is because the property and liability insurance.
shipwreck has nothing to do with the loss of the ship since there was
discontinuance of a series of event. The shipwreck is not continuing in character. The definition includes:
It is piracy that causes the loss of the ship. However, the insurer is still liable
1. Property insurance on goods in transit
because the ship and its cargoes was not delivered from its original peril which is
2. Property insurance on goods of certain specified types
the shipwreck.
3. Property insurance on fixed property
4. Property insurance on a few means of transportation
TN: This is based on a foreign jurisprudence cited by De Leon in the book but
5. Liability insurance
there is no such similar jurisprudence in the Philippines.
Classes/scope
Important: Perils of the sea must be the proximate cause of the loss. Insurer is
To be eligible for inland marine contract, the risk must involve an element of
NOT liable if the proximate cause of the loss is a peril of the ship.
transportation. Its classes are:
In ocean marine insurance, insurer is liable if the proximate cause of the loss or
1. Property in transit – Insurance provides protection for property frequently
damages is a peril of the sea. If it is a peril of the ship, generally, not liable.
exposed to loss while it is in transportation from one location to another.
Coverage of Marine Insurance
2. Bailee liability – Provides protection to persons who have temporary custody
All as enumerated under Section 101.
of the goods or personal property of others such as carriers, laundrymen,
warehousemen, and garage-keepers.
Definitions:
3. Fixed transportation property – Covers bridges, tunnels and other
A. Barratry – Any willful misconduct on the part of the master or crew, in
instrumentalities of transportation and communication as they are held to be
pursuance of an unlawful or fraudulent purpose, without consent of the
an essential part of the transportation system.
owner and to the prejudice of the owner’s interest. “still covered under perils
of the sea”.
4. Floater – It provides insurance to follow the insured property wherever it may
be located, subject always to the territorial limits of the contract.

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INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
Question: What is meant by Floaters?
A: These are properties which are subject to territorial limits and that their
insurance follow wherever they may be located.
Example is when one wants to exhibit the Spolarium, painted by Juan Luna, and it
is to be exhibited from Batanes to Laoag, Ilocos, Baguio, then to the Visayas region
and throughout the Philippines. In such case, the Spolarium may be insured with
a floater policy which is a class of an inland marine insurance.
Question: What is meant by Bailee liability as a class of inland marine insurance?
A: Bailee refers to the carrier. Being so, the bailee may incur liabilities in case when
the property, which the bailee obliges to transport, will be damaged or lost. Hence,
the bailee may take a bailee liability which is a class of inland marine insurance.
Section 102. Insurable interest
Section 102. The owner of a ship has in all cases an insurable interest in it, even
when it has been chartered by one who covenants to pay him its value in case of
loss: Provided, that in this case the insurer shall be liable for only that part of the
loss which the insured cannot recover from the charterer.
Insurable interest
Marine insurance, as with other insurances, is invalid unless supported by an
insurable interest in the thing insured.
Exception: If an insurance is taken upon a ship or cargo “lost or not lost”, the
insurer expressly agrees that he will be bound in any event, even though the vessel
is already lost. The contract is binding and the insurer must pay, even though it
be proved that the insured had nothing to insure when the contract is made.
SIR: This type of insurance is already not common in today’s time considering the
advances in technology wherein it is already very easy to transmit information
through the use of cellular phones and the internet.
Questions:
1. May the insurer be subrogated on the right of the owner of the ship against
the charterer?
A: Yes. But only if the charterer is the one who is guilty for causing the loss
or damage of the ship.
2. Does the charterer have any insurable interest over the ship?
A: Yes, and up to the amount which he obligated himself to pay to the owner
of the ship in case of loss or damage to the ship.
3. What if the ship already sank and is already at the bottom of the sea, may
the owner insure the ship?
A: Yes, provided that the owner does not know that the ship already sank at
the time that he took the insurance.
Insurable interest and sale contracts
1. In the case of a vessel
Insurable interest is commonly possessed by the owner or by the one who
holds mortgage on the vessel if money has been borrowed.
2. In the case of a cargo
Insurable interest is in the shipper or the consignee depending upon the terms
of sale.
(a) F.O.B. (free on board)
 FOB factory – buyer assumes responsibility when the goods leave
the factory
 FOB point of destination – buyer does not assume responsibility
until the goods are received from the carrier
(b) C.I.F. (cost, insurance, and freight)- seller assumes complete
responsibility for securing all necessary insurance
(c) C. & F. (cost and freight)- buyer procures own insurance
20 | U N I V E R S I T Y O F S A N C A R L O S
3. In the case of a vendee/ consignee of goods in transit
The perfected contract of sale even without delivery vests in the vendee an
equitable title, an existing interest over the goods sufficient to be the subject
of insurance.
Section 103. Loan on bottomry
Section 103. 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.
Loan on bottomry
One which is payable only if the vessel, given as a security for the loan, completes
in safety the contemplated voyage.
Question: If an owner of the ship chartered his ship to a charterer and the latter
agreed to pay to the owner the amount of the ship in case it will be lost. May the
owner still insure the ship?
A: In such case, the owner has an insurable interest only in the excess of its value
over the amount of the bottomry loan.
Important: Loans on cargoes secured in a similar manner are referred to as
respondentia loan.
Section 104. Freightage
Section 104. Freightage, in the sense of a policy of marine insurance, signifies
all the benefits derived by the owner, either from the chartering of the ship or its
employment for the carriage of his own goods or those of others.
Freightage or freight
The benefit which is to accrue to the owner of the vessel from its use in the voyage
contemplated or the benefit derived from the employment of the ship.
Sources
1. Chartering of the ship
2. Its employment for the carriage of his own goods
3. Its employment for the carriage of the goods of others
When does the insurable interest of expected freightage of the charter
party exist?
A: Where freight is the price to be paid for the hire of the ship under a charter
party, the shipowner has an inchoate right to freight as soon as there is an
inception of performance by the ship under the charter party.
Where the inchoate right to freight accrues as soon as the goods are actually put
on board and where part of the goods has been loaded and the balance is ready,
there is an insurable interest in the whole freight Where the shipowner has made
a binding contract for freight and the ship is in readiness to receive the goods, he
has an insurable interest
What is Seeking Ship?
A: One which looks for cargo to be transported, the ship owner has no insurable
interest in the freight to be earned on goods not loaded.
Is there insurable interest in expected profit in marine insurance?
A: Yes, however, the interest in the goods or adventure out of which the profits
are expected to be realized should be legal interest although such interest may be
contingent, like commission to an agent or consignee.
Extent of insurable interest of a charterer
The insurable interest of a charter of a ship is up to the extent that he is liable to
be damnified by its loss.
Types of charter party
1. Bareboat/Demise Charter
A demise of a vessel, much as a lease of an unfurnished house is a demise
of real property. Ship owner turns over full possession and control of his
vessel to the charterer, who then undertakes to provide the crew and
victuals and supplies and fuel for her during the term of the charter.
The charterer becomes the owner for the voyage or the service stipulated,
and subject to liability for damages caused by negligence.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

2. Contract of Affreightment A: No, unless such person was a marine expert.

Owner of the vessel, leases part or all of its space to haul goods for others.
Is there presumptive knowledge of the insured of the prior loss?
It is a contract of special service to be rendered by the owner of the vessel
Yes, Section 111. A person insured by a contract of marine insurance is presumed
who retains the possession, command and navigation of the ship, the
to have knowledge, at the time of insuring, of a prior loss, if the information might
charter or freighter merely having use of the space in the vessel in return
possibly have reached him in the usual mode of transmission and at the usual rate
for the payment of the charter hire or freight. Ship owner retains
of communication.
possession, command and navigation of the ship. It can either be Voyage
Charter or Time Charter.
Section 112. Concealment that will not vitiate the contract
Question: Why is it that in a bareboat charter, the charterer is considered as
owner pro hac vice? Section 112. A concealment in a marine insurance, in respect to any of the
following matters, does not vitiate the entire contract, but merely exonerates the
A: In a demise or bareboat charter, the charterer is treated as owner pro hac vice
insurer from a loss resulting from the risk concealed:
(owner for the time being or for that particular instance) because he takes over
the full possession and control of the vessel. In such case, the master of the vessel (a) The national character of the insured;
is the agent of the charterer and not of the ship owner. The charterer or owner (b) The liability of the thing insured to capture and detention;
pro hac vice, and not the general owner of the vessel, is held liable for the (c) The liability to seizure from breach of foreign laws of trade;
expenses of the voyage including the wages of the seamen. (d) The want of necessary documents; and
(e) The use of false and simulated papers.
Sections 105-111. Concealment
When concealment does not vitiate entire contract
Section 105. The owner of a ship has an insurable interest in expected freightage
The concealment of a material fact entitles the injured party to rescind the entire
which according to the ordinary and probable course of things he would have
contract of insurance. However, concealment of any of the matters indicated from
earned but for the intervention of a peril insured against or other peril incident to
paragraphs (a) to (e) does not avoid the policy ab initio.
the voyage.
If the vessel be lost due to any of the causes mentioned in Section 112, which was
Section 106. The interest mentioned in the last section exists, in case of a charter
concealed, the insurer is not liable; but if the vessel be lost due to other perils of
party, when the ship has broken ground on the chartered voyage. If a price is to
the sea like a storm, the insurer is not exonerated from liability.
be paid for the carriage of goods it exists when they are actually on board, or there
is some contract for putting them on board, and both ship and goods are ready
Important: The national character of the vessel is not a material fact; but facts
for the specified voyage.
lying peculiarly within the knowledge of the insured, which will expose the property
to belligerent risks or seizure and condemnation for violation of the trade or
Section 107. One who has an interest in the thing from which profits are expected
navigation laws of another country, must be disclosed.
to proceed has an insurable interest in the profits.
Question: There was concealment as to the national character of the insured.
Section 108. The charterer of a ship has an insurable interest in it, to the extent
The ship was lost due to perils of the sea – strong typhoon. Is the insurer liable?
that he is liable to be damnified by its loss.
A: Yes. The loss was due to the perils of the sea and not because of the national
Section 109. In marine insurance, each party is bound to communicate, in identity of the insured.
addition to what is required by Section 28, all the information which he possesses,
material to the risk, except such as is mentioned in Section 30, and to state the Effects of concealment in marine insurance
exact and whole truth in relation to all matters that he represents, or upon inquiry
discloses or assumes to disclose. GR: It avoids the policy or that the insured cannot get the proceeds thereof.

Section 110. In marine insurance, information of the belief or expectation of a
third person, in reference to a material fact, is material.
Section 111. 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.
Concealment
Failure to disclose any material fact or circumstance which in fact or law is within
or which ought to be within the knowledge of one party and of which the other
has no actual or presumptive knowledge.
Question: Is it stricter compare to other insurance?
A: Yes it is greater 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 in cases of insurance on buildings than on vessel,
which are often insured when absent or afloat.
Question: Can there be an instance where you are in possession of material fact
though you are not aware of it?
A: Yes, in a case of an agent who failed to notify his principal of the loss of a cargo
and the latter, after the loss but ignorant thereof, secured insurance “lost or not”
on the venture, such insurance will be vid on the group of concealment.
Question: Is the insurer duty bound to communicate the opinion of 3rd persons?
A: Yes but the only requirement is that the information be in reference to a material
fact. Thus, there is concealment where the insured the insured at the time of
application for insurance did not disclose the opinion of marine experts who
inspected the vessel insured that the ship was unseaworthy.
Questions: The ship owner was walking in the pier when he overheard someone
saying “ah this ship is not seaworthy. I believe this will sink later”. Is the ship
owner duty bound to communicate it to the insurer?
XPNs Concealment in respect to any of the following matters, does not vitiate the
entire contract, but merely exonerates the insurer from a loss resulting from the
risk concealed:
1. The national character of the insured
2. The liability of the thing insured to capture and detention
3. The liability to seizure from breach of foreign laws of trade
4. The want of necessary documents, and
5. The use of false and simulated papers
Section 113. Representation
Section 113. If a representation by a person insured by a contract of marine
insurance, is intentionally false in any material respect, or in respect of any fact on
which the character and nature of the risk depends, the insurer may rescind the
entire contract.
Applicability of rules on representation to marine insurance
A substantial misrepresentation of any material fact or circumstance relating to
marine insurance avoids the policy.
The general rule that a representation is material where it would influence the
judgment of a prudent insurer in fixing the premium or in determining whether he
would take the risk, is applicable to marine insurance.
Effect of false representation by insured
Any misrepresentation of a material fact made with fraudulent intent avoids the
policy.
If the misrepresentation is not intentional or fraudulent but the fact misrepresented
is material to the risk, the insurer may also rescind the contract from the time the
representation becomes false.
Important: Representations as to the age, equipment, earnings, and particular
condition or rating of a vessel or as to anything which concerns the state of the
vessel at any particular period of her voyage, have been held to be material.

21 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
But statements of the nature and amount of the cargo, where she was not
overloaded or where the underwriter did not rely thereon, have been held to be
immaterial.
Section 114. Falsity
Section 114. The eventual falsity of a representation as to expectation does not,
in the absence of fraud, avoid a contract of marine insurance.
Effect of falsity of representation as to expectation
Representations of expectations are statements of future facts or events which are
in their nature contingent and which the insurer is bound to know that the insured
could not have intended to state as known facts, but as intentions or expectations
merely.
Important: Hence, unless made with fraudulent intent, their failure of fulfilment
is not a ground for rescission.
This rule applies to statements of:
1. The time a vessel will sail or is expected to sail
2. The nature of the cargo to be shipped
3. The amount of profits expected
4. The destination of the vessel
5. That the insured has no doubt that he can get insurance effected for a certain
premium
Section 115. Implied Warranties
Section 115. In every marine insurance upon a ship or freightage, or upon
anything which is the subject of marine insurance, a warranty is implied that the
ship is seaworthy.
Warranty in marine insurance
Warranty has been defined as a stipulation, either expressed or implied, forming
part of the policy as to some fact, condition or circumstance relating to the risk.
Implied warranties in marine insurance
The insurer will not be liable for any loss under his policy in case the vessel:
1. Is unseaworthy at the inception of the insurance; or
2. Deviates from the agreed voyage; or
3. Engages in an illegal venture;
4. The ship will carry the requisite documents of nationality or neutrality of the
ship or cargo where such nationality or neutrality is expressly warranted;
5. Insured has an insurable interest in the subject matter insured.
Implied warranty of seaworthiness
In every voyage policy of marine insurance, there is an implied warranty that the
vessel is in all respects seaworthy, and such warranty can be excluded only by
clear provisions of the policy.
Where seaworthiness is admitted by insurer
If the policy provides that the seaworthiness of the vessel as between insured and
insurer is admitted, the issue of seaworthiness cannot be raised by the insurer
without showing concealment or misrepresentation by the insured.
The admission of seaworthiness by the insurer may mean:
1. That the warranty of seaworthiness is to be taken as fulfilled; or
2. That the risk of unseaworthiness is assumed by the insurer
Where unseaworthiness is unknown to owner of cargo insured
Where cargo is the subject of marine insurance, the implied warrant of
seaworthiness attaches to whoever is insuring the cargo, whether he be the
shipowner or not.
Important: The fact that the unseaworthiness of the ship was unknown to the
insured is immaterial in ordinary marine insurance and may not be used by him as
a defense in order to recover on the marine insurance policy
It becomes the obligation of the cargo owner to look for a reliable common carrier
which keeps its vessels in seaworthy condition.
Where vessel found unseaworthy
Common carriers are presumed to have been at fault or to have acted negligently
for the loss, destruction, or determination of goods, unless they prove that they
observed diligence.
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Where a vessel is found unseaworthy, a shipowner is also presumed to be
negligent since it is tasked with the maintenance of its vessel.
Important: An exception to the limited liability doctrine which limits the insurer’s
liability to it pro rata share in the insurance proceeds, is when the damage is due
to the fault of the shipowner and the captain. In such case, the shipowner, unless
it overcomes the presumption of negligence, is liable to the total value of the
damage or loss.
Section 116. Seaworthiness
Section 116. A ship is seaworthy, when reasonably fit to perform the service and
to encounter the ordinary perils of the voyage contemplated by the parties to the
policy.
What constitutes seaworthiness
Seaworthiness is a relative term depending upon the nature of the ship, the
voyage, and the service in which she is at the time engaged.
Generally, for a vessel to be seaworthy, it must be adequately equipped for the
voyage and manned with a sufficient number of competent officers and crew. The
failure of a common carrier to maintain in seaworthy condition the vessel involved
in the contract of carriage is a clear breach of its duty prescribed in Article 1755 of
the Civil Code.
Nature of the ship
To comply with the implied warranty of seaworthiness, the vessel must be in a fit
state as to repair, e equipment, crew and in all other respects to perform the
voyage insured and to encounter the ordinary perils of navigation. It must also be
in a suitable condition to carry the cargo put on board or intended to be put on
board.
Important: It is not necessary that the cargo itself be seaworthy.
Nature of voyage
What is reasonable fitness to encounter the perils expected to arise in the course
of the voyage vary, naturally, with the character of the particular voyage.
Nature of service
The seaworthiness of a vessel is also to be determined with regard to the nature
of the cargo which it undertakes to transport, the requirement being that it shall
be reasonably capable of safely carrying the cargo to its port of destination.
Criterion of seaworthiness
The warranty of seaworthiness is not an absolute guaranty that the vessel will
safely meet all possible perils.
A perfect vessel or one impervious to the assaults of the elements is not required;
nor is the best and most skilful form of construction required, but only such as is
sufficient for the kind of vessels insured with reference to their physical and
mechanical condition, the extent of its fuel and provision supply, the quality of its
officers and crew, and its adaptability for the service which they are employed.
Section 117. Implied Warranty of Seaworthiness
Section 117. An implied warranty of seaworthiness is complied with if the ship
be seaworthy at the time of the commencement of the risk, except in the following
cases:
(a) When the insurance is made for a specified length of time, the implied
warranty is not complied with unless the ship be seaworthy at the
commencement of every voyage it undertakes during that time.
(b) When the insurance is upon the cargo which, by the terms of the policy,
description of the voyage, or established custom of the trade, is to be
transhipped at an intermediate port, the implied warranty is not complied
with unless each vessel upon which the cargo is shipped, or transhipped,
be seaworthy at the commencement of each particular voyage.
When seaworthiness is complied with
GR: The warranty of seaworthiness is complied with if the ship be seaworthy at
the time of the commencement of the risk.
Important: Prior 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. There
is no implied warranty that the vessel will remain in seaworthy condition
throughout the life of the policy.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
XPNs:
(a) In the case of time policy, the ship must be seaworthy at the commencement
of every voyage she may undertake;
(b) In the case of cargo policy, each vessel upon which the cargo is shipped or
transhipped, must be seaworthy at the commencement of each particular
voyage; and
(c) In the case of a voyage policy contemplating voyage in different stages, the
ship must be seaworthy at the commencement of each portion.
Ship’s actual condition at commencement of voyage
The unexplained sinking of a vessel creates the presumption of unseaworthiness.
The shipowner cannot escape liability by presenting in evidence a certificate that
tends to show that the vessel was fit for voyage.
Seaworthiness relates to the vessel’s actual condition at the time of the
commencement of the voyage. The issuance of the certificate neither negates the
presumption of unseaworthiness triggered by an unexplained sinking nor
establishes seaworthiness.
Time and voyage policies
Marine insurance policies are usually valued policies. In addition, the policy will be
either a time policy or voyage police.
A. Time policy
Provides coverage for a fixed period of time, at the expiration of which the
insurance will lapse. This policy gives protection for a stipulated period and,
therefore, avoids the annoyance of constant attention to the termination of
voyages and the renewal of policies. By means of the time policy, the insured
avoids the necessity of continually describing separate voyages many of
which are over similar routes.
B. Voyage policy
Covers the subject matter for the voyage named in the policy until the
specified voyage ends, regardless of the time it takes to complete the
voyage. This policy is particularly adapted to tramp steamers and sailing
vessels, inasmuch as these do not move over fixed routes and their travel
may be more easily described by separate voyage policies. Because cargoes
are subject to sea risk for comparatively short periods, the voyage is
frequently used.
Section 118. Scope of Seaworthiness
Section 118. A warranty of seaworthiness extends not only to the condition of
the structure of the ship itself, but requires that it be properly laden, and provided
with a competent master, a sufficient number of competent officers and seamen,
and the requisite appurtenances and equipment, such as ballasts, cables and
anchors, cordage and sails, food, water, fuel and lights, and other necessary or
proper stores and implements for the voyage.
Scope of seaworthiness of vessel
Seaworthiness requires that:
(a) The vessel must have equipment and appliances appropriate to the voyage
in which it is engaged and the cargo it carries
(b) it must have sufficient fuel, stores and provisions to last for the entire
voyage
(c) It must have sufficient number of competent officers and men, and
(d) If the insurance is on cargo, the same must be properly loaded, stowed,
dunnaged and secured so as not to imperil the navigation of the vessel or
to cause injury to the vessel or cargo
TN: A ship is not unseaworty because of some defect in loading or stowage which
is easily curable by those on board, and was cured before the loss.
Important: The carrying cargo on deck raises a presumption of unseaworthiness
which can be overcome only by showing affirmatively that the deck cargo was not
likely to interfere with the due management of the vessel; and when by jettison or
otherwise, the vessel can be made seaworthy, the warranty satisfied. A ship may
not be designed to carry substantial amount of cargo on deck and the inordinate
loading of cargo on deck may result in the decrease of the vessel’s metacentric
height thus making it unstable.
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Section 119. Seaworthiness during voyage in stages
Section 119. Where different portions of the voyage contemplated by a policy
differ in respect to the things requisite to make the ship seaworthy therefor, a
warranty of seaworthiness is complied with if, at the commencement of each
portion, the ship isseaworthy with reference to that portion.
Seaworthiness during voyage in stages
This provides the third exception to the general rule stated in Section 117.
Where the policy contemplates a voyage in different stages during which the
subject matter insured will be exposed to different degrees or kinds of perils, or
the ship will require different kinds of equipment, it must be seaworthy at the
commencement of each stage, but it is sufficient if at the commencement of each
stage it is seaworthy for the purpose of that stage.
The stages must be separate and distinct in order to have a different degree of
seaworthiness for particular parts.
Section 120. Ship becomes unseaworthy during voyage
Section 120. When the ship becomes unseaworthy during the voyage to which
an insurance relates, an unreasonable delay in repairing the defect exonerates the
insurer on ship or ship owner’s interest from liability from any loss arising
therefrom.
Where ship becomes unseaworthy during voyage
There is no implied warranty that the vessel will remain in a seaworthy condition
throughout the life of the policy.
However, when the vessel becomes unseaworthy during the voyage, it is the duty
of the master, as the ship owner’s representative, to exercise due diligence to
make it seaworthy again, and if loss should occur because of his negligence in
repairing the defect, the insurer is relieved of liability but the contract of insurance
is not affected as to any other risk or loss covered by the policy and not caused or
increased by such particular defect.
Important: The benefit of exoneration is given only to an “insurer on ship or ship
owner’s interest.”
Section 121. Seaworthiness as to cargo
Section 121. A ship which is seaworthy for the purpose of an insurance upon the
ship may, nevertheless, by reason of being unfitted to receive the cargo, be
unseaworthy for the purpose of insurance upon the cargo.
Seaworthiness as to cargo
The seaworthiness of a vessel is also to be determined with regard to the nature
of the cargo which she undertakes to transport, the requirement being that she
shall be reasonably capable of safely conveying the cargo to its port of destination.
A ship which is seaworthy for the purpose of insurance upon the ship may yet be
unseaworthy for the purpose of insurance upon the cargo.
Section 122. Nationality or neutrality of the ship
Section 122. Where the nationality or neutrality of a ship or cargo is expressly
warranted, it is implied that the ship will carry the requisite documents to show
such nationality or neutrality and that it will not carry any documents which cast
reasonable suspicion thereon.
Express warranty as to nationality or neutrality
Warranty of national character Warranty of neutrality
Imports that the property insured is
neutral in fact, and shall be so in
May be gathered from the language appearance and conduct, that the
of the policy describing the vessel as property shall belong to neutrals and
the “Philippine,” “American,” etc. that no act of insured or his agent
shall be done which can legally
compromise its neutrality.
Does not mean that the vessel was Extends to insured’s interest in all
built in such country, but that the property intended to be covered by
property belongs to a subject the policy, but not to the interest of
thereof. It refers to beneficial third persons not covered
ownership rather than legal title. by the policy.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

Implied warranty to carry requisite documents

Section 128. Improper deviation
Warranty of national character Warranty of neutrality Section 128. An insurer is not liable for any loss happening to the thing insured
Requires that the insured property subsequent to an improper deviation.
Requires that the vessel be shall be accompanied by
conducted and documented as of documentary evidence of its neutral
Effect of improper deviation
such nation character and not by any other
The insurer becomes immediately absolved from further liability under the policy
papers which compromise such
for losses occurring subsequent to the deviation. And the fact that the deviation
character.
did not increase the risk is wholly immaterial.
Such production is not excused
A breach of warranty in either
because the papers were lost by the
particular will avoid the policy Sections 129-132. Loss
fault of the master.
The warranty is a continuing one Section 129. A loss may be either total or partial.
and a change of nationality is a
breach of warranty, but the warranty The proper papers must be produced Section 130. Every loss which is not total is partial.
is not broken by a contract for sale when necessary to rove ownership
and transfer to an alien at a Section 131. A total loss may be either actual or constructive.
future date
Section 132. An actual total loss is caused by:
Sections 123-125 Deviation (a) A total destruction of the thing insured;
(b) The irretrievable loss of the thing by sinking, or by being broken up;
Section 123. When the voyage contemplated by a marine insurance policy is (c) Any damage to the thing which renders it valueless to the owner for the
described by the places of beginning and ending, the voyage insured is one which purpose for which he held it; or
conforms to the course of sailing fixed by mercantile usage between those places. (d) Any other even which effectively deprives the owner of the possession, at
the port of destination, of the thing insured.
Section 124. If the course of sailing is not fixed by mercantile usage, the voyage
insured by a marine insurance policy is that way between the places specified,
Kinds of losses
which to a master of ordinary skill and discretion, would mean the most natural,
1. Partial loss
direct and advantageous
2. Total loss
(a) Actual or absolute
Section 125. Deviation is a departure from the course of the voyage insured,
(b) Constructive or technical
mentioned in the last two (2) sections, or an unreasonable delay in pursuing the
voyage or the commencement of an entirely different voyage.
Important: When the loss is total, the underwriter is liable for the whole of the
amount insured.
Meaning of deviation
Any unexcused departure from the regular course or route of the insured voyage Meaning of actual total loss
or any other act which substantially alters the risk. The subject matter of the insurance is wholly destroyed or lost or when it is so
damaged as no longer to exist in its original character.
Cases of deviated in marine insurance
There are 4 cases of deviation in marine insurance, namely: Complete physical destruction not essential to constitute actual total
loss
1. Departure from the course of sailing fixed by mercantile usage between the Such a loss may exist where the form and specie of the thing is destroyed although
places of beginning and ending specified the policy; the materials of which it consisted still exist.
2. Departure from the most natural, direct, and advantageous route between
the places specified if the course of sailing is not fixed by mercantile usage Limited liability rule
3. Unreasonable delay in pursuing the voyage
4. The commencement of an entirely different voyage. GR: The ship owner’s or ship agent’s liability is usually co-extensive with his
interest in the vessel such that a total loss thereof results in its extinction.
Sections 126-127 When is deviation proper
Important: There must be abandonment to avail of the limited liability rule.
Section 126. A deviation is proper: However, when the vessel is totally lost in which case there is no vessel to
(a) When caused by circumstances over which neither the master nor the abandon, abandonment is not required. Because of such total loss, the liability of
owner of the ship has any control; the shipowner or agent for damages is extinguished.
(b) When necessary to comply with a warranty, or to avoid a peril, whether or
not the peril is insured against; XPN: A shipowner or ship agent may be held liable for damages when the sinking
(c) When made in good faith, and upon reasonable grounds of belief in its of the vessel is attributable to the actual fault or negligence of the shipowner or
necessity to avoid a peril; or its failure to ensure the seaworthiness of the vessel.
(d) When made in good faith, for the purpose of saving human life or relieving
another vessel in distress. Question: X owns a vessel valued at P50M with several cargoes in it as well as
passengers. The ship was unable to withstand the perils of the sea (a storm) which
Section 127. Every deviation not specified in the last section is improper. caused it to sink to the bottom of the sea. The owner of the vessel is liable to the
cargo owners as well as to the passengers who died. And the liability of the owner
Kinds of deviation of the vessel amounts to P200M. Supposing the vessel owner was advised by his
Deviation may be proper or improper. Deviation is proper in the cases enumerated counsel to abandon his claim of the ship. Would it follow that he’s no longer liable
in Section 126. Every deviation not specified in Section 126 is improper. to the cargo owners and the family of the passengers who perished?

Important: The insurer is not exonerated from liability for loss happening after
proper deviation. The effect is as if there were no deviation.
When deviation is proper
If the deviation is justified or caused by actual necessity which is equal in
importance to such deviation.
(a) Where the ship is compelled to head for another port by stress of weather
(b) Where a departure from the course is made to take on a pilot when
necessary to the safety of the adventure; or in order to proceed to a place
where the ship will meet a convoy; or to escape capture
(c) Where the master seeks another port of discharge when the water where he
is supposed to discharge is too shallow for his vessel to enter
A: Based on the fact that there was a storm, no storm happens immediately
without any forecast, and I’m assuming there was a forecast. Because they still
continued to voyage, they cannot limit their liability by simply abandoning the
vessel because the loss, the complete sinking of the ship and the lives lost, were
due to the negligence and fault of the shipowner. This is one exception to the
limited liability rule. Second, no abandonment can be made because there was
complete destruction of the vessel.
The owner of the vessel need not make abandonment because there was complete
loss of the vessel.

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INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
Section 133. Constructive total loss
Section 133. A constructive total loss is one which gives to a person insured a
right to abandon, under Section 141.
Meaning of constructive total loss
A constructive total loss, or as it is sometimes called, a “technical total loss,” is one
which the loss, although not actually total, is of such a character that the insured
is entitled, if he thinks fit, to treat it a total by abandonment.
Importance of distinction between actual and constructive total loss
Upon them depends the whole doctrine of abandonment.
In cases of actual total loss, no abandonment is necessary. But if the loss is merely
constructively total, an abandonment becomes necessary in order to recover as
for a total loss.
Section 134. Presumption of actual total loss
Section 134. An actual loss may be presumed from the continued absence of a
ship without being heard of. The length of time which is sufficient to raise this
presumption depends on the circumstances of the case.
Presumption of actual total loss
Where a vessel is not heard of at all within a reasonable time after sailing, or for
a reasonable time after she was last seen, she will be presumed to have been lost
from a peril insured against.
There is no fixed rule with regard to the time after which a missing vessel will be
presumed to be lost. It depends upon the circumstances of each case.
Section 135. Reshipment
Section 135. When a ship is prevented, at an intermediate port, from completing
the voyage, by the perils insured against, the liability of a marine insurer on the
cargo continues after they are thus reshipped.
Nothing in this section shall prevent an insurer from requiring an additional
premium if the hazard be increased by this extension of liability.
Liability of insurer in case of reshipment
This contemplates an insurance upon cargo.
If the original ship be disabled, and the master, acting with a wise discretion, as
the agent of the merchant and the ship owners, forwards the cargo in another
ship, such necessary and justifiable change of ship will not discharge the
underwriter on the goods from liability for any loss which may take place on goods
subsequently to such reshipment.
Important: This rule will not be obligatory where resort must be had to distant
places to procure a vessel, and there are serious impediments in the way of putting
the cargo on board. In any case, the insurer may require an additional premium if
the hazard be increased by the extension of liability.
Question: With respect to reshipment, considering that the contract of insurance
is very specific that the cargo will be loaded in Motor Vessel A, when in truth and
in fact, the same cargo was reloaded in Motor Vessel B, under the concept of
reshipment. Is the insurer still liable?
A: If the cause of the reshipment is not the fault or negligence of the master or
the officers of Motor Vessel A, then the insurer is not liable. But if it were, then the
insurer will be liable.
Question: Is the same cargo still covered by the insurance after it is being loaded
to another vessel? If something happens to said vessel, still the insurer is liable for
the cost of actually transferring said cargo from vessel A to vessel B?
A: Yes, on both.
25 | U N I V E R S I T Y O F S A N C A R L O S
Section 136. Additional liability
Section 136. In addition to the liability mentioned in the last section, a marine
insurer is bound for damages, expenses of discharging, storage, reshipment,
extrafreightage, and all other expenses incurred in saving cargo reshipped
pursuant to the last section, up to the amount insured.
Nothing in this or in the preceding section shall render a marine insurer liable for
any amount in excess of the insured value or, if there be none, of the insurable
value.
Additional liability of insurer of goods
The insurer is liable for them in addition to paying for any loss or damage which
may take place on the goods, due to the perils insured against.
Section 137. Right of the insured
Section 137. Upon actual total loss, a person insured is entitled to payment
without notice of abandonment.
Right of insured to payment upon an actual total loss
The right of the insured to claim the whole insurance is absolute. Hence, he need
not give notice of abandonment nor formally abandon to the insurer anything that
may remain of the insured property.
Section 138. Average
Section 138. Where it has been agreed that an insurance upon a particular thing,
or class of things, shall be free from particular average, a marine insurer is not
liable for any particular average loss not depriving the insured of the possession,
at the port of destination, of the whole of such thing, or class of things, even
though it becomes entirely worthless; but such insurer is liable for his proportion
of all general average loss assessed upon the thing insured.
Meaning of average
Any extraordinary or accidental expense incurred during the voyage for the
preservation of the vessel, cargo, or both and all damages to the vessel and cargo
from the time it is loaded and the voyage commenced until it ends and the cargo
unloaded.
Kinds of average
1. Gross or general averages
Those which include damages and expenses which are deliberately caused
by the master of the vessel or upon his authority, in order to save the vessel,
her cargo, or both at the same time from a real and known risk
Who bears?
A general average loss must be born equally by all of the interests concerned
in the venture in proportion to the value of the property saved.
2. Simple or particular averages
Those which include all damages and expenses caused to the vessel or to
her cargo which have not incurred to the common benefit and profit all the
persons interested in the vessel and her cargo.
They refer to those losses which occur under such circumstances as do not
entitle the unfortunate owners to receive contribution from other owners
concerned in the venture as where a vessel accidentally runs aground goes
to pieces after the cargo is saved.
Who bears?
A particular average is suffered by and borne alone by the owner of the
cargo or of the vessel, as the case may be.
Principle of general average contribution
When it is decided by the master or captain of a vessel, acting for all the interest
concerned, to sacrifice any part of a venture exposed to a common and imminent
peril in order to save the rest, the interests so saved are compelled to contribute
ratably or proportionately, based on the value of the said interests, to the owner
of the interest sacrificed, so that the cost of the sacrifice shall fall equally upon all.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

Right of a party to claim general average contribution 7. The notice of abandonment must be explicit and must specify the particular
cause of the abandonment.
1. There must be a common danger to the vessel or cargo
2. Part of the vessel or cargo was sacrificed deliberately
Important: The right of abandonment of vessels does not apply to cases where
3. The sacrifice must be for the common safety or for the benefit of all
the injury or average was occasioned by the shipowner’s own fault.
4. It must be made by the master or upon his authority
5. It must not be caused by any fault of the party asking the contribution
Necessity for abandonment
6. It must be successful
Whenever the underwriter by prompt action might be able to save some portion
7. It must be necessary
of the insured property, he is entitled timely notice of abandonment by the insured
and he cannot be made liable for a total loss without it.
Jettison is the intentional casting overboard of any part of a venture exposed to a
peril in the hope of saving the rest of the venture.
But there is no obligation upon the insured to abandon. It is a matter of his own
election. If he omits to abandon, he may nevertheless recover his actual loss.
Question: The vessel amounts to P50M and inside the vessel are the cargoes of
A, B, and C. The cargoes of A = P20M, B = P20M, C = P10M. While the vessel is
Important: When the vessel is totally lost, abandonment is not required as there
trying to maneuver the high seas, it faced some perils. Thus, the captain ordered
is no vessel to abandon. By reason of such total loss, the liability of the ship’s
to jettisoned the cargos owned by A amounting to P20M. May A claim some
owner or agent for damages extinguished in the absence of any finding of fault on
reimbursement from the owner of the vessel and as well as from B and C?
other part. However, the insurer answers for the damages from which the
A: A may ask for B, C and the shipowner to contribute in order to indemnify him shipowner or agent may be held liable.
for the loss. Each is liable for his proportion of all general average loss assessed
upon the thing insured, using the formula: Section 141. Constructive Loss

Liability of insurer for general average Section 141. A person insured by a contract of marine insurance may abandon
He is liable for his proportion of all general average loss assessed upon the thing the thing insured, or any particular portion thereof separately valued by the policy,
insured. It places the insurer on the same footing as other persons who have an or otherwise separately insured, and recover for a total loss thereof, when the
interest in the vessel, or the cargo therein, at the time of the occurrence of the cause of the loss is a peril insured against:
general average and who are compelled to contribute.
(a) If more than three-fourths (3/4) thereof in value is actually lost, or would
The formula for computing the liability of the insurer may be stated as follows: have to be expended to recover it from the peril;
(b) If it is injured to such an extent as to reduce its value more than three-
Amount of insurance x General Average Loss = Proportion of GAL fourths (3/4);
__________________ (GAL) for which insurer is (c) If the thing insured is a ship, and the contemplated voyage cannot be
Total amount or value liable lawfully performed without incurring either an expense to the insured of
Involved more than three-fourths (3/4) the value of the thing abandoned or a risk
which a prudent man would not take under the circumstances; or
(d) If the thing insured, being cargo or freightage, and the voyage cannot be
Liability of insurer for particular average
performed, nor another ship procured by the master, within a reasonable
Policies of marine insurance frequently contain stipulations with respect to certain
time and with reasonable diligence, to forward the cargo, without incurring
class of goods which are perishable or peculiarly subject to damage under which
the like expense or risk mentioned in the preceding subparagraph. But
the insurer will not be liable for loss, partial or total, arising from perils of the sea.
freightage cannot in any case be abandoned unless the ship is also
The purpose of such stipulation is to protect the insurer.
abandoned.
In the absence of any contrary stipulation, the insurer is liable for particular
average loss. When constructive total loss exists
Three rules:
Section 139. Scope of Insurance
1. English rule – The subject matter of the insurance, while still existent in
Section 139. An insurance confined in terms to an actual total loss does not cover specie is so damaged as not to be worth, when repaired, the cost of repairs.
a constructive total loss, but covers any loss, which necessarily results in depriving
the insured of the possession, at the post of destination, of the entire thing insured. 2. American rule – When it is so damaged that the cost of repairs would exceed
one-half of the value of the thing as required. Ordinarily spoken as the “fifty
percent rule”
Scope of insurance against actual total loss
It will cover any total loss, whether it is actual or constructive, although there is
3. Philippine rule – The insured may not abandon the thing insured unless the
authority to the contrary. The insurer will not be liable for constructive or technical
loss or dame is more than three-fourths of its value
total loss.
Abandonment where insurance divisible and where indivisible
The permanent non-arrival thereof of the entire thing at the port of destination is
Under the first paragraph, any particular portion of the thing insured separately
an actual total loss.
valued by the policy may be separately abandoned as it is deemed separately
insured.
Section 140. Abandonment
Important: Whether a contract is entire or severable is a question of intention to
Section 140. Abandonment, in marine insurance, is the act of the insured by
be determined by the language employed by the parties.
which, after a constructive total loss, he declares the relinquishment to the insurer
of his interest in the thing insured.
In a case, it was held that the fact that the logs were loaded in two different barges
did not make the contract several and divisible because the logs were not
Meaning of abandonment separately valued or separately insured.
It is the act of an insured in notifying the insurer that owing to damage done to
the subject of insurance, he elects to take the amount of the insurance in the place Criterion as to extent of loss
of the subject thereof, the remnant of which he cedes to the insurer. The extent of the injury to the vessel is to be considered with reference to its
general market value immediately before the disaster.
Requisites for valid abandonment
1. There must be an actual relinquishment by the person insured of his interest In determining the extent of the loss, the expenses incurred or to be incurred by
in the thing insured the insured recovering the thing insured are taken into account.
2. There must be a constructive total loss
3. The abandonment be neither partial nor conditional
4. It must be made within a reasonable time after receipt of reliable information
of the loss
5. It must be factual
6. It must be made by giving notice thereof to the insurer which may be done
orally or in writing; and

26 | U N I V E R S I T Y O F S A N C A R L O S
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
Section 142. Absolute Abandonment
Section 142. An abandonment must be neither partial nor conditional.
Abandonment must be absolute
The abandonment must be entire and cover the whole interest insured.
Section 143. Abandonment within reasonable time
Section 143. An abandonment must be made within a reasonable time after
receipt of reliable information of the loss, but where the information is of a doubtful
character, the insured is entitled to a reasonable time to make inquiry.
Abandonment must be made within a reasonable time
When the insured has received notice of a loss, he must elect within a reasonable
time whether he will abandon to the insurer, and if he elects to abandon, he must
give notice thereof.
This is in order that the insurer may not be prejudiced by the delay, and may take
immediate steps for the preservation of such of the property insured as may
remain in existence.
TN: What is a reasonable time is a question depending on the facts and
circumstances in each case.
Section 144. Abandonment must be factual
Section 144. Where the information upon which an abandonment has been made
proves incorrect, or the thing insured was so far restored when the abandonment
was made that there was then in fact no total loss, the abandonment becomes
ineffectual.
Abandonment must be factual
The right of the insured to abandon and recover for a total loss depends upon the
state of facts at the time of the offer to abandon, and not upon the state disclosed
by the information received, or upon the state of loss at a prior or subsequent
time.
If the abandonment when made is good, the rights of the parties are definitely
fixed, and do not become changed by any subsequent events.
If, after a valid abandonment has been made, the insured property was recovered,
the insured cannot withdraw the abandonment.
Instances justifying abandonment
1. Capture
2. Seizure
3. Detention of the ship or cargo
4. Restraint by blockade or embargo
5. Through no fault of the owner, funds for repair cannot be raised
6. The voyage is absolutely lost
7. Under urgent necessity, the master of a vessel makes a sale of the insured
property
Information need not be direct or positive
The intelligence which authorized the insured to abandon need not be direct or
positive information. (protest, newspaper report, report of a pilot is sufficient)
The information must be of such facts and circumstances as to render it highly
probable that a constructive loss has occurred, and facts sufficient to constitute a
total loss must exist.
Section 145. Notice in abandonment
Section 145. Abandonment is made by giving notice thereof to the insurer, which
may be done orally, or in writing: Provided, That if the notice be done orally, a
written notice of such abandonment shall be submitted within seven (7) days from
such oral notice.
Form of notice of abandonment
The law requires no particular form for giving notice of abandonment.
The notice may be made orally unless the policy requires it to be in writing. If the
notice be done orally, the insured must submit to the insurer within seven (7) days
from such oral notice, a written notice of abandonment.
By whom and to whom notice made
The abandonment may be made by the insured or by an authorized agent, and an
agent having an authority to insure has prima facie an authority to abandon.
27 | U N I V E R S I T Y O F S A N C A R L O S
The abandonment may be made to an agent of the underwriter and abandonment
to a broker who is agent for both parties is sufficient.
Section 146. Notice must be explicit
Section 146. A notice of abandonment must be explicit, and must specify the
particular cause of the abandonment, but need state only enough to show that
there is probable cause therefor, and need not be accompanied with proof of
interest or of loss.
Notice of abandonment must be explicit
The notice of abandonment must be explicit, and not left open as a matter of
inference from some equivocal acts. There must be an intention to abandon,
apparent from the communication to the insurer, and a relinquishment of all rights
to the insurer.
But there is no abandonment although the insured may have given notice of an
intention to abandon, if he continues to claim and use the property as his own.
Notice of abandonment must specify particular cause thereof
The grounds for the abandonment must be stated with such particularity as to
enable the underwriter to determine whether or not he is bound to accept the
offer. However, it is sufficient if the notice shows probable cause for abandonment.
Proof of interest or of loss is not required.
Section 147. Admissibility of proof
Section 147. An abandonment can be sustained only upon the cause specified in
the notice thereof.
Proof of other causes not admissible
He cannot avail himself of any ground of abandonment other than that stated at
the time thereof. If he assigns an insufficient cause or causes which do not in fact
exist, proof of other causes will not be admitted in suing for a total loss.
Section 148. Valid abandonment
Section 148. An abandonment is equivalent to a transfer by the insured of his
interest to the insurer, with all the chances of recovery and indemnity.
Effect of valid abandonment
A valid abandonment transfers to the insurer the interests in the subject matter
covered by the policy subject to the rights and interests, if any of third persons. In
other words, the insurer becomes entitled to all the rights which the insured
possessed in the thing insured.
Important: The execution of a formal instrument is not necessary to effect an
abandonment for the act of abandonment, when accepted, has all the effects
which the most carefully drawn assignment would accomplish.
Section 149. Rights of insurer
Section 149. If a marine insurer pays for a loss as if it were an actual total loss,
he is entitled to whatever may remain of the thing insured, or its proceeds or
salvage, as if there had been a formal abandonment.
Rights of insurer who pays partial loss as actual total loss
An election and notice of abandonment is a condition precedent to a claim for a
constructive total loss.
In this provision, the interest of the insured over the thing covered by the policy
will be transferred to the insurer, notwithstanding the lack of abandonment, as if
there had been a formal abandonment, in case the insurer pays for a loss as if it
were an actual total loss.
Important: The acceptance by the insured of the payment is deemed an offer of
abandonment on his part.
Section 150. Transfer of agency
Section 150. Upon an abandonment, acts done in good faith by those who were
agents of the insured in respect to the thing insured, subsequent to the loss, are
at the risk of the insurer, and for his benefit.
Transfer of agency to insurer
The captain or master continues to be the agent of the insured until abandonment,
but from the moment of a valid abandonment, the master of the vessel and agents
of the insured become the agents of the insurer, and the latter becomes
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
responsible for all their acts in connection with the insured property and for all the
expenses and liabilities in respect thereof.
Liability of insurer for expenses and wages
The title of the insurer becomes vested as of the date of the loss and he is
responsible for the reasonable expenses incurred by the master after that date in
an attempt to save the vessel. Insurers are also liable for the wages of seamen
earned subsequent to the loss, but take free from any lien or liability for wages
earned prior thereto.
Section 151. Refusal to accept abandonment
Section 151. Where notice of abandonment is properly given, the rights of the
insured are not prejudiced by the fact that the insurer refuses to accept the
abandonment.
Effect of insurer’s refusal to accept abandonment on insured’s rights
Acceptance is in no case necessary if the abandonment is properly made. The
insured’s right to abandon in a policy of marine insurance, is absolute when
justified by the circumstances.
Section 152. Form of acceptance
Section 152. The acceptance of an abandonment may be either express or
implied from the conduct of the insurer. The mere silence of the insurer for an
unreasonable length of time after notice shall be construed as an acceptance.
Form of acceptance of abandonment
An insurer’s acceptance of an offered abandonment need not be express. It may
be implied by conduct, as by an act of the insurer in consequence of an
abandonment which can be justified only under a right derived from the
abandonment.
Important: Mere silence after notice would not operate as an acceptance, if it is
not for an unreasonable length of time. Nor would steps taken by the insurer to
preserve the property from further loss for the benefit of all the parties amount to
an acceptance.
Sections 153-154. Effect of acceptance
Section 153. The acceptance of an abandonment, whether express or implied, is
conclusive upon the parties, and admits the loss and the sufficiency of the
abandonment.
Section 154. An abandonment once made and accepted is irrevocable, unless
the ground upon which it was made proves to be unfounded.
Effect of acceptance of abandonment
If the insurer accepts, he becomes at once liable for the whole amount of the
insurance, and also becomes entitled to all rights which insured possessed in the
thing insured.
TN: The acceptance of an abandonment fixed the rights of the parties. Whether
expressed or implied, is conclusive upon them, and irrevocable.
Important: Whether or not the insured has a right to abandon is immaterial
where the abandonment is accepted and there is no fraud. The only exception
provided by law is the case where the ground upon which it was made proves to
be unfounded.
Section 155. Right of insurer to freightage
Section 155. On an accepted abandonment of a ship, freightage earned previous
to the loss belongs to the insurer of said freightage; but freightage subsequently
earned belongs to the insurer of the ship.
Right of insurer to freightage
Freightage earned subsequent to the loss belongs to the insurer of said ship. But
freightage earned previously belongs to the insurer of said freightage earned
previously belongs to the insurer of said freightage who is subrogated to the rights
of the insured up to the time of loss.
Section 156. Refusal to accept valid abandonment
Section 156. If an insurer refuses to accept a valid abandonment, he is liable as
upon an actual total loss, deducting from the amount any proceeds of the thing
insured which may have come to the hands of the insured.
28 | U N I V E R S I T Y O F S A N C A R L O S
Effect of refusal to accept a valid abandonment on insurer’s liability
The insured’s right to abandon, in a policy of marine insurance, is absolute when
justified by the circumstances and no acceptance is necessary to validate the
abandonment.
If the insurer declines to accept a proper abandonment, he is liable as upon actual
total loss less any proceeds the insured may have received on account of the
damaged property as when the insured succeeds in selling the property as
damaged.
Important: If the abandonment was improper, the insured may nevertheless
recover to the extent of the damage proved.
Section 157. Failure to make abandonment
Section 157. If a person insured omits to abandon, he may nevertheless recover
his actual loss.
Effect of insured’s failure to make abandonment
The insured has an election to abandon or not, and cannot be compelled to
abandon although abandonment is proper. He may await the final event, and
recover accordingly for a total or partial loss, as the case may be.
Important: Under Section 157, the insured fails to make an abandonment. On
the other hand, Section 156 applies where a valid abandonment has been made
but the insurer refuses to accept the same without any valid reason.
Section 158. Measure of Indemnity
Section 158. A valuation in a policy of marine insurance is conclusive between
the parties thereto in the adjustment of either a partial or total loss, if the insured
has some interest at risk, and there is no fraud on his part; except that 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.
But a valuation fraudulent in fact, entitles the insurer to rescind the contract.
Valuation in a marine policy
A policy of marine insurance may be valued or open. The object of a valuation in
a policy is to fix in advance the value of the property and thus avoid the necessity
of proving its actual value in case of loss.
It may happen when a vessel is insured for a long time or for a long voyage, her
value at the end of the voyage, may not be the same as at the beginning.
The insured value must be taken to be that which is stated in the policy.
It is conclusive upon the parties provided that:
(a) The insured has some interest at risk
(b) There is no fraud on his part.
If the valuation is fraudulent in fact, the insurer is entitled to rescind the contract.
Right to give evidence of value
GR: In a valued marine policy, neither party can give evidence of the real value of
the thing insured.
XPN: When the thing has been hypothecated by bottomry or respondentia before
its insurance and without the knowledge of the person who actually procured the
insurance, the insurer may show the real value but he is not entitled to rescind the
contract unless he can prove that the valuation was in fact fraudulent.
Section 159. Coinsurance in Marine Insurance
Section 159. A marine insurer is liable upon a partial loss, only for such proportion
of the amount insured by him as the loss bears to the value of the whole interest
of the insured in the property insured.
When insured a co-insurer in marine insurance
In every marine insurance, the insured is expected to cover by insurance the full
value of the property insured. If the value of his interest exceeds the amount of
insurance, he is considered the con-insurer for an amount determined by the
difference between the insurance taken out and the value of the property.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

(Partial) Loss Amount of Amount of Value of the property lost Amount of Amount of
______________________ x insurance = recovery ______________________ x insurance = recovery
Value of the thing insured Value of whole property
insured
Question: Supposing X owns a vessel in the amount of 10M. And he insures his
vessel for 6M. One day, when the vessel was having its journey in the high seas, Question: How much can be recovered by the insured?
it suffered some losses because of the perils of the sea and such peril is a peril
insured against. So the vessel suffered damages in the amount of P4M. How much Expected profits of insured on the cargo = P1M
may the insured be allowed to recover? Amount of cargo = P2M
Amount of Losses in cargo = P1M
A: The insured can only recover for such proportion of the amount insured by him
as the loss bears to the value of the whole interest of the insured in the property A: 500,000
insured.
[Value of property lost / Value of whole property insured] x Expected Profits
In every marine insurance, the insured is expected to cover by insurance the full insured = Amount that can be recovered
value of the property insured. If the value of his interest exceeds the amount of [1M / 2M] x 1M = Amount that can be recovered
insurance, he is considered the co-insurer for an amount determined by the [0.5] x 1M = 500K
difference between the insurance taken out and the value of the property.

While it is true that P4M is still covered in the amount of insurance which is P6M,
the insurer can only recovery up to P2.4M because the rule on co-insurance in this
case will apply.
Formula:
Section 161. Part of cargo or freightage insured
Section 161. In case of a valued policy of marine insurance on freightage or
cargo, if a part only of the subject is exposed to risk, the valuation applies only in
proportion to such part.

Where only part of a cargo or freightage insured exposed to risk

Partial Loss x Amount of = Amount of Where cargo is insured under a valued policy but only a portion of the cargo is
Value of the Insurance Recovery actually carried by the vessel at the time of loss, the valuation will be reduced
Thing insured proportionately. The insurer is bound to return such portion of the premium as
corresponds with the portion of the cargo which had been exposed to the risk.

P4M x P6M = 2.4M

P10M Section 162. Presumption of loss of profit

Section 162. When profits are valued and insured by a contract of marine
Question: Supposing my vessel suffered up to P7M pesos, how much will you insurance, a loss of them is conclusively presumed from a loss of the property out
give me if the same insurer? of which they are expected to arise, and the valuation fixes their amount.

A: In this case, the full value of P6M because it is only the extent of face value of
the insurance.
Question: Supposing the vessel suffered up to P6M pesos, how much will you
give me?
A: Also, 6M.
Question: Supposing in our example, the shipowner insured the ship in the
amount of P10M which is also the value of the ship. It suffered damages in the
amount of P4M. How much is the shipowner can recover?
A: The shipowner can recover up to the extent of the loss which is P4M because
in this case, the rule on co-insurance in case of partial loss does not apply. Co-
insurance will only apply if:
(1) The loss is partial and
(2) The amount of insurance is less than the insured's entire insurable interest
in the property insured.
Since, the amount of insurance covers the entire insurable interest in the property,
then the rule on co –insurance does not apply. Hence, the insured can recover the
total amount of the loss actually incurred.
Question: E has a house valued at 10M. She insured it for 6M. The house was
gutted by fire and the amount of the damage is P4M. How much can the insured
recover?
A: The insured can recover the actual loss incurred P4M because this is fire
insurance. The rule on co–insurance does not apply unless stipulated by the
parties.
Section 160. Loss of profit separately insured
Section 160. 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.
Loss of profits separately insured
If the profits to be realized are separately insured from the vessel or cargo, the
insured is entitled to recover, in case of loss, such proportion of the profits as the
value of the property lost bears to the value of the whole property.
Presumption of loss of profits
Where profits are separately insured from the property out of which they are
expected to arise, the insured, in case of partial loss of the property, is entitled
merely to partial indemnity for the profits lost.
If the property is totally lost, pro tanto the total profits are also lost.
Important: The loss of the profits is conclusively presumed from the loss of the
property and the valuation agreed upon in the policy fixes the amount of recovery.
Section 163. Rules for estimating loss
Section 163. In estimating a loss under an open policy of marine insurance the
following rules are to be observed:
(a) The value of a ship is its value at the beginning of the risk, including all
articles or charges which add to its permanent value or which are necessary
to prepare it for the voyage insured.
(b) The value of the cargo is its actual cost to the insured, when laden on
board, or where the cost cannot be ascertained, its market value at the
time and place of lading, adding the charges incurred in purchasing and
placing it on board, but without reference to any loss incurred in raising
money for its purchase, or to any drawback on its exportation, or to the
fluctuation of the market at the port of destination, or to expenses incurred
on the way or on arrival.
(c) The value of freightage is the gross freightage, exclusive of primage,
without reference to the cost of earning it; and
(d) The cost of insurance is in each case to be added to the value thus
estimated.
Rules for estimating loss under an open policy of marine insurance
TN: Section 163 refers to an open policy while Section 156 refers to valued policies.
The real value of the thing insured must be proved by the insured in each case.
(a) Value of the vessel – taken as of the commencement of the risk and not its
value at the time she was built.

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INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
(b) Value of the cargo – its actual cost to the insured, when laden on board, or
where the cost cannot be ascertained, its market value at the time and
place of shipment.
TN: The expected profits from cargo are not considered since they can be
covered by a separate insurance.
(c) Value of the freightage – the gross freightage and not the net freightage is
the basis. The reason is that the gross amount of the freightage, as the
measure of indemnity, can be easily and exactly determined.
TN: Primage is excluded from gross freightage. It is a small compensation
paid by a shipper to the master of the vessel for his care and trouble
bestowed on the shipper’s goods.
(d) Cost of insurance –The cost is always added in calculating the value of the
ship, cargo, or freightage or other subject matter in an open policy.
Section 164. Cargo insured against partial loss is damaged
Section 164. If cargo insured against partial loss arrives at the port of destination
in a damaged condition, the loss of the insured is deemed to be the same
proportion of the value which the market price at that port, of the thing so
damaged, bears to the market price it would have brought if sound.
Where cargo insured against partial loss is damaged
This applies if the cargo is insured against partial loss and it suffers damage as a
result of which its market value at the port of destination is reduced.
Market price in sound state
Less: Market price in damaged state
------------------------------------------
= Reduction in value (depreciation)
Reduction in value Amount of Amount of
--------------------- x insurance = recovery
Market price in sound
state
Question: X, the supplier, owns fresh vegetables. X owns an organic farm and
enters into a transaction where it will be shipping organic products valued at P1M.
The market value of these products is also 1M. Insured the cargo in the amount
of P500K. In the port of destination, it was discovered that the organic herbs and
vegetable shipped were damaged. Thus, the value of the said products was
reduced to P500K. How much can be recovered by X?
A: 250,000
[Reduced Value / Market price in sound state] x Amount of insurance = Amount
that can be recovered
[500K / 1M] x 500K = 250K
Section 165. Liability of insurer for repair and recovery
Section 165. A marine insurer is liable for all the expenses attendant upon a loss
which forces the ship into port to be repaired; and where it is stipulated in the
policy that the insured shall labor for the recovery of the property, the insurer is
liable for the expense incurred thereby, such expense, in either case, being in
addition to a total loss, if that afterwards occurs.
Liability of insurer for expenses incurred for repair and recovery
As a general rule, a marine insurer is not liable for more than the amount of the
policy.
However, expenses incurred in repairing the damages suffered by a vessel because
of the perils insured against as well as those incurred for saving the vessel from
such perils, such as the expenses of launching or raising the vessel or of towing or
navigating it into port for her safety, are items to be borne by the insurer in
addition to a total loss if that afterwards takes place.
Also known as “Port of refuge” expenses.
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Sections 166-167. Rights of insured in general average
Section 166. A marine insurer is liable for a loss falling upon the insured, through
a contribution in respect to the thing insured, required to be made by him towards
a general average loss called for by a peril insured against: Provided, That the
liability of the insurer shall be limited to the proportion of contribution attaching to
his policy value where this is less than the contributing value of the thing insured.
Section 167. When a person insured by a contract of marine insurance has a
demand against others for contribution, he may claim the whole loss from the
insurer, subrogating him to his own right to contribution. But no such claim can be
made upon the insurer after the separation of the interests liable to contribution,
nor when theinsured, having the right and opportunity to enforce contribution from
others, has neglected or waived the exercise of that right.
Rights of insured in case of general average
GR: The insurer is liable for any general average loss where it is payable or has
been paid by the insured in consequence of a peril insured against.
XPNs: There can be no recovery for general average loss against the insurer:
(a) After the separation of the interests liable to contribution
(b) The insured has neglected or waived his right to contribution
Limit as to liability of insurer
The liability of the insurer shall be less than the proportion of the general average
loss assessed upon the thing insured where its contributing value is more than the
amount of the insurance.
Amount of
Insurance x Proportion of general = Limit of
----------- average loss liability of
Value of the thing insurer
insured
Section 168. Liability of insurer in case of partial loss
Section 168. In the case of a partial loss of ship or its equipment, the old
materials are to be applied towards payment for the new.
Unless otherwise stipulated in the policy, a marine insurer is liable for only two-
thirds (2/3) of the remaining cost of repairs after such deduction, except that
anchors must be paid in full.
Liability of insurer in case of partial loss
In case of partial loss of a vessel, by common usage, there is deducted from the
cost of repairs “one-third new for old,” on the theory that the new materials render
the vessel much more valuable than it was before the loss.
When repairs are thus made, one-third of the cost of the repair is laid upon the
insured as his burden.
Important: There is an implied agreement under the policy that in case of
damage to the ship by a peril within the policy, the loss shall be estimated at two-
thirds of the cost of repairs fairly executed
Question: A vessel owner incurred a partial loss of one of the equipment inside
the ship. The cost of repair was 1 million pesos. The vessel owner wants to claim
some compensation from his insurer. How much can he recover from insurer?
A: The insurer is liable up to 2/3 of 1 million or 666,666 pesos.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

Ocean Marine and Fire Insurance Policies distinguished

FIRE INSURANCE
Ocean Marine Policies Fire Insurance Policies
Section 169. Fire Insurance defined
The hazard is fire alone and the
A policy of insurance on a vessel
Section 169. As used in this Code, the term fire insurance shall include insurance subject is an unfinished vessel,
engaged in navigation
against loss by fire, lightning, windstorm, tornado or earthquake and other allied never afloat for voyage.
risks, when such risks are covered by extension to fire insurance policies or under
separate policies. Rules in constructive total loss and Constructive total loss and
abandonment applies. abandonment does not apply.
Definition
A fire insurance is a contract of indemnity by which the insurer, for a stipulated Concept of co-insurance
Concept of co-insurance applies
premium, agrees to indemnify the insured against loss, damage to, a property does not apply
caused by “hostile fire” located at the place stated in the policy.
Section 170-171. Alteration in the use of the thing insured
Fire and extended coverage
Fire insurance includes not only insurance against loss by fire, but also insurance Section 170. An alteration in the use or condition of a thing insured from that to
in the so-called “Allied lines”, that protect against loss by lightning, windstorm which it is limited by the policy made without the consent of the insurer, by means
etc. ,where some risk are covered by extension to fire insurance policies. within the control of the insured, and increasing the risks, entitles an insurer to
rescind a contract of fire insurance.
Allied Lines
Other risks such as lightning, windstorm, etc., but included as an extension to Section 171. An alteration in the use or condition of a thing insured from that to
fire insurance policies or separate policies subject to payment of increased which it is limited by the policy, which does not increase the risk, does not affect
premium a contract of fire insurance.

Question: Can you insure damage caused by earthquake or typhoon with a fire
insurance? Can you recover the proceeds?
A: Yes, as long as they are included in the allied lines of a fire-and-extended
coverage.
Nature of fire Insurance
It is essentially a contract of indemnity.
Concept of Fire
Fire is oxidation which is so rapid as to produce either a flame or glow, which is
caused by combustion. The presence of heat, steam or even smoke is evidence
of fire, but taken by itself will not prove the existence of fire.
Important: In our Jurisprudence, fire may not be considered natural calamity or
disaster since it almost arises from some act of man. It cannot be an act of God,
unless caused by lightning or a natural disaster.
Risks or losses covered
To determine whether a risk or loss is written, the scope and coverage of the policy
and the intention of the parties controls.
Fire insurance policies frequently contain “extended coverage” provisions bringing
certain additional risks. In some policies, damage or loss by explosion, lightning,
earthquake, typhoon, flood riot and other special perils maybe expressly insured
against in addition to that caused by fire.
They may also extend the coverage of indirect or consequential loss.
Requisites when alteration in thing insured entitles insured to rescind
1. The use or condition of the thing is specifically limited or segregated
2. Such use or condition as limited by the policy is altered.
3. Alteration is made without the consent of the insurer
4. The alteration is made by means within the control of the insured
5. The alteration increases the risk
INCREASE OF RISK OR HAZARD
Implied undertaking of the insured
Every contract of insurance is made with reference to the conditions surrounding
the subject matter of the risk and the premium is fixed with reference thereto.
There is an implied promise or undertaking on the part of the insured that he will
not change the premises or character of the business carried there so as to
increase the loss by fire.
Character of the increase risk
An increase of hazard takes place whenever the insured property is put to some
use, and the new use increases the chance of loss. There must be an actual
increase in risk (substantial character) although the increase in risk does not
necessary contributed to the loss.
However, mere negligent acts temporarily endangering the property nor
temporary acts which have ceased prior to the occurrence of loss will not violate
the policy.
Alterations Avoiding Policy

INDIRECT LOSS (a) Risk of loss increased – Policy is avoided where firecracker are placed in
the insured building or building insured as dwelling is used as
disreputable roadside tavern and bawdy house.
Indirect loss coverage
A standard fire insurance contract is an agreement to repay the insured for the
(b) Increase no longer existing at time of loss – Insurer would still be liable if
direct loss. It is apparent, however, that the consequences of a direct loss may be
the increase in hazard was no longer existing at the time of loss unless
greater than the damage itself.
there is a breach of warranty that no hazardous goods should be stored
or kept in the property insured.
The attachment of a consequential loss form to the standard fire policy extends
the coverage to the consequential los.
Alterations Not Avoiding Policy
Kinds of Indirect loss (a) Risk of loss not increased – when the use is not dangerous and does not
differ materially from the use specified i the policy, the policy is not avoided.
1. Physical damage caused to other property.
(b) Questioned articles required by insured’s business – Even if policy contains
Example: Fire may interfere with the heating, cooling, air conditioning and provision prohibiting specified articles from being kept in the insured
as a result goods are spoiled premises, the policy will not be avoided by the violation of these provisions
if the articles are ordinarily or necessary used in the business.
2. Loss of Earnings to interruption of business by damage to insured’s
property. (c) Insured property would be useless if questioned acts were prohibited – the
making of repairs, painting or doing other acts of similar character on the
3. Extra expense or additional expenditure. thing insured are not to be regarded as increasing the risk since the
property would be useless if such acts were prohibited.

Where insured has no control or knowledge of the alteration

(a) Insurer’s liability unaffected – the insurer is NOT relieved from liability if
the acts or circumstances by which the risk is increased are occasioned by
accident, or a cause over which the insured has no control.

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(b) Insurer’s knowledge presumed – every act of the insured’s tenant
substantially and permanently affecting the conditions of the property so
as to constitute an increase in risk, would be presumptively known to the
insured.
Application of Section 77 and 171
(a) Valuation conclusive between the parties – Valuation in a policy if insurance
is conclusive between the parties in the adjustment of either partial or total
loss is the insured had insurable interest and was not guilty of fraud.
TN: The insurer’s liability in a fire insurance cannot exceed the amount of
the insurance nor the actual loss suffered.

Section 77
Breach of immaterial
provision
will NOT avoid policy.
However insured will avoid policy under SECTION 77 if
Insurer is given the right to
insert terms and conditions
in the policy which if
violated would avoid it
Section 171
Alteration which does not increase the risk
will NOT affect a fire insurance contract.
If alteration made in the use of the thing
such alteration is expressly prohibited
although it had not increase risk.
If policy is silent upon the
subject Section 171 applies
(b) Amount stated in the policy/amount of partial loss – The valuation of a
property insured under the policy may be fixed. In case of total loss, the
insured can recover the whole amount insured and in a partial loss, the full
amount of partial loss.
(c) Pro rata contribution to payment of loss – if the thing is insured under 2 or
more policies, each policy shall contribute pro rata to the payment o such
whole or partial loss.
Insured not a co-insurer in the absence of stipulation
In a usual contract of fire insurance, the insurer, in case of partial loss, is required
to give full indemnity for such loss up to amount written in the policy even though
the property be very inadequately insured.

Section 172. Acts of the insured NOT in violation of the policy
Section 172. A contract of fire insurance is not affected by any act of the insured
subsequent to the execution of the policy, which does not violate its provisions,
even though it increases the risk and is the cause of the loss..
This is an exception to the general rule.
The policy does not contain any prohibition limiting the use or condition of the
thing insured, an alteration in the said use does NOT constitute a violation of the
policy. The contract is not affected even if it increases the risk or cause the loss.
Co-insurance clause
A standard provision known as “co-insurance clause” in the fire insurance policy is
inserted to encourage property owners to insure their property for an amount as
close to full value as possible.
It is a clause requiring the insured to maintain insurance to an amount equal to
the value or specified percentage of the value of the insured property under
penalty of becoming co-insurer to the extent of such deficiency. It divides the
potential risk between the insured and the insurer in case of partial loss or
destruction of the insured property.

At present, most insurance companies expressly provide in every policy of fire Option to rebuild clause
insurance that it shall be avoided by any act of the insured which increase the risk, The fact that the parties fixed a valuation in the policy does not prevent them from
this is to protect themselves. stipulating in the policy concerning the repairing, rebuilding, or replacing of the
structures wholly or partially damaged.

Section 173-174.Measure of Indemnity in Fire Insurance
Section 173. If there is no valuation in the policy, the measure of indemnity in
an insurance against fire is the expense it would be to the insured at the time of
the commencement of the fire to replace the thing lost or injured in the condition
in which it was at the time of the injury; but if there is a valuation in a policy of
fire insurance, the effect shall be the same as in a policy of marine insurance.
Section 174. Whenever the insured desires to have a valuation named in his
policy, insuring any building or structure against fire, he may require such building
or structure to be examined by an independent appraiser and the value of the
insured’s interest therein may then be fixed as between the insurer and the
insured. The cost of such examination shall be paid for by the insured.
A clause shall be inserted in such policy stating substantially that the value of the
insured’s interest in such building or structure has been thus fixed. In the absence
of any change increasing the risk without the consent of the insurer or of fraud on
the part of the insured, then in case of a total loss under such policy, the whole
amount so insured upon the insured’s interest in such building or structure, as
stated in the policy upon which the insurers have received a premium, shall be
paid, and in case of a partial loss the full amount of the partial loss shall be so
paid, and in case there are two (2) or more policies covering the insured’s interest
therein, each policy shall contribute pro rata to the payment of such whole or
partial loss. But in no case shall the insurer be required to pay more than the
amount thus stated in such policy. This section shall not prevent the parties from
stipulating in such policies concerning the repairing, rebuilding or replacing of
buildings or structures wholly or partially damaged or destroyed.
Option to Rebuild Clause – Insurer stipulates in order to protect him against the
unfairness in the appraisal and award rendered by a packed board of arbitrators
or in the proof of loss. Insurer must exercise option within a reasonable time or
what is stipulated in the policy.
Section 175. Pledge, etc. of fire insurance after a loss
Section 175. No policy of fire insurance shall be pledged, hypothecated, or
transferred to any person, firm or company who acts as agent for or otherwise
represents the issuing company, and any such pledge, hypothecation, or transfer
hereafter made shall be void and of no effect insofar as it may affect other creditors
of the insured.
Pledge, etc. of fire insurance after loss
After a loss has occurred, the insured may pledge, hypothecate or transfer the fire
insurance policy or rights there under, even without the consent of, or notice to,
the insurer.
Exception: The right of insured to assign his claims against the insurer after a loss
has occurred, is subject to the prohibition in section 175 against transfer of a policy
to any person or company who acts as agent or otherwise represents the insurer.

Measure of indemnity in an open policy

In the absence of express stipulation in a fire insurance policy, the insured is only
entitled to recover the amount of actual loss sustained and the burden is upon
insured to establish the amount of loss by preponderance of evidence.

Important: The liability of the insurer shall in no event exceed what it would cost
the insured to repair or replace the thing insured.

TN: Market value of personal property that can be readily determined maybe be
applied in determining actual loss sustained.

Measure of indemnity under a valued policy

The effect of a valuation in a policy of fire insurance is the same as in the policy
of marine insurance,

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INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
CASUALTY INSURANCE
Section 176. Casualty Insurance
Section 176. Casualty insurance is insurance covering loss or liability arising from
accident or mishap, excluding certain types of loss which by law or custom are
considered as falling exclusively within the scope of other types of insurance such
as fire or marine. It includes, but is not limited to, employer’s liability insurance,
motor vehicle liability insurance, plate glass insurance, burglary and theft
insurance, personal accident and health insurance as written by non-life insurance
companies, and other substantially similar kinds of insurance.
Definition
Insurance covering all forms of loss or liability arising from accident or mishap,
excluding certain types of loss falling exclusively within the scope of other type of
insurance.
Important: Casualty means accident. It is a violent mishap proceeding from an
unknown or unexpected cause. It excludes losses arising from accident within the
coverage of other type of insurance.
Two general divisions of casualty insurance
1. Insurance against specified perils which may affect the person/property of
the insured
2. Insurance against specified perils which may give rise to liability on the part
of the insured for damages or injuries to others.
LIABILITY INSURANCE
A contract of indemnity for the benefit of the insured and those in privity with him,
or those to whom the law upon the grounds of public policy extends the indemnity
against liability. Indemnity in respect of his legal liability.
Liability insurable
1. Liability for quasi delict or non-fulfillment of contract – Liability involving the
commission of a quasi delict or tort is civil injury and not a felony which is a
public injury.
2. Liability for criminal negligence – liabilities arising out of acts of negligence
which are also criminal are also insurable provided acts are accidental.
Important: But liabilities in consequence of deliberate criminal acts are NOT
INSURABLE.
Insurable interest in liability insurance
Insurable interest is not particularly important. However, like any other insurance,
it must be supported by an insurable interest in the insured.
The insurable interest is found in the interest of the insured for the safety of
persons. This does not depend whether the insured has a legal or equitable interest
in the property, but whether he may be charged by law within the liability against
which insurance is taken out.
Liability insurance in policy payable
Insurance against liability attaches when the liability of the insured to the injured
third party attaches, regardless of actual loss at that time.
Right of the injured person to sue insurer or insured
1. Indemnity against third party liability- Third persons can sue directly the
insurer upon the occurrence of the injury or event which the liability depends,
regardless whether or not he suffered actual loss. The liability of the insurer
is direct. This is to protect the injured person from the insolvency of the
insured who cause such injury.
2. Indemnity against actual loss – Third persons cannot sue the insurer, the
contract being solely to reimburse the insured from liability actually
discharged by him though payment to third persons. Third person’s recourse
limited to the insured alone. Prior payment of the insured is necessary in
order obligation of insurer may arise.
Basis and extent of insurer’s liability
Insurer is directly liable to the persons under indemnity contract but it does not
mean insurer is solidarily liable. Liability of insurer to third person is based on
contract (insurance policy). Liability if insured to third persons I based on torts
under the Civil Code.
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The insurer undertakes to indemnify the insured against loss, damage or liability
arising from unknown or contingent event but it is only up to the extent of the
insurance policy required by law.
Accident v. health insurance
Accident insurance Health insurance
Reimburses the insured for Reimburses the insured for
pecuniary loss suffered as a result of pecuniary loss suffered arising out of
injuries sustained in an accident disease-related illness.
Combination of accident and health
Also, accident insurance is offered as supplement to life insurance. If death is
caused by accident, many life policies pay “double indemnity”
Burden of proof
Insured’s beneficiary has burden of proof in demonstrating that the cause of death
is an accident covered by peril. One established, burden shifts to insurer to show
that it was under the excepted peril stipulated by the parties.
Suicide and willful exposure to needless peril
Both are in pari matere, signify a disregard for one’s life.
“Voluntary exposure to known danger” is held to negate the accidental character
of whatever followed form the know danger.
Meaning of “accident/accidental” as used in accidental policy
An accident is an event that takes place without one’s foresight or expectation. It
is an event that proceeds from an unknown cause, or is an unusual effect of a
known cause and therefore, not expected. It happens without human agency or if
with human agency under the circumstances that are unusual to and not expected.
Meaning of “intentional” as used in accidental policy
Intentional as used in accident policy excepting intentional injuries inflicted by the
insured or any other person, etc., implies the exercise of reasoning facilities
consciousness and volition.
Effect of “no action” clause in liability insurance
The policy requires that suit and final judgment must first be obtained against
insured, that only thereafter can the person injured recover on the policy.
Important: “No action” clause cannot prevail under the rules of court.
SURETYSHIP
Section 175. Definition of Suretyship
Section 175. A contract of suretyship is an agreement whereby a party called the
surety guarantees the performance by another party called the principal or obligor
of an obligation or undertaking in favor of a third party called the obligee. It
includes official recognizances, stipulations bonds or undertakings issued by any
company by virtue and under the provisions of Act No. 536, as amended by Act
No. 2206.
Suretyship
It is an agreement whereby one (usually an insurance company) undertakes to
answer, under specified terms and conditions, for the debt, default or miscarriage
of another (principal or obligor), such as failure to perform a contract or certain
duties, or for breach of trust, negligence, and the like, in favor of a third party
(obligee).
A contract of suretyship includes:
1. Official recognizances
2. Stipulations, bonds
3. Undertakings issued by any company
Co-suretyship
There may be a co-suretyship whereby two or more parties become co-sureties in
a single bond.
(a) Unlimited – each co-surety assumes solidary liability
(b) Limited – obligation is joint
Under Section 176, the liability of the surety or co-sureties is solidary.
Corporate suretyship
Memorandum Circular No. 622 of the Office of the President of the Philippines,
dated February 12,1973, provides:
"For the protection of the interest of the Government, all insurance companies
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

shall be required to present a certification of the Insurance Commissioner Distinction between suretyship and guaranty
regarding their financial conditions, outstanding obligations with the Government
and such other matters as may, from time to time, be required by said official, Suretyship Guaranty
before they can issue any bond or policy in favor of any gov’t agency or office. “
Assumes liability as a regular The liability of the guarantor depends
party to the undertaking upon an independent agreement to
Section 176. Nature of Liability of Surety
pay if the primary debtor fails to do
so
Section 176. The liability of the surety or sureties shall be joint and several with
the obligor and shall be limited to the amount of the bond. It is determined strictly
Primarily liable Secondarily liable
by the terms of the contract of suretyship in relation to the principal contract
Has the right to have all the property
between the obligor and the obligee, (as amended by PD No. 1855.)
Not entitled to benefit of exhaustion of the debtor and legal remedies
of the debtor’s assets against eh debtor first exhausted
Nature of liability of surety before he can be compelled to pay
the creditor
A. Solidary – The liability of the surety or sureties under a bond is solidary. This Undertakes to pay if the Binds himself to pay if the
means that upon default by the obligor in complying with his obligation, the principal does not pay principal cannot pay.
surety becomes primarily liable to the obligee who has right to demand
payment under the terms and conditions of the bond
Important: Guarantor refers to the person who binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
B. Limited or Fixed – It is limited to the amount of the bond

C. Contractual – It is determined strictly by the terms of the
 contract of
suretyship in relation to the principal contract between the obligor and the
obligee.
D. Collateral contract – Its basis is the principal contract or undertaking, which
it secures. The obligee does not participate in the processing and approval
of the bond application. Any misrepresentation made by the bond applicant
cannot, therefore, defeat the rights of the obligee.
Section 177. Payment of Premiums
Section 177. The surety is entitled to payment of the premium as soon as the
contract of suretyship or bond is perfected and delivered to the obligor. No contract
of suretyship or bonding shall be valid and binding unless and until the premium
therefor has been paid, except where the obligee has accepted the bond, in which
case the bond becomes valid and enforceable irrespective of whether or not the
premium has been paid by the obligor to the surety;

Indemnity agreement Provided, That if the contract of suretyship or bond is not accepted by, or filed
A third contract executed by the obligor in favor of surety to indemnify the latter with the obligee, the surety shall collect only a reasonable amount, not exceeding
against loss. The (original) surety issuing the prime bond may cede a portion or fifty per centum of the premium due thereon as service fee plus the cost of stamps
portions of the bond to one or more insurers or sureties under a bond reinsurance or other taxes imposed for the issuance of the contract or bond; Provided,
contract. however, That if the non-acceptance of the bond be due to the fault of the surety,
no such service fee, stamps or taxes shall be collected.
Distinction between suretyship and property insurance
In the case of a continuing bond, the obligor shall pay the subsequent annual
Suretyship Insurance contract premium as it falls due until the contract of suretyship is cancelled by the obligee
Accessory contract Principal Contract or by the Commissioner or by court of competent jurisdiction, as the case may be.
3 parties: Surety, Principal 2 Parties: Insurer and Insured
Debtor/Obligor, and Creditor/Obligee Rules on premiums
Credit accommodation, with the Generally a contract of indemnity
surety assuming primary liability 1. The premium becomes a debt as soon as the contract of suretyship or bond
Surety is entitled to reimbursement There is no right of recovery for the is perfected and delivered to the obligor
from the principal and his guarantors loss the insurer may sustain except
for the loss it may suffer under the when the insurer is entitled case of 2. The contract of suretyship or bonding shall not be valid and binding unless
contract party against whom contract; to and until the premium therefor has been paid;
subrogation.
3. Where the obligee has accepted the bond, it shall be valid and enforceable
Can only be cancelled by or with the Insurance may be cancelled notwithstanding that the premium has not been paid
consent of the obligee or by the unilaterally either by the insured or
Commissioner or by a court of by the insurer on grounds provided 4. If the contract of suretyship or bond is not accepted by, or filed with the
competent jurisdiction by law obligee, the surety shall collect only a reasonable amount;

Requires the acceptance of the
obligee before it becomes valid and
enforceable
Risk-shifting device, the premium
paid being in the nature of a service
fee
Does not need the acceptance
of any third party
Risk-distributing device, the
premium paid being considered a
ratable contribution to a common
fund
5. If the non-acceptance of the bond be due to the fault or negligence of the
surety, no service fee, stamps, or taxes imposed shall be collected by the
surety; and
6. In the case of a continuing bond (for a term longer than one year or with no
fixed expiration date), the obligor shall pay the subsequent annual premium
as it falls due until the contract is cancelled
7. The premium is the consideration for furnishing the bond or the guaranty
and the obligation to pay the same subsists for as long as the liability of the
surety shall exist.

Section 178. Suppletory provisions

Section 178. Pertinent provisions of the Civil Code of the Philippines shall be
applied in a suppletory character whenever necessary in interpreting the provisions
of a contract of suretyship.

TYPES OF SURETY BONDS

1. Contract bonds – connected with construction and supply contracts. They

are for the protection of the owner against a possible default by the
contractor to comply with his contract or his possible failure to pay material
men, laborers, and sub-contractors. The position of surety, therefore, is to

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INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

answer for a failure of the principal to perform in accordance with the terms 2. Cestui que vie – The person whose life is the subject of the policy.
and specifications of the contract.
3. Beneficiary – The person whose proceeds are paid.
(a) Performance bond — One covering the faithful performance of the
contract NATURE OF LIFE INSURANCE

(b) Payment bond — One covering the payment of laborers and material
2. Fidelity bonds – They pay an employer for loss growing out of a dishonest
act of his employee. They are classified as:
(a) Industrial bond — One required by private employers to cover loss
through dishonesty of employees;
(b) Public official bond — One required of public officers for the faithful
performances of their duties and as a condition of entering upon the
duties of their offices. It ordinarily includes all officers who have
custody of public funds. The requirement of an official bond,
therefore, is to protect public funds.
A. Liability is absolutely certain – The event upon which the payment is to
be made is absolutely certain to happen at some future time, provided the
policy remains in effect.
B. It is a valued policy – There is no way to measure the value of the human
life. Life insurance policies are valued by the purchaser when the policy is
purchased and the value placed on the insured is basically decided by the
amount the purchaser who is willing to pay the requisite premiums.
C. It is an investment – To provide security to the insured’s beneficiaries in
the event the insured suffers an early death. The insurance is designated to
indemnify the beneficiaries for the loss they suffered as a result of being
deprived of the earning power of the insured.

3. Judicial bonds – Those required in connection with judicial proceedings,
i.e. injunction bonds, attachment bonds, replevin bonds, bail bonds and
appeal bonds. The purpose of requiring a litigant to furnish a judicial bond
is to indemnify the adverse party against damages resulting from the
proceeding.
Important: The amount named in a life insurance policy is not treated as
the upper limit of recovery; it is the amount payable, no more and no less.
Not being a contract of indemnity, the insurer is not entitled to subrogation.
Life insurance distinguished from fire insurance

Life insurance Fire and marine insurance

LIFE INSURANCE
Not a contract of indemnity but a
Section 181. Life insurance contract of investment
Valued policy
Section 181. Life insurance is insurance on human lives and insurance May be transferred or assigned to
appertaining thereto or connected therewith. any person even if he has no
insurable interest
Every contract or undertaking for the payment of annuities including contracts for The consent of the insurer is not
the payment of lump sums under a retirement program where a life insurance essential to the validity of
company manages or acts as a trustee for such retirement program shall be assignment, unless expressly
considered a life insurance for purposes of this Code. required
Insurable interest in the life or
Section 182. An insurance upon life may be made payable on the death of the health of the person need not exist
person, or on his surviving a specified period, or otherwise contingently on the after the insurance takes place or
continuance or cessation of life. when the loss occurs1
Insurable interest need not have
Every contract or pledge for the payment of endowments or annuities shall be legal basis
considered a life insurance contracts for purposes of this Code. The contingency that is
contemplated (death), is a certain
In the absence of a judicial guardian, the father, or in the latter’s absence or event; what is only uncertain is the
incapacity, the mother, of any minor, who is insured or a beneficiary under a time when the it will take place
contract of life, health, or accident insurance, may exercise, in behalf of said minor,
any right under the policy, without necessity of court authority or the giving of a The liability of insurer to make
bond, where the interest of the minor in the particular act involved does not exceed payment is certain; what is only
five hundred thousand pesos (Php 500, 000) or in such reasonable amount as may uncertain is when such payment
be determined by the Commission. Such right may include ,but shall not be limited may be made
to, obtaining a policy loan, surrendering the policy, receiving the proceeds of the
policy, and giving the minor’s consent to any transaction on the policy.
Although may be terminated by the
In the absence or in case of the incapacity of the father or mother, the insured, cannot be cancelled by the
grandparent, the eldest brother or sister at least 18 years of age, or any relative insurer; usually a long term contract
who has actual custody of the minor insured or beneficiary, shall act as a guardian The “loss” to the beneficiary can
without need of a court order or judicial appointment as such guardian, as long as seldom be measured accurately in
such person is not otherwise disqualified or incapacitated, Payment made by the terms of cash value
insurer pursuant to this Section shall relieve such insurer of any liability under the Beneficiary is under no obligation to
contract. prove actual financial loss as a result
of the death of the insured in order
LIFE INSURANCE to collect the insurance
Contract of indemnity
May be open or valued policy
The transferee or assignee must
have an insurable interest in the
thing insured
Consent is necessary in the absence
of waiver
Insurable interest must exist not
only when the insurance takes effect
but also when the loss occurs
II must have a legal basis
Contingency insured against may or
may not happen
Liability is uncertain because the
happening of the peril insured
against is uncertain. The amount
insured will have to be paid sooner
or later, while in the latter, the
amount insured may not have to be
paid.
May be cancelled by either party and
is usually for a term of one year
Loss can be ascertained in cash
value especially in the loss of
property
The insured is required to submit
proof of his actual loss as a condition
precedent to collecting the
insurance.

Insurance payable on the death of a person, or on his surviving a specified period,
or otherwise contingently on the continuance or cessation of life.
A mutual agreement by which a party agrees to pay a given sum on the happening
of a particular event contingent on the duration of human life, in consideration of
the payment of a smaller sum immediately, or in periodical payments by the other
party.
PARTIES INVOLVED
1. Owner of the policy – He has the power to name or change the
beneficiary, assign the policy, cash it in for its surrender value, or use its
collateral in obtaining a loan, and the obligation to pay the premiums
EXCEPTION OF LIFE INSURACE POLICIES FROM EXECUTION
Under the Rules of Court, all moneys, benefits, privileges or annuities accruing or
in any manner growing out of any life insurance are exempt from execution
regardless of the amount of the annual premiums paid.
Statutes exempting proceeds of life insurance from claims of creditors are regarded
as exemption laws, and not as part of the insurance laws of the State, nor as
designed simply to protect the insurer from harassing litigation, and should be
construed liberally and in the light of, and to give effect to, their purpose of
enabling an individual to provide fund after his death for his family which will be
free from the claims of creditors.

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INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

APPLICATION OF EXEMPTION TO ACCIDENT INSURANCE LIFE ANNUITY

Accident insurance regarded as life insurance Definition

When one of the risks insured in the life insurance is the death of the insurance
by accident, then such accident insurance may also be regarded as life insurance.
Burden of Proof
Insured’s beneficiary has the burden of proving that the cause of death is due to
the covered peril. Once the fact is established, the burden of proving shifts to the
insurer to show any excepted peril that may have been stipulated by the parties.
An accident insurance is not thus to be likened to an ordinary life insurance where
the insured’s death, regardless of the cause thereof, would normally be
compensable.
KINDS OF LIFE INSURANCE POLICIES
Debtor binds himself to pay an annual pension or income during the life of one or
more determinate persons in consideration of a capital consisting of money, or
other property, whose ownership is transferred to him at once with the burden of
the income.
Concept
Upside down application of the life insurance principle. The purpose therein is the
scientific liquidation of an estate
The purchases of an annuity expects his insurer to pay him a periodic income as
long as he lives. Thus, under a life insurance contract, the insurer starts paying
upon the death of the insured, whereas under an annuity contract, the insurer
stops paying upon the death of the insured.

Ordinary Life policy Life annuity v. Life policy

Insured is required to pay certain fixed premium annually or at more frequent
intervals throughout his entire life and the beneficiary is entitled to receive Annuity contract Life policy
payment under the policy only after the death of the insured. Both provide protection for substantial risk. A person may take life insurance
and at the same time enter into a contract of annuity to provide security both
Important: Considered paid up when the insured reaches the age of 100. The against the risk of premature death and against the risk of long life.
ultimate payment of the issuance proceeds, either age or at death, is as certain as Insures against economic problems Insures against problems resulting
death itself. resulting from a long life from an early death

TN: This type of policy is also known as whole life or regular life, or straight life, Looks to transiency Looks to longevity
or cash value insurance. It is also an investment policy. The lump sum is paid to the insurer Insured pays the insurer an annuity
immediately and the annuitant and his beneficiary receives at the
Limited payment life policy receives the annuity payments as insured’s death the lump sum
Premiums are payable only during a limited period of years – usually, 10, 15, 20. long as he lives. payment
When the specified number of premium payments have been made, the insurance Investment , which may or may not Characteristics akin to “indemnity” as
is fully paid for it. turn out to be profitable the insurer will reimburse the
insured’s beneficiaries a large sum
Payable only at the death of the insured If the insured should die within the upon the insured’s death
specified period, his beneficiary is entitled to all the proceeds of the policy without
any liability for the unpaid premium. The insurance does have a cash surrender
Section 183. Liability in case of suicide
value.
Section 183. The insurer in a life insurance contract shall be liable in case of
Endowment Policy
suicide only when it is committed after the policy has been in force for a period of
Insurer binds himself to pay a fixed sum to the insured if he survives for a specified
2 years from the date of its issue or of its last reinstatement, unless the policy
period, or if he dies within such period, to some other person indicated The insured
provides a shorter period; provided, however, that suicide committed in the state
stands a chance of being paid the proceeds of the policy while still alive. After
of insanity shall be compensable regardless of the date of commission.
receiving the face amount of the policy, all coverage shall be terminated.

Represents both term insurance and a form of annuity. Useful in retirement
planning; has an investment aspect.
Term insurance policy
It provides coverage only if the insured dies during a limited period. It is an
insurance for a fixed period or a specific term- 2, 5 or 10 years. If the insured dies
within the period specified, the policy is paid to the beneficiary. If he survives the
period, the contract terminated or expires at the end of the time period. No
element of investment; no loan value. The insured may be given the option to
convert the policy to one of whole life or endowment life.
TN: Temporary insurance; essentially pure insurance.
SCOPE OF LIFE INSURANCE
Life insurance
It undertakes to protect the insured’s family, creditors, or others against pecuniary
loss which may be the outgrowth of the death of the insured. The loss occasioned
by death against which life insurance attempts to provide protection is the
cessation of the current earning power of the insured.
TN: Economic death = permanent loss of earning capacity
Death may be:
1. Actual death - “casket death”
2. Living death - permanent disability
3. Retirement death - living beyond the period of earning capacity
Health and disability insurance
Provides benefits for hospital or medical expenses, or for loss of time or earning
power because of injury or illness. Only medical expenses incurred by the insured
are paid.
Liability of the insurer
1. The suicide is committed after the policy has been in force for a period of 2
years from the date of its issue or of its last reinstatement
2. The suicide is committed after a shorter period provided in the policy
although within the 2 year period
3. The suicide is committed in te state of insanity regardless of the date of
commission, unless suicide is an excepted risk.
Important: The policy cannot provide a period longer than 2 years. Thus, if the
policy provides for a 3 year period, and the suicide is committed within said period
but after 2 years the insurer is liable.
When is insurer not liable
1. The suicide is not by reason of insanity and is committed within 2 year period
2. The suicide is by reason of insanity but is not among the risk assumed by
the insurer regardless of the date of the commission; and
3. The insurer can show that the policy was obtained with the intention to
commit suicide even in the absence of any suicide exclusion in the policy.
Section 184. Life insurance policies are assignable
Section 184. A policy of insurance upon life or health may pass by transfer, will
or succession to any person, whether he has an insurable interest or not, and as
such person may recover upon it whatever the insured might have recovered.
Life insurance policies are assignable
Life insurance policies are declared by law to be assignable regardless of whether
the assignee has an insurable interest in the life of the insured or not.
TN: A provision in a contract of insurance denying the insured his right to assign
without the consent of the insurer will be void.

TN: Both life and non-life insurance.

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INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
Necessity of consent of beneficiary to assignment
(a) With waiver of right to change beneficiary – Beneficiary acquires a
vested and absolute interest which cannot be divested without his consent.
(b) Without waiver – Insured may assign the policy without the consent of
the beneficiary. The latter has a mere expectancy and he cannot make an
assignment of the policy until his interest in the proceeds thereof becomes
absolutely fixed by the death of the insured.
Section 185. Requirement of Notice
Section 185. Notice to an insurer of a transfer or bequest thereof is not necessary
to preserve the validity of a policy of insurance upon life or health, unless thereby
expressly required.
Notice required by policy
An assignment, without such notice, in the absence of a waiver shall have no
effects far as the insurer is concerned. The insurer without notice is relieved of any
responsibility in case payment is made to the beneficiary before receipt by the
insurer of the notice.
TN: The assignment is binding upon the assignor and the assignee
When notice is not required
If the policy does not so require, notice is not essential to the validity of the
assignment.
Assignment with consent of insurer
Regardless if notice is required by the policy, the assignment with the consent of
the insurer creates a novation. The assignee takes the newly formed contract free
of the defenses available to the insurer against the insured under the old contract.
TN: Since the consent for the insurer is not necessary to the validity of the
assignment, the absence of notice to the insurer of the assignment cannot affect
the validity of the policy itself.
Section 186. Valued Policy
Section 186. Unless the interest of a person is susceptible of exact pecuniary
measurement, the measure of the indemnity under a policy of insurance upon life
or health is the sum fixed in the policy.
Life policies are valued ones.
GR: There could be no exact pecuniary measurement of a person’s interest in his
life or the life of another
XPN: A person insures the life of another, as where a creditor insures the life of
his debtor.
CHAPTER 3. THE BUSINESS OF INSURANCE
CLAIM SETTLEMENT
Section 247. Claim Settlement
Section 247.
(1) No insurance company doing business in the Philippines shall refuse, without
just cause, to pay or settle claims arising under coverages provided by its policies,
nor shall any such company engage in unfair claim settlement practices. Any of
the following acts by an insurance company, if committed without just cause and
performed with such frequency as to indicate a general business practice, shall
constitute unfair claim settlement practices:
(a) Knowingly misrepresenting to claimants pertinent facts or policy provisions
relating to coverages at issue;
(b) Failing to acknowledge with reasonable prompt-ness pertinent
communications with respect to claims arising under its policies.
(c) Failing to adopt and implement reasonable standards for the prompt
investigation of claims arising under its policies;
(d) Not attempting in good faith to effectuate prompt, fair and equitable
settlement of claims submitted in which liability has become reasonably
clear; or
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(e) Compelling policyholders to institute suits to recover amounts due under its
policies by offering without justifiable reason substantially less than the
amounts ultimately recovered in suits brought by them.
(2) Evidence as to numbers and types of valid and justifiable complaints to the
Commissioner against an insurance company, and the Commissioner’s complaint
experience with other insurance companies writing similar lines of insurance shall
be admissible in evidence in an administrative or judicial proceeding brought under
this section.
(3) If it is found, after notice and an opportunity to be heard, that an insurance
company has violated this section, each instance of non-compliance with
paragraph (1) may be treated as a separate violation of this section and shall be
considered sufficient cause for the suspension or revocation of the company’s
certificate of authority.
Claim settlement defined
Claims settlement is the indemnification of the loss suffered by the insured. The
claimant may be the insured or reinsured, the insurer who is entitled to
subrogation, or a third party who has a claim against the insured.
To eliminate unfair claim settlement practices, Section 241 enumerates the
grounds which shall be considered as sufficient cause of the suspension or
revocation of an insurance company's certificate of authority.
Obligation of insurer to respect insured’s decision to compromise third
party claim
Where a policy gives the insurer control of the decision to settle claim or litigate it,
the insurer nevertheless is required to observe a certain measure of consideration
for the interest of the insured.
While the express terms of the policy do not impose on the insurer the duty to
settle the claim at all costs, there is an implied duty on his part to give due
consideration to the interest of the insured in its exercise of the option to reject a
compromise settlement and proceed with litigation.
TN: Insurer is required to observe strict standards of good faith and fair dealing.
Question: In a suit for personal injuries filed by T against D (insured), D offered
to settle for a sum that was within the policy limits of P10,000. R (insurer),
however, refused the offer and elected to go with the trial of the case. T obtained
a verdict for P15,000. Is R also liable for the P5,000, the amount in excess of the
policy limits?
A: It depends. If R acted honestly under the circumstances, the insurer has the
right to refuse an offer of settlement which it believes to be unreasonable or
excessive. If, on the other hand, the verdict resulted from R's negligence or bad
faith, R shall be liable for the amount of P5,000.
Section 248. Life Insurance Losses
Section 248. The proceeds of a life insurance policy shall be paid immediately
upon maturity of the policy, unless such proceeds are made payable in installments
or as an annuity, in which case the installments or annuities shall be paid as they
become due;
Provided, however, that in the case of policy maturing by the death of the insured,
the proceeds thereof shall be paid within sixty days, presentation of the claim and
filing of the proof of the death of the insured. Refusal or failure to pay the claim
within the time prescribed herein will entitle the beneficiary to collect interest on
the proceeds of the policy for the duration of the delay at the rate of twice the
ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is
based on the ground that the claim is fraudulent.
The proceeds of the policy maturing by the death of the insured payable to the
beneficiary shall include the discounted value of all premiums paid in advance of
their due dates, but are not due and payable at maturity.
LIFE INSURANCE LOSSES
Definiteness of death
The settlement of life claims usually is taken care of by the life insurance agent.
The definiteness of the death peril and the amount of insurance payable makes it
possible for the agent to arrange for the payment from the insurer. In the unusual
situation where a claim is questioned, the legal department and claim department
of the insurer company provide the necessary legal advice.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
Proof of death
Notice may be given by a beneficiary or the legal representative of the insured.
Technically, the life insurance policy does not provide for payment upon death but
rather for payment upon submission of proof of death to the insurer.
TN: The death of the insured may be sufficiently established by the death
certificate issued by the Civil Registrar of the place where the insured died.
Nature of claim
Life insurance pays the face value in lump sum upon death of the insured. Money
claims are death claims.
Income Benefit Provision
Endowment contracts and annuities may provide an income benefit upon the
survival of the insured to a fixed date or age. The choice as to the method of
payment may be made by the insured or by the beneficiary if the insured has not
made a choice.
TIME FOR PAYMENT OF CLAIMS IN LIFE POLICIES
Policies maturing upon the expiration of the term
Proceeds are immediately payable
 to the insured, unless they are made payable in
installments or as annuity, in which case, the installments or annuities shall be
paid as they become due
Policies maturing at the death of the insured occurring prior to the
expiration of the term
Proceeds are payable to the beneficiaries within 60 days after presentation of the
claim and filing of proof of death
Sixty-day period procedural in nature
When the policy matures upon the death of the insured, the obligation of the
insurer to pay arises as of that date.
The sixty-day period fixed by law within which to pay the proceeds after
presentation of proof of death is merely procedural in nature, evidently to
determine the exact amount to be paid and the interest thereon to which the
beneficiaries may be entitled to collect in case of unwarranted refusal of the
company to pay, and also to enable the insurer to verify or check on the fact of
death which it may even validly waive.
Death is the suspensive condition that renders the life policy matured
and not the filing of proof of death.
This is because even if such proof were presented, but it turns out later that the
insured is alive, such filing does not give maturity to the policy. The delay in the
presentation of proof of death does not alter the date of maturity of the policy nor
the liability of the company to pay the proceeds of the insurance.
The insurer's liability may arise on a presumption of death.
Section 249. Fire Insurance Losses
Section 249. The amount of any loss or damage for which an insurer may be
liable, under any policy other than life insurance policy, shall be paid within thirty
days after proof of loss is received by the insurer and ascertainment of the loss or
damage is made either by agreement between the insured and the insurer or by
arbitration; but if such ascertainment is not had or made within sixty days after
such receipt by the insurer of the proof of loss, then the loss or damage shall be
paid within ninety days after such receipt.
Refusal or failure to pay the loss or damage within the time prescribed herein will
entitle the assured to collect interest on the proceeds of the policy for the duration
of the delay at the rate of twice the ceiling prescribed by the Monetary Board,
unless such failure or refusal to pay is based on the ground that the claim is
fraudulent.
FIRE INSURANCE LOSSES
Obligations upon the insured immediately upon the occurrence of a loss
1. Comply with the obligation to submit or file notice of loss and proof of loss
– These are conditions precedent before there is any liability on the part of
the insurer.
2. After a fire, the insured is required to do everything reasonable to prevent
further damage to the property insured. – An insured who fails to protect
his property adequately from further loss after the fire, cannot collect for
the additional loss thus occasioned.
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Options of settlement by the insurer
The insurer has two options on how to settle the claims:
1. Payment of damages for the loss
2. Restoration of the subject matter of the insurance to its former condition
(see Sec. 172.)
TN: If the insurer elects to rebuild, the amount of damage recoverable for a breach
is not thereafter limited to the amount of insurance.
Sufficiency of proof of loss
While the insurer, and the Insurance Commissioner for that matter, have the right
to reject proofs of loss if they are unsatisfactory, they may not set up for
themselves an arbitrary standard of satisfaction.
Important: Substantial compliance with the requirements will always be deemed
sufficient.
LIABILITY INSURANCE LOSSES
Difference from other losses
The adjustment of liability claims differs from direct damage claims in that the
claimant is not the insured. In representing the insurer, the adjuster is not dealing
with a customer of the insurer as is the case in settling the usual direct damage
property loss.
Direct property damage claim
The extent of a claim for damages to property is measured by the amount of the
loss occasioned the property owner. The measure of loss is the difference in value
between the property undamaged and the property in its damaged condition.
PROPERTY DAMAGE LIABILITY CLAIM
TN: Property damage liability claims must be differentiated from direct loss
insurance claims.
A fire claim, for example, usually includes only payment for the direct damage to
the property unless additional coverage is purchased to provide for the indirect
results of the loss of use of the property, such as loss of profits or rents.
In property damage liability claims, however, the loss of use may be included. The
rental cost of a similar automobile, for instance, would be included in a liability
claim against the person causing damage serious enough to prevent its use for a
length of time.
TIME FOR PAYMENT OF CLAIMS IN NON-LIFE POLICIES
The proceeds shall be paid within thirty (30) days after receipt by the insurer of
proof of loss, and ascertainment of the loss or damage by agreement of the parties
or by arbitration but not later than ninety (90) days from such receipt of proof of
loss whether or not ascertainment is had or made.
TN: The rule in Compulsory Motor Vehicle Liability Insurance is different.
EFFECTS OF FRAUDULENT CLAIMS
All benefits under the policy shall be forfeited if the claim for loss be in any respect
fraudulent. If any false declaration be made by the insured or his agent to obtain
any benefit under the policy, a serious discrepancy between the actual loss and
that claimed in the proof of loss, shall avoid it as when the claim exceeds the true
value of property lost by 50% as to indicate that the false statements were made
willfully and intentionally.
Important: Fraud in any part of the claim taints the whole. The mere filing of
such a claim will exonerate the insurer. The burden of proving fraud rests on the
insurer.
EFFECT OF FALSE STATEMENTS INNOCENTLY MADE
The rights of the insured are, however, in no way prejudiced by false statements
inadvertently and innocently made in his proofs of loss despite a clause in the
policy providing for its forfeiture in the event of any false swearing; and although
the false statements are as to a material matter to the insurer's liability, the insured
can recover for his loss.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
REFERENCE TO ARBITRATION
Where arbitration not required should insurer deny liability
A stipulation in a fire insurance policy that in the event of a loss, unless the
company should deny liability, as a condition precedent to bringing an action on
the policy by the insured, the latter should first submit to an arbitration,1 is one
valid at law and unless it be first complied with, no action can be brought. But, if
in the course of the settlement of the loss, the company should in any case refuse
to pay, it will be deemed to have waived the condition precedent with reference
to arbitration, and suit upon the policy will lie.
Where arbitration limited to amount of insurer's liability
An insurance contract provision for prior arbitration before resort to court action,
which reads: "If any dispute shall arise as to the amount of company's liability
under this policy x x x" was held to apply only as to disputes regarding the amount
of the insurer’s liability but not as to any dispute as to the existence or non-
existence of liability, i.e., where the insurer completely denies any liability.
TN: Where disagreements between the insured and the insurer cannot be resolved,
Section 416 confers on the Insurance Commissioner the power to adjudicate claims
and complaints.
Where arbitration required only when there is dispute
Where there is an agreement to arbitrate and one party puts up a claim which the
other disputes, the need to arbitrate is imperative

Where settlement by arbitration not invoked
A clause in policy concerning reference of dispute to an arbitrator, as condition
precedent to a right of action or suit upon the policy, was deemed waived where
none of the parties to the contract invoked the same, or made any reference
to
 arbitration during the negotiations preceding the institution of the action against
the insurer.
Where insured voluntarily submitted to arbitration
On the other hand, where the insured commenced an action to recover an
insurance policy and then voluntarily agrees to an arbitration and submits his
proofs to the arbitrator, in the absence of fraud or mistake, is estopped and bound
by the award.
RIGHT OF INSURER TO SUBROGATION
Subrogation, a normal incident of indemnity insurance
Subrogation is the right of the insurer in certain cases, to take over the rights of
the insured against the party responsible for his injury, loss or damage. The
equitable right of subrogation as the legal effect of payment inures to the insurer
without any formal assignment or any express stipulation to that effect in the
policy.
Important: The principle of subrogation does not apply to life and accident
policies as they are not contracts of indemnity.
Limit of recovery
A subrogee cannot succeed to a right not possessed by the subrogor. The rights
to which the subrogee succeeds are the same as, but not greater than the
subrogor.
Loan repayable from collection not deemed payment of insurance
It is customary for insurers, in order to save the
 right to their assureds and to
promptly place them in funds, so that their business might be continued without
embarrassment, to lend to their assureds the amount of the loss payable only out
of money collected on account of the loss. Such losses are not payment of
insurance.
Section 250. Liability of Insurer to Pay Damages and Interests
Section 250. In case of any litigation for the enforcement of any policy or contract
of insurance, it shall be the duty of the Commissioner or the Court, as the case
may be, to make a finding as to whether the payment of the claim of the insured
has been unreasonably denied or withheld; and in the
 affirmative case, the
insurance company shall be adjudged to pay damages which shall consist of
attorney’s fees and other expenses incurred by the insured person by reason of
such unreasonable denial or withholding of payment plus interest of twice the
ceiling prescribed by the Monetary Board of the amount of the claim due the
insured, from the date following the time prescribed in section two hundred forty-
two or in section two hundred forty-three, as the case may be, until the claim is
fully satisfied;
Provided, That the failure to pay any such claim within the time prescribed in said
sections shall be considered prima facie evidence
 of unreasonable delay in
payment.
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Section 251. It is unlawful to:
1. Present or cause to be presented any fraudulent claim for the payment of a
loss under a contract of insurance; and
2. Fraudulently prepare, make or subscribe any writing with intent to present
or use the same, or allow it to be presented in support of any such claim.
Any person who violates this section shall be punished by a fine not exceeding
twice the amount claimed or imprisonment of two (2) years, or both, at the
discretion of the court.
LIABILITY OF INSURER TO PAY DAMAGES AND INTERESTS
Finding of unreasonable delay
Under Sections 242, 243, and 244, the Commissioner or the Court must still make
a finding that the payment of the claim has been unreasonably denied or withheld
before the insured shall be entitled to collect damages and the interest provided
which has been increased from 12% to 24%.
Important: They apply only when the Commissioner or the Court finds an
unreasonable delay or refusal in the payment of the clauses. In the absence of
such express finding, the judgment should bear only the legal rate of 12% for the
delay in the payment of the claim.
Examples of justifiable delay:
1. Where the delay in payment was due to the investigation the insurer
conducted to ascertain the truth of
 the information it received that the
insured was not insurable at the time of his application, the delay was held
justifiable.
2. Where the insurer was faced by the problem
 of determining who the actual
beneficiary of the insurance policies involved was.
Presumption of unreasonable delay
There is prima facie presumption of unreasonable delay, however, if the insurer
fails to pay any such claim within the time prescribed in Sections 242 and 243
Conflicting resolutions of trial court and commission
Aside from the revocation or suspension of license, the Insurance Commissioner
also has the discretion to impose upon the erring insurance companies and its
directors, officers and agents, fines and penalties, as set out in Section 415.
The findings of the trial court will not necessarily foreclose the administrative case
before the Commission, or vice versa. True, the parties are the same, and both
actions are predicated on the same set of facts, and will require identical evidence.
But the issues to be resolved, the quantum of evidence, the procedure to be
followed, and the reliefs to be adjudged by these two bodies are different.
In the civil case, the insured must establish his case by a preponderance
 of
evidence, while in the administrative case, the degree of proof required of the
insured to establish his claim is substantial evidence. These two
 bodies conduct
independent means of ascertaining the ultimate facts of their respective cases that
will serve as basis for their respective decisions.
Recoverable damages
It is clear that under Section 244, in case of unreasonable delay in the payment of
the proceeds of an insurance policy, the
 damages that may be awarded are:
1. Attorney's fees
2. Other expenses incurred by the insured person by reason of such
unreasonable denial or withholding
 of payment
3. Interest at twice the ceiling prescribed by the Monetary Board of the amount
of the claim due the insured, and
4. The amount of the claim.
Important: Section 244 does not require a showing of bad faith in order that
attorney's fees be granted.
IMPORTANT NOTE:
FOR THE REMAINING TOPICS, PLEASE REFER TO YOUR CODALS. I WILL NOT
ANYMORE INCLUDE THE PROVISIONS HERE, OTHERWISE MA 100 PAGES ATO
REVIEWER. HAHAHA. THANK YOU.
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
Sections 386-402
Motor vehicle
Any vehicle propelled by any power other than muscular power using the public
highways
Exception: Road rollers, trolley cars, street sweepers, sprinklers, lawn mowers,
bulldozers, graders, forklifts, amphibian trucks, and cranes if not used in public
highways, vehicles running only on rails or tracks, and tractors, trailers and traction
engines of all kinds used exclusively for agricultural purposes.
Motor Vehicle Liability Insurance
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 a motor vehicle by its owner.
Important: Compulsory Third Party Liability Insurance only covers death of or
bodily injuries to persons involved in vehicular accidents
Obtaining Protection
Obtained purely on a voluntary basis by a motor vehicle owner to meet his needs
in connection with whatever liability may be incurred in operating the vehicle. At
present, however, motor vehicle liability insurance must, to a certain extent, be
taken on compulsory basis by a motor vehicle owner.
Passenger
Any fare-paying person being transported and conveyed in and by a motor vehicle
for transportation of passengers for compensation, including persons, expressly
authorized by law or by the vehicle's operator or his agents to ride without fare
Third Party
Any person other than a passenger and shall also exclude 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, as likewise
defined herein, or his employee in respect of death or bodily injuries arising out of
and in course of employment
Pre-requisite regarding the operation and registration of motor vehicle
Section 387, Insurance Code enjoins a land transportation operator (LTO) or a
motor vehicle owner (MVO) not to operate his vehicle in public highways unless
there is in force in relation thereto a policy insurance or guaranty in cash or surety
bond to indemnify the death or bodily injury of the third party or passenger, arising
from the use thereof what the law mandates is third party liability coverage for
such death or bodily injury
TN: LTO will register/renew registration ONLY IF there is in force such insurance
of guaranty in cash or surety bond
Importance of compulsory 3 rd-party liability insurance
To assure victims of motor vehicle accidents or their dependents, especially when
poor, immediate financial assistance or indemnity regardless of financial capability
of vehicle owner or operator responsible. This is to answer to the existing need to
assure financial assistance and relief to victims.
TN: Surety Bond – Undertaking to secure the indemnification of passenger and
third party liability for death or bodily injuries arising from motor vehicles accidents
Important: Insurer’s liability is primary and accrues immediately upon occurrence
of injury and not dependent on recovery of judgment and although the victim may
proceed directly against the insurer for indemnity, the third party liability is only
up to the extent of the insurance policy and those required by law.
PERSONS SUBJECT TO CMVLI REQUIREMENT
Motor Vehicle Owner (MVO)
One who is the actual legal owner of a motor vehicle in whose name such vehicle
is registered with the Land Transportation Office.
Land Transportation Operator (LTO)
One who is the owner of a motor vehicle or vehicles being used for conveying
passengers for compensation including school buses.
40 | U N I V E R S I T Y O F S A N C A R L O S
SUBSTITUTE FOR CVMLI POLICY
Surety bond
Post a surety bond with the Insurance Commissioner who shall be made the
obligee or creditor in the bond in such amount or amounts required as limits of
indemnity to answer for the same losses sought to be covered by a CMVLI policy.
Cash Deposit
Make a cash deposit with the Insurance Commission in such amount or amounts
required as limits of indemnity also for the same purpose.
TN: After Commissioner proceeds against the cash deposit, MVO or LTO must
replenish cash deposit or restore surety bond in the required amount as limit of
liability within 60 days after impairment or expiry, otherwise shall secure required
insurance policy
SCOPE OF COVERAGE REQUIRED
Owners or private MVs
Must be comprehensive against 3rd party liability for death or bodily injuries and
shall include passenger liability if private motor vehicle is used to transport
passengers for compensation
Land transportation operators
Must be comprehensive against both passenger and 3 rd party liabilities for death
and bodily injuries and insurer may extend additional other risks at its option
TN: Sec 390 prescribes the minimum limits of indemnity of comprehensive
coverage and that in case of excess over the minimum limit of coverage, such
excess should be deemed to have been taken on voluntary basis not compulsory
NO-FAULT INDEMNITY CLAIM
No-fault connotes that victim of a tort can recover loss from his insurer without
regard to his contributory fault or of tortfeasor since it guarantees compensation
or indemnity to persons suffering loss in motor vehicle accidents
Claim subject to certain conditions
Insurance company concerned shall pay any claim for death or bodily injuries
sustained by a passenger or third party without the necessity of proving fault or
negligence of any kind subject to certain conditions but this doesn’t apply to
property damage
TN: If the total
indemnity claim exceeds P5,000 (now P15,000), and there is
controversy, the finding of fault may be availed of by the insurer only as to the
excess while the first P5,000.00 (now P15,000) should be paid without regard to
fault.
Claim against insurer of vehicle where victim is an occupant
Claim “shall” lie against the insurer of the vehicle in which the occupant is riding,
mounting, or dismounting from which is mandatory that the claim be made against
the insurer of such vehicle even if it was not at fault since vehicle may recover
later from owner or responsible vehicle.
TN: It is immaterial whether or not fault or negligence lies with the other vehicle
involved in the accident.
Claim against insurer of vehicle responsible for accident
Where victim is not an occupant (includes both passenger and 3 rd party), claim
shall lie against the insurer of the directly offending vehicle.
MALUS SYSTEM UNDER CVMLI
Vehicle owner who suffered an accident resulting in a loss during the immediately
preceding policy period, is required to pay a surcharge not less than 30 pesos upon
renewal of his coverage in addition to the basic premium equivalent to the product
of the amount of loss paid multiplied by the rate of premium for the vehicle
AUTHORIZED DRIVER CLAUSE
AUTHORIZED DRIVER. Any of the following:
1. The insured
2. Any person driving on the insured's order or with his permission; Provided,
That the person driving is permitted in accordance with the licensing or other
laws or regulations, to drive the motor vehicle and is not disqualified from
driving such motor vehicle by order of a court of law or by reason of any
enactment or regulation in that behalf.

INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017
Authorized Driver Clause
In contemplation or anticipation of accident in the legal sense in which it should
be understood (not of an event such as theft)
License Requirement
Clause limits the use of the insured vehicle to 2 persons only:
1. Insured himself
2. Any person on insured’s permission – “any person” is qualified by phrase
“…on the insured’s order or with his permission”
TN: Main purpose of the "authorized driver clause" is that a person other than the
insured owner, who drives the vehicle on the insured's order or with his permission,
must be a duly licensed driver and has no disqualification to drive as motor vehicle.
Important: License requirement is inapplicable when driver is the insured himself
Theft clause applicability
Theft is constituted when a car is unlawfully and wrongfully taken without owner’s
consent or knowledge
Theft Clause applies in cases of theft and not the authorized driver clause since
the risk of theft is different from the risk of accident.
INSURANCE COMMISSIONER
ADMINISTRATIVE AND ADJUDICATORY POWERS
Section 437. The Insurance Commissioner
GOVERNMENT REGULATION OF INSURANCE
There are 3 basic methods of providing insurance regulation:
1. Legislation – This is the foundation of insurance regulation. The insurance
law is now embodied in the Insurance Code, as amended RA 10607.
2. Administrative action – Applications of insurance law are left in the
hands of the Insurance Commissioner. The major powers of the
Commissioner are:
(a) Licensing – Check on the insurer’s financial condition to ascertain
that it has the required capital and surplus for the kinds of insurance
permitted in the license.
(b) Examination – Checking of assets, liabilities and reserves is part of
this procedure, as well as a review of almost all underwriting,
investment and claim practices of insurers.
(c) Investigation – Extend to a wide variety of powers to determine
WON insurers or their representatives are meeting the requirements
of the law. Free access to records and books of the insurers and
hearings on such matters as rate violations or unfair trade practices
are examples of his authority. The Commissioner may issue
administrative rulings or advisory opinions with regard to the
business conduct.
3. Court action – The extremely broad authority of the Commissioner is
subject to review and interpretation by the courts
POWERS, DUTIES, GENERALLY, OF AN INSURANCE COMMISSIONER
The general duty and function of the Commissioner is to regulate and supervise
transaction of insurance business so as to protect the interest of the public, to
execute the insurance laws and to see that violations of the insurance laws are
properly dealt with or punished.
Conferred by law
Statutes which provide that an insurance board or officer shall have the power to
regulate and review rates, to serve as a statutory receiver or liquidator of insurance
companies, to approve or disapprove the amendment of their by-laws, etc., have
generally been upheld or recognized as a proper delegation of administrative or
ministerial duties, rather than of legislative powers.
Exercise generally not subject to judicial review
An injunction will not lie to restrain board or official from proceeding in a matter
within its jurisdiction. As an application of the nature of exhaustion of remedies, a
court will refuse to take jurisdiction of a matter while it is still pending before the
board or official, since the administrative remedy has not been fully exhausted at
that point.
41 | U N I V E R S I T Y O F S A N C A R L O S
NATURE OF POWERS OF THE INSURANCE COMMISSIONER
The Insurance Commissioner is an administrative agency vested with regulatory
power and adjudicatory authority.
Regulatory or non-quasi-judicial
Authority to issue, or refuse issuance of, a certificate of authority to a person or
entity desirous of engaging in insurance business in the Philippines, and to revoke
or suspend such certificate of authority upon finding of existence of statutory
grounds for such revocation or suspension.
Adjudicatory or quasi-judicial
This is described in Section 439 which also specifies the authority to which appeal
may be taken from a final order or decision of the Commissioner given in the
exercise of his adjudicatory or quasi-judicial power.
COMMISSIONER’S DECISIONS, REGULATIONS AND RULINGS
Adjudications or decisions in individual cases
The Commissioner acts as a judge and is required in some instances to give
interested parties a formal hearing.
Section 439 empowers the Commissioner to adjudicate claims and complaints
involving any loss, damage or liability being claimed or sued upon any kind of
insurance, bind, reinsurance contract or membership certificate where the amount,
excluding interests, costs and attorney’s fees, does not exceed any single claim of
P100,000. Any decision or ruling has the force and effect of a judgment appealable
to the CA.
The power does not cover the relationship affecting the insurance company and
its agents but is limited to adjudicating claims and complaints filed by the insured
against the insurance company.
Issuance in the form of regulations, rulings, etc.
1. Formal promulgation of official regulations
The Commissioner is authorized by law to make regulations which are
general rules applicable to classes of insurers, agents or other persons subjet
to the statute. Such are considered subordinate legislations and should be
officially promulgated. However, official regulations that conflict with the
statute, or that go beyond the scope of the Commissioner’s powers are
invalid.
2. Making of rulings
Sometimes they are given in connection with official acts, and sometimes
merely as advice or admonition. On difficult questions of law, he often asks
the opinion of the Secretary of Justice. The Commissioner, unlike a court of
law, is not bound by precedents.
OBJECTIVES OF INSURANCE REGULATION
1. Make insurance available to all who want and need it
2. Assure that the insurance product is of high quality and reliability
3. Ensure that the price of insurance be not excessive, inadequate,
discriminatory or destructive of competition
DUTIES AND FUNCTIONS OF THE INSURANCE COMMISSION
To insure the solvency of the insurance company
1. To issue certificates of authority to insurance companies that meet the
minimum legal requirements
2. To suspend or revoke the certificates of authority of companies that are of
unsound condition
3. To require insurance companies to keep books, records, accounts and
vouchers
4. To require the setting up of reserves
5. To require the filing of annual statements showing the exect condition of the
affairs of the company
6. To require adequate rates
7. To pass upon and approve certain classes of investments
8. To cause an examination, at least once a year and as often as public interest
so demands to know financial conditions
9. To act as depository of securities required of insurance companies for the
benefit and security of their policyholders and creditors
10. To see that no non-life insurance company shall retain any risk on any one
subject of insurance in an amount exceeding 20% of its net worth
11. To rehabilitate or liquidate insolvent companies
INSURANCE LAW l Finals Reviewer l Atty. Eduardo Soleng l For the exclusive use of EH 404 A.Y. 2016-2017

12. To maintain and administer the 10Million Security Fund for the payment of
allowed claims against insolvent insurance companies

To assure fair trade practices of insurance companies and their agents

1. To approve policy forms
2. To require that rates be equitable and reasonable
3. To adjudicate claims and complaints involving any insurance loss, damage
or liability, not exceeding P100,000 in any single claim
4. To prohibit unfair claims settlement practices
5. To accept service of notice, proof of loss, summons or other legal process
for foreign insurance companies without an agent on whom such notice,
proof, summons and others may be served

To assure reasonable insurance service

To license agents, brokers, adjusters, resident agents, non-life company
underwriters, actuaries and rating organization

To promote national interest

1. To pass upon and approve investments of insurance companies’ funds to
insure that technical reserves arising from insurance and reinsurance
operations are invested locally
2. To require insurance companies to increase their retention of local risks
and/or reinsure locally before ceding to unauthorized foreign companies
whenever technically feasible
3. To pass upon and approve reinsurance treaties
4. To pass upon remittances of reinsurance premium on risks ceded abroad and
of claims for losses payable abroad

OTHER TOPICS: (Just read the codal provisions as per Atty. Soleng)
Mutual benefit associations (Sections 403-423)
Insurance companies, organization, etc. (Sections 190-199)

“That in all things, God may be glorified.”

42 | U N I V E R S I T Y O F S A N C A R L O S