LAW ON INSURANCE 2017
Justice Lloren
Rights of Subrogation of Insurer to Rights of Insured against
wrong doer
Doctrine of Subrogation is a process of legal Substitution
Basis of the Right: the insurer, after paying the amount covered
by the insurance policy, stepping into the shoes of the insured,
as it were and availing himself of the latter’s rights that exist
against the wrongdoer at the time of the loss.
Note:
 right of Subrogation is applicable only to property
insurance
This is not available to life insurance
Reason: the value of Human is unlimited.
Hence, no recovery from a third party can
be deemed adequate to compensate the
insured’s beneficiary.
 Life insurance contracts are not contracts of
INDEMNITY.
Privity of Contract or assignment by the insured of claim not
essential:
- Payment by the insurer to the insured operates
as an equitable assignment to the former of all
the remedies which the latter may have against
the third party whose negligence or wrongful act
caused the loss.
Note:
 The right of subrogation is not dependent upon any
privity of contract or written assignment of claim.
When does the right accrue (subrogation)?
- Upon payment of the insurance claim by the
insurer
Note:
 The presentation of the insurance policy as evidence
is not indispensible before the insurer may recover.
 The Subrogation receipt by itself is sufficient to
establish not only the
(1) Relationship of the insured and insurer,
and
(2) The amount paid to settle the insurance
Loss or injury for risk must be covered by the policy
- This is a requirement
- When the insurer pays the insured for a loss or
right not covered by the policy, the insurer has
no right of subrogation
o This is called VOLUNTARY
SUBROGATION
EXPN:Article 1236. The creditor is not bound to
accept payment or performance by a third
person who has no interest in the fulfillment of
the obligation, unless there is a stipulation to the
contrary.
Whoever pays for another may demand from
the debtor what he has paid, except that if he
paid without the knowledge or against the will of
the debtor, he can recover only insofar as the
payment has been beneficial to the debtor.
Right of insured to recover from both insurer and third party
- The insured can only recover ones
o He may recover from either of them
o He is only entitled to the amount of the
injury
- But if the amount paid by the insurance
company does not fully cover the injury or loss, it
is the AGGRIEVED PARTY and not the INSURER,
who is entitled to recover the deficiency.
Limit to the right of recovery by the insurer
- Limited to the amount recoverable by the
insured to the insurer
- Provided it does not exceed the amount
ACTUALLY paid to the insured
Exercise of right of subrogation by the insurer
- This is discretionary
Loss of right of subrogation by act of insured or insurer
If the insured after receiving the payment from the insurer,
release by his win act the wrongdoer or third party
- The insurer loses his rights
Limitations to the right of subrogation
1. Both the insurer (of goods covered by bill of lading)
and the consignee are bound by the contractual
stipulations under the bill of lading
2. The insurer can be subrogated only to the rights as
the insured may have against the wrongdoer
3. Right of insurer against third party limited to amount
recoverable from the latter by the insured.
4. If the insured after receiving the payment from the
insurer, release by his win act the wrongdoer or third
party
Note: The Exercise of the RIGHT OF SUBROGATION is
DISCRETIONARY
Legal Concept of Insurance
 It is a type of contract
Definition: A contract of insurance is an agreement by which
one party(insurer) for a consideration(premium) paid by the
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 LAW ON INSURANCE 2017
Justice Lloren

other party (insured), promises to pay money or its equivalent
or to do some act valuable to the latter (or his nominee) upon
the happening of a loss, damage, liability, or disability arising
from an unknown or contingent event
Note: A written insurance contract is called a Policy
When is a Contract of Suretyship deemed an insurance
contract?
If made by a surety who or which as such, is doing an insurance
business within the meaning of the code.
Note: that strictly speaking, a contract of Suretyship is entirely
different from a contract of insurance
Elements of the Contract
1. Subject Matter: This refers to the thing insured
2. Consideration: premium paid
3. Object and Purpose: Transfer and distribution of risk
of loss, damage, or liability arising from an unknown
or contingent event
3. Insurance may rise by OPERATION OF LAW
Aleatory
- It depends upon some contingent event
- But it is not a contract of chance
- One of the parties bind themselves to give or to
do something in consideration of what the other
shall give or do upon the happening of an event
which is uncertain , or which is to occur at an
indeterminate time
Unilateral
- It is executed as to the insured after the
payment of the premium
- Executory on the part of the insurer in the sense
that it is not executed until payment for a loss
- In other words, it is a unilateral contract
imposing legal duties only on the insurer who
promises to indemnify in case of loss
Contract of Indemnity

Nature and Characteristic - Because of the promise of the insurer to make

good only of the loss of the insured
Characteristic
EXPN: Life and accident insurance are not considered as
1. Consensual CONTRACT of indemnity
2. Voluntary
3. Aleatory Note:
4. Unilateral
1. Any contract that contemplates a possible gain to the
5. Conditional insured by the happening of the event upon which
6. Contract of Indemnity the liability of the insurer becomes fixed is contrary to
7. Personal the proper nature of insurance
8. Property 2. No person may secure insurance upon property in
9. Risk Distributing Device which he has no interest.
10. Onerous  If the insured has no insurable
interest, the contract is void and
11. Uberrimae fides Contract
unenforceable as being contrary
to public policy because it affords
temptation to the insured to wish
Consensual or bring about the happening of
the loss.
- It is perfected by the meeting of the minds
Personal Contract
Voluntary
- As a rule, a party cannot assign, before the
- It is not compulsory
happening of the loss, his rights under a property
- The parties may incorporate such terms and
policy to others without the consent of the
conditions as they may deem convenient
insurer.
- If a person whose property is insured sells it to
EXPN:
another, the buyer cannot be his successor in
1. Liability insurance may be required by law ( CMVL) the contract of insurance
2. Or as a condition to granting a license to conduct a
EXPN:
business or calling affecting the public safety or
welfare 1. the sale is with the consent of the insurer or

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Justice Lloren

2. the sale is with the consent of the insurer

3. or unless by express stipulation of the parties, the Fields of Insurance
contract is made to run with the property to the
transferee In general:

REMEMBER: 1. Voluntary Insurance: includes the major category

When the insurance is – of commercial insurance
1. “on account of the owner” or  Which is divided into personal and
2. “for whom it may concern” or property types of protection
3. “ The loss is payable to the bearer”  Under property insurance :
The subsequent owners or transferees become by the 1. Fire-marine Insurance
terms of the contract, the real parties to the contract 2. Casualty Surety Insurance
of insurance
(SUCCESSIVE NOVATION- See Art. 1292, NCC) Multiple Line Insurance
Denotes not just several kinds of insurance but the combination
Note: of at least two kinds of insurance
1. Property insurance is also personal in a limited sense Most common combination: Traditional fire and Casualty Lines
 The insurance is on the insured’s
interest in the property All Lines Insurance
 Not on the property itself Combination of at least most of the basic types of insurance
 It is the damage to the personal
property that is being reimbursed Commercial Insurance
2. Life insurance policy are generally assignable or
transferable Two major Classifications:
 They are in the nature of property 1. Personal Insurance
and do not represent a personal 2. Property Insurance
agreement between the insured
and the insurer
Personal Insurance
This division is based on the nature of the perils as when the
Distinguishing elements of the contract of insurance
losses due to loss of the earning power of a person

1. Insurable interest on the part of the insured Property Insurance

2. The insured is subject to a risk of loss through the
Loss arising from the ownership or use of property
destruction or impairment of that interest by the
happening of designated perils
 Two general Classifications of
3. The insures assumes that risk of loss
Insurance
4. Such assumption of risk is part of a general scheme to
1. The first form indemnifies
distribute actual losses among a large group or
the insured on the event of
substantial number of persons bearing a similar risk
loss growing out of damages
5. As consideration for the insurer’s promise, the
to, or destruction of his own
insured makes a ratable contribution called
property. (e.g. fire and
“premium”, to a general insurance fund
marine)
All of these elements must be present; otherwise there will be 2. Pays damages for which the
no contract of insurance. insured is legally liable, the
consequence of negligent
acts that result in injuries to
Note: There still no contract of insurance if the primary
other persons or damage to
purpose of the contract is rendering of service, even if all the
their property (e.g. casualty
above mentioned elements are present.
and surety insurance
Insurance: A risk distributing device
Principal and Older forms of insurance
1. Marine
A contract possessing only the first three elements named
2. Fire
above is a risk-shifting device not a contract of insurance.
3. Accident
A contract of insurance is a RISK DISTRIBUTING DEVICE if it has
all the five elements.
Group of different kinds of Insurance Contracts

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Justice Lloren

- Hence, all those not identified causes

1. Insurance against loss or impairment of property excluded are listed in the policy
interests automatically included
2. Insurance against loss of earning power
3. Insurance against contingent liability to make All Risk Coverage
payment to another Other advantages –
1. Presumably simpler to understand
MODERN CLASSIFICATION SCHEME: 2. Duplication of coverages and premiums from
1. Marine separate, specified-risk policies is avoided
2. Property 3. Pressures towards adverse selection are minimized;
3. Personal 4. The policies are easier and less expensive for the
4. Liability insurer to administer
5. Avoidance of gaps of coverage
Classification by interests protected  Losses that would otherwise
fall within the gaps of
1. First party v. Third Party insurance specified-risk coverage will
First Party Third Party Insurance be indemnified if a policy is
The contract between the insurer deemed to be all risk
and the insured is designed to
indemnify the insured for a loss Coverage not absolute –
suffered directly by the insured The observation that “all risk insurance fills in all the gaps”
Property Insurance is FIRST-PARTY Liability insurance ,is needs to be substantially qualified
insurance sometimes described as  “All risk” event covered does
- The damage to the third-party insurance not include an undisclosed
property is an because the interests to event that existed prior to
immediate, direct be protected by the coverage
diminution of the contract are ultimately  or an event that
insured’s asset those of third parties existed prior to
injured by the insured’s coverage
conduct.  or an event caused
All insurance except liability can be by the
fairly thought of as first-party consummation
insurance. during the period
of coverage of an
NO FAULT insurance indwelling fault in
- Essentially the substitution of first-party the goods that had
insurance for tort liability. existed prior to
- The victim of a tort, instead of looking to the that coverage.
tortfeasor and his insurer for reimbursement,
looks to his own insurer for first-party Note: all-risk coverage does not alter basic insurance law
protection. principles that can operate to limit the coverage
- First party insurance is compulsory under the
typical no-fault scheme. Classifications of Insurance contract under the Insurance code
- The term connotes that the victim recovers for
his loss from his own insurer, without regard to 1. Life Insurance
the fault of the third party or his own 2. Non-life Insurance
contributory fault. 3. Contracts of Suretyship or bonding

Contracts WRITTEN BY GUARANTY OR SURETY COMPANIES

2. All risk vs. Specified Risk
All Risk
Reimburses the insured damage to the
subject matter of the policy from all
causes except those specifically
excepted in the policy.
A class of contracts written by guaranty or surety companies,
Specified-Risk and generally, designated as guaranty insurance, comprise
Covers damage to the principally fidelity, title, bond, and security guaranty.
subject matter of the - These kind of contracts are now almost regarded
policy only if it result as those of insurance where the underwriter
from specifically engages in the business for profit

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 LAW ON INSURANCE 2017
Justice Lloren

- Like other contracts, they are construed strictly incidental to the service of the
against the insurer. business(Higger v. Rodziminsky, Inc.)

Note: A contract of suretyship shall be deemed to be an Principal object and purpose test to determine nature of
insurance contract only if made by a surety who or which, as, contract
such, is doing an insurance business within the meaning of the
code. (How to determine whether the is one of Insurance)

Construction of Insurance Contracts - If principal object and purpose is “indemnity”,

the contract is Insurance
1. When there is ambiguity or doubt - But if the principal object is “service”, risk
 GR: must be construed liberally in favour of the transfer and distribution being merely incidental:
insured and strictly against the insurer resolving all o It is not an insurance contract
the ambiguities against the latter.
Functions of Insurance
Remember: That a policy of insurance is a contract of
“adhesion” 1. Principal Function- is RISK BEARING
 The financial losses of the few are equitably
distributed by all.
What constitute doing or transacting insurance business?  It spread the losses over a large number of
persons
Name or designation by insurer not Controlling 2. Subsidiary functions-
The name by which a company or association or its certificates A. Stimulates business enterprise
or policies are designated are not determinative of the question B. Encourages Business efficiency and enterprise
of whether the organization is an insurance company or C. Promotes loss- prevention
association, or is engaged in an insurance business, or its D. Encourages saving
contracts are in the nature of insurance policies. E. Solves social problems

Acts deemed included by law

3. Indirect functions
The fact that no profit is derived from the making of insurance a. Investment of funds
contracts or that no separate or direct consideration is received b. Use of reserve funds
therefor is not deteminative c. Effect on prices
- The fact that the contract states that it is not an d. Basis of credit
insurance policy is not conclusive to show that
the making thereof does not constitute the CHAPTER I
doing or transacting of an insurance business.
What may be insured?
Note:
- A company may be found to be engaged in an Sec. 3
insurance business even if it expressly disclaims 1. Any contingent or unknown event
any intention to sell insurance. 2. Whether past or present
- A contract for payment of burial or funeral 3. Which may damnify a person having an insurable
expenses at the death of the holder is a contract interest, or
of life insurance subject to the insurance laws. 4. Create a liability against him
- Any warranty is not generally considered as May be insured against, subject to the provisions of the
insurance if it excludes external accidental chapter.
clauses
o This is in relation to an agreement to Requisites of a Contract of Insurance
service and repair, at a flat monthly
fee, any burned out and defective 1. A subject matter in which the insured has an
parts of fluorescent fixtures has been insurable interest
held not to constitute an insurance 2. Event or peril insured against which may be
contract since any element of warranty any(future) contingent or unknown event, past or
or guaranty in the agreement is merely future

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 LAW ON INSURANCE 2017
Justice Lloren
3. A promise to pay or indemnify in a fixed or
ascertainable amount
4. A consideration for the promise, known as the
“Premium”
5. A meeting of the minds of the parties upon all the
foregoing essentials
Subject Matter of Insurance
1. In general:
 Anything that has an appreciable pecuniary value,
which is the subject to loss or deterioration or of
which one may be deprived so that his pecuniary
interest is or may be prejudiced.
2. Property Insurance
3. Life, health, and accident insurance
4. Casualty insurance
Event or peril insured against
Insurance by a married woman
A married woman may take out an insurance on her
life or that of her children without the consent of her husband,
she having an insurable interest in the latter
Insurance by a minor
Requirements for a minor to enter into a valid contract of
insurance:
a. The contract is for life, health, or accident
insurance;
b. The insurance is taken on his life and
c. The beneficiary is any of those enumerated
by law
Note: insurance other than life taken by a minor is not entirely
void.
- It is valid until annulled in a proper action in
court but the minor or his legal representatives.
- If the contract is not disaffirmed by the minor,
the insurer cannot escape liability by pleading
minority as a defense because “persons who are
capable cannot allege the incapacity of those
with whom the contracted.
o But if the contract is fair and no fraud
pr undue influence was practiced by
the insurer, the minor cannot recover
the premiums paid, if he cannot return
the benefits received.
GR: the minor is not bound by the contract but the Insurance
Company is bound.
Ownership of life insurance policy
1. Interest of person who insured his own life
One who takes a policy of insurance on his
own life becomes, in so doing, a party to
the contract, even though thebenefits of
the insurance are to accrue to someone
else known asbeneficiary. Such contract
remains his, at least, in part, and maybe
maintained by suit, if necessary, for the
protection of thosein whose favor it is
made.
2. Interest of beneficiary
In general, the nature ofthe interest of the
beneficiary depends on the terms of
theinsurance contract, including the
existing statutes bywhich the insurer and its
policyholders are bound.
Under our Code, the married woman or the
minor allowedto take out an insurance
policy may exercise all the rights
andprivileges of an owner, as insured
and/or beneficiary.
3. Transfer of rights to minor insured upon death of
original owner of policy
Upon the death of the original owner of a
policy of insurance taken out by him on the
life or health of aminor, all rights, title and
interest in the policy shallautomatically vest
in the minor unless otherwise provided
forin the policy.
Prohibited insurance
Sec. 4. The preceding section does not authorize an insurance
for or against the drawing of any lottery, or for or against any
chance or ticketing a lottery drawing a prize.
Lottery:
Extends to all schemes for the distribution of prizes
by chance, such as policy playing, gift exhibition, prize concerts,
raffles at fairs, etc., and various forms of gambling.
Three Essential elements:
1. Consideration
2. Prizes
3. Chance
Note: there is a consideration of price paid if it appears that
the prizes offered by whatever name they may be called came
out of the fund raised by the sale of chances among the
participants in order to win the prizes.
Contract of insurance not a wagering Contract
A contract of insurance is a contract of indemnity and is not a
wagering contract.
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 LAW ON INSURANCE 2017
Justice Lloren

 Though it is based on a contingency, it is not a liability, or to guarantee the performance of or

contract of chance and is not used for profit.
Insurance
Parties seek to distribute
possible loss by reason of
mischance
Seeks to avoid misfortune
Tends to equalize fortune
What the insured gains is not
at the expense of another
insured.
Purchase of insurance does
not create a new and,
therefore, non-existing risk of
loss to the purchaser
Gambling
The parties contemplate gain
through mere chance
Courts fortune
Tends to increase the
inequality of fortune
Essence: whenever a person
wins from a wager, is lost by
the other wagering party
As soon as a party makes a
wager, he creates a risk of loss
to himself where no such risk
existed previously
compliance with contractual obligations or the
payment of debts of others.
Sec. 7. Anyone except a public enemymaybe insured.
Capacity of party Insured
1. Natural Person (two essential requisites):
a. He must be competent to make a contract
b. He must possess an insurable interest in the
subject of the insurance
c. Must not be a public enemy
2. Juridical Person
A juridical person, like a partnership or a corporation,
may take out insurance on property owned by it.
Public Enemy

Sec. 5. All kinds of insurance are subject to the provisions of
this chapter so far as the provisions can apply.
Parties to the Contract
Sec. 6. Every person, partnership, association, orcorporation
duly authorized to transact insurancebusiness as elsewhere
provided in this Code,may be aninsurer,
A public enemy designates a nation with whom the Philippines
is at war and it includes every citizen or subject of such nation.
- This term may be taken to mean “alien enemy”
Note: during war time, a private corporation is deemed an
enemy corporation is deemed an enemy corporation although
organized under Philippine law if they are controlled by enemy
aliens.

1. Insurer – the party who assumes or accepts the risk of
loss and undertakes for a consideration to indemnify
the insured or to pay him a certain sum on the
happening of a specified contingency or event
o May be a corporation or private individual
2. The insured- or the second party to the contract
o The person in whose favor the contract
is operative and who is indemnified
against
o Or the one who will receive a certain
sum upon the happening of a specified
contingency or event
3. Beneficiary – to whom the benefits of the policy may
be given
Who may be an insurer?
1. Foreign or domestic insurance Company or
Corporation
o Must obtain a certificate of Authority
2. Individual, partnership or association
a. “Insurance Corporation” – one formed or
organized to save any person or persons or other
corporations harmless from loss, damage, or
liability arising from any unknown or future or
contingent event, or to indemnify or to
compensate any person or persons or other
corporations for any such loss, damage, or
Effect of War on existing insurance contracts
1. Where parties rendered enemy aliens - all intercourse
between citizens of belligerent powerswhich is
inconsistent with a state of war is prohibited
- Of course, if the parties are not rendered enemy
aliens
by the intervention of war, the policy continues to
beenforceable according to its terms and the laws
governinginsurance and the general rules regarding
contracts.
2. RE Property insurance -
The insurance policy ceases to be valid and
enforceable as soon as an insured becomes a public
enemy.
3. RE Respect to life insurance –
Three rules or doctrines have arisen;
a. United States rule- that the contract is not
merely suspended but is abrogated by reason of
nonpayment of premiums, since the time of the
payments is peculiarly of the essence of the
contract.
o But the insured is entitled to the cash
or reserve value of the policy (if any),

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 LAW ON INSURANCE 2017
Justice Lloren
which is the excess of the premiums
paid over the actual risk carried during
the years when the policy had been in
force.
Sec. 8. Unless the policy otherwise provides, where a
mortgagor of property effects insurance in his own name
providing that the loss shall be payable to the mortgagee, or
assigns a policy of insurance to a mortgagee, the insurance is
deemed to be upon the interest of the mortgagor, who does
not cease to be a party to the original contract, and any act of
his, prior to the loss which would otherwise avoid the
insurance, will have the same effect, although the property is
in the hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the mortgagor,
may be performed by the mortgagee therein named, with the
same effect as if it had been per-formed by the mortgagor.
Insurable interest of Mortgagee and mortgagor
Separate Insurable Interest
 Each of the ME and MR have separate and distinct
insurable interest in the mortgaged property.
o Insurance taken by one in his own name
only and his favor alone, does not inure to
the benefit of the other.
o NO DOUBLE INSURANCE- when both take
separate insurance policies on the same
property or one policy covering their
respective interests
 Extent of II of MR
o To the extent of the Value of the property
o Even if the debt equals such value
 Reason: the loss or destruction of
the property insured will not
extinguish the debt
 Extent of II of ME-
o To the extent of the debt secured
o He is not insuring the property itself but his
interest or lien thereon,
o His II is prima facie the value mortgaged
and extends only to the amount of the debt
 Cannot exceed the value of the
mortgaged property.
 Extent of the amount of recovery
o MR: cannot recover beyond the full amount
of his loss
o ME: in excess of the credit at the time of
the loss nor the value of the property of the
mortgaged.
Insurance by mortgagee of his own interest
Right of ME in case of loss
 If he independently insures his own interest in the
mortgaged property, he is entitled to the proceeds of
the policy in case of loss before payment of the
mortgage.
Subrogation of insurer to right of ME
 The ME is not allowed to retain his claim against the
mortgagor but it passes by subrogation to the
insurer to the extent of the insurance money paid
Change of Creditor
 The payment of the insurance to the Mortgagee by
reason of the loss does not relieve the mortgagor
from his principal obligation but only changes the
creditor
Insurance by mortgagor of his own interest
For his own benefit
 The MR may insure his own interest as owner of his
benefit
 In case of loss, the insurance proceeds do not inure to
the benefit of the ME
o The ME has NO greater right than the
unsecured creditor.
For the benefit of ME: the ME may be the beneficial payee in
several ways:
1. He may be the assignee of the policy with the consent
of the insurer
2. He may be the mere pledge without such consent
3. A rider making the policy payable to the ME “as his
interest may appear” may be attached.
4. A “standard mortgage clause” containing a collateral
independent contract between the ME and the
insurer may be attached ; or
5. The policy, though, by its terms payable absolutely to
the mortgagor; may have been procured by a
mortgagor under a contract duty to insure for the
mortgagee’s benefit, in which case the ME acquires
an equitable lien upon the proceeds
Insurance by mortgagor for benefit of ME, or policy assigned to
Mortgagee
Legal effects:
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 LAW ON INSURANCE 2017
Justice Lloren
1. The contract is deemed to be upon the interest of the
MR, hence, he does not cease to be a party to the
contract
2. Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance affects the ME
even if the property is in the hands of the ME
3. Any act which under the contract of insurance is to be
performed by the MR may be performed by the ME
with the same effect
4. In case of loss, the ME is entitled to the proceeds to
the extent of his credit
5. Upon recovery by the ME to the extent of his credit,
the debt is extinguished
(the rule on subrogation by the insurer to the right of
the ME does not apply in this case)
Effect of standard and open clauses in fire insurance policy
Fire insurance Policy contains a STANDARD or UNION
mortgage clause
 The acts of the MR do not affect the ME.
 Purpose of the clause: to make a separate and
distinct contract of insurance on the interest of the
ME
Open or loss-payable mortgage clause
 Merely provides for the payment of loss, if any, to the
ME as his interest may appear
 And the acts of the MR affect the ME
Hence if the policy is obtained by the MR with a loss-
payable clause in favor of the ME as his interest may appear,
the mortgagee is only a beneficiary under the contract and
recognized as such by the insurer but not made a party to the
contract itself.
o Then, any act of the mortgagor which
defeats his right will also defeat the right of
the mortgagee
Right of Mortgagee under Mortgagor’s policy
The contract of indemnity under such policy is primarily with
the mortgagor, but the mortgagee is a third party beneficiary.
 Before loss – the mortgagee is a conditional
appointee of the mortgagor entitled to receive so
much of any sum that may become under the policy
as long as it does not exceed his interest as
mortgagee
 After loss-
o When loss happens when credit is not due
 ME is entitled to receive the
money for the extinguishment of
the debt
o Loss after credit has matured
 The ME may apply the proceeds
to the extent of his credit
Effect of Insurance by ME on behalf of the MR
 Discharge of the debt- (Upon the destruction of the
property)
o In full: if the amount is sufficient
o If the amount is in excess- the ME holds the
excess as the trustee of the MR
 No discharge of the debt-
o When there is right of Subrogation
Sec. 9 If an insurer assents to the transfer of an insurance
from a mortgagor to a mortgagee, and at the time of his
assent, imposes further obligations on the assignee, making a
new contract with him, the acts of the mortgagor cannot
affect the rights of said assignee, making a new contract with
him, the acts of the MR cannot affect the rights of said
assignee.
Assignment or transfer of insurance policy
Effect of Assignment or transfer
 To substitute the assignee or transferee in place of
the original insured in respect to the right to claim
indemnity or payment for a loss as well as the
obligation to perform the conditions, if any, of the
policy.
o The assignee does has no greater right
under the insurance than the assignor had
(subject to insurer’s defenses)
 EXPN: unless the assignee makes
a new contract
As to fire policy
 A fire policy before it becomes a fixed liability is not
subject to assignment in the absence of provision in
the contract or subsequent consent of the insurer.
o Reason: being a Strictly personal contract
Note: The insurer is naturally concerned about the moral
character of the insured and should not be compelled to
become an insurer to an assignee to whom he would have
declined to issue a policy and who could materially alter the
risks assumed by the insurer without his consent
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As to marine Policy
 Not Assignable without the consent of the insurer
As to casualty policy
 Insurer’s consent is required
As to Life Policy
 the policy may freely be assigned before or after the
lossoccurs, to any person whether he has an insurable
interest ornot.
o However, an assignment of a life policy to
aperson without an insurable interest,
which the insured makesin bad faith and
under such circumstances as where
therewas a preconceived agreement that
the policy was to beassigned for the
purpose of accomplishing an illegal
purpose,that is, permitting the assignee of
the policy to wager on thelength of life of
the insured, will not be upheld.
Right of Mortgagor to assign insurance policy to mortgagee
- This is recognized
Effect of new contract between insurer and mortgagee-
assignee
Fire insurance
 Transfer by the MR to the ME with the consent of the
Insurer does not convert the contract into one of
indemnity to the ME
 The contract remains with the MR as it is his interest
alone that is covered
 The assignment merely operates as en equitable
transfer of the policy so as to enable the ME to
recover the amount due in case of loss subject to the
conditions of the policy
BUT:
 When a new and distinct consideration passes from
the ME to the Insurer
o A new contract is created between them
o A novation of the original contract takes
place.
 Hence, the acts of the MR cannot
affect the right of the ME(the
assignee)
INSURABLE INTEREST
Sec. 10. Every person has an insurable interest in the life and
health:
(a) Of himself, of his spouse and of his children;
(b) Of any person on whom he depends wholly or in
part for education or support, or in whom he has a
pecuniary interest;
(c) Of any person under a legal obligation to him for
the payment of money, or respecting property or
services, of which death or illness might delay or
prevent the performance; and
(d) Of any person upon whose life any estate or inter-
estvested in him depends
Insurable Interest
 It is the interest which the law requires the owner of
an insurance policy to have in the person or thing
insured
Pecuniary In Nature
Person is deemedto have an insurable interest in the subject
matter insuredwhere he has a
a. relation or connection with or concern in it that he
will derive pecuniary or financial benefit or
advantage from its preservation and
b. will suffer pecuniary loss or damage from its
destruction, termination, or injury by the happening
of the event insured against.
Note: Interest does not necessarily imply a right to the whole or
a part of a thing. To have an interest in the preservation of a
thing is to be circumstanced with respect to it as to have
benefit from its existence and prejudice from its destruction
EXPN: In life insurance – to have insurable interest is the life of
a person, the expectation of benefit from the continued life of
that person need not necessarily be of a pecuniary nature.
Two general classes of life policies
Life Insurance:
1. Insurance upon one’s life:
the insurance is for the insured’s own benefit or his
estate
2. Upon life of another
o The insured must have an insurable interest
on the life of the Beneficiary
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Justice Lloren
Insurable interest in one’s own life
Insurable interest in life of another
 It must be a pecuniary one
 The assured shall have an interest to preserve the life
insured in spite of the insurance, rather than destroy
it because of insurance.
Insurance for the benefit of a third party
When the owner of the policy insures the life of another (the
cestuiquevei) and designates a third party as beneficiary
o Both the owner and beneficiary must have
an insurable interest in the life of the
Cestuique vie
CestuiQue vie meaning:
 The third person to whom the insurance policy is for
Insurable interest in life ofperson upon whomone depends for
education or support orin whom he has a pecuniary interest.
When mere blood relation is sufficient
Article 195 of our Family Code (Exec. Order No. 209.), theyare
obligedto support each other:
(a) The spouses;
(b) Legitimate ascendants and descendants;
(c) Parents and their legitimate children and thelegiti-mate or
illegitimate children of the latter;
(d) Parents and their illegitimate children and thelegiti-mate or
illegitimate children of the latter;
(e) Legitimate brothers and sisters, whether of the full orhalf-
blood.
Brothers and sisters not legitimately related, whetherof the full
or half-blood, are likewise bound to supporteach other except
only when the need for support of thebrother or sister, being of
age, is due to a cause imputableto the claim-ant's fault or
negligence. (Sec. 196, ibid.)
When pecuniary Benefit is essential
 In lesser degree of kinship (uncle/aunt)
 Relationship is by affinity (son-in-law)
Note: love and affection, gratitude or friendship by itself is not
sufficient
Insurable interest of a person in life ofanother under a legal
obligation to former
1. Related by contract or commercial relation
(employer-employee)
2. Risk that performance of obligation might be delayed
or prevented
Insurable Interest of creditor in life of his debtor
Extent of interest
a creditor may insure his debtor's life for thepurpose of
protecting his debt but only to the extent of theamount of the
debt and the cost ofcarrying the insurance on the debtor's life
o the amount of the policy must not be
sodisproportionate to the amount of the
debts and liens thereonplus the cost of the
insurance as to justify the conclusion that
the policy is merely a wagering or
speculative one.
Right of debtor in insurance taken by creditor
 Acreditor who insures the life of his debtor does not
act as theagent of the latter
 The contract is one purely between the insurerand
the insuring creditor inasmuch as by law, the creditor
isgiven an insurable interest on the life of his debtor.
 the insurance does not inure to thebenefit of the
debtorunless, of course, the contrary is expressly
stipulated.
Extent of the amount that may be recovered by insuring
creditor of the debtor’s life
 only up to the extent of the amount of the unpaid
debt
Insurance taken by debtor for the benefit of creditor
Where a debtor in GD insures his life for the benefit of the
creditor, full payment of the debt does not invalidate the policy
o in such case, the proceeds should go to the
estate of the debtor.
Where the debt becomes legally unenforceable
 in here, the creditor may not insure the life of his
debtor unless the latter has a legal obligation to him
for the payment of the money.
Consent of person whose life insured NOT essential
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Justice Lloren
Under PH law, so long as it could be proved that the assured
has a legal interest at the inception of the policy, the insurance
is valid, even without the consent
SEC. 11. The insured shall have the right to change the
beneficiary he designated in the policy, unless he has
expressly waived this right in said policy. Notwithstanding the
foregoing, in the event the insured does not change the
beneficiary during his lifetime, the designation shall be
deemed irrevocable.
Beneficiary
Definition- the person who is named or designated in a
contract of life, health, or accident insurance as the one who is
to receive the benefits which became payable, according to the
terms of the contract, upon the death of the insured.
- Persons (natural/juridical) who, though not
parties to a contract, are mentioned in it as the
intended recipients of the proceeds or benefits
of the insurance if the insured risk occurs.
Kinds of beneficiary
1. Insured himself
2. Third person who paid a consideration
3. Third person through mere bounty of insured
Note: where the insured, before dying, was judicially declared
insolvent, the proceeds should be paid to the beneficiary and
not to the assignee in insolvency.
Limitations in the Appointment of beneficiary
1. Done in good faith and w/o intent to make the
transaction a mere cover for a forbidden wagering
contract
2. Art. 2012 NCC
Any person forbidden from receiving any donation
under Art. 739 cannot be named beneficiary of a life
insurance policy by the person who cannot make any
donation to him, according to the said article.
Art. 739
The following donations shall be void:
a. Between person who were guilty of
adultery or concubinage at the time of the
donation
b. Between persons found guilty of the same
criminal offense, in consideration thereof,
c. Those made to a public officer or his wife,
descendants and ascendants, by reason of
his
office.
Note: prior conviction for adultery or concubinage is not
required
- The guilt of the donee and donor may be proved
by preponderance of evidence.
 Life insurance policy, in essence, is not different from
a civil donation.
Right of insured to change beneficiary in life insurance
General rule: WON the policy reserves to the insured the right
to change the beneficiary
 He has the power to change the beneficiary without
the comment of the latter who acquires no vested
right but only an expectancy of receiving the
proceeds under the insurance.
Effect of death of the insured
The right must be exercised (change the beneficiary)
 In the manner provided in the policy or contract
 But the insured’s power to extinguish the
beneficiary’s interest ceases at his death
a. Cannot be exercised by his personal
representatives or assignees
b. The beneficiary’s right then becomes fixed.
Right to change is waived
 Expressly waived – the insured has no power to make
such change w/o the consent of the beneficiary
a. The beneficiary acquires an absolute and
vested interest to all benefits accruing to
the policy from the date of its issuance and
delivery
o Then the beneficiary has thus a
property right in the policy of which
could not be deprived without his
consent.
b. Neither can a new beneficiary be added to
the irrevocably designated beneficiary for
this would in effect reduce the latter’s
vested rights.
c. The insured cannot retain the power to
destroy the contract by refusing to pay
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Justice Lloren
premiums for the beneficiary can protect
his interest by paying the premiums
 Reason: the fulfillment of an
obligation may be made by a third
person even against the will of
the debtor and if he has an
interest in the fulfillment of the
obligation, even against the will of
the creditor.
Measurement of vested interest of beneficiary in policy
 The full face Value
- Not the cash surrender value
Note: the beneficiary may continue paying it and is entitled to
automatic extended term or paid-up insurance options etc.
Nario v. Philippine American Life Insurance Co.
An application of loan under the policy and the surrender of the
policy by the insure constitute acts of disposition or alienation
of property rights of the beneficiary and not merely of
management or administration because they involve the
incurring or termination of contractual obligations.
When the beneficiary dies before the insured
- In case of irrevocability
- the proceeds will go to the estate of the
beneficiary
Designation of Beneficiary
1. Children includes-
a. adopted child
b. Adult child not forming a part of the
household of the insured or
c. After-born children even of a marriage
subsequently contracted
- Unless they are specifically named
2. Husband; wife or widow
3. Husband and Children; wife and children – this is
deemed for the benefit of all children of the insured,
whether by the named wife or those of another.
- This is divided per capita
So what if the policy states: “common children only?”
4. Family – this is decided by the court
5. Heirs or legal heirs- this doesn’t mean that it is limited
only to heirs at law, this includes that class of persons
who would take the property of the insured in case
he died intestate.
6. Estate or legal representatives of deceased –
The words “estate”, “representatives” or “legal
representatives” when use in designating
beneficiaries, are to be construed to mean executors
or administrator
- Unless it appears that the insured intended to
use these expressions in the sense of heirs or
next of kin.
If no beneficiary is designated in the life insurance policy
proceeds thereof will go to his LEGAL HEIRS.
Consuegra v. GSIS
If two women unknowingly married the same man in good faith
- And the husband acquired an insurance but did
not expressly provided names for the
beneficiary.
- Each family shall be then entitled to one half of
the insurance
Section 12- the interest of a beneficiary in a life insurance
policy shall be forfeited when the beneficiary is the principal,
accomplice, or accessory in willfully bringing about the death
of the insured; in which event, the nearest relative of the
insured shall receive the proceeds of said insurance if not
otherwise disqualified.
Interest: under this section means the right of the beneficiary
to receive the proceeds of the life insurance policy
- This does not mean insurable interest
The following are the nearest relatives –
1. Legitimate children
2. Father and mother, if living
3. The grandfather and grandmother or ascendants
nearest in degree, if living
4. The illegitimate children
5. The surviving spouse
6. The collateral relatives, to wit:
a. Brothers and sisters of full blood
b. Brothers and sisters of half-blood; and
c. Nephew and nieces
7. In default of the above, the state shall be entitled to
receive the insurance proceeds.
Liability of insurer on death of insured
1. Death at the hands of the law – the death, as by legal
execution, is one of the risks assumed by the insurer
under a life insurance policy in the absence of a valid
policy exception.
2. Death by self-destruction –
Sec. 87: the insurer is not liable in case the insured
commits suicide intentionally with whatever motive,
when in sound mind.
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Note: but if the death is purely incidental, even though due to
the insured’s own carelessness or negligence is not excluded
from the coverage by the words “self-destruction,” “death by
his own hand” and the like which are general considered
synonymous with suicide .
3. Death by suicide while insane – in the absence of
express conditions to the contrary the suicide of an
insured while insane does not discharge the insurer
from his liability on his contract
4. Death caused by beneficiary - he cannot received any
benefit under the contract of insurance
- His interest will be forfeited
- The nearest relative of the insured shall receive
the proceeds of said insurance if not otherwise
disqualified.
EXPN:
a. Caused under circumstances as do not amount
to a felony as henthe killing was accidental or in
self-defense
b. Or where the beneficiary was insane
c. When the death was not intentional, even if the
beneficiary is liable for a felony.
Note: deliberate killing is sufficient, regardless if there is an
intent to gain or not.
5. Death by violation of law – the mere fact that the
insures died while he was committing a felony or
violating a law would not warrant denial of liability.
- To avoid the liability the insurer must prove that
the commission of the felony or the violation of
law was the cause or had a casual connection
with the accident resulting in the death of the
insured.
Note:
- an act or omission punishable by a special law is
strictly not a felony but more of the general
term- crime, offense, transgression or infraction
of law.
Section 13- Every interest in property, whether real or
personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might
directly damnify the insured, is an insurable interest.
- Anyone has insurable interest in property who
derives a benefit from its existence or would
suffer loss from its destruction.
-
Occurrence of loss may be uncertain
- It is not necessary that the event insured against
would necessarily subject the insured to loss
- It is enough that it may do so.
o That pecuniary injury would be the
natural consequence.
Title or right to possession not essential
- It is sufficient that person is so situated with
respect to the property that he will suffer loss as
the proximate result of its damage or
destruction.
3. Legal expectation of loss or benefit
- Insurable interest in property is not necessarily
related to property
- But a concern in the preservation of the property
and such a relation to or connection with it as
will necessarily entail a pecuniary loss in case of
its injury or destruction.
Note: expectation of benefit to be deprived from the
continued existence of property must have a basis of
legal right, although the person insured has no title
o Either legal or equitable to the
property insured.
Mere factual expectation of loss
- Such expectation not arising from any legal right
or duty in connection with the property, does
not constitute an insurable interest.
Situation: An owner of a gasoline filling station near a hotel has
no sufficient insurable interest in the hotel simply because its
burning or destruction, though it leaves the filing station
physically unharmed, will lessen his income from guests of the
hotel.
Section 14- An insurable interest in property may consist in :
a. An existing interest
b. An inchoate interest founded on existing
interest or
c. An expectancy, coupled with a n existing
interest in that out of which the
expectancy arises.
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Justice Lloren
Insurable interest in property in particular cases
EXISTING INTEREST
- This may be a legal title or equitable title
Examples:
1. Trustee – in the case of the seller or property
mortgaged
2. Lessor- including sublease
3. Assignee- of property for the benefit of creditors
Note: when the legal title is held in a representative capacity, as
by an executor, administrator, trustee, or receiver, the
representative has sufficient insurable interest for the purpose
of taking out insurance on the property under his control, but
any proceeds from such insurance are to be held for the benefit
of those for whose benefit the representative is acting.
The following have insurable interest arising from equitable
interest:
- Purchaser of property before delivery or
- Before he has performed the conditions of sale
- Mortgagee of property mortgaged
- Mortgagor after foreclosure but before
expiration of the period within which
redemption is allowed
- Beneficiary under a deed of trust
- Creditors under a deed of assignment
- A judgement debtor whose property has been
seized under execution until the right to redeem
or the right to redeem or the right to have the
sale set aside has been lost
- Builders and constructors in the buildings
pending the payment of the construction price.
- A purchaser of an option to buy real estate has a
insurable interest to the extent of the advance
payment for the option.
Inchoate interest
- A stockholder has an inchoate interest in the
property of the corporation of which he is a SH
o His insurable interest is limited to the
extent of the value of his interest or to
his share in the distribution of the
corporate assets upon dissolution
- Partner has an insurable interest in the firm
property which will support a separate policy for
his benefit.
An expectancy coupled with an existing interest in that out of
w/c such expectancy arises
- A farmer may insure future crops if they are to
be grown in land owned by him at the time of
the issuance of the policy
o Or although the crops are to be raised
by him on the land of another,
provided the crops will belong to him
when produced.
- A workman has an insurable interest in any
building he may have contracted to repair
- Or an artist might insure the structure for the
interior decoration of which he had been
employed.
Section 15- A carrier or depository of any kind has an insurable
interest in a thing held by him as such to the extent of his
liability but not to exceed the value thereof.
Insurable interest of carrier or depository
Reason: because loss/liability/damage may cause up to the
extent of the value of the goods/property
Note: what may be insured is only up to the extent of the
interest
Section 16- A mere contingent event or expectant interest on
anything, not founded on an actual right to the thing, nor
upon any valid contract for it, is not insurable
A mere hope or expectation of benefit which may be frustrated
by the happening of some event uncoupled with any present
legal right will not support a contract of insurance
1. Property of father/son/spouse- a father cannot insure
his son’s property
- Nor can the son insure the property he expects
to inherit
- A spouse has no insurable interest in the
property of the other spouse
2. Life of parents/children/spouse – they can insure
each other’s life
- Mutual support
3. Property of debtor- a general or unsecured creditor
cannot insure a specific property of the debtor who is
alive, even though destruction of such property
would render worthless any judgement he might
obtain
EXPN:
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Justice Lloren
a. an unsecured creditor may insure the
property of a deceased debtor since all
personal liability ceases with the death of
the debtor.
b. An unsecured creditor who obtains a
judgement in his favor becomes a
judgement creditor
i. Then he obtains an insurable
interest in the debtor’s property
as may be necessary to satisfy the
judgement
ii. To recover on the insurance, the
creditor must prove that the
debtor has no other property out
of which the judgement may be
satisfied.
c. Unsecured creditor has an insurable
interest in the life of his debtor to the
extent of the amount of the debt.
4. Property of testator still alive –
The beneficiary in a will has no insurable interest in a
property designated before the testator’s death
- The will has no legal effect until death
- The will can be revoked anytime before the
death
o EXPN: Unless he has waived such right
to revoke under the policy
o As a result, THERE IS INSURABLE
INTEREST
Section 17- The measure of insurable interest in property is
the extent to which the insured might be damnified by loss or
injury thereof.
Section 18- No contract or policy of insurance on property
shall be enforceable except for the benefit of some person
having an insurable interest in the property insured.
Effect of absence of insurable interest in property insured
- The insurance is void
- Even if he subsequently acquired an insurable
interest
Cha v. CA
The contract of lease provides that any fire insurance policy
obtained by the lessee over his merchandise inside the leased
premises without the consent of the lessor is deemed assigned
or transferred to the lessor
Held: such automatic assignment is void for being contrary to
law and public policy, hence, the insurer cannot be compelled
to pay the proceeds of the policy to the lessor who has no
interest in the property insured.
Note: when the insurance is invalidated on the ground that no
insurable interest exists, the premium is ordinarily returned to
the insured, unless he is in pari delicto with the insurer
Doctrine of waiver or estoppel: if there is no insurable interest,
the doctrine cannot be invoked since the public has an
insurable interest in the matter independent of the consent or
concurrence of the parties.
Garcia v. Hongkong
The real intention of the insured was to insure his goods for
P15,000. But through the error or mistake of the insurer, the
policy issued for the building in which the goods were stored
which building the insured never owned or had any insurable
interest, it was held in case of loss of the goods, the insured
can recover.
Measure of indemnity in insurance contracts.
1. Marine or fire insurance
- The amount of indemnity may be determined
after the loss or previously fixed in the contract
GR: the amount of insurance fixed in the policy of a marine or
fire insurance is not the exact measure of indemnity to which
the insured is entitled
- But the maximum indemnity which he might
obtain
- The insured cannot recover in excess of his
actual loss
Valued Policy
The valuation of the thing insured is conclusive between the
parties thereto in the adjustment of loss
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Justice Lloren
- If the insured has some interest at risk and there
is no fraud on his part, although it might be
proved that the actual value of the thing is less.
Note: the principle of indemnity cannot be invoked by the
insurer who agreed to repair or replace the thing insured with a
new one even though the cost of the undertaking may exceed
the original amount (Sec. 172)
Liability Insurance Contracts
- Contracts of indemnity against liability and not
against loss
- Here, the insurer’s promise is to pay the
proceeds of the policy in behalf of the insured to
a third person to whom the insured is liable
- If there was no loss suffered
o Such liability cannot be enforced
Life insurance Contracts
- Not a contract of indemnity
- The amount fixe payable at the death of the
insured is not considered as the true value of the
thing insured
- The life of a person is priceless
- The amount is the measure of indemnity w/c the
insurer bound himself to pay the insured.
Personal Accident Insurance
- Just like life insurance
EXPN: if a person effects a personal accident insurance on the
life of another person
- The amount recoverable is the loss sustained by
the person who effected the policy
Health insurance contracts
- Just like life insurance
- But health insurance contracts that provide a
specific periodic income to disabled persons are
not contracts of indemnity
- But those that cover medical expenses are
contracts of indemnity.
o In this case, only medical expenses
incurred by the insured are paid.
Section 19- An interest in property insured must exist when
the insurance takes effect, and when the loss occurs, but need
not exist in the meantime; and interest in the life or health of
a person insured must exist when the insurance takes effect,
but need not exist thereafter or when the loss occurs.
Section 20- except in the cases specified in the next four
sections, and in the case of life, accident, and health
insurance, a change of interest in any part of a thing insured
unaccompanied by a corresponding change of interest in the
insurance, suspends the insurance to an equivalent extent,
until the interests in the thing and the interest in the
insurance are vested in the same person.
Effect of change in interest
GR: mere transfer of the thing insured does not transfer the
policy but suspends it until the same person becomes the
owner of both the policy and the thing insured.
EXPN: insurance is not suspended
1. Life,health and accident insurance
2. Change of interest in the thing insured after the
occurrence of an injury which results in a loss
3. A change of interest in one or more of several things,
separately insured by one policy
4. Change by will or succession on the death of the
insured
5. A transfer of interest by one of the several parties,
joint owners, or owner in common, who are jointly
insured, to the owners
6. When a policy is so framed that it will inure to the
benefit of whomever, during the continuance of the
risk, may become the owner of the interest insured
7. When there is a express prohibition against alienation
in the policy, in case of alienation, the contract of
insurance is not merely suspended but it is avoided
Change of interest covered by law
- Absolute transfer of the property insured
Note: the interest in the property insured does not pass by
mere execution of the pledge or mortgage
- There is no alienation within the meaning of the
insurance law until the mortgagee acquires a
right to take possession of the property by
default of the mortgagee acquires a right to
taken possession of the property by default of
the mortgagor under the terms of the mortgage.
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Justice Lloren

- There is no alienation within the meaning of the

insurance law until the mortgagee acquires a Section 24- A transfer of interest by one several partners,
right to take possession of the property by joint owners, or owners in common, who are jointly insured,
default of the mortgagor under the terms of the to the others, does not avoid an insurance shall cease upon an
mortgage. alienation of the thing insured.

Exception to general rule: *

The rule that change of interest suspends the Transfer of interest by one of the several partners, etc., jointly
insurance is subject to exceptions:
insured
1. In life, health, and accident insurance
2. A chance of interest in the thing insured after
- Transfer of interest in the
the occurrence of an injury which results in a loss
3. A change of interest in one or more of several
Sec. 25. Every stipulation in a policy of insurance for the
things, separately insured by one policy
payment of loss whether the person insured has or has not
4. A change of interest by will or succession on the
any interest in the property insured, or that the policy shall be
death of the insured
received as proof of such interest, and every policy executed
5. A transfer of interest by one of several partners,
by way of gaming or wagering, is void
joint owners, or owners in common, who are
jointly insured, to the others. Concealment
6. When a policy is so framed that it will inure to
the benefit of whomsoever, during the Sec. 26. A neglect to communicate that which a party knows
continuance of the risk, may become the owner and ought to communicate, is called a conceal-ment.
of the interest insured
7. When there is an express prohibition against Devices for ascertaining and controlling risk and loss
alienation in the policy, in case of alienation, the
1. Concealment and representation
contract of insurance is not merely suspended
2. Warranties and conditions
but is avoided.
Concealmet
Section 21- A change of interest in a thing insured, after the
occurrence of an injury which results in a loss, does not affect neglect to communicate that which a party knows and ought to
the right of the insured to indemnity. communicate

Change of interest in a thing insured after loss Requisites

- After a loss has happened, the liability of the
insurer becomes fixed
- The insured has a right to assign his claim against
the insurer as freely as any other money claim.
- This right is absolute and cannot be d elimited by
agreement
- The insured has also the absolute right to
transfer the thing insured after the occurrence of
the loss.
Section 20 – refers to change of interest in the thing insured
before loss has occurred
Section 22- A change of interest in one or more of several
distinct things, separately insured by one policy, does not
avoid the insurance as to the others.
---------- ------ ------- ------- ------- --------
concealment unless:
(1) a party knows the fact which he neglects to communicate or
disclose to the other;
(2) such party concealing is duty bound to disclose such fact to
the other;
(3) such party concealing makes no warranty of the fact
concealed; and
(4) the other party has not the means of ascertaining the fact
concealed.
Where a warranty is made of the fact concealed, the
nondisclosure of such fact is not concealment but constitutes a
violation of warranty.

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Sec. 27. A concealment whether intentional or unintentional or tending to prove the falsity of a warranty, entitles the
entitles the injured party to rescind a contract of insurance. insurer to rescind.

When fraudulent intent necessary

Effect of concealment - Under this section, the concealment relates to

the falsity of a warranty”
failure on the party of the insured to disclose conditions - In here, the concealment must be intentional
affecting the risk, of which he is aware, makes the contract and fraudulent
voidable at the insurer's option.
Sec. 30. Neither party to a contract of insurance

is bound to communicate information of the matters

Proof of fraud in Concealment
follow-ing, except in answer to the inquiries of the other:
- The insurer need not prove fraud in order to
rescind a contract of insurance (a) Thosewhich the other knows;
- Existence of fraud is not required.
(b) Those which, in the exercise of ordinary care,
Sec. 28. Each party to a contract of insurance must
communicate to the other, in good faith, ail facts within his the other ought to know, and of which the former has
knowledge which are material to the contract, and which the
no rea-son to suppose himignorant;
other has not the means of ascertaining, and as to which he
makes no warranty.
(c) Those of which the otherwaives communication;
Matters that must be communicated even in the absence of
(d) Those which prove or tend to prove the
inquiry
existence of a risk excluded by a warranty, and which
1. Material to the contract
2. The other does not have the means of ascertaining are not other-wisematerial; and
the said facts
3. As to which the party with the duty to communicate (e) Those which relate to a risk excepted from the
makes no warranty
policy, and which are not otherwise material.
TEST of Materiality
Matters made the subject of special inquiries material
If the applicant is aware of the existence of some circumstances
which he knows would influence the insurer in acting upon his Gr: matters made subject of inquiry must be deemed material
application, good faith requires him to disclose that
- Failure of an apparently complete answer to
circumstance, though unasked.
make full disclosure will avoid the policy
Effect of failure of insurer to verify - But an answer incomplete on its face will not
defeat the policy in the absence of bad faith
- The effect of material concealment cannot be
avoided by the allegation that the insurer could When there is no duty to make disclosure
have known and discovered the illness or disease
1. Matters known to, or right to be known by insurer, or
which the insured had concealed
of which he waives disclosure
- The insurance company has no obligation to
2. Risk expected from the policy
verify the statements made by the insured in his
3. Nature or amount of insured’s interest
application
Sec. 31. Materiality is to be determined not by the event, but
Sec. 29. An intentional and fraudulent omission, on the part of
solely by the probable and reasonable influence of the facts
one insured, to communicate information of matters proving

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Justice Lloren
upon the party to whom the communication is due, in forming
his estimate of the disadvantages of the proposed contract, or
in making his inquiries.
Test of Materiality
To be material, a fact need not increase the risk or contribute
to any loss or damage suffered. It is sufficient if the knowledge
of it would influence the parties in making the contract.
From the stand point of the insurer
- A fact is material if the knowledge of it would
have a probable and reasonable influence upon
the insurer in assessing the risk involved and in
making or omitting further inquiries, and caused
him either in making or omitting further
inquiries, and caused him either to reject the risk
or to accept it only at a higher premium rate or
on different terms
After contract has become effective
- If the contract is already effective before the
information in question is acquired
o There can be no duty resting upon the
insured to disclose it
o Even though the policy is yet to issue
- Thus concealment must happen at the time the
contract is entered into in order that the policy
may be avoided and not afterwards.
Sec. 32. Each party to a contract of insurance is bound to
know all the general causes which are open to his inquiry,
equally with that of the other, and which may affect the
political or material perils contemplated and all general
usages of trade.
Sec. 33. The right to information of material facts may be
waived, either by the terms 6f insurance or by neglect to
make inquiries as to such facts where they are distinctly
implied in other facts of which information is communicated.
Sec. 34. Information of the nature or amount of the interest of
one insured need not be communicated unless in answer to
an inquiry, except as prescribed by Section fifty-one.
Sec. 35. Neither party to a contract of insurance is bound to
communicate, even upon inquiry, information of his own
judgment upon the matters in question.
Representation
Sec. 36. A representation may be oral or written.
Representation defined.
Representation
- is a statement made by the insured at the time
of, or prior to, the issuance of the policy (Sec.
37.), as to an existing or past fact or state of
facts, or concerning a future happening, to give
information to the insurer and otherwise induce
him to enter into the insurance contract.
Misrepresentation in insurance is a statement
(1) as a fact of something which is untrue,
(2) which the insured statedwith knowledge that it is
untrue and with an intent to deceive, or which he
states positively as true without knowing it to be true
and which has a tendency to mislead, and
(3) where such fact in either case is material to the
risk.
Such a misrepresentation by the insured renders the insurance
contract voidable at the option of the insurer, even though
innocently made and without wrongful intent.
Form and nature of representation
1. Information given concerning risk
2. Forms basis of contract
3. Intended as collateral inducements
Sec. 37. A representation may be made at the time of, or
before, issuance of the policy
Sec. 38. The language of a representation is to be interpreted
by the same rules as the language of contracts in general.
Sec. 39. A representation as to the future is to be deemed a
promise, unless it appears that it was merely a statement of
belief or expectation.
Kinds of Representation
1. Oral or written
2. Made at the time of issuing the policy or before
3. Affirmative or promissory
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Justice Lloren

Affirmative representation
is any allegation as to the existence or non-existence of a fact
when the contract begins.
Promissory Representation
is any promise to be fulfilled after the contract has come into
existence or any statement concerning what is to happen
during the existence of the insurance.
- And it was impossible for the agent under such
circumstances in the exercise of due diligence to
have made such communication before the
making of the contract, the insured will liable for
the truth
Sec. 44. A representation is to be deemed false when the facts
fail to correspond with its assertions or stipulations.
False representation

Nature of promissory representations - Representation need not be literally true

1. Used to indicate a parol or oral promise made in
connection with the insurance, but not incorporated
in the policy.
2. An undertaking by the insured, inserted in the policy,
but not specifically made a warranty
Thus, promissory representation is, therefore,
substantially a condition or a warranty
Sec. 40. A representation cannot qualify an express provision
in a contract of insurance; but it may qualify an implied
warranty
Sec. 41. A representation may be altered or withdrawn before
the insurance is effected, but not afterwards.
Sec. 42. A representation must be presumed to refer to the
date on which the contract goes in effect.
Sec. 43. When a person insured has no personal knowledge of
a fact, he may nevertheless repeat information which he has
upon the subject, and which he believes to be true, with the
explanation that he does so on the in-formation of others; or
he may submit the information, in its whole extent, to the
insurer; and in neither case is he responsible for its truth,
unless it proceeds from an agent of the insured, whose duty it
is to give the information
Effect of information obtained from third persons
If the representation turns out to be false, he is not responsible
therefor, provided he gives explanation that he does so on the
information of others.
- Must only be substantially true
Sec. 45. If a representation is false in a material point,
whether affirmative or promissory, the injured party is
entitled to rescind the contract from the time when the
representation becomes false. The right to rescind granted by
this Code to the insurer is waived by the acceptance of
premium payments despite knowledge of the ground for
rescission.
Effect of falsity of representation
- Fraud or intent is not necessary for rescission
- To be deemed false, it is sufficient if the
representation fails to be
Effect of collusion or fraud of agent insurer
1. Collusion with insured
- will vitiate the policy
- Even though the agent is acting within the
apparent scope of his authority
- When there is collusion, the agent ceases to
represent his principal, and represents himself
- Thus, the insurer is not estopped from avoiding
the policy
2. Principal of agent
- Where the insured merely signed the application
from and made the agent of the insurer fill the
same for him
- It was held that by doing so, the insured ,ade the
agent of the insurer his own agent

Effect where information obtained from agent of

insured/insurer.

1. Agent of insured – if from agent of the insured,

whose duty is in the ordinary course of business to
communicate such information to his principal

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 LAW ON INSURANCE 2017
Justice Lloren

Sec. 46. The materiality of a representation is deter-mined by fraudulent concealment or misrepresentation of the insured
the same rules as the materiality of a concealment. or his agent

Test of Materiality Grounds for rescission

- The materiality is not determined by the event, 1. Concealment

but solely by the probable and reasonable 2. False representation
influence the facts upon the party to whom the 3. Breach of warranty
representation is made
Incontestability of life policies
CONCEALMENT MISREPRESENTATION
The insured withholds The insured makes erroneous - that the policy shall be inconstestable after a
information of material facts statements of facts with the stated period are in general use, and are now
from the insurer intent of inducing the insurer required by statutes force in many states.
to enter into the insurance - Thus the insurer shall be estopped from
contract contesting the policy or setting up any defense,
except those allowed on the ground of public
Materiality is determined by - policy.
the same rules as applied in
Requisites
misrepresentation
1. The policy is a life insurance policy
Concealment on the part of -
2. It is payable on the death of the insured
the insured has the same
3. It has been in force during the lifetime of the insured
effect as a misrepresentation
for at least two (2) years from its date if issue or of its
and gives the insurer a right
last reinstatement.
to rescind the contract
What if the there are different dates?
Since the contract of
insurance is said to be one of - As when the policy date, issue date and the
utmost good faith on the part payment of premium,
of both parties to the o Ambiguities are interpreted in favor of
agreement, the rules on the policy holder or beneficiary
concealment and o If the insurance became effective on a
representation apply likewise date prior to date of issue-
to the insurer  The contestable period shall
be computed from the
earlier date
Sec. 47. The provisions of this chapter apply as well to a
Nevertheless, in a case where the policy was dated back six
modification of a contract of insurance as to its original
months to obtain the benefit of a lower age and lower
formation
premium, it has been held that the contestable period
Sec. 48. Whenever a right to rescind a contract of insurance is commenced from the date of issue and not the effective date
given to the insurer by any provision of this chapter, such right of the coverage. (Forest vs. Mutual Benefit Life Ins. Co., 89 NYS
must be exercised previous to the commencement of an [2d] 488 [1949].)
action on the contract.
Note : the two year period can be shortened but can never be
After a policy of life insurance made payable on the death of extended
the insured shall have been in force during the lifetime of the
insured for a period of two years from the date of its issue or
of its last reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindible by reason of the

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 LAW ON INSURANCE 2017
Justice Lloren
Effect when policy becomes incontestable
- After the period, the insurer may not refuse to
pay the same by claiming that:
1. The policy is void ab initio; or
2. It is rescissible by reason of the fraudulent
concealment of the insured or his agent, no
matter how patent or well-founded
3. It is rescissible by reason of the fraudulent
misrepresentations of the insured or his agent.
Defenses not barred by incontestable clause
1. That the person taking the insurance lacked insurable
interest as required by law
2. The cause of death of the insured is an excepted risk
3. That the premiums have not been paid
4. The conditions of the policy relating to military or
naval service have been violated
5. That the fraud is of a particularly vicious type
6. That the beneficiary failed to furnish proof of death
or to comply with any condition imposed by the
policy after the loss has happened
7. The action was not brought within the time specified.
Sec. 49. The written instrument in which a contract of
insurance is set forth, is called a policy of insurance.
Sec. 50. The policy shall be in printed form which may contain
blank spaces; and any word, phrase, clause, mark, sign,
symbol, signature, number, or word necessary to complete
the contract of insurance
shall be written on the blank spaces provided therein.
Any rider, clause, warranty, or endorsement purporting to be
pert of the contract of insurance and which is pasted or
attached to said policy is not binding on the insured, unless
the descriptive title or name of the rider, clause, warranty, or
endorsement is also mentioned and written on the blank
spaces provided in the policy.
Unless applied for by the insured or owner, any rider, clause,
warranty, or endorsement issued after the original policy shall
be countersigned by the insured or owner, which
countersignature shall be taken as
his agreement to the contents of such rider, clause, warranty,
or endorse-ment.
Group insurance and group annuity policies, however, may be
typewritten and need not be in printed form
Importance of delivery of policy
1. Evidence of the making of a contract and of its terms
2. As communication of the insurer’s acceptance of the
insured’s offer
Note: delivery of the policy is not, a prerequisite to a valid
contract of insurance
Effect of delivery of policy
1. Conditional delivery
- Non-performance of the condition precedent
prevents the contract from taking effect.
2. Where delivery unconditional
3. Where premium still unpaid after unconditional
delivery
Rider in a contract of insurance
A rider is a small printed or typed stipulation contained on a
slip of paper attached to the policy and forming an integral part
of the policy.
- Additional binding stipulation between the
parties
- Riders are necessary is found in the fact that in
the conduct of insurance business
o It often becomes necessary to add a
new provision to a policy, or to modify
or waive an existing provision
Rules in case of conflict between a rider and printed
stipulation
- Rider prevails
Attached papers on insurance policy
1. Binding effect
- Rider, slip, or other paper becomes a part of a
contract or policy of insurance if properly and
sufficiently attached or referred to thereon in a
manner as to leave no doubt as to the intention
of the parties in such respect.
Sec. 51. A policy of insurance must specify:
(a) The parties between whom the contract is made;
(b) The amount to be insured except in the cases of open or
running policies;
23
 LAW ON INSURANCE 2017
Justice Lloren
(c) The premium, or if the insurance is of a character where
the exact premium is only determinable upon the termination
of the contract, astatement of the basis and rates upon which
the final premium is to be determined;
(d) The property or life insured;
(e) The interest of the insured in property insured, if he is not
the absolute owner thereof; and
(f) The risks insured against; and
(g) The period during which the insurance is to continue.
Sec. 52. Cover notes may be issued to bind insurance
temporarily pending the issuance of the policy. Within sixty
days after issue of a cover note, a policy shall be issued in lieu
thereof, including within its terms the identical insurance
bound under the cover note and the premium therefor.
Cover notes may be extended or renewed beyond such sixty
days with the written approval of the Commissioner if he
determines that such extension is not contrary to and is not
for the purpose of violatin any provisions of this Code. The
Commissioner may promulgate rules and regu-lations
governing such extensions for the purpose of pre-venting such
violations and may by such rules and regula-tions dispense
with the requirement of written approval by him in the case
of extension in compliance with such rules and regulations
Preliminary contracts of insurance
1. Preliminary contracts of present insurance
2. Preliminary contracts of executory insurance
Issuance and renewal of cover noted
Issuance and renewal of cover notes. Cover notes (also called a
binder) may be issued to afford immediate provisional
protection to the insured until the insurer can inspect or
evaluate the risk in question and issue the proper policy (Sec.
52, par. 1.), or until the risk is declined and notice thereof
given.
- The fact that no separate premium was paid on
the cover note before the loss insured against
occurred, does not militate against its binding
effect as an insurance contract.
Rules on cover notes.
(1) Insurance companies doing business in the Philippines may
issue cover notes to bind insurance temporarily, pending the
issuance of the policy.
(2) A cover note shall be deemed to be a contract of insurance
within the meaning of Section 1(1) of the Code.
(3) No cover note shall be issued or renewed unless in the form
previously approved by the Insurance Commission.
(4) A cover note shall be valid and binding for a period not
exceeding sixty (60) days from the date of its issuance, whether
or not the premium therefor has been paid, but such cover
note may be cancelled by either party upon at least seven (7)
days notice to the other party.
(5) If a cover note is not so cancelled, a policy of insurance shall,
within sixty (60) days after the issuance of such cover note, be
issued in lieu thereof. Such policy shall include within its terms
the identical insurance bond under the cover note and the
premium therefor.
(6) A cover note may be extended or renewed beyond the
aforementioned period of sixty (60) days with the written
approval of the Insurance Commission, provided that such
written approval may be dispensed with upon the certification
of the president, vice-president, or general manager of the
insurance company concerned that therisks involved, the
values of such risks and/or the premiums therefor have not as
yet been determined or established and that such extension
or renewal is not contrary to and is not for the purpose of
violating any provisions of the Insurance Code, or of any of the
rulings, instructions, circulars, orders or decisions of the
Insurance Commissioner.
Sec. 53. The insurance proceeds shall be applied exclu-sively
to the proper interest of the person in whose name or for
whose benefit it is made unless otherwise specified in the
policy
Sec. 54. When an insurance contract is executed with an agent
or trustee as the insured, the fact that his princi-pal or
beneficiary is the real party in interest may be indicated by
describing the insured as agent or trustee, or by other general
words in the policy
Sec. 55. To render an insurance effected by one partner or
part-owner, applicable to the interest of his copartners or
other part-owners, it is necessary that the terms of the policy
should be such as are applicable to the joint or com-mon
interest.
Sec. 56. When the description of the insured in a policy is so
general that it may comprehend any person or any class of
persons, only he who can show that it was intended to include
him can claimthe benefit of the policy.
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 LAW ON INSURANCE 2017
Justice Lloren
Sec. 57. A policy may be so framed that it will inure to the
benefit of whomsoever, during the continuance of the risk,
may become the owner of the interest insured.
Sec. 58. The mere transfer of a thing insured does not transfer
the policy, but suspends it until the same person becomes the
owner of both the policy and the thing in-sured.
Sec. 59. A policy is either open, valued, or running.
Sec. 60. An open policy is one in which the value of the thing
insured is not agreed upon, but is left to be ascer-tained in
case of loss.
Sec. 61. A valued policy is one which expresses on its face an
agreement that the thing insured shall be valued at a specified
sum.
Sec. 62. A running policy is one which contemplates successive
insurances, and which provides that the object of the policy
may be from time to time defined, especially as to the
subjects of insurance, by additional statements or
indorsements.
A valued policy is defined in Section 61. Therefore, it is one in
which the parties expressly agree on the value of the subject
matter of the insurance.
A running policy is defined in Section 62. This kind of policy is
intended to provide indemnity for property which cannot well
be covered by a valued policy because of its frequent change of
location and quantity, or for property of such a nature as not to
admit of a gross valuation.
Advantages of a running policy
(1) He is neither underinsured nor over insured at any time, the
premium being based on the monthly values reported;
(2) He avoids cancellations that would otherwise be necessary
to keep insurance adjusted to value at each location, and for
which cancellations he would be charged the expensive short
rate;
(3) He is saved the trouble of watching his insurance and the
danger of being underinsured in spite of his care, through
oversight or mistake; and
(4) The rate is adjusted to 100% insurance, whereas valued
policies requiring insurance only to, say 80% of the value, give
either a small or no reduction for amounts of insurance above
this figure.
Sec. 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 year from the time
when the cause of action accrues, is void.
General rule. — A clause in an insurance policy to the effect
that an action upon the policy by the insured must be brought
within a certain period is valid and will prevail over the general
law on limitations of actions as prescribed by the Civil Code12 if
not contrary to Section 63. (see Teal Motor Co. vs. Orient Ins.)
Period limitation. — If the period fixed is less than one year
from the time the cause of action accrues, the stipulation
would be void.
When cause of action accrues
- The right of the insured to the payment of his
loss accrues from the happening of the loss.
- However, the cause of action in an insurance
contract does not accrue until the insured's
claim is finally rejected by the insurer.
- This is because before such final rejection, there
is no real necessity for bringing suit.
Stipulated prescriptive period begins from happening of the
loss.
- As the stipulation is upon a written contract, the
time limit is ten years from the time the cause of
action accrues. (Art. 1144, Civil Code.)
Note: a complaint or claim filed by the insured with the Office
of the Insurance Commissioner would now be considered an
"action" or "suit"
the filing of which would have the effect of tolling or
suspending the
running
Sec. 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 effec-tive
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 ormaterialmisrepresentation;
(d) discovery of willful or reckless acts or omissions increasing
the hazard insured against;
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 LAW ON INSURANCE 2017
Justice Lloren

(e) physical changes in the property insured which re-sult in Kinds of warranties
the property becoming uninsurable; or 1. Express
2. Implied
(f) a determination by the Commissioner that the con- 3. Affirmative
tinuation of the policy would violate or would place the in- 4. Apromissory
surer in violation of this Code, (n)

Sec. 65. All notices of cancellation mentioned in the preceding Sec. 68. A warranty may relate to the past, the present, the
section shall be in writing, mailed or delivered to the named future, or to any or all of these.
insured at the address shown in the policy, and shall state (a)
which of the grounds set forth in section sixty-four is relied Sec. 69. No particular form of words is necessary to create a
upon and (b) that, upon written request of the named warranty.
insured, the insurer will furnish the facts on which the
cancellation is based.
Warranties Representation
Form and sufficiency of notice of cancellation by the Insurer. Considered parts of the Collateral inducements only
contract
The conditions under which the right may be exercised are: Always written on the face if May be written in a totally
the policy, actually or by disconnected paper or may be
(1) There must be prior notice of cancellation to the insured reference oral
Must be strictly complied with Substantial truth only is
(2) The notice must be based on the occurrence, after the required
effective date of the policy, of one or more of the grounds Falsity or nonfulfillment or a Falsity renders the policy void
mentioned (Sec. 64.); warranty operates as a breach on the ground of fraud
of contract
(3) It must be in writing, mailed or delivered to the named Presumed material Insurer must show the
insured at the address shown in the policy; and materiality of the
representation in order to
(4) It must state which of the grounds set forth is relied upon. defeat an action on the policy

Sec. 66. In case of insurance other than life, unless the insurer
at least forty-five 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 one year shall be considered as if written for a term
of one year. Any policy written for a term longer than one
year or any policy with no fixed expiration date shall be
considered as if written for successive policy periods or terms
of one year.
Warranties
Sec. 67. A warranty is either express or implied
Warranty
is a statement or promise by the insured set forth in the policy
itself or incorporated in it by proper reference, the untruth or
nonfulfillment of which in any respect and without reference to
whether the insurer was in fact prejudiced by such untruth or
nonfulfillment, renders the policy voidable by the insurer
Sec. 70. Without prejudice to section fifty-one, every express
warranty, made at or before the execution of a policy, must
be contained in the policy itself, or in another instrument
signed by the insured and referred to in the policy as making a
part of it.
Sec. 71. A statement in a policy, of a matter relating to the
person or thing insured, or to the risk, as a fact, is an express
warranty thereof.
Sec. 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.
Sec. 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.
When breach of warranty does not avoid policy
1. Loss occurs before time for performance
2. Performance becomes unlawful
3. When performance becomes impossible

26
 LAW ON INSURANCE 2017
Justice Lloren
Where insurer barred by waiver or estoppel
- Breach of warranty operates to discharge the
insurer from liability unless the insurer is liable
because of a waiver of the warranty or an
estoppel
- The omission to fulfill a warranty or condition
will likewise be excused where there is a waiver
on the part of the insurer
Under 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.
The ground of estoppel is that it would be against equity and
good conscience for the insurer to assert such defense.
- Estoppel is different from waiver, but the result
is much the same.
Sec. 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.
The violation of the terms of a contract of insurance entitles
either party to terminate the contractual relations. (Young vs.
Midland Textile Ins. Co., 30 Phil. 614 [1915].) Thus, the insured
can sue for rescission for breach of contract due to the refusal
of the insurer to grant a loan applied for although this was
expressly agreed upon in the policy and he can recover the full
amount of the premiums paid by him up
to the filing of the action.
Sec. 75. A policy may declare that a violation of speci-fied
provisions thereof shall avoid it, otherwise the breach of an
immaterial provision does not avoid the policy.
Sec. 76. A breach of warranty without fraud, merely ex-one
rates an insurer from the time that it occurs, or where it is
broken in its inception, prevents the policy from attach-ing to
the risk.
Warranty Condition
Does not suspend or defeat Condition precedent is one
the operation of the without the performance of
contract which the contract, although in
- Breach form executed by the parties
affords either and delivered, does not bring
the remedy into life
expressly - Limitation to the
provided in attachment of
the contract the risk
or that
furnished by
law
Nature-
If the insured person contracts and warrants that if the
representations made by him in his application for insurance
are not true, the policy shall be null and void, such statements
are not conditions precedent but rather of the nature of a
defeasance.
Also, promissory warranties are usually regarded as conditions
subsequent to be performed after the policy has become a
valid contract, non-performance of which will work a
defeasance
Premium
Sec. 77. An insurer is entitled to payment of the premium as
soon as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance
company is valid and binding unless and until the premium
thereof has been paid, except in the case of a life or an
industrial life policy whenever the grace period provision
applies.
premium
may be defined as the agreed price for assuming and carrying
the risk — that is, the consideration paid an insurer for
undertaking to indemnify the insured against a specified peril
assessment, in the law of insurance, is a sum specifically levied
by mutual insurance companies or associations, upon
Effect of nonpayment of premium
a general principle, the time specified for the payment of
premiums is of the essence of the contract. The ability of the
insurer to meet its contingent obligations to the public depends
upon the prompt payment of all premiums due it
1. First Premium – non-payment of the 1st premium
unless waived, prevents the contract from becoming
binding notwithstanding the acceptance of the
application nor the issuance of the policy
o But nonpayment of the balance of the
premium due does not produce the
cancellation of the contract
2. Subsequent Premiums
- Nonpayment of subsequent premiums does not
affect the validity of the contracts unless, by
express stipulation, it is provided that the policy
shall in that event be suspended or shall lapse.
- In case of individual life or endowment insurance
and group life insurance, the policyholder is
entitled to a grace period of
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Justice Lloren
o either thirty (30) days or
o one (1) month
o within which the payment of any
premium after the first may be made.
- In the case of industrial life insurance,
o the grace period is four (4) weeks, and
where premiums are payable monthly,
o either thirty (30) days or one (1)
month.
Excuses for Non-payment
1. Fortuitous events
2. Condition, conduct or default of insurer
Validity of Policy where credit extension granted to insured
----
When policy valid and binding notwithstanding nonpayment
of premium.
1. Life or industrial policy whenever the grace period
provision applies
2. When there is an acknowledgement in a policy or
contract of insurance of receipt of premium
o Even if there is a stipulation therein
that it shall not be binding until the
premium is actually paid
3. When there is an agreement allowing the insured to
pay the premium in installments and partial payment
has been made at the time of loss
4. 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
5. Estoppel
Sec. 78. An acknowledgment in a policy or contract of
insurance of receipt of premium is conclusive evidence of its
payment, so far as to make the policy binding, notwith-
standing any stipulation therein that it shall not be binding
until the premiumis actually paid
Sec. 79. A person insured is entitled to a return of pre-mium,
as follows:
(a) To the whole premium if no part of his interest in the thing
insured be exposed to any of the peril 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 deduct-ing 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.
Sec. 80. 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 concerned.
Sec. 81. A person insured is entitled to a return of the
premium when the contract is voidable, on account of the
fraud or misrepresentation of the insurer, or of his agent, or
on account of facts, the existence of which the insured was
ignorant without his fault; or when by any default of the
insured other than actual fraud, the insurer never incurred
any liability under the policy.
Sec. 82. In case of an over insurance by several insur-ers, the
insured is entitled to a ratable return of the pre-mium,
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 the insurance is for a definite period and the insured
surrenders his policy before the termination thereof {ibid., [b].);
(3) When the contract is voidable because of the fraud or
misrepresentations of the insurer or his agent (Sec. 81.);
(4) When the contract is voidable because of the existence of
facts of which the insured was ignorant without his fault (ibid.);
(5) When the 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 (Sec. 82.); and
(7) When rescission is granted due to the insurer's breach of
contract.
Right to recover premiums as to life insurance.
Recovery of premiums paid is not allowed in life insurance if
the insured surrenders his policy.
Over Insurance
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Justice Lloren
In case of over-insurance by double insurance (see Sec. 93.), 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.
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 policies exceeds the
insurable value of the thing at risk.
Note: When the insurance is void because it is illegal, the
general rule is that the premiums cannot be recovered.
But if, in fact, the parties are not in pari delicto, the law will
allow an innocent insured to take again his premiums as when
the insured was ignorant of the facts which rendered the
insurance illegal.
Loss
Sec. 83. 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
Claim
may be defined as a demand for the satisfaction of a loss
suffered within the purview of an insured's policy.
Sec. 84. 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 contem-plated 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
may be defined as the injury, damage, or liability sustained by
the insured in consequence of the happening of one or more of
the perils against which the insurer, in consideration of the
premium, has undertaken to indemnify the insured.
Proximate cause is that which, in a natural and continuous
sequence, unbroken by any new independent cause, produces
an event and without which the event would not have
occurred.
Sec. 86. Where a peril is especially excepted in a con-tract of
insurance, a loss, which would not have occurred but for such
peril, is thereby excepted although the immediate cause of
the loss was a peril which was not excepted.
proximate cause is an excepted peril.
- Insurer not liable
Sec. 87. An insurer is not liable for a loss caused by the willful
act or through the connivance of the insured; but he is not
exonerated by the negligence of the insured, or of the
insured’s agents or others.
Loss caused by negligence of insured.
1. Ordinary negligence
Thus, it is a basic rule in insurance that the
carelessness and negligence of the insured or his
agents constitute no defense on the part of the
insurer
Gross negligence
But gross negligence or recklessness on the part of the insured,
the consequence of which must have been palpably obvious to
him at the time, will relieve the insurer from liability
Notice of loss
Sec. 88. In case of loss upon an insurance against fire, an
insurer is exonerated, if notice thereof be not given to him by
an insured, or some person entitled to the benefit of the
insurance, without unnecessary delay, (a)
Sec. 89. 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.
Notice of loss is the more or less formal notice given the
insurer by the insured or claimant under a policy of the
occurrence of the loss insured against.
The notice must be given "without unnecessary delay."
- within a reasonable time
Sec. 90. 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.
Sec. 91. Delay in the presentation to an insurer of notice or
proof of loss is waived if caused by any act of his, or if he
omits to take objection promptly and specifically upon that
ground.
Sec. 92. If the policy required, 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 rea-sonable
diligence to procure it, and
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Justice Lloren

in case of the refusal of such person to give it, then to furnish value in the case of unvalued policies, he must hold such sum
reasonable evi-dence to the insurer that such refusal was not in trust for the insurers, according to their right of
induced by any just grounds of disbelief in the facts necessary contribution among themselves;
to be certified or testified.
(e) Each insurer is bound, as between himself and the other
Double Insurance insurers, to contribute ratably to the loss in propor-tion to the
Sec. 93. A double insurance exists where the same per-son is amount for which he is liable under his contract.
insured by several insurers separately in respect to the same
subject and interest. - the insured can recover no more than the
amount of his insurable interest whether the
There is no double insurance unless the following requisites insurance is contained in one policy or in several
exist: policies
(1) The person insured is the same;
(2) Two or more insurers insuring separately;
(3) The subject matter is the same; Reinsurance
(4) The interest insured is also the same; and
(5) The risk or peril insured against is likewise the same. Sec. 95. A contract of reinsurance is one by which an insurer
procures a third person to insure him against loss or liability
by reason of such original insurance.
Over Insurance Double Insurance
There is over-insurance when In double insurance, there Double Insurance Reinsurance
the amount of the insurance may be no over-insurance as the insurer remains as the the insurer becomes the
is beyond the value of the when the sum total of the insurer insured, insofar as the
insured's insurable interest. amounts of the policies issued of the original insured reinsurer is concerned;
does not exceed the insurable the subject of the insurance is it is the original insurer's
interest of the insured. property, risk
over-insurance there may be double insurance there are an insurance of the same insurance of a different
only one insurer involved. always several insurers interest interest
the insured is the party in the original insured has no
The purpose of the prohibition against double insurance is to interest in all the contracts interest in the contract of
prevent over-insurance and thus avert the perpetration of reinsurance which is
fraud. independent of the original
- The public, as well as the insurer, is interested in contract of insurance
preventing the situation in which a loss would be
the insured has to give his the consent of the original
profitable to the insured.
consent, while in reinsurance insured (who is hardly even
aware of the reinsurance
Sec. 94. Where the insured is over-insured by double
transaction) is not necessary.
insurance:
Sec. 96. Where an insurer obtains reinsurance, except under
(a) The insured, unless the policy otherwise provides, may
reinsurance treaties, he must communicate all the
claim payment from the insurers in such order as he may
representations of the original insured, and also all the
select, up to the amount for which the insurers are severally
knowledge and information he possesses, whether previously
liable under their respective contracts;
or subsequently acquired, which are material to the risk
(b) Where the policy under which the insured claims is a
Methods of Ceding Reinsurance
valued policy, the insured must give credit as against the
valuation for any sum received by him under any other pol-icy
1. automatic
without regard to the actual value of the subject matter
2. facultative
insured;
- which covers liability on individual risk, there is
no obligation either to cede or to accept
(c) Where the policy under which the insured claims is an
participation in the risk insured, each party
unvalued policy he must give credit, as against the full
having free choice.
insurable value, for any sum received by him under any other
- But once the share is accepted, the obligation is
policy;
absolute and the liability assumed thereunder
can be discharged by one and only way-
(d) Where the insured receives any sum in excess of the
payment of the share of the losses
valuation in the case of valued policies, or of the insur-able

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Justice Lloren

Sec. 97. A reinsurance is presumed to be a contract of Risks or losses covered in ocean marine insurance
indemnity against liability, and not merely against damage.
- All except those repugnant to public policy or
Nature positively prohibited

1. Indemnity against liability Note:

2. Contract separate from original insurance policy
3. Based on original policy 1. Insurance on freight – the perils insured against shall
4. Insurable interest requirement applicable
not prevent the ship from earning full freight for the
5. Rule on subrogation applicable
insured in that voyage.
Sec. 98. The original insured has no interest in a contract of 2. The underwriter of a vessel does not undertake for
reinsurance the cargo but engages only for the ability of the vessel
to perform her voyage and to bear damage which the
Marine Insurance vessel may sustain in making the voyage

Section 99- Perils of the sea

- Includes only those casualties due to the unusual

violence or extraordinary action of wind and
Transportation Insurance
wave, or to other extraordinary causes
connected with navigation
- Property insurance
- Concerned with the peril dos property in transit
Note: Barratry meaning- any unwilful misconduct on the part of
as opposed to property perils at a generally fixed
the master or crew in pursuance of some unlawful or
location
fraudulent purpose without the consent of the owners and to
- This does not include normal motor vehicle
the prejudice of the owner’s interest
insurance which is treated separately by law.
- Requires a willful and intentional act in its
Major Divisions of Transportation insurance
commission
- No honest error of judgement or mere
1. Ocean Marine Insurance – one of the oldest written
negligence, unless criminally gross can be
forms
considered barratry
( Old law, Marince insurance definition- an insurance
against risk connected with navigation, to which a
Perils not covered (perils of the sea)
ship. Cargo, freightage, profits or other insurable
interest in movable property, may be exposed during - Losses from ordinary wear and tear
a certain voyage or a fixed period of time - Other damages usually incident to the voyage
2. Inland marine insurance- covers land transportation
perils of property shipped by railrods, motor trucks,
airplanes, and other means of transportation. PERILS OF THE SEA PERILS OF THE SHIP
- Covers risk of lake, river, or other inland
waterway transportation Only those losses due to the A loss w/c, in the ordinary
extraordinary nature course of events, results –
Scope of Ocean Marine Insurance
Or those arising from some 1. From the natural
1. Ships or hulls overwhelming power which and inevitable
2. Goods or cargoes cannot be guarded against by action of the sea
3. Earnings such as freight, passage money, the ordinary exertion of 2. From the ordinary
commissions or profits human skill or prudence, as wear and tear of the
4. Liability (protection and indemnity insurance) distinguished form the ship
incurred by the owner or any interested parties in or ordinary wear and tear 3. From the negligent
responsible for the insured property failure Of the

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Justice Lloren

shipowner to - Protection for property frequently exposed to

provide the vessel loss while it is in transportation from one
Does not include: those due with proper location to another
to the inherent vice of the equipment to 2. Bailee Liability
thing or by the act of the convey the cargo - Protection to persons who have temporary
owner, master or shipper under ordinary custody of the goods or personal property of
conditions others, such as carriers and warehousemen
3. Fixed transportation property
- Covers bridges, tunnels and other
instrumentalities of transportation and
Perils of the sea must be the proximate cause of loss communication, although as a matter of fact
they are fixed property
“All risks” Marine insurance policy
4. Floater- provides insurance to follow the insured
- This policy insures against all causes of property
conceivable loss or damage Wherever it may be located, subject always to the
- Except as otherwise excluded in the policy territorial limits of the contract.
o Or due to fraud or intentional - Applied to jewelries, work of art etc.
misconduct

Scope
Insurable Interest on Marine Insurance
- Covers all the losses during the voyage
Section 100- The owner of the ship has in all cases an
- WON arising from a marine peril or not
insurable interest in it, even when it has been chartered by
o Including pilferage
one who covenants to pay him its value in case of loss,
 Pilferage – the act of stealing
provided, that in this case the insurer shall be liable for only
things of small value (during
that part of loss which the insured cannot recover from the
war)
charterer.
Note: in All risk the insured has the initial burden of proving
Pendergast v. Glove
that the cargo was in good condition when the policy attached
If the insurance is taken upon a ship or cargo “lost or not lost,”
- And that the cargo was damaged when unloaded
that is, the insurer expressly agrees that he will be bound in any
from the vessel
event, even though the vessel be already lost, the contract is
- Thereafter, the burden then shifts to the insurer
binding and the insurer must pay, even though it be proved
to show the exception to the coverage
that the insured had nothing to insure when the contract was
Inland Marine Insurance made

Original Coverage – loss or damage due to perils of

transportation
Insurable Interest and sale contracts
Two classes of Inland marine insurance
1. In the case of cargo
1. Property insurance on goods in transit by railroad, - In the shipper/consignee depending upon the
express mail, motor truck, aircraft and water terms of sale:
2. Property insurance on goods of certain specified a. FOB (Free on Board)
types o FOB factory – the buyer assumes
responsibility when the goods leave
Four divisions or classes of inland marine insurance the factory; or
o FOB point of destination – the buyer
1. Property in transit does not assume responsibility until
the goods are received from the carrier

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Justice Lloren
b. CIF (Cost, insurance and freight)
o The seller assumes complete
responsibility for securing all necessary
insurance and
c. C & F (cost and freight) – the buyer
procures his own insurance.
2. In the case of a vendee/consignee of goods in transit
– The vendee/consignee has such existing interest
therein as may be the subject of a valid contract of
insurance.
- His interest over the goods is based on the
perfected contract of sale between him and the
shipper of the goods which operates to vest in
him an equitable title even before delivery or
before he performed the conditions of the sale.
- 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 101 – the insurable interest of the owner of a ship
hypothecated by bottomry is only the excess of its value over
the amount secured bottomry.
Shipowner’s and lender’s insurable interest where vessel
hypothecated by bottomry
What is bottomry? A system of merchant insurance in which a
ship is used as security against a loan to finance a voyage, the
lender shall lose the investment if the ship sinks.
What do you mean by hypothecation? A debtor pledges a
collateral to secure a debt or as a condition precedent to the
debt or a third party pledges a collateral for the debt
A loan on bottomry – is one which is payable only if the vessel,
given as a security for the loan, completes in safety the
contemplated voyage,
The lender in bottomry is entitled to receive a high rate of
interest to compensate him for the risk of losing his loan.
- The owner of the vessel receives in case of loss
no indemnity for his loss, but he does secure
immunity from payment of the loan.
When a vessel is bottomed, the owner has an insurable inters
only in the excess of its value over the amount of the bottomry
loan.
The insurable interest of the lender on bottomry in the vessel
given as security is to the extent of the loan.
Insurable interest in expected freightage in a charter party
- The insured must have an inchoate right to
freight, that ism he must be in such position with
regard to freight that nothing could prevent him
from ultimately having a perfect right to it but
the intervention of the perils insured against.
1. Where freight is the price to be paid for the
hire of the ship under a charter party
o The shipowner has an inchoate right to
freight as soon as there is an inception
of performance by the ship under the
charter party
2. 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.
3. The shipowner has made a binding contract
for freight and the ship is in readiness to
receive the goods, he has an insurable
interest
When None exists –
1. Where there is no contract and no part of the goods
expected to be carried are on board, there is no
insurable interest in freight
2. Where the vessel is a mere “seeking ship” or a vessel
looking for cargo to be transported, the owner has no
insurable interest in freight to be earned on goods
not loaded
Section 105 – One who has an interest in the thing from w/c
profits are expected to proceed, has an insurable interest in the
profits
Insurable interest in expected profits
1. Interest in the thing involved based on some legal
right
- Owner of a cargo to be carried on a trading
voyage has an insurable interest on the value of
the cargo and on the expected profit from the
sale of the cargo.
- Insured has sufficient interest if it is based on a
valuable consideration paid
Sec. 106 – The Charterer of a ship has an insurable interest in it
, to the extent that he is liable to be damnified by its loss
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Justice Lloren
Insurable interest of the charterer
1. One who charters a vessel, with a stipulation to pay
its value in case of loss, has an insurable interest to
the extent of its value
2. The charterer has insurable interest in the profits he
expects to earn by carrying the goods in excess of the
amount he agreed to pay for the charter of the
vessel.
Types of Charter parties
A charter party is a contract by which an entire ship or some
principal part thereof is lent by the owner to another person for
a specified time or use.
1. Bareboat/demise
a. turns over full possession and control of his
vessel to the charterer, who then
undertakes to provide a crew and victuals
and supplies and fuel for her during the
term of the charter.
b. Called bareboat because generally does not
include a crew.
c. The charterer in effect becomes the owner
for the voyage or service stipulated
2. Contract of Affreightment
a. The owner of the vessel leases part or all of
its space to haul goods for others.
b. Contract of special service to be rendered
by the owner of the vessel who retains the
possession, command and navigation of the
ship
i. The charterer/freighter merely
having use of the space in the
vessel in return for the payment
of the charter hire or freight
c. The charterer is free from liability to 3rd
persons in respect to the ship.
i. VOYAGE CHARTER or TRIP
CHARTER
A contract for the carriage of
goods, from one or more ports of
loading to one or more ports of
unloading, on one or on a series
of voyages
 The master and crew remain
in the employ of the owner
of the vessel
 Shipowner supplies the
ship’s store
 Pays the wages
 Defrays expenses
for the
maintenance of the
ship
ii. Time Charter
 Contract for the use of a
vessel for a specified period
of time or for the duration of
one or more specified
voyages
 The owner of the time
chartered vessel retains
possession and control
through the master and crew
who remain his employees.
 Charterer acquires the right
to utilize the carrying
capacity and facilities of the
vessel and to designate here
destinations during the term
of the charter.
- In bareboat- the charterer is treated as owner
pro hac vice of the vessel
o Thus, the charterer assumes the
customary rights and liabilities of the
shipowner in relation to third persons
who have dealt with him or with the
vessel
o Thus, the master of the vessel is the
agent of the charterer and not of the
shipowner
o The charterer/owner pro hac vice is
held liable for expenses of the voyage
including the wages of the seamen.
CONCEALMENT IN MARINE INSURANCE
Sec. 107. In marine insurance, each party is bound to
communicate, in addition to what is required by sec-tion
twenty-eight, all the information which he possesses, material
to the risk, except such is
mentioned in section thirty, and to state the exact and whole
truth in relation to all matters that he represents, or upon
inquiry discloses assumes to disclose.
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 LAW ON INSURANCE 2017
Justice Lloren
- Failure to disclose any material fact or
circumstances which in fact or law is within the
knowledge of one party and which the other has
no actual or presumptive knowledge.
- Thus, if the agent failed to notify his principal of
the loss of a cargo and the latter, after loss but
ignorant thereof, secured insurance “lost or not”
on the venture, such insurance will be void on
the ground of concealment.
Sec. 108. In marine insurance, information of the belief or
expectation of a third person, in reference to a material fact,
is material.
Sec. 109. 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.
Presumptive knowledge by insured of prior loss
- Sec. 109 establishes a rebuttable presumption of
knowledge of a prior loss on the part of the
insured “if the information might possibly have
reached him in the usual mode of transmission
and at the usual rate of communication.
When rules on Sec. 109 not applicable?
- Insured is not bound to use all accessible means
of information at the very last instant of time to
ascertain the condition of the property insured
- Ex. The insured is not required and is not
expected to call the post office is a mail or letter
has arrived for him.
Sec. 110. A concealment in a marine insurance, 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:
(a) The national character of the insured;
(b) The liability of the thing insured to capture and de-tention;
(c) The liability to seizure from breach of foreign laws of trade;
(d) The want of necessary documents;
(e) The use of false and simulated papers.
REPRESENTATION
Sec. 111. 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.
Effect of false representation by the insured
1. Intentional – any misrepresentation of a material fact
made with fraudulent intent avoids the policy
2. Not intentional- if the fact misrepresented is material,
insurer may rescind
Sec. 112. The eventual falsity of a representation as to
expectation does not, in the absence of fraud, avoid a con-
tract of marine insurance.
IMPLIED WARRANTIES
Sec. 113. In every marine insurance upon a ship or freight, or
freightage, or upon anything which is the subject of marine
insurance, a warranty is implied that the ship is seaworthy.
Warranty – 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
1. The ship is seaworthy
2. Won’t deviate from the agreed voyage
3. Won’t engage in an illegal venture
4. The ship will carry the requisite documents
nationality or neutrality of the ship or cargo where
such nationality or neutrality is expressly warranted
Where unseaworthiness unknown to owner of cargo insured.
— Where cargo (see Sec. 99[1, a].) is the subject of marine
insurance, the implied warranty of seaworthiness attaches to
whoever is insuring the cargo, whether he be the shipowner or
not.
- The fact that the unseaworthiness of the ship
was unknown to insured is immaterial in
ordinary marine insurance
o and may not be used by him as a
defense in order to recover on the
marine insurance policy.
- Since the law provides for an implied warranty of
sea-worthiness in every contract of ordinary
marine insurance, it becomes the obligation of a
cargo owner to look for a reliable common
carrier which keeps its vessels in seaworthy
condition.
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 LAW ON INSURANCE 2017
Justice Lloren
- The shipper who has no control over the vessel
but has full control in the choice of the common
carrier that will transport his goods
Charterer’s duty re vessel’s seaworthiness
- Charterer of a vessel has no obligation before
transporting its cargo to ensure that the vessel it
chartered complied with all the legal
requirements.
- The duty rests upon the common carried simply
for being engaged in public services.
- Because of the implied warranty of
seaworthiness, shippers of goods are not
expected when transacting with common
carriers, to inquire into the vessel's
seaworthiness, genuineness of its licenses and
compliance with all maritime laws.
Where vessel is found unseaworthy
- GR: common carriers are presumed seaworthy
- In case it is found to be unseaworthy, the
shipowner is also presumed to be negligent since
it is tasked with the maintenance of its vessel.
Sec. 114. 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.
Seaworthiness
- The warranty of seaworthiness is not an absolute
guaranty that the vessel will safely meet all
possible perils.
Sec. 115. 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 voy-age 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 transshipped 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.
GR: warranty of seaworthiness is complied with if the ship be
seaworthy at the time of the commence of the risk.
- Prior or subsequent unseaworthiness is not a
breach of the warranty
- Nor is it material that the vessel arrives in safety
at the end of her voyage.
- There is no implied warranty that the vessel will
remain seaworthy throughout the life of the
policy.
EXPN:
1. Time policy – the ship must be seaworthy at the
commencement of every voyage she may undertake
2. Cargo policy- each vessel upon which the cargo is
shipped or transshipped must be seaworthy at the
commence of each particular voyage.
3. Voyage Policy, the ship must be seaworthy at the
commencement of each portion.
Sec. 116. 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.
Sec. 118. When a ship becomes unseaworthy during the
voyage to which an insurance relates, an unreason-able delay
in repairing the defect exonerates the insurer on ship or
shipowner’s interest from liability from any loss arising
therefrom.
Voyage and deviation
There are four (4) cases of deviation in marine
insurance, namely:
(1) Departure from the course of sailing fixed by
mercantile usage between the places of beginning and ending
specified in the policy (Sec. 121.);
(2) Departure from the most natural, direct, and
advantageous route between the places specified if the course
of
sailing is not fixed bymercantile usage (Sec. 122.);
(3)
Unreasonable delay in pursuing the voyage (Sec. 123.); and
(4) The commencement of an entirely different voyage
Sec. 124. Adeviation is proper:
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(a) When caused by circumstances overwhich neither
themaster nor the owner of the ship has any control;
(b) When necessary to complywith awarranty, or to
avoid a peril,whether or not the peril is insured against;
(c) When made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a peril; or
(d) When made in good faith, for the purpose of saving
human life or relieving another vessel in distress.
Sec. 125. Every deviation not specified in the last sec-tion is
improper.
Sec. 126 An insurer is not liable for any loss happening to the
thing insured subsequent to an improper deviation.
Effect of improper deviation.
Where there has been any deviation or change of the risk w/o
just cause, the insurer becomes immediately absolved from
further liability under the policy for losses occurring subsequent
(not before) to the deviation.
LOSS
1. Total
a. Actual
b. Constructive
2. Partial
Actual total loss
- When the SM of the insurance is wholly
destroyed or lost when it is so damaged as no
longer to exist in its original
- Complete physical destruction not essential
- Such loss may exist where the form and specie of
the thing is destroyed although the materials of
which it consisted still exist
Limited Liability Rule
GR: SO and SA’s liability is usually co-extensive with his interest
in the vessel such that a total loss thereof results in its
extinction.
Art. 587. The ship agent shall also be civilly liable for the
indemnities in favor of third persons which may arise from the
conduct of the captain in the care of the goods which he loaded
on the vessel; but he may exempt himself therefrom by
abandoning the vessel with all her equipment and the freight
itmay have earned during the voyage.
Art. 590. The co-owners of the vessel shall be civilly liable in the
proportion of their interests in the common fund for the results
of the acts of the captain referred to in Article 587.
Each co-owner may exempt himself from this liability by the
abandonment, before a notary, of the part of the vessel
belonging to him.
Art. 837. The civil liability incurred by shipowners in the case
prescribed in this section, shall be understood as limited to the
value of the vessel with all its appurtenances and freightage
served during the voyage.
Note: liability of the ship owner or agent is limited only to the
value of the vessel, its appurtenances and freightage earned in
the voyage
- Provided that the owner or agent abandons the
vessel
- Total loss does not require abandonment
- Because of total loss, the liability of the
shipowner agent for damages is extinguished
Sec. 131. Constructive total loss / technical total loss
Sec. 132. An actual loss may be presumed from the continued
absence of the 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 loss
- It is not enough to prove that the vessel was not
heard of at her port of departure after she sailed
without calling witnesses from her port of
destination to show that she never arrived there.
- The plaintiff must prove that when the vessel
left her port of outfit, she was bound in the
voyage insured.
Sec. 133. When a ship is prevented, at an intermedi-ate port,
from completing the voyage, by the perils insured against, the
liability of a marine insurer on the cargo con-tinues after they
are thus reshipped.12
Nothing in this section shall prevent an insurer from requiring
an additional premium if the hazard be increased by this
extension of liability
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Liability of insurer in case of reshipment
- This is insurance upon cargo
- If the original ship is disabled, and the master,
acting in GF and wise discretion, as the agent of
the merchant and the shipowners, 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 ta ke place on goods
subsequently to such reshipment.
- Hence, the insurer may require an additional
premium if the hazard be increased.
Sec. 134. In addition to the liability mentioned in the last
section, a marine insurer is bound for damages, expenses of
discharging, storage, reshipment, extra freightage, and all other
expenses incurred in saving
cargo reshipped pur-suant 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 in-sured value or,
if there be none, of the insurable value
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
a. Include damages and expenses deliberately
caused by the master of the vessel or upon
his authority
i. In order to save the vessel, cargo
or both at the same time from a
real and known risk
b. Must be borne equally by all of the interests
concerned in the venture
2. Simple or particular average
a. All damages and expenses caused to the
vessel or to her cargo
i. w/c have not inured to the
common benefit and profit of all
the persons interested in the
vessel and her cargo.
b. Owners are not entitled to receive
contribution from other owners concerned
c. It is the loss suffered by and borne alone by
the owner of the cargo or of the vessel, as
the case may be.

Sec. 135. Upon an actual total loss, a person insured is entitled General Average
to payment without notice of abandonment. - The master will decide to sacrifice any part of a
venture exposed to a common and imminent
Constructive total loss peril in order to save the rest
- Abandonment is necessary - The interest saved are compelled to contribute
ratably or proportionately to the owner of the
interest sacrificed.
Actual total Loss - - the cost of the sacrifice shall fall equally
- The right of the insured to claim the whole upon all
insurance is absolute
- No need for notice of abandonment Right of a party to claim general average contribution

Sec. 136. Where it has been agreed that an insurance upon a Requisites:
particular thing, or a 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.
Average
- Any extraordinary or accidental expense
incurred during the voyage for the preservation
of the vessel, cargo or both and all damages to
1. There must be a common danger to the vessel or
cargo;
2. Part of the vessel or cargo was sacrificed
deliberately;
3. The sacrifice must be for the common safety or for
the benefit of all;
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;
6. It must be successful, i.e., resulted in the saving of
the vessel and/or cargo; and
7. It must be necessary.

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Jettison – the intentional casting overboard of any part of a
venture exposed to a peril in the hope of saving the rest of the
venture.
Liability of insurer for general average
- liable for his proportion of all general average
loss assessed upon the thing insured
Liability of insurer for particular average
- insurance policies may contain stipulations
relating to particular average
- it may also be agreed by the parties that the
insurance shall be free from particular average.
EXPN: such particular average loss has the
effect of depriving the insured of the
possession at the port of destination of the
whole of the thing insured
Sec. 137. An insurance confined in terms to an actual total loss
does not cover a constructive total loss, but covers any loss,
which necessarily results in depriving the insured of the
possession, at the port of destination, of the entire thing
insured.
- Limited to “total loss only” actual or constructive
Abandonment
Sec. 138. Abandonment, in marine insurance, is the act of the
insured by which, after a constructive total loss, he declared
the relinquishment to the insurer of his interest in the thing
insured.
Meaning of Abandonment
- Act of the insured in notifying the insurer that
owing to damage done to the subject of the
insurance, he elects to take the amount of the
insurance in the place of the subject thereof, the
remnant of which he cedes to the insurer.
Requisites
1. There must be an actual relinquishment by the
person insured of his interest in the thing insured
(Sec. 138.)
2. There must be a constructive total loss (Sec. 139.);
3. The abandonment be neither partial nor conditional
(Sec. 140.);
4. It must be made within a reasonable time after
receipt of reliable information of the loss (Sec. 141.);
5. It must be factual (Sec. 142.);
6. It must be made by giving notice thereof to the
insurer which may be done orally or in writing (Sec.
143.); and
7. The notice of abandonment must be explicit and must
specify the particular cause of the abandonment.
Necessity for abandonment
1. in technical loss
- the insured cannot claim the whole insurance
without showing due regard to the interest
which the underwriter may take in the
abandoned property
- whenever the underwriter by prompt action
might be able to save some portion of the
insured property, he is entitled to timely notice
of abandonment by the insured and he cannot
be made liable for a total loss without it.
- But insured has no obligation to abandon
o It is his choice
o If he omits to abandon, he can recover
his actual loss
2. Total Loss
- No need to abandon since there is nothing to
abandon
- The liability of the shipowner or agent for
damages extinguished in the absence of any
fault on their part.
- The insurer answers for the damages form which
Sec. 139. A person insured by a contract of marine insurance
may abandon the thing insured, or any particular portion
thereof separately valued by the policy, or otherwise separately
insured, and recover for a total loss thereof, when the cause of
the loss is a peril insured against:
(a) If more than three-fourths thereof in value is actu-ally lost,
or would 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-fourths;
(c) If the thing insured is a ship, and the contemplated voyage
cannot be lawfully performed without incurring either an
expense to the insured of more than three-fourths the value of
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the thing abandoned or a risk which a prudent man would not
take under the circumstances; or
(d) If the thing insured is cargo or freightage, and the voyage
cannot be performed, hor another ship procured by the master,
within a reasonable time and with reason-able diligence to
forward the cargo, without incurring the like expense or risk
mentioned in the preceding sub-para-graph. But freightage
cannot in any case be abandoned, unless the ship is also
abandoned
When constructive total loss exists.
- the insured may not abandon the thing insured
unless the loss or damage is more than three
fourths (3/4) of its value as indicated in Section
139.
Indivisible/divisible insurance
- any particular portion of the thing insured
separately valued by the policy may be
separately abandoned as it is deemed separately
insured.
Criterion as to extent of loss
- General Market Value immediately before the
disaster
- But in case there is a valuation provided by the
policy
o Valuation of the policy is the proper
criterion
o The expenses incurred or to be
incurred by the insured recovering the
thing insured are taken into account.
Section 140 Abandonment must be neither partial nor
conditional
Sec. 141. 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.
When is abandonment ineffectual
Sec. 142. Where the information upon which an abandonment
has been made proved 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
- Abandonment depends upon the state if facts at
the time of the offer to abandon
o Not upon the state disclosed by the
information received, or upon the
state of loss at a prior or subsequent
time
Effect of Subsequent Events
- Abandonment was good
o Subsequent events have no effect
- When not good
o Subsequent circumstances will not
affect it so as retroactivity, to impart to
it a validity which it has not at its origin
Sec. 143. Abandonment is made by giving notice there-of to
the insurer, which may be done orally, or in writing; Provided,
That if the notice be done orally, a written no-tice of such
abandonment shall be submitted within seven days from such
oral notice
- No particular form
- Unless there is a form required in the policy
Who should make the notice and to whom?
- By the insured/authorized agent/ agent having
an authority to insure has prima facie an
authority to abandon
- To an agent of the underwriter and to a broker
who is agent for both parties is sufficient.
Sec. 144. 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.
Sec. 145. An abandonment can be sustained only upon the
cause specified in the notice thereof.
Sec. 146. An abandonment is equivalent to a transfer by the
insured of his interest, to the insurer, with all the chances of
recovery and indemnity.
Sec. 147. 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.
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RIGHTS OF THE INSURER who pays partial loss as actual loss
- An election and notice of abandonment is a
condition precedent to a claim for a constructive
total loss
- The acceptance of the insured of the payment is
deemed an offer of abandonment on his part
- Hence, the insurer is entitled to whatever may
remain of the thing insured, or its proceeds or
salvage
Sec. 148. 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.
Captain or master
- Before valid abandonment
o AGENT OF THE INSURED
- After
o Agent of the insurer
Sec. 149. 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.
- Acceptance of the insurer is not required
o If the abandonment is properly made
Sec. 150 the acceptance of an abandonment may either
express or implied from the conduct of the insurer. The mere
silence for an unreasonable length of time after notice shall
be construed as an acceptance.
Sec. 151. The acceptance of an abandonment, whether
expressed or implied, is conclusive upon the parties, and
admits the loss and the sufficiency of the abandonment.
Sec. 152. An abandonment once made and accepted is
irrevocable, unless the ground upon which it was made proves
to be unfounded.
Whether or not the insured has a right to abandon is
immaterial where the abandonment is accepted and there is no
fraud.
EXPN:
- The ground upon which it was made proves to
be unfounded
o Abandonment should only be upon the
grounds specified in the notice
thereof.
Sec. 153. On an accepted abandonment of a ship, freightage
earned previous to the loss belongs to the in-surer of said
freightage; but freightage subsequently earned belong to the
insurer of the ship.
Sec. 154. If an insurer refuses to accept a valid aban-donment,
he is liable as upon an actual total loss, deduct-ing from the
amount any proceeds of the thing insured Which may have
come to the hands of the insured.
(1) If the insurer declines to accept a proper abandonment, he
is liable as upon an 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.
(2) If the abandonment was improper, the insured may
nevertheless recover to the extent of the damage proved.
Sec. 155. If a person insured omits to abandon, he may
nevertheless recover his actual loss.
Measure of Indemnity
Sec. 156. 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 in-terest
at risk, and there is no fraud on his part; except that when a
thing has been hypothecated by bottomry or re-spondentia,
before its insurance, and without the knowl-edge 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.
Right to give evidence of value. —
In a valued marine policy, neither party can thus give evidence
of the real value of the thing insured.
- However, when the thing has been
hypothecated by bottomry or respondentia (see
Sec. 101.) before
its insurance and without the knowledge of the person who
actually procured the insurance, the insurer may show the real
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value but he is not entitled to rescind the contract unless he
can prove that the valuation was in fact fraudulent.
Sec. 157. 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 in-sured in the
property insured.
Sec. 158. Where profits are separately insured in a con-tract of
marine insurance, the insured is entitled to recov-er, 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 profit separately insured
- If the profit is separately insured from the vessel
or cargo
o The insured is entitled to recover, in
case of loss, such proportion of the
profits as the value of the property lost
bears the value of the whole property.
Section 159. In case of valued policy of marine insurance on
freightage or cargo, if a part of the subject is exposed to risk,
the valuation applies only in proportion to such part.
Only part of the cargo/freightage insured exposed to risk
- (valued policy) The valuation will be reduced
proportionately
- The insurer is bound to return such portion of
the premium which corresponds with the
portion of the cargo which had been exposed to
the risk.
Section 160- When profits are valued and insured by a
contract of marine insurance, a loss of them is conclusively
presumed from a loss of the property out of which they were
expected to arise, and the valuation fixes their amount.
Presumption of loss of profits
- If profits are separately insured from the
property out of which they are expected to arise,
the insured
o In case of partial loss of the property, is
entitled merely to partial indemnity for
the profits lost.
- If the property is totally lost, the total profits are
also lost
- Thus, such loss of profits is conclusively
presumed from the loss of the property and the
valuation agreed upon in the policy fixes the
amount of recovery.
Sec. 161. 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 cargo is its actual cost to the insured, when
laden on board, or where that cost cannot be ascertained, its
market value at the time and place of lading, adding the
charges incurred in purchasing and placing it on board, but
without reference to any loss incurred in raising money for 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, ex-clusive of
primage, without reference to the cost of earn-ing it; and
(d) The cost of insurance is in each case to be added to the
value thus estimated.
Sec. 162. If cargo insured against partial loss arrives at the
port of destination In a damaged condition, the loss 6f 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.
Sec. 163. 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 ex-
pense, in either case, being in addition to a total loss, if that
afterwards occurs.
Sec. 164. 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: Pro-vided,
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,
(a)
Sec. 165. 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
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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 the insured, having the right and
opportunity to enforce contribution from others, has
neglected or waived the exercise of that right.
Rights in General Average
1. The Insurer is liable for any general loss
a. Choices of the Insured
i. May hold the insurer directly
liable for the whole of the insured
value of the property sacrificed
for the general benefit + right of
subrogation OR
ii. Demand contribution from the
other interested parties as the
vessel arrives at her destination.
- Thus, the insured need not wait for an
adjustment of average
EXPN: there can be no recovery from the insurer
for general average in the following instances:
1. After the separation of the interests liable to
contribution
a. This happens after the cargo liable for
contribution has been removed from
the vessel
2. The insured has neglected or waived his right to
contribution
Limit of Insurer’s liability
- Proportion of contribution attaching to his policy
value where this is less than the contributing
value of the thing insured.
- Thus, 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
o The insured is liable to contribute
ratably with the Insurer
“ONE-THIRD NEW FOR OLD”
Sec. 166. In the case of a partial loss of a 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 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 of ship or its
equipment
- When repairs are made, 1/3 of the cost of the
repair is laid upon the insured as his burden
o And the implied agreement under the
policy is that in case of damage of the
ship by a peril insured against, the loss
shall be estimated at 2/3 of the cost of
the repairs fairly executed.
- Thus, in case of partial loss of a vessel, there is
deducted from the cost of the repairs “one-third
new for old”
o On the theory that the new materials
render the vessel much more valuable
that it was before the loss.
FIRE INSURANCE
Sec. 167. As used in this Code, the term “fire insurance” shall
include insurance against loss by fire, lightning, windstorm,
tornado or earthquake and other allied risks, when such risks
are covered by extension to fire insurance policies or under
separate policies
Fire insurance
- Contract of indemnity
- The insurer for a stipulated premium,
- Agrees to indemnify the insured against loss of,
or damage to, a property caused by hostile fire.
Fire and extended Coverage
- Fire insurance is not limited to loss due to fire
- Also includes “allied lines” that protect against
loss by lighting, windstorm, etc.
o But only when such risks are covered
by extension to fire insurance policies
or under separate policies subject to
the payment of additional premiums.
Indirect loss Coverage
- The standard fire contract is an agreement to
repay the insured for direct loss.
- But consequences of a direct loss may be greater
than the damage itself.
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Kinds of indirect losses
1. Physical Damage
a. Caused to other property
2. Loss of Earning due to the interruption of business by
damage to insured’s property
3. Extra expense or additional expenditure or charges
incurred by the insured following damage or
destruction of buildings or contents by an insured
peril
Ocean Marine v. Fire Insurance
1. Ocean Marine- insurance on a vessel engaged in
navigation is contract of marine insurance although it
insures against fire only
2. Fire Insurance – where the hazard is fire alone and the
subject is an unfinished vessel, never afloat for a voyage.
a. Especially in the absence of an express
agreement that it shall have the incidents of
marine policy or where it shall have the
incidents of marine policy or where it insures
materials in a shipyard for use in contracting
vessels.
Importance of the distinction
- No abandonment, constructive/actual total loss
in fire insurance
- In case of partial loss of a thing insured for less
than the actual value, the insured in a marine
policy is a co-insurer of the uninsured portion
o In fire insurance, the insured may only
become a co-insurer if expressly
agreed upon by the parties.
Sec. 168. An alteration in the use or condition of a thing
insured from that to which it is limited by the policy made
without the consent of the insurer, by means within the
control of the insured, and increasing the risks, entitles an
insurer to rescind a contract of fire insurance.
Sec. 169. An alteration in the use or condition of a thing
insured from that to which it is limited by the policy, which
does not increase the risk, does not affect a contract of fire
insurance.
When alteration entitles the insurer to rescind; Requisites
1. Use or condition of the thing is specifically limited or
stipulated in the policy
2. Such use or condition as limited by the policy is
altered
3. The alteration is made without the consent of the
insurer
4. The alteration is made by means within the control of
the insured
5. The alteration increases the risk
Increase of risk or hazard in general
1. Implied undertaking of insured
- He will not change the premises or the character
of the business carried there, or to be carried on
there, so as to increase the risk of loss by fire
2. Character of the increase In risk
- An increase of hazard takes place whenever the
insured property is put to some new use, and
the new use increases the chance of loss
- Mere negligent acts temporarily endangering the
property will not violate the policy
- Nor temporary acts or conditions which have
ceased prior to the occurrence of the loss
- There must be an actual increase of risk and
while it is not necessary that the increased risk
should have caused or contributed to the loss
- The increase be of a substantial character
Note: insurer will be liable if the increase in hazard was no
longer existing at the time of the loss.
Alterations not avoiding policy
1. Risk of loss not increased
- Even if the insured used the premises differently
- And such use is not of a dangerous character and
does not differ materially from the use specified
in the policy
2. Where questioned articles required by insured's
business.— Even though the policy contains certain
provisions prohibiting specified articles from being
kept in the insured premises, the policy will not be
avoided by a violation of these provisions if the
articles are necessary or ordinarily used in the
business conducted in the insured premises
3. Where insured property would be useless if
questioned acts were prohibited
4. Insured has no control or knowledge of alteration
Note: there is a presumption that the insured is
aware of the acts of his tenants which substantially
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Justice Lloren
and permanently affects the condition of the
property
Sec. 170. 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 a loss.
Where act of insured not in violation of policy
- If the policy does not contain any prohibition
limiting the use or condition of the thing insured,
an alteration in said use or condition does not
constitute a violation of the policy
o Hence, the contract is not affected by
such alteration even though it
increases the risk and is the cause of
the loss
Sec. 171. If there is no valuation in the policy, the measure of
indemnity in an insurance against fire is the ex-pense it would
be to the insured at the time of the com-mencement 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 ofmarine insurance.
Sec. 172. Whenever the insured desires to have a valu-ation
named in his policy, insuring any building or struc-ture 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 be -tween 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 pre-mium,
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 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.
CO-INSURANCE CLAUSE
- 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
Option to rebuild clause
- the mere fact that the parties have fixed a
valuation in the policy does not prevent them
from stipulating in the policy concerning the
repairing, rebuilding or replacing of buildings or
structures wholly or partially damaged or
destroyed.
- insurer may be given the option to reinstate or
replace the property damaged or destroyed or
any part thereof, instead of paying the amount
of the loss or damage.
- Unless the policy has limited the cost of
rebuilding to the amount of the insurance, the
insurer, after electing to rebuild, can be
compelled to perform his undertaking, even
though the cost may exceed the original amount
of insurance.
Sec. 173. 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 policy after a loss
Consent of or notice to insurer not required
After a loss has occurred, the insured may pledge, hypothecate,
or transfer a fire insurance policy or rights thereunder.
Limitation
Subject to the prohibition in Section 173 against the transfer of
a policy of fire insurance to any person or company who acts as
agent or otherwise represents the insurer. Any such pledge,
etc. shall be void and of no effect insofar as it may affect other
creditors of the insured.
Casualty Insurance
Sec. 174. 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
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Justice Lloren

exclusively within the scope of other types of insurance such When liability insurance in policy payable.
as fire or marine. It includes, but is not limited to, employer’s
liability insurance, workmen’s compensation insurance, public - I don’t know
liability insurance, motor vehicle liability insurance, plate glass LIFE LIABILITY
insurance, burglary and theft insurance, personal accident and that the coverage or liability an action against the insurer
health insurance as written by non-life insurance companies, of the insurer attaches when does not lie until an actual
and other substantially similar kinds of insurance. the liability of the insured loss is sustained by the
attaches , regardless of actual insured
Casualty insurance loss at that
- includes all forms of insurance against loss or time
liability arising from accident or mishap
excluding certain types of loss or liability which
are not within the scope of other types of LIFE INSURANCE
insurance, namely: marine; fire; suretyship; and
life.
Sec. 179. Life insurance is insurance on human lives and
insurance appertaining thereto or connected there-with. (n)
Risk or losses covered
1. Casualty also means accident
Sec. 180. An insurance upon life may be made payable on the
2. In burglary, robbery and theft insurance, the death of the person, or on his surviving a specified period, or
opportunity to defraud the insurer — the moral
otherwise contingently on the continuance or cessation of life.
hazard — is so great that insurer have found it
necessary to fill up their policies with many
Every contract or pledge for the payment of endowments or
restrictions designed to reduce the hazard
annuities shall be considered a life insurance contract for
purposes of this Code.
Two general division of casualty insurance
1. Insurance against specified perils which may affect
In the absence of a judicial guardian, the father, or in the
the person and / or property of the insured such as
latter’s absence or incapacity, the mother, of any minor, who
personal accident, robbery or theft, damage to or loss
is an insured or a beneficiary under a contract of life, health,
of motor vehicle, insolvency or debtors, defalcation of
or accident insurance, may
employees, etc.
exercise, in behalf of said minor, any right under the policy,
2. Insurance against specified perils which may give rise
without necessity of court authority or the giving of a bond,
to liability on the part of the insured for claims for
where the interest of the minor in the particular act involved
injuries to others or for damage to their property
does not exceed twenty thousand pesos. Such right may
a. Ex. Workman’s compensation, motor
include, but shall not be limited to obtaining a policy loan,
vehicle liability, professional liability
surrendering the policy, receiving the proceeds of the policy,
and giving the minor’s consent to any transaction on the
Liability Insurance policy.
contract of indemnity for the benefit of the insured and those
in privity with him, or those to whom the law upon the grounds
Life Insurance
of public
- Insurance payable on the death, or on his
policy extends the indemnity against liability.
surviving a specified period, or otherwise
contingently on the continuance or cessation of
Insurable interest in liability insurance. life.

The insurable interest is to be found in the interest the insured
has in the safety of persons who may maintain, or in the
freedom from damage of property which may become the basis
of suits against him in case of their injury or destruction.
Nature of life insurance
1. Not a mere contract of indemnity
2. Liability is absolutely certain
3. Amount of insurance generally without limit
4. Life insurance is a valued policy

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Justice Lloren

5. Direct pecuniary loss not required
Life
Not a contract of indemnity
but a contract of investment
Always a valued policy
May be transferred or
assigned to any person even if
he has no insurable interest
Unless expressly required, the
consent of the insurer is not
essential to the validity of the
assignment of a life policy
Insurable interest in the life or
health or the person insured
need not exist after the
insurance take effect or when
the loss occurs
The contingency
contemplated is a certain
event (death)
May be terminated by the
insured but cannot be
cancelled by the insurer
Marine /fire
Contract of indemnity
Open or valued
Transferee or assignee must
have an insurable interest
While such consent, in the
absence of waiver by the
insurer, is essential in the
assignment of a fire or marine
policy
Insurable interest must exit at
the time the insurance takes
effect and at the time of the
loss
The contingency may or may
not occur
May be cancelled by either
party
EXPN: when one of the risks insured in the accident insurance is
the death of the insured by accident, then such accident
insurance may also be regarded as a life insurance
Kinds of insurance policies
1. Ordinary Life Policy
2. Term insurance policy
a. One which pro
3. Endowment Policy
Scope of Life insurance
- The loss earning power by persons results from
their death, injury, illness, old age, or loss of
employment.
- It undertakes to protect the insured’s family,
creditors, or others against pecuniary loss which
may be the outgrown of the death of the
insured.
Contract of life annuity
- The 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

Loss to the beneficiary caused The opposite

by the death of the insured
can seldom be measured
accurately in terms of cash
value
The beneficiary is under no
obligation to prove actual
financial loss as a result of the
death of the insured in order
to collect the insurance
The insured is required to
submit proof of his actual
pecuniary loss as a condition
precedent to collecting
insurance.
Sec. 180-A. The insurer in a life insurance contract shall be
liable in case of suicide only when it is committed after the
policy has been in force for a period of two years from the
date of its issue or of its last reinstatement, un-less the policy
provides a shorter period; Provided, how-ever, That suicide
committed in the state of insanity shall be compensable
regardless of the date of commission
Liability of insurer in case of suicide

When Liable –
Exemption of Life insurance 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 (Rule 39, Sec. 12[k]
thereof.) regardless of the amount of the annual premiums
paid
Application of exemption to accident insurance.
1. The suicide is committed after the policy has been in
force for a period of two 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 two-year
period
3. The suicide is committed in the state of insanity
regardless of the date of commission, unless a suicide
is ab excepted risk
Note: the policy cannot provide for a longer period

GR: life insurance is distinct and different from an accident Sec. 181. A policy of insurance upon life or health may pass by
insurance transfer, will or succession to any person, whether he has an

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Justice Lloren

insurable interest or not, and such person may recover upon it sufficient cause for the suspension or revocation of the
whatever the insured might have recovered. company’s certificate of authority.

Sec. 182. Notice to an insurer of a transfer or bequest thereof Unfair claims settlement practices
is not necessary to preserve the validity of a policy of
insurance upon life or health, unless thereby expressly Claims settlement – is the indemnification of the loss suffered
required. by the insured

Sec. 183. Unless the interest of a person insured is susceptible Section 241 enumerates the grounds which shall be consid-ered
of exact pecuniary measurement, the measure of the as sufficient cause of the suspension or revocation of an in-
indemnity under a policy of insurance upon life or health is surance company's certificate of authority. It is designed to
the sum fixed in the policy. elimi-nate unfair claim settlement practices.

Sec. 242. The proceeds of a life insurance policy shall be paid

Claim settlement 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
Sec. 241. (1) No insurance company doing business in the
become due; Provided, however, That in the case of policy
Philippines shall refuse, without just cause, to pay or settle
maturing by the death of the insured, the proceeds thereof
claims arising under coverages provided by its policies, nor
shall be paid within sixty days, pre-sentation of the claim and
shall any such company engage in unfair claim settlement
filing of the proof of the death of the insured. Refusal or
practices. Any of the following acts by an insurance company,
failure to pay the claim within the time prescribed
if committed without just cause and performed with such
herein will entitle the beneficiary to collect interest on the
frequency as to indicate a general business practice, shall
proceeds of the policy for the duration of the delay at the rate
constitute unfair claim settlement practices:
of twice the ceiling prescribed by the Monetary Board, unless
such failure or refusal to pay is based on the ground that the
(a) knowingly misrepresenting to claimants perti-nent facts or
claimis fraudulent. The proceeds of the policy maturing by the
policy provisions relating to coverages at issue;
death of the insured payable to the beneficiary shall include
the discounted value of all premiums paid in advance of their
(b) failing to acknowledge with reasonable prompt-ness
due dates, but are not due and payable at maturity.
pertinent communications with respect to claims arising
under its policies;
FIRE insurance Losses
(c) failing to adopt and implement reasonable standards for
Obligations of the insured
the prompt investigation of claims aris-ing under its policies;
1. File a notice of loss and file a proof of loss
2. After the fire, the insured is required to do everything
(d) not attempting in good faith to effectuate prompt, fair and
reasonable to prevent further damage to the
equitable settlement of claims sub-mitted in which liability
property insured.
has become
a. An insured who fails to protect his property
reasonably clear; or
adequately from further loss after the fire,
cannot collect for the additional loss thus
(e) compelling policyholders to institute suits to recover
occasioned.
amounts due under its policies by offering without justifiable
reason substantially less than the amounts ultimately
recovered in suits brought by them.
Options of settlement by the insurer
- The fire insurance contract usually provides for
(2) Evidence as to numbers and types of valid and justifiable
two options of settlement by the insurer
complaints to the Commissioner against an insurance
1. Payment of damages for the loss
company, and the Commissioner’s complaint experience with
2. Restoration of the subject matter of
other insurance companies writing similar lines of insurance
the insurance to its former condition
shall be admissible in evidence in an
administrative or judicial proceeding brought under this
section.
Time for payment of claims in non-life policies
(3) If it is found, after notice and an opportunity to be heard,
- Within 30 days after receipt of the insurer of
that an insurance company has violated this sec-tion, each
proof of loss or damage by agreement of the
instance of non-compliance with paragraph (1) may be treated
parties or by arbitration
as a separate violation of this section and shall be considered

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Justice Lloren

- But not later than 90 days from such receipt of 5. Presumption of unreasonable delay – if the insurer
proof of loss whether or not ascertainment is fails to pay any of such claim within the time
had or made. prescribed
6. Findings of the trial court will not necessarily
Effect where claim fraudulent foreclose the administrative case before the
Commission or vice versa
(under policies) all benefits under the policy shall be forfeited if
the claim for loss be in any respect fraudulent, or 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 the policy

Effect of false statements innocently made

- Does not avoid the policy

- Honest mistakes in valuation without fraud is
allowed
- Numerical precision should not be expected

Sec. 244. 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 per -son 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 in-sured, from the date following
the time prescribed in sec-tion 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.

Liability of insurer to pay damages and interests

1. In finding of unreasonable delay- : the court or
commissioner will determine such.
2. Interest – 24% when the Commissioner or the court
finds an unreasonable delay or refusal in the payment
of the clauses
3. In the absence of the such express finding the
judgment should bear only the legal rate of 12% for
the delay in payment
4. Other damages
a. Expenses incurred by the insured person by
reason of such unreasonable denial or
withholding of payment
b. Interest twice the ceiling prescribed by the
monetary board of the amount of the claim
due to the insured
c. The amount of the claim

49