UST Notes - Insurance PDF

UST GOLDEN NOTES 2011
INSURANCECODE connectionwithorconcerninitthathe
will derive pecuniary benefit or
I.CONCEPTOFINSURANCE advantagefromitspreservationandwill
suffer pecuniary loss from its
Q:Whatlawsgoverninsurance? destruction or injury by the happening
oftheeventinsuredagainst.
A:
1. InsuranceCodeof1978(P.D.1460) 4. Assumption of Risk The insurer
2. NewCivilCode assumes that risk of loss for a
3. SpecialLaws consideration.

Q:Whatisacontractofinsurance? 5. RiskoflossTheinsuredissubjecttoa
risk of loss through the destruction or
A:Itisanagreementwherebyoneundertakesfor impairment of that interest by the
aconsiderationtoindemnifyanotheragainstthe happeningofdesignatedperil.
loss,damageorliabilityarisingfromanunknown
orcontingentevent.(Sec.2[1],InsuranceCode) Note: Because of the first element, an
insurance contract therefore is a risk
Note:Acontractofinsuranceisstillacontract,thus distributingdevice.
it must have all the essential elements of a valid
contractasenumeratedinArt.1318oftheNewCivil Q:Whatismoralhazard?
Code
A: An undesirable side effect in the transfer of
Q:WhatisUberrimaeFidesContract? risk.Itisaphenomenononwhichtheexistenceof
insurance could have the perverse effect of the
A. The contract of insurance is one of Perfect probabilityofloss.
GoodFaithnotfortheinsuredalone,butequally
so far the insurer. It requires the parties to the III.CHARACTERSITICSANDNATUREOFAN
contract to disclose conditions affecting the risk INSURANCECONTRACT
ofwhichHeoughttoknow.
Q:Whatarethenatureandcharacteristicsofan
II.ELEMENTSOFCONTRACTOFINSURANCE insurancecontract?

Q: What are the elements of a contract of A:
insurance? 1. Consensual Acceptance of the offer
perfectsthecontractofinsurance.
A:SPEAR
1. Scheme to distribute losses Such Note: Insurance contracts through
assumption of risk is part of a general correspondence follow the cognition
scheme to distribute actual losses theory wherein an acceptance made by
among a large group or substantial lettershallnotbindthepersonmakingthe
number of persons bearing a similar offer except from the time it came to his
risk. knowledge(Enriquezv.SunLifeAssurance
Co. of Canada, GR No. L15774, Nov. 29,
2. PaymentofpremiumAsconsideration 1920).
for the insurers promise, the insured
makes a ratable contribution called 2. VoluntaryThepartiesmayincorporate
premium,toageneralinsurancefund such terms and conditions as they may
deem convenient Provided they do not
3. Existence of insurable interest The contraveneanyprovisionoflawandare
insured possesses an interest of some not opposed to public policy, law
kind susceptible of pecuniary morals,goodcustoms,orpublicorder.
estimation, known as insurable
interest. GR: The taking out of an insurance
contractisnotcompulsory.
In general (except in life insurance
policies),apersonisdeemedtohavean XPN:Liabilityinsurancemayberequired
insurable interest in the subject matter by law in certain instances (E.g.
insured where he has a relation or compulsory motor vehicle liability
46
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
INSURANCE CODE
insurance, or employees under Labor IV.CLASSESOFINSURANCE

Code, or as a condition to granting a
license to conduct a business or calling Q:Whatarethe3classesofinsurance?
affectingthepublicsafetyorwelfare).
A:
3. Aleatory Liability of the insurer 1. Lifeinsurancedependentuponhuman
dependsuponsomecontingentevent. life.
a. Individuallife
Note: An aleatory contract is a contract b. Grouplife
where one or both of the parties c. Industriallife
reciprocallybindthemselvestogiveordo
upon the happening of an event which is 2. NonLifeInsurance
uncertain, or which is to occur at an a. Marine
indeterminatetime(Art.2010,NCC). b. Fire
c. Casualty
4. UnilateralItimposeslegaldutiesonly
oninsurerwhopromisestoindemnifyin 3. Contracts of suretyship or bonding. (De
caseofloss. Leon, The Insurance Code Annotated,
2006)
5. Conditional It is subject to conditions
the principal one of which is the A.MARINEINSURANCE
happeningoftheeventinsuredagainst.
Q:Whatismarineinsurance?
6. Contractofindemnity
A: Insurance against risks connected with
GR:Theinsurerpromisestomakegood navigation, to which a ship, cargo, freightage,
onlythelossoftheinsured. profits or other insurable interest in movable
property,maybeexposedduringacertainvoyage
XPN:Alifeinsuranceisnotacontractof orfixedperiodoftime.
indemnity. It is not applicable to life
insurance policies because life is not Q:Whatvesselsarecontemplatedinmarine
capable of pecuniary estimation. The insurance?
only situation where the principle of
indemnityisapplicabletolifeinsurance A: Those used, or at least, intended for
isiftheamountinthepolicyisfixed.An navigation. E.g., one for shipping, chartering,
example would be in a case where a voyage and the like. Vessels which are used as
creditorinsuresthelife ofhisdebtor museums or those that are stationary are not
totheextentofthelattersdebtto entitled to be insured under this a marine
theformer. insurance.

7. PersonalEachpartyhavinginviewthe Q:Whatdoesmarineinsuranceinclude?
character, credit and conduct of the
other. A:Marineinsuranceincludes:

8. PropertySinceinsuranceisacontract, 1. Insuranceagainstlossordamageto:
itispropertyinlegalcontemplation. a. Vessels, goods, freight, cargo,
merchandise, profits, money,
9. Risk distributing device Insurance valuable papers, bottomry and
servestodistributetheriskofeconomic respondentia, and interest in
lossamongasmanyaspossibleofthose respect to all risks or perils of
who are subject to the same kind of navigation;
loss. b. Persons or property in connection
withmarineinsurance;
10. Onerous there is a valuable c. Precious stones, jewels, jewelry
considerationcalledthepremium and precious metals whether in
the course of transportation or
otherwise;and
47
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII UNIVERSITYOFSANTOTOMAS
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
V ICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE Facultad de Derecho Civil
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ

d. Bridges, tunnels, piers, docks and b. Earnings such as freight, passage
other aids to navigation and money
transportation(Sec.99) c. Liability incurred by reason of
maritimeperils
Note:Cargocanbethesubjectofmarine d. Shipsorhulls
insurance,andonceitisenteredinto,the
implied warranty of seaworthiness 2. Inland marine insurance covers
immediately attaches to whoever is primarilythelandorovertheland(but
insuringthecargo,whetherhebetheship sometimes water) transportation perils
owner or not. (Roque v. IAC, G.R. No. L ofpropertyshippedbyrailroads,motor
66935,Nov.11,1985) trucks, airplanes, and other means of
transportation. It also covers risks of
2. Marine protection and Indemnity lake,river,ortheotherinlandwaterway
insurance which means insurance transportation and other waterborne
against, or against legal liability of the perils outside of those risks that fall
insured for loss, damage, or expense definitely within the ocean marine
incident to ownership, operation, category.Classes:PtBFF
chartering,maintenance,use,repair,or
construction of any vessel, craft or a. Property in Transit Provides
instrumentality in use of ocean or protection to the property
inland waterways, including liability of frequentlyexposedtolosswhileit
the insured for personal injury, illness is being transported from one
ordeathorforlossofordamagetothe locationtoanother.
propertyofanotherperson.(Sec.99)
b. Bailee liability Insurance for
Measureofindemnity: thosewhohavetemporarycustody
a. Valuedpolicythepartiesare ofthegoods.
boundbythevaluation,ifthe
insured had some interest at c. Fixed transportation property
riskandthereisnofraud(Sec. They are so insured because they
156) are held to be an essential part of
b. Open policy the following transportation system such as
rules shall apply in estimating bridges,tunnels,etc.
aloss:
i. value of the ship value d. Floater Provides insurance to
at the beginning of the follow the insured property
risk whereveritmaybelocatedsubject
ii. valueofthecargoactual always to the territorial limits of
cost when laden on thecontract.
boardormarketvalueat
the time and place of Q: What does the phrase perils of the sea or
lading perilsofnavigationmean?
iii. valueoffreightagegross
freightage exclusive of A: It includes only those casualties due to the
primage unusual violence or extraordinary action of wind
iv. cost of insurance in and wave, or to other extraordinary causes
eachcasetobeaddedto connectedwithnavigation.
theestimatedvalue(Sec.
161) Q:Whatdoesperilsoftheshipmean?

Q: What are the two major divisions of Marine A: It is a loss which, in the ordinary course of
insurance? events,resultsfrom:
1. Thenaturalandinevitableactionofthe
A: sea
1. Ocean marine insurance covers 2. Theordinarywearandtearoftheship
primarily sea perils of ships and 3. Thenegligentfailureoftheshipsowner
cargoes.Scope:GELS to provide the vessel with proper
a. Goodsorcargoes
48
MERCANTILELAWTEAM:
INSURANCE CODE
equipment to convey the cargo under then shifts to the insurer to show the exception
ordinaryconditions. tothecoverage.

Q: Does an insurer undertake to insure against Q:Whatistheextentoftheinsurableinterestof
perilsoftheship? thefollowing?

A: A:
GR:No. 1. Shipowner
a. Overthevesseltotheextentofits
XPN:Intheabsenceofanystipulationtothe value,exceptthatifchartered,the
contrary, the insurer does not undertake to insuranceisonlyuptotheamount
insureagainstperilsoftheship.Thepurpose not recoverable from the
of an ocean marine policy is to secure an charterer.(Sec.100)
indemnity against accidents which may b. If hypothecated by a bottomry
happen not against event which must loan, the insurable interest is only
happen. up to the excess of the values of
thevesselovertheloan.(Sec.101)
Q: A marine insurance policy on a cargo states c. He also has an insurable interest
that the insurer shall be liable for losses onexpectedfreightage.(Sec.103)
incidenttoperilsofthesea.Duringthevoyage,
seawater entered the compartment where the 2. Cargo owner over the cargo and
cargowasstoredduetothedefectivedrainpipe expectedprofits.(Sec.105)
of the ship. The insured filed an action on the
policyforrecoveryofthedamagescausedtothe 3. Chartererovertheamountheisliable
cargo.Maytheinsuredrecoverdamages? to the ship owner, if the ship is lost or
damagedduringthevoyage(Sec.106).
A:No.Theproximatecauseofthedamagetothe
cargo insured was the defective drainpipe of the 4. Creditor/lenderamountoftheloan
ship.Thisisperiloftheship,andnotperilofthe
sea.Thedefectinthedrainpipewastheresultof Q: What is the risk insured against in marine
the ordinary use of the ship. To recover under a insurance?
marine insurance policy, the proximate cause of
thelossordamagemustbeperilofthesea.(1998 A:
BarQuestion) GR:Onlyperilsoftheseaisinsuredagainst.

Q:Whatisanallrisksmarineinsurancepolicy? XPN:Unlessperilsof theshiparecoveredby
anallriskspolicy.
A:
GR: It is that which insures against all causes Q: What are the distinctions between perils of
ofconceivablelossordamage. theseaandperilsoftheship?

XPN: A:
1. Asotherwiseexcludedinthepolicy;or PERILSOFTHESEA PERILSOFTHESHIP
2. Due to fraud or intentional misconduct Includes only those A loss which in the
onthepartoftheinsured.(ChoaTiekv. casualtiesduetothe: ordinary course of
CA,G.R.No.84507,Mar.15,1990)This 1. Unusual events,resultsfromthe:
typeofpolicygrantsgreaterprotection violence;or 1. Natural and
than that afforded by the perils 2. Extraordinary inevitable action of
clause. action of wind thesea;
andwave;or 2. Ordinary wear and
3. Other tearoftheship;or
Q:Whohastheburdenofproofinanallrisks
extraordinary 3. Negligent failure of
marineinsurancepolicy?
causes the ships owner to
connected with provide the vessel

A: The insured under an "all risks insurance navigation. with proper
policy" has the initial burden of proving that the equipment to
cargo was in good condition when the policy convey the cargo
attached and that the cargo was damaged when under ordinary
unloadedfromthevessel;thereafter,theburden conditions.
49

in freight although there are goods
Q:Whatisaloanonbottomry? ready for shipment or the master is
provided with funds for the purpose of
A: It is one which is payable only if the vessel purchasingacargo.
givenassecurityfortheloancompletesinsafety
thecontemplatedvoyage. 2. Where the vessel is a mere seeking
Q:Whatisfreightage? shiporavessellookingforcargotobe
transported,theownerhasnoinsurable
A:Itisthebenefitwhichistoaccruetotheowner interest in freight to be earned on
of the vessel from its use in the voyage goodsnotloaded.
contemplated or benefit derived from the
employmentoftheship. Q: What are special marine insurance contracts
andclauses?
Q:Whereisfreightagederivedfrom?
A:
A: 1. Allrisks policy insurance against all
1. Thecharteringoftheship causes of conceivable loss or damage,
2. Its employment for the carriage of his except:
owngoods a. Excluded risk stipulated in the
3. Its employment for the carriage of policy,or
goodsofothers.(Sec.102) b. due to fraud or intentional
misconduct on the part of the
Q: When does insurable interest in expected insured(ChaoTiekSengv.CA,GR.
freightageinacharterpartyexist? No.84507,Mar.15,1990)

A:Itexistswhentheinsuredhasaninchoateright The insured has the initial burden
to freight, that is, he must be in such position of proving that the cargo was in
withregardtofreightthatnothingcouldprevent good condition when the policy
him from ultimately having a perfect right to it attached and that the cargo was
buttheinterventionoftheperilsinsuredagainst. damagedwhenunloadedfromthe
vessel; thereafter, the burden
Q:Whendoesinchoaterighttofreightexists? shifts to the insurer to show the
exceptiontothecoverage.
A:
1. Wherefreightisthepricetobepaidfor 2. Barratry clause a clause which
the hire of the ship under a charter provides that there can be no recovery
party, the ship owner has an inchoate on the policy in case of any willful
right to freight as soon as there is an misconductonthepartofthemasteror
inception of performance by the ship crew in pursuance of some unlawful or
underthecharterparty. fraudulentpurposewithouttheconsent
of the owner and to the prejudice of
2. Assoonasthegoodsareactuallyputon owners interest. It requires an
boardandwherepartofthegoodshas intentional and willful act in its
been loaded and the balance is ready, commission. No honest error or
there is an insurable interest in the judgment or mere negligence, unless
wholefreight. criminallygross,canbebarratry.(Roque
v.IAC,G.R.No.L66935,Nov.11,1985)
3. Where the ship owner has made a
bindingcontractforfreightandtheship 3. Inchamaree clause a clause which
isinreadinesstoreceivethegoods,he makes the insurer liable for loss or
hasaninsurableinterest. damagetothehullormachineryarising
fromthe:
Q: When is insurable interest in expected a. Negligence of the captain,
freightageinacharterpartynonexistent? engineers,etc.
b. Explosion,breakageofshafts;and
A: c. Latentdefectofmachineryorhull.
1. Wherethereisnocontractandnopart (Thames and Mersey Marine
ofthegoodsexpectedtobecarriedare
onboard,thereisnoinsurableinterest
50
MERCANTILELAWTEAM:
INSURANCE CODE
Insurance Co v. Hamilton Fraser 5. The use of false and simulated papers.

andCo[1887]12AC484) (Sec.110)

4. Sue and labor clause a clause under Q: What are the distinctions on concealment in
whichtheinsurermaybecomeliableto marineinsuranceandotherpropertyinsurance?
pay the insured in addition to the loss
actually suffered, such expenses as he
may have incurred in his efforts to A:
protect the property against a peril for OTHERPROPERTY
MARINEINSURANCE
which the insurer would have been INSURANCE
liable(Sec.163) Theinformationor
Theinformationorthe beliefofa3rdpartyis
Note: Such clause constitutes an exception to the belieforexpectationof notmaterialandneed
principle that an insurance contract is one of 3rdpersonsinreference notbecommunicated,
indemnity(wheretheinsurerpromisestomakegood toamaterialfactis unlessitproceedsfrom
onlythelossoftheinsured)sincetheinsurerisliable materialandmustbe anagentoftheinsured
topayadditionalexpensesfortheprotectionofthe communicated. whosedutyistogive
propertyagainstaninsuredperil. information.
Theconcealmentofany
Q:Whatisconcealmentinmarineinsurance? factinrelationtoanyof Concealmentofany
themattersstatedin materialfactwill
A:Itisthefailuretodiscloseanymaterialfactor Sec.110doesnotvitiate vitiatetheentire
circumstance which in fact or law is within, or theentirecontractbut contract,whetheror
merelyexoneratesthe notthelossresults
which ought to be within the knowledge of one
insurerfromarisk fromtherisk
party and of which the other has no actual or
resultingfromthefact concealed.
presumptiveknowledge.
concealed.

Q:Isinformationofthebelieforexpectationofa
Q: What is the effect of false representation by
third person, in reference to a material fact,
theinsured?
material?

A:Anymisrepresentationofamaterialfactmade
A: Yes. Thus, there is concealment where the
with fraudulent intent avoids the policy. If the
insured at the time of application for insurance
misrepresentationisnotintentionalorfraudulent
did not disclose the opinion of marine experts
but the fact misrepresented is material to the
who inspected the vessel insured that it was
risk, the insurer may rescind the contract from
unseaworthy.(Sec.108)
thetimerepresentationbecomesfalse.(Sec.111)

Q: When is the insured presumed to have
Q: What is the distinction between promissory
knowledgeofapriorlossinmarineinsurance?
representation and representation of
expectation?
A:Theinsuredispresumedtohaveknowledgeof

a prior loss at the time of insuring, if the
A:
information might possibly have reached him in
PROMISSORY REPRESENTATIONOF
the usual mode of transmission and at the usual REPRESENTATION EXPECTATION
rateofcommunication.(Sec.109) Itisanypromisetobe It is a statement of
fulfilled after the future facts or events
Q: What matters, when concealed, do not contracthascomeinto whichareintheirnature
vitiatetheentireinsurancecontract,butmerely existence or any contingent and which
exoneratestheinsurerfromalossresultingfrom statement concerning the insurer is bound to
theriskconcealed? what is to happen know that the insured
duringtheexistenceof could not have intended
A: theinsurance to state as known facts,
1. Nationalcharacteroftheinsured but as intentions or
2. The liability of the thing insured to expectationsmerely.
captureanddetention
3. The liability to seizure from breach of Q:Whatistheeffectoffalsityastoexpectation?
foreignlawsoftrade
4. Thewantofnecessarydocuments A: Representations of expectation or intention,
unless made with fraudulent intent, their failure

51

of fulfillment is not ground for rescission. (Sec. the commencement of each portion.
112) (Sec.117)

Q:Whatiswarrantyinmarineinsurance? Q: What is the effect of the admission of
seaworthinessbytheinsurer?
A: It is a stipulation, either express or implied,
forming part of the policy as to some fact, A:Ifthepolicyprovidesthattheseaworthinessof
conditionorcircumstancerelatingtotherisk. the vessel as between insured and insurer is
admitted, the issue of seaworthiness cannot be
Q: What are the implied warranties in marine raised by the insurer without showing
insurance? concealmentormisrepresentationbytheinsured.
(Phil. American General Insurance Co. v. CA, G.R.
A: No.116940,June11,1997)
1. Seaworthiness.(Sec.113)
2. Nondeviation from the agreedvoyage. Q:Whatdoestheadmissionofseaworthinessby
(Secs.123,124,125) theinsurermean?
3. Nonengagementfromillegalventure.
4. Warranty of neutrality the ship will A:Itmaymean:
carry neutrality of the ship or cargo 1. Thatthewarrantyofseaworthinessisto
where such nationality or neutrality is betakenasfulfilled;or
expresslywarranted.(Sec.120) 2. That the risk of unseaworthiness is
5. Presenceofinsurableinterest assumed by the insurer. (Philippine
American General Insurance Co., Inc. v
Q:Whatisseaworthiness? CA,GRNo.116940.June11,1997)

A:Itisarelativetermdependinguponthenature Q: What is the effect if unseaworthiness is
oftheship,voyage,serviceandgoodsdenotingin unknowntotheownerofthecargo?
general, a ships fitness to perform the service
and to encounter the ordinary perils of the A: It is immaterial in ordinary marine insurance
voyage, contemplated by the parties to the andmaynotbeusedbyhimasadefenseinorder
policy.(Sec.114) to recover on the marine insurance policy. It
becomestheobligationofacargoownertolook
Q: When is the warranty of seaworthiness for a reliable common carrier, which keeps its
compliedwith? vesselsinseaworthyconditions.Theshippermay
havenocontroloverthevesselbuthehascontrol
A: in the choice of the common carrier that will
GR: The warranty of seaworthiness is transport his goods. (Roque v. IAC, G.R. No. L
compliedwithiftheshipbeseaworthyatthe 66935,Nov.11,1985)
time of the commencement of the risk. (Sec.
115) There is no implied warranty that the Q: What is the scope of the seaworthiness of a
vessel will remain in seaworthy condition vessel?
throughoutthelifeofthepolicy.
A:Awarrantyofseaworthinessextendsnotonly
XPN: totheconditionofthestructureoftheshipitself,
1. Inthecaseoftimepolicytheshipmust but requires that it be properly laden, and
beseaworthyatthecommencementof provided with a competent master, a sufficient
every voyage she may undertake. (Sec. number of competent officers and seamen, and
115[a]) therequisiteappurtenancesandequipment,such
asballasts,cablesandanchors,cordageandsails,
2. In the case of cargo policy each vessel food, water, fuel and lights, and other necessary
upon which cargo is shipped or orproperstoresandimplementsforthevoyage.
transshippedmustbeseaworthyatthe (Sec.116)
commencement of each particular
voyage.(Sec.115[b]) Q:Whatarethetwokindsoftotalloss?

3. In the case of voyage policy A:
contemplating a voyage in different 1. Actualtotalloss
stages the ship must be seaworthy at 2. Constructivetotalloss
52
MERCANTILELAWTEAM:
INSURANCE CODE
Q: In an insurance upon cargo, what is the

Q:Whatarethedistinctionsbetweenthetwo? liabilityoftheinsurerincaseofreshipment?

A: A:Iftheoriginalshipbedisabled,andthemaster,
CONSTRUCTIVETOTAL actingwithawisediscretion,astheagentofthe
ACTUALTOTALLOSS
LOSS merchant and the ship owners, forwards the
Itexistswhenthe Itisonewhichtheloss, cargo in another ship, such necessary and
subjectmatterofthe althoughnotactually justifiable change of ship will not discharge the
insuranceiswholly total,isofsucha underwriter on the goods from liability for any
destroyedorlostor characterthatthe losswhichmaytakeplaceongoodssubsequently
whenitissodamaged insuredisentitled,ifhe to such reshipment. (Sec. 133) The insurer may,
asnolongertoexistin thinksfit,totreatitas however, require additional premium if the
itsoriginalcharacter. totalbyabandonment.
hazardbeincreasedbyhisextensionofliability.
(Sec.131)

Therightofthe Abandonmentbythe
Q.Whatisdeviationinmarineinsurancepolicy?
insuredtoclaimthe insuredisnecessaryin

wholeinsuranceis ordertorecoverfora
absolute.Noneedto totalloss(Sec.138)in A:Deviationisadepartureofthevesselfromthe
givenoticeof theabsenceofany courseofthevoyage,oranunreasonabledelayin
abandonment.(Sec. provisiontothecontrary pursuingthevoyage,orthecommencementofan
135) inthepolicy. entirelynewvoyage.(Sec.123)

Q:Whatconstitutesactualtotalloss? Q:Whatarethefourcasesofdeviationin
marineinsurance?
A:
1. Atotaldestructionofthethinginsured A:
2. The irretrievable loss of the thing by 1. Departure from the course of sailing
sinking,orbybeingbrokenup fixed by mercantile usage between the
3. Anydamagetothethingwhichrenders places of beginning and ending
it valueless to the owner for the specifiedinthepolicy.(Sec.121)
purposeforwhichheheldit;or
4. Any other event which effectively 2. Departure from the most natural,
deprives the owner of the possession, direct, and advantageous route
at the port of destination, of the thing between the places specified if the
insured.(Sec.130) course of sailing is not fixed by
mercantileusage.(Sec.122)
Note:Completephysicaldestructionisnotessential
toconstituteactualtotalloss. 3. Unreasonable delay in pursuing the
voyage.(Sec.123)
Q:Whatisconstructivetotalloss?
4. The commencement of an entirely
A: differentvoyage.
1. Actuallossofmorethanofthevalue
oftheobject Q:Whatarethetwokindsofdeviation?
2. Damagereducingvaluebymorethan
ofthevalueofthevesselandofcargo; A:
and 1. ProperThiswillnotvitiateapolicyof
3. Expenseoftransshipmentexceedsof marine insurance because deviation is
thevalueofthecargo.(Sec.131) consideredjustifiedorcausedbyactual
necessity which is equal in importance
Q:Whenisactuallosspresumed? tosuchdeviation.(Sec.124)

A: It may be presumed from the continued 2. Improper The insurer becomes
absence of a ship without being heard of. The immediately absolved from further
length of time which is sufficient to raise his liability under the policy for losses
presumption depends on the circumstances of occurring subsequent to the deviation
thecase.(Sec.132) because deviation is considered to be
without just cause. Every deviation not
specified in Sec.124 is improper. (Sec.
125)

53

Q:Whatistheeffectofavalidabandonment?
Q:Whatistheadditionalliabilityoftheinsurer
ofgoodsreferredtointhereshipmentofcargo? A: It is equivalent to a transfer by the insured of
hisinterest,totheinsurer,withallthechancesof
A:Themarineinsurerisboundfor: recovery and indemnity. The insurer becomes
1. Damages entitled to all the rights which the insured
2. Expensesofdischarging possessedinthethinginsured.(Sec.146)
3. Storage
4. Shipment Q: What are the forms of acceptance of
5. Extrafreightage abandonment?
6. All other expenses incurred in saving
cargoreshipped.(Sec.134) A:
1. Express
Note: The liability of the insurer cannot exceed the 2. Impliedfromtheconductoftheinsurer
amountoftheinsurance. 3. Mere silence of the insurer for
unreasonable length of time after
Q:Whatisabandonment? notice.(Sec.150)

A: It is the act of the insured by which, after a Q: When may the insured, by a contract of
constructive total loss he declared the marineinsurance,abandonthethinginsured?
relinquishmenttotheinsurerofhisinterestinthe
thinginsured. A:
1. If more than threefourths thereof in
Q: What are the requisites for the validity of value is actually lost, or would have to
abandonment? beexpendedtorecoveritfromtheperil

A: 2. If it is injured to such an extent as to
1. Theremustbeanactualrelinquishment reduce its value more than three
by the person insured of his interest in fourths
thethinginsured.(Sec.138)
3. If the thing insured is a ship, and the
2. Theremustbeaconstructivetotalloss. contemplated voyage cannot be
(Sec.139) lawfully performed without incurring
either an expense to the insured of
3. The abandonment must neither be more than threefourths the value of
partialnorconditional.(Sec.140) the thing abandoned or a risk which a
prudentmanwouldnottakeunderthe
4. It must be made within a reasonable circumstances;or
time after receipt of reliable
informationofthelos.s(Sec.141) 4. If the thing insured is cargo or
freightage, and the voyage cannot be
5. Itmustbefactual.(Sec.142) performed, nor another ship procured
bythemaster,withinareasonabletime
6. It must be made by giving notice and with reasonable diligence to
thereof to the insurer which may be forward the cargo, without incurring
doneorallyorinwriting.(Sec.143) the like expense or risk mentioned in
theprecedingsubparagraph.(Sec.139)
7. The notice of abandonment must be
explicit and must specify the particular Note:Freightagecannotinanycasebeabandoned,
causeofabandonment.(Sec.144) unlesstheshipisalsoabandoned.

Q:Whatistheformofnoticeofabandonment? Q:Whatisthethreefourthrule?

A: Abandonment may be done orally, or in A:Whatiscontemplatedasunderthelawmust
writing;Providedthatifthenoticebedoneorally bemorethan.Whenwhatwaslostwasexactly
a written notice of such abandonment shall be ,therulecannotbeapplied.
submitted within 7 days from such oral notice.
(Sec.143) Q: An insurance company issued a marine
insurance policy covering a shipment by sea
54
MERCANTILELAWTEAM:
INSURANCE CODE
from Mindoro to Batangas of 1,000 pieces of Q: What is the effect of the insurers refusal to
Mindorogardenstonesagainsttotallossonly. acceptavalidabandonment?
Thestoneswereloadedintwolighters,thefirst
with600piecesandthesecondwith400pieces. A: If the insurer declines to accept a proper
Because of rough seas, damage was caused the abandonment,heisliableasuponanactualtotal
secondlighterresultinginthelossof325outof loss less any proceeds the insured may have
the400pieces.Theowneroftheshipmentfiled receivedonaccountofthedamagedpropertyas
claims against the insurance company on the whentheinsuredsucceedsinsellingtheproperty
ground of constructive total loss inasmuch as as damaged (Sec. 154). If the abandonment was
morethanofthevalueofthestoneshadbeen improper, the insured may nevertheless recover
lost in one of the lighters. Is the insurance totheextentofthedamageproved.
companyliableunderitspolicy?Why?
Q:Whatistheeffectofinsuredsfailuretomake
A: The insurance company is not liable under its abandonment?
policy covering against total loss only the
shipment of 1,000 pieces of Mindoro garden A:Theinsuredhasanelectiontoabandonornot,
stones.Thereisnoconstructivetotallossthatcan and cannot be compelled to abandon although
beclaimedsincetheruleistobecomputedon abandonment is proper. If the insured fails to
the total 1,000 pieces of Mindoro garden stones abandon,hemayneverthelessrecoverhisactual
covered by thesingle policy coverage. (1992 Bar loss(Sec.155).
Question)
Q:Whendoescoinsuranceexist?
Q: What are the effects of acceptance of
abandonment? A: There is coinsurance if the value of the
insureds interest exceeds the amount of
A: insurance; he is considered the coinsurer for an
1. The insurer becomes at once liable for amount determined by the difference between
thewholeamountoftheinsuranceand the insurance taken out and the value of the
alsobecomesentitledtoallrightswhich property.
insured possessed in the thing insured.
(Sec.146) Amarineinsurerisliableuponapartiallossonly
forsuchproportionoftheamountinsuredbyhim
2. Itfixestherightsoftheparties;whether as the loss bears to the value of the whole
express or implied, is conclusive upon interest of the insured in the property insured
them,andirrevocable.(Sec.152) (Sec.157).

3. It stops the insurer to rely on any Note:Coinsuranceappliesonlytomarineinsurance.
insufficiencyintheform,time,orright, Logically, there cannot be coinsurance in life
of abandonment. Whether the insured insurance.Butcoinsuranceappliesinfireinsurance
has a right to abandon is immaterial onlywhenexpresslystipulatedbytheparties.
where the abandonment is accepted
andthereisnofraud. Q:Whataretherequisitesforcoinsurance?

4. On accepted abandonment of a ship, A: There is coinsurance when the following
the freightage earned subsequent to requisitesconcur:
the loss belongs to the insurer of the 1. The amount of insurance is less than
ship. But freightage earned previously theinsuredsinsurableinterest;
belongstotheinsurerofsaidfreightage 2. Thelossispartial.
who is subrogated to the rights of the
insureduptothetimeoftheloss.(Sec. Q: What is the Formula to determine the
153) amountrecoverable?

XPN: Where the ground upon which it was A:
made proves to be unfounded. (Sec. 152) (Partial)LossXAmountofInsurance=Amount
Under Sec. 145, abandonment can be ofrecovery
sustained only upon the ground specified in Valueofthing
thenoticethereof. Insured

55

Illustration: expenses incurred on the way or on
If a vessel valued at P1M is insured for only P800, arrival;
000andisdamagedtotheextentofP400,000,the
insurerwill berequired to pay only 80% oftheloss 3. Value of freightage the gross
suffered, or P320,000; the other 20% or P80,000 freightage, exclusive of primage,
beingbornebytheinsuredhimself. without reference to the cost of
earning;
P400,000or2/5XP800,000=P320,000

P1M
Note: Primage is a compensation paid to

thecaptainafterasuccessfulvoyage.
The insured is considered a coinsurer as to the

uninsuredportionofP200,000.

4. CostofinsuranceItisalwaysaddedin
Note:Ifthelossistotal,theinsurerisliableforthe calculatingthevalueoftheship,cargo,
full amount of P800,000. On the other hand, if the orfreightageorothersubjectmatterin
property is insured to its full value, the insured is anopenpolicy.(Sec.161)
entitledtorecoverthefullamountofthepartialloss
ofP400,000. Q: What does the phrase port of refuge
expensesmean?
Q:Incaseofloss,whatistheinsuredentitledto
recover if profits to be realized are separately A: These are the additional expenses incurred in
insured? repairing the damages suffered by a vessel
because of the perils insured against as well as
A: If profits to be realized are separately insured those incurred for saving the vessel from such
from the vessel or cargo, the insured is entitled perils,suchastheexpenseoflaunchingorraising
torecover,incaseofloss,suchproportionofthe the vessel or of towing or navigating it into port
profits as the value of the property lost bears to forhersafety.Theseareitemstobebornebythe
thevalueofthewholeproperty.(Sec.158) insurer in addition to a total loss if that
afterwardstakesplace.(Sec.163)
Q: When is the loss of profits conclusively
presumed? Q: What are the rightsof the insured in caseof
generalaverage?
A: When profits are valued and insured by a
contract of marine insurance, a loss of them is A:
conclusivelypresumedfromalossoftheproperty GR: The insurer is liable for any general
outofwhichtheywereexpectedtoarise,andthe averageloss(Sec.136) whereitispayableor
valuationfixestheiramount.(Sec.160) hasbeenpaidbytheinsuredinconsequence
ofaperilinsuredagainst.
Q: What are the rules for estimating loss under
anopenpolicyofmarineinsurance? The insured may either hold the insurer
directly liable for the whole of the insured
A: value of the property sacrificed for the
1. Value of the ship In ascertaining the general benefit, subrogating him to his own
value of the vessel, the value is to be right of contribution or demand contribution
taken as of the commencement of the from the other interested parties as soon as
risk and not its value at the time she the vessel arrives at her destination (Sec.
wasbuilt; 135).

2. ValueofcargoThevalueofthecargo XPN: There can be no recovery for general
is its actual cost to the insured, when averagelossagainsttheinsurer:
laden on board, or where that cost 1. After the separation of the interests
cannotbeascertained,itsmarketvalue liable to contribution, that is to say,
at the time and place of lading it on after the cargo liable for contribution
board,butwithoutreferencetoanyloss hasbeenremovedfromthevessel;or
incurred in raising money for its
purchase, or to any drawback on its 2. When the insured has neglected or
exportation,ortothefluctuationofthe waivedhisrighttocontribution.
marketattheportofdestination,orto
Note:Generalaverageisaprincipleoflaw
whereby,whenitisdecidedbythemaster
56
MERCANTILELAWTEAM:
INSURANCE CODE
of a vessel, acting for all the interest

concernedtosacrificeapartofaventure 2. Such use or condition as limited by the
exposedtoacommonandimminentperil policyisaltered;
in orderto save the rest, the interests so
savedarecompelledtocontributeratably 3. The alteration is made without the
or proportionately to the owner of the consentoftheinsurer;
interestsacrificed,sothatthecostofthe
sacrificeshallfallequallyuponall.(Hector
4. Thealterationismadebymeanswithin
S.DeLeon,TheLawonInsurance,2003)
thecontroloftheinsured;and

Q:WhatisFreeFromParticularAverageClause
5. Thealterationincreasestherisk.
(FPAClause)?

Note:Acontractoffireinsuranceisnotaffectedby
A: A clause agreed upon in a policy of marine
any act of the insured subsequent to the execution
insurance in which it is stated that the insurer
of the policy, which does not violate its provisions
shallnotbeliableforaparticularaverage. eventhoughitincreasestheriskandisthecauseof
theloss.(Sec.170)
Theinsurerisliableonlyforgeneralaverageand
not for particular average unless such particular Q: What are the distinctions of ocean marine
averagelossastheeffectofdeprivingtheinsured andfirepolicies?
ofthepossessionattheportofdestinationofthe
wholeofthethinginsured.(Sec.136) A:
OCEANMARINE FIREINSURANCE
Q:Whatisthelimitastoliabilityofinsurer? Apolicyofinsuranceon Where the hazard is fire
a vessel engaged in alone and the subject is
A: The liability of the insurer for any general navigation is a contract an unfinished vessel,
average loss is limited to the proportion of of marine insurance neverafloatforavoyage,
contribution attaching to his policy value where although it insures thecontracttoinsureisa
thisislessthanthecontributingvalueofthething againstfirerisksonly. fire risk, especially in the
insured.(Sec.164) absence of an express
agreement that it shall
B.FIREINSURANCE have the incidents of
marinepolicy,orwhereit
Q:Whatisfireinsurance? insures materials in a
shipyard for use in
A: It is a contract of indemnity by which the constructingvessels.

insurer, for a consideration, agrees to indemnify
Also where a policy
the insured against loss of or damage by fire,
insures against fire, a
lightning, windstorm, tornado or earthquake and vessel while moored and
otheralliedrisks,whensuchrisksarecoveredby inuseasahospital
extension to fire insurance policies or under
separatepolicies.(Sec.167) Q: Why is the distinction between marine and
fireinsuranceimportant?
Note: The liability of an insurer is to pay for direct

loss only. The insurer may be liable to pay for
consequentiallossesifcoveredbyextensiontosuch A:
firepoliciesorinsuredunderseparatepolicy 1. In marine insurance, the rules on
constructive total loss (Secs. 131, 139)
Q: When does alteration in the thing insured and abandonment (Sec. 138) apply but
entitletheinsurertorescind? notinfireinsurance;

A:Inorderthattheinsurermayrescindacontract 2. Incaseofpartiallossofathinginsured
of fire insurance for any alteration made in the forlessthanitsactualvalue,theinsured
use or condition of the thing insured, the inamarinepolicyisacoinsurerofthe
followingrequisitesmustbepresent: uninsuredportion(Sec.157),whilethe
insured may only become a coinsurer
1. The use or condition of the thing is in fire insurance if expressly agreed
specially limited or stipulated in the uponbytheparties.(Sec.172)
policy;

57

Q: What is the measure of indemnity in open 2. Third party liability insurance
andvaluedpoliciesinfireinsurance? Insuranceagainstspecifiedperilswhich
may give rise to liability on the part of
A: the insured of claims for injuries or
OPENPOLICIES VALUEDPOLICIES damagetopropertyofothers.
The expense necessary to The parties are bound
replace the thing lost or by the valuation, in Q: What are some rules on third party liability
injured in the condition it theabsenceoffraud. insurance?
was at the time of the
injury. A:
1. Insurable interest is based on the
Q:Whatisacoinsuranceclause? interest of the insured in the safety of
the persons, and their property, who
A: It is that which requires the insured to may maintain an action against him in
maintain insurance to an amount equal to the case of their injury or destruction
valueorspecifiedpercentageofthevalueofthe respectively.
insured property under penalty of becoming co
insurertotheextentofsuchdeficiency. 2. In a third party liability (TPL) insurance
contract, the insurer assumes the
Note: The insured is not a coinsurer under fire obligation by paying the injured third
policiesintheabsenceofstipulation. party to whom the insured is liable.
Prior payment by the insured to the
Q:Whatisafallofbuildingclause? third person is not necessary in order
that the obligation may arise. The
A: It is that which provides, in a fire insurance moment the insured becomes liable to
policy, that if the building or any part thereof third persons, the insured acquires an
falls,exceptasaresultoffire,allinsurancebythe interestintheinsurancecontractwhich
policyshallimmediatelycease. maybegarnishedlikeanyothercredit.

Q:Whatisanoptiontorebuildclause? 3. In burglary, robbery and theft
insurance, the opportunity to defraud
A: It gives the insurer the option to rebuild the
the insurer (moral hazard) is so great
destroyed property instead of paying the
that insurer have found it necessary to
indemnity. This clause serves to protect the
fill up the policies with many
insurer against unfair appraisals friendly to the
restrictions designed to reduce the
insured.(Sec.172)
hazard.Personsfrequentlyexcludedare

those in the insureds service and
C.CASUALTYINSURANCE
employment. The purpose of the

exception is to guard against liability
Q:Whatiscasualtyinsurance?
should theft be committed by one

having unrestricted access to the
A: It is that which covers loss or liability arising
property.
from accident or mishap, excluding those falling

under types of insurance as fire or marine. (Sec.
4. Right of third party injured to sue the
174)
insurer of party at fault depends on

whether the contract of insurance is
Q: What are the two divisions of casualty
intended to benefit third persons also
insurance?
oronlytheinsured

A:
Q:Whendoestheinjuredpersonhavetheright
1. Accident or health insurance
tosueinsurerofthepartyatfault?
Insuranceagainstspecifiedperilswhich

may affect the person and/or property
A:
oftheinsured.
1. Indemnity against third party liability

injured third party can directly sue the
E.g. personal accident, robbery/theft
insurer.
insurance

58
MERCANTILELAWTEAM:
INSURANCE CODE
Purpose:Toprotectinjuredpersonagainst A:Beverlycanrecovertheproceedsofthepolicy
the insolvency of the insured who causes from the insurer. The death of the insured was
suchinjury. notduetosuicideorwillfulexposuretoneedless
peril which are excepted risks. The insureds act
2. Indemnity against actual loss or waspurelyanactofnegligencewhichiscovered
payment third party has no cause of by the policy and for which the insured got the
action against the insurer. The third insurance for his protection. In fact, he removed
persons recourse is limited to the themagazinefromthegunandwhenhepointed
insuredalone.Thecontractissolelyfor the gun to his temple he did so because he
theinsurertoreimbursetheinsuredfor thoughtthatitwassafeforhimtodoso.Hedid
liabilityactuallysatisfiedbyhim. sotoassurehissisterthatthegunwasharmless.
Thereisnoneinthepolicythatwouldrelievethe
Note: The insurer is not solidarily liable with the insurer of liability for the death of the insured
insured. The insurers liability is based on contract; since the death was an accident. (1995 Bar
that of the insured is based on torts. Furthermore, Question)
theinsurersliabilityislimitedbytheamountofthe
insurancecoverage.
Q:Whatisliabilityinsurance?

Q: Chirs, a boxer, is a holder of an accident A:Ithasbeensaidtobeacontractofindemnity
insurancepolicy.Inaboxingmatch,dediedafter forthebenefitoftheinsuredandthoseinprivity
being knocked out by the opponent. Can his with him, or those to whom the law upon the
fatherwhoisabeneficiaryundersaidinsurance grounds of public policy extends the indemnity
policy successfully claim indemnity from the againstliability.
insurancecompany?
Q:Whatsthedifferencebetweentheliabilityof
A:Yes.Clearly,theproximatecauseofdeathwas the insurer and that of the insured in case for
the boxing contest. Death sustained in a boxing indemnityagainstthirdpersonliability?
contest is an accident. (De la Cruz v. Capital
Insurance&SuretyCo.,G.R.No.L21574,June30, A:
1966)(1990BarQuestion) INSURER INSURED
Theliabilityisdirectbut Liability is direct and can

Q: SunMoon Insurance issued a Personal
the insurer cannot be beheldliablewithallthe
AccidentPolicytoHenryDywithafacevalueof
held solidarily liable partiesatfault.
P500,000. A provision in the policy states that with the insured and
the company shall not be liable in respect of otherpartiesatfault.
bodily injury consequent upon the insured Liability is based on Liabilityisbasedontort.
personattemptingtocommitsuicideorwillfully contract
exposing himself to needless peril except in an
The thirdparty liability The liability extends to
attempt to save human life. Six months later
is only up to the extent theamountofactualand
Henry Dy died of a bullet wound in his head. of the insurance policy other damages. (Heirs of
Investigation showed that one evening Henry and that required by GeorgeY.Poev.Malayan
was in a happy mood although he was not law Insurance Company, Inc.
drunk. G.R. No. 156302, Apr. 7,
2009)
Hewasplayingwithhishandgunfromwhichhe
had previously removed its magazine. He Q: In liability insurance, is the insureds liability
pointedthegunathissisterwhogotscared.He mustfirstbedeterminedbythecourtbeforethe
assured her it was not loaded. He then pointed thirdpartyliabilityinsurercouldbesued?
thegunathistempleandpulledthetrigger.The
gunfiredandHenryslumpedonthefloor. A:No,thecontentionoftheinsurerisnotcorrect.
There is no need to wait for the decision of the
Henrys wife Beverly, as the designated court determining insureds liability with finality
beneficiary, sought to collect under the policy. before the third party liability insurer could be
SunMoon Insurance rejected her claim on the sued. The occurrence of the injury to a third
ground that the death of Henry was not person immediately gave rise to the liability of
accidental.Beverlysuedtheinsurer.Decideand the insurer under its policy. In other words,
Discussfully. whereaninsurancepolicyinsuresdirectlyagainst
liability,theinsurersliabilityaccruesimmediately
upon the occurrence of the injury or event upon

59

whichtheliabilitydepends.Theinsurercannotbe 2. The contract of suretyship or bonding
heldsolidarilyliablewiththeinsured.Theliability shall not be valid and binding unless
of the insurer is based on contract while that of and until the premium therefore has
the insured is based on tort. If the insurer was beenpaid
solidarilyliablewiththeinsured,itcouldbemade
topaymorethantheamountstatedinthepolicy. 3. Where the obligee has accepted the
This would, however, be contrary to the bond, it shall be valid and enforceable
principlesunderlyinginsurance contracts. Onthe notwithstanding that the premium has
otherhand,iftheinsurerwassolidarilyliableand not been paid; (Philippine Pryce
itismadetopayonlyuptotheamountstatedin AssuranceCorp.v.CA,G.R.No.107062,
the insurance policy, the principles underlying Feb.21,1994)
solidaryobligationswouldbeviolated.(1996Bar
Question) 4. If the contract of suretyship or bond is
not accepted by, or filed with the
Q:Whatisanoactionclause? obligee, the surety shall collect only a
reasonableamount;
A: It is a requirement in a policy of liability
insurance which provides that suit and final 5. If the nonacceptance of the bond be
judgment be first obtained against the insured, due to the fault or negligence of the
that only thereafter can the person injured surety, no service fee, stamps, or taxes
recoveronthepolicy.(Guingonv.DelMonte,G.R. imposed shall be collected by the
No.L21806,Aug.17,1967) surety;and

Note: A no action clause must yield to the 6. In the case of continuing bond (for a
provisions of the Rules of Court regarding term longer than one year or with no
multiplicityofsuits.(Shafterv.RTC,G.R.No.78848, fixed expiration date), the obligor shall
Nov.14,1988) paythesubsequentannualpremiumas
it falls due until the contract is
D.SURETYSHIP cancelled.(Sec.177)

Q:Whatissuretyship? Q:Whatarethetypesofsuretybonds?

A: It is an agreement whereby the surety A:
guarantees the performance by another of an 1. Contract bonds These are connected
undertaking or an obligation in favor of a third withconstructionandsupplycontracts.
party.(Sec.175) They are for the protection of the
owneragainstapossibledefaultbythe
Q:Whatisthenatureofliabilityofsurety? contractororhispossiblefailuretopay
materialmen, laborers and sub
A: contractors.
1. Solidarywiththebondobligor
The position of surety, therefore, is to
2. Limited to the amount in the bond (it answer for a failure of the principal to
cannotbeextendedbyimplication) perform in accordance with the terms
andspecificationsofthecontract.
3. Itisdeterminedstrictlybythetermsof
thecontractofsuretyshipinrelationto Theremaybetwobonds:
the principal contract between the
obligorandtheoblige a. Performance bond One covering
the faithful performance of the
Q: What are the rules in the payment of contract;and
premiumsinsuretyship? b. Payment bond One covering the
payment of laborers and material
A: men.
1. The premium becomes a debt as soon
asthecontractofsuretyshiporbondis 2. Fidelity bonds They pay an employer
perfected and delivered to the obligor for loss growing out of a dishonest act
(Sec.77) ofhisemployee.

60
MERCANTILELAWTEAM:
INSURANCE CODE
For the purposes of underwriting, they cessation of life (Sec. 180). It is a mutual
areclassifiedas: agreementbywhichapartyagreestopayagiven
sum on the happening of a particular event
a. Industrial bond One contingent on the duration of human life, in
requiredbyprivateemployers consideration of the payment of a smaller sum
to cover loss through immediately, or in periodical payments by the
dishonestyofemployees;and otherparty.
b. Public official bond One
required of public officers for Q: What are the distinctions between life
the faithful performances of insuranceandfire/marineinsurance?
theirdutiesandasacondition
of entertaining upon the A:SeeAppendixC
dutiesoftheiroffices.
Q:Whatarethekindsoflifeinsurancepolicies?
3. Judicial bonds They are those which
arerequiredinconnectionwithjudicial A:
proceedings. 1. Ordinary life, general life or old line
policy Insured pays a premium every
Q:Whatarethedistinctionsbetweensuretyship yearuntilhedies.Surrendervalueafter
andpropertyinsurance? 3years.

A: 2. Limited payment Insured pays
SURETYSHIP PROPERTY premium for a limited period. It is
INSURANCE payable only at the death of the
Itisanaccessorycontract. The principal contract insured.
itself.
There are three parties: There are only two 3. Endowment Insured pays a premium
the surety, obligor/debtor, parties: insurer and foraspecifiedperiod.Ifheoutlivesthe
andtheobligee/creditor. insured period, the face value of the policy is
More of a credit A contract of paid to him; if not, his beneficiaries
accommodation with the indemnity receivebenefit.
surety assuming primary
liability 4. Term insurance Insured pays once
Surety is entitled to No right of recovery only, and he is insured for a specified
reimbursement from the forthelosstheinsurer period. If he dies within the period, his
principal and his may sustain except
beneficiaries benefit. If he outlives the
guarantors for the loss it when the insurer is
period, no person benefits from the
may suffer under the entitled to
contract. subrogation.
insurance. Also known as temporary
A bond may be cancelled May be cancelled
insurance.
by or with the consent of unilaterally either by
the obligee or by the the insured or by the 5. Industrial life Life insurance entitling
commissioner or by the insurer on grounds theinsuredtopaypremiumsweekly,or
court. providedbylaw. where premiums are payable monthly
Requiresacceptanceofthe Does not need oroftener
obligee before it becomes acceptance of any
validandenforceable. thirdparty. 6. Variable contract Any policy or
A riskshifting device, the A riskdistributing contractoneitheragrouporindividual
premiumpaidbeinginthe device, the premium basis issued by an insurance company
natureofaservicefee. paid being considered providing for benefits or other
a ratable contribution contractual payments or values
toacommonfund. thereunder to vary so as to reflect
investment results of any segregated
E.LIFEINSURANCE portfolioofinvestment.

Q:Whatislifeinsurance?

A: It is that which is payable on the death of a
person or on his surviving a specified period, or
otherwise contingently on the continuance of

61

Q:Whatistheeffectifthebeneficiarywillfully F.COMPULSORYMOTORVEHICLELIABILITY
bringaboutthedeathoftheinsured? INSURANCE

A: Q:Whatismotorvehicleliabilityinsurance?
GR: The interest of a beneficiary in a life
insurance policy shall be forfeited when the A:Itisaprotectioncoveragethatwillanswerfor
beneficiary is the principal, accomplice; legal liability for losses and damages for bodily
accessoryinwillfullybringingaboutthedeath injuries or property damage that may be
of the insured, in which event, the nearest sustained by another arising from the use and
relative of the insured shall receive the operationofamotorvehiclebyitsowner.
proceeds of said insurance, if not otherwise
disqualified.(Sec.12) Q:Whatisthepurposeofmotorvehicleliability
insurance?
XPN:
1. Thebeneficiaryactedinselfdefense; A: To give immediate financial assistance to
2. The insureds death was not victims of motor vehicle accidents and/or their
intentionally caused (e.g., thru dependents,especiallyiftheyarepoorregardless
accident); offinancialcapabilityofmotorvehicleownersof
3. Insanity of the beneficiary at the time operatorsresponsiblefortheaccidentsustained.
hekilledtheinsured. (First Integrated Bonding Insurance Co., Inc. v.
Hernando,G.R.No.L51221,July31,1991)
Q:Whenistheinsurerliableincaseofsuicide?
Q:Whoisapassenger?
A:
1. The suicide is committed after the A:Anyfarepayingpersonbeingtransportedand
policyhasbeeninforceforaperiodof2 conveyed in and by a motor vehicle for
yearsfromthedateofitsissueorofits transportation of passengers for compensation,
lastreinstatement. including persons expressly authorized by law or
by the vehicles operator or his agents to ride
2. Thesuicideiscommittedafterashorter withoutfare.(Sec.373[b])
period provided in the policy although
withinthe2yearperiod Q:Whoisathirdparty?

3. Thesuicideiscommittedinthestateof A:Anypersonotherthanapassengerasdefined
insanity regardless of the date of inthissectionandshallalsoexcludeamemberof
commission, unless suicide is an thehousehold,oramemberofthefamilywithin
exceptedrisk.(Sec.180A) theseconddegreeofconsanguinityoraffinity,of
a motor vehicle owner or land transportation
Note:Thepolicycannotprovideaperiodlongerthan operator, as likewise defined herein, or his
2years.Ifthepolicyprovidesforalongerperiodand employee in respect of death, bodily injury, or
thesuicideiscommittedwithinsaidperiodbutafter damage to property arising out of and in the
2years,theinsurerisliable. courseofemployment.(Sec.373,[c])

Theinsurerisnotliableifitcanshowthatthepolicy Q: What is the meaning of a motor vehicle
was obtained with the intention to commit suicide owner?
even in the absence of any suicide exclusion in the
policy.
A: It means the actual legal owner of a motor

vehicle, whose name such vehicle is duly
Q: What is the measure of indemnity under a
registered with the Land Transportation Office.
policyofinsuranceuponlifeorhealth?
(Sec.373,[d])

A: Unless the interest of a person insured is
Q: What is the meaning of land transportation
susceptibleofexactpecuniarymeasurement,the
operator?
measureofindemnityunderapolicyofinsurance

uponlifeorhealthisthesumfixedinthepolicy.
A: It means the owner or owners of motor
(Sec.183)
vehicles for transportation of a passenger for

compensation, including school buses. (Sec. 373,

[e])

62
MERCANTILELAWTEAM:
INSURANCE CODE
This nofault claim does not apply to property

Q:Whatisanofaultindemnityclause? damage. If the total indemnity claim exceeds P15,
000andthereiscontroversyinrespectthereto,the
A: It is a clause where the insurer is required to findingoffaultmaybeavailedofbytheinsureronly
pay a third party injured or killed in an accident as to the excess. The first P15, 000 shall be paid
without the necessity of proving fault or withoutregardtothefault.
negligence on the part of the insured. There is a
stipulated maximum amount to be recovered. Q:Whatistheauthorizeddriverclause?
(1994BarQuestion)
A:Itindemnifiestheinsuredowneragainstlossor
Q: What are the rules under the no fault damage to the car but limits the use of the
clause?? insuredvehicleto:
1. Theinsuredhimself;or
2. Any person who drives on his order or
A: with his permission. (Villacorta v.
1. The total indemnity in respect of any Insurance Commissioner, G.R. No.
onepersonshallnotexceedP15,000for 54171,Oct.28,1980)
all motor vehicles (Insurance
MemorandumCircularNo.42006)(Sec. Q: What is the main purpose of an authorized
378) driverclause?

2. Proofofloss: A: Its main purpose is to require a person other
a. Policereportofaccident than the insured, who drives the car on the
b. Death certificate and evidence insuredsorder,suchas,hisregulardriver,orwith
sufficienttoestablishproperpayee hispermission,suchasafriendormemberofthe
c. Medical report and evidence of familyortheemployeesofacarserviceorrepair
medical or hospital disbursement. shop to be duly licensed drivers and have no
(Sec.378[ii]) disqualification to drive a motor vehicle.
(Villacorta v. Insurance Commission, G.R. No. L
3. Claim may be made against one motor 54171,Oct.28,1980)
vehicleonly
Q:Whatisthetheftclause?
4. Incaseofanoccupantofavehicle,the
claimshalllieagainsttheinsurerofthe A: It is that which includes theft as among the
vehicle in which the occupant is riding, risks insured against. Where a car is unlawfully
mountingordismountingfrom andwrongfullytakenwithouttheknowledgeand
consent of the owner, such taking constitutes
5. Inanyothercase,claimshalllieagainst theft and it is the theft clause, not the
the insurer of the directly offending authorized driver clause which should apply.
vehicle (Palermo v. Pyramid Inc., G.R. No. L36480, May
31,1988)
6. Inallcases,therightofthepartypaying
the claim to recover against the owner Q:Whatisacooperationclause?
of the vehicle responsible for the
accidentshallbemaintained A:Itisthatwhichprovidesthattheinsuredshall
give all such information and assistance as the
Note:Theclaimantisnotfreetochoosefromwhich insurermayrequire,usuallyincludingattendance
insurerhewillclaimthe"nofaultindemnity,"asthe attrialsorhearings.
law, by using the word "shall, makes it mandatory
that the claim be made against the insurer of the Q: When a passenger jeepney,insuredbut with
vehicleinwhichtheoccupantisriding,mountingor anauthorizeddriversclauseandwasdrivenby
dismounting from. That said vehicle might not be adriverwhoonlyholdsaTrafficViolationreport
the one that caused the accident is of no moment (TVR) because his license was confiscated, met
since the law itself provides that the party paying anaccident,maytheownerofthejeepneyclaim
may recover against the owner of the vehicle fromtheinsurancecompany?
responsible for the accident. (Perla Compania de
Seguros, Inc. v. Ancheta, G.R. No. L49599, Aug. 8, A:Yes.Thefactthatthedriverwasmerelyholding
1988) a TVR does not violate the condition that the
driver should have a valid and existing drivers

63

license. Besides, such a condition should be amountoramountsrequiredaslimits
disregarded because what is involved is a ofindemnityforthesamepurpose.
passenger jeepney, and what is involved here is
notowndamageinsurancebutthirdpartyliability V.INSURABLEINTEREST
where the injured party is a third party not privy
tothecontractofinsurance.(2003BarQuestion) Q:Whatisaninsurableinterest?

Q:AnnainsuredherbrandnewcarwithVilches A:
Ins.Co.forcomprehensivecoveragewhereinthe GR:Apersonisdeemedtohaveaninsurable
insurancecompanyundertooktoindemnifyhim interest in the subject matter insured where
againstlossordamagetothecara)byaccidental he has a relation or connection with or
collision b) by fire, external explosion, burglary, concern in it that he will derive pecuniary
or theft, and c) malicious act. The car was benefit or advantage from its preservation
carnapped and at that time, Annas license was and will suffer pecuniary loss from its
already expired. Anna filed a claim with the destructionorinjurybythehappeningofthe
insurance company but it denied the claim eventinsuredagainst.
because of authorized driver clause. May the
insurance company be held liable to indemnify XPN: The term has a somewhat broader
Annaforthelossoftheinsuredvehicle? meaninginconnectionwithlifeinsurance.To
have an insurable interest in the life of a
A: Yes. The car was lost due to theft. What person, the expectation of benefit from the
appliesinthiscaseisthetheftclause,andnot continued life of that person need not
the authorized driver clause. It is immaterial necessarilybeofpecuniarynature.
that Anna was driving the car with an expired
drivers license at the time it was carnapped. Q: Differentiate insurable interest in life
(1993BarQuestion) insurance and insurable interest in property
insurance.
Q: Who are the persons subject to the
compulsory motor vehicle liability insurance A: Insurable interest in life exists when there is
requirement? reasonablegroundfoundedontherelationofthe
parties, either pecuniary or contractual or by
A: blood or affinity, to expect some benefit or
1. Motorvehicleowner(MVO)oronewho advantagefromthecontinuanceofthelifeofthe
is the actual legal owner of a motor insured.
vehicle in whose name such vehicle is
registeredwiththeLTO;or On the other hand, every interest in property,
whetherrealorpersonal,oranyrelationthereto,
2. Land transportation operator (LTO) or orliabilityinrespectthereof,ofsuchnaturethat
one who is the owner of a motor a contemplated peril might directly damnify the
vehicle or vehicles being used for insured.(Sec.13)
conveyingpassengersforcompensation
includingschoolbuses. Q:Whatarethereasonsfortherequirementof
aninsurableinterest?
Q: What are the substitutes for a compulsory
motorvehicleliabilityinsurancepolicy? A:
1. As deterrence to the insured The
A:MVOsorLTOs,insteadofaCMLVIpolicy,may requirement of an insurable interest to
either: supportacontractofinsuranceisbased
1. PostasuretybondwiththeInsurance upon considerations of public policy
Commissionerwhoshallbemadethe which render wager policies invalid. A
obligee or creditor in the bond in wager policy is obviously contrary to
suchamountoramountsrequiredas publicinterest.
limitsofindemnitytoanswerforthe
samelossessoughttobecoveredby 2. As a measure of limit of recovery If
aCMLVIpolicy;or and to the extent that any particular
insurance contract is a contract to pay
2. Make a cash deposit with the indemnity,theinsurableinterestofthe
Insurance Commission in such insured will be the measure of the
64
MERCANTILELAWTEAM:
INSURANCE CODE
upper limit of his provable loss under a. Of any person on whom he depends
thecontract. wholly or in part for education or
support,orinwhomhehasapecuniary
A.INLIFE/HEALTH interest;(Section10,[b])

Q: What are the two general classes of life Mere blood relationship or mere
policies? relationship by affinity does not
constitute an insurable interest; there
A: mustbeariskofmonetarylossfromthe
1. Insurance upon ones life are those insuredsdeath.
taken out by the insured upon his own
life (Section 10[a]) for the benefit of b. Of any person under a legal obligation
himself, or of his estate, in case it to him for the payment of money, or
matures only at his death, for the respectingpropertyorservices,ofwhich
benefit of third person who may be death or illness might delay or prevent
designatedasbeneficiary. performance;(Sec.10,[c])

The question of insurable interest is c. Of any person upon whose life any
immaterialwherethepolicyisprocured estate or interest vested in him
by the person whose life is insured. A depends.(Sec.10,[d])
person who insures his own life can
designateanypersonashisbeneficiary, Q: Who are the persons under Sec. 10, (c) who
whether or not the beneficiary has an haveaninsurableinterestonthelifeandhealth
insurable interest in the life of the ofaperson?
insured subject to the limits under
Article739and2012oftheNCC. A:Acreditormaynamehimselfasbeneficiaryina
policyhetakesonthelifeofhisdebtor.Thedeath
Note: An application for insurance on of the debtor may either prevent payment if his
onesownlifedoesnotusuallypresentan estate is not sufficient to pay his debts or delay
insurableinterestquestion. such payment if an administrator has to be
appointedtosettlehisestate.ExceptSection10,
2. Insurance upon life of another are (a) of the Insurance Code, an insurance contract
thosetakenoutbytheinsureduponthe partakesthenatureofacontractofindemnity.
lifeofanother. (Sec.10[a],[b],[c]and
[d]) Q: What is theextent of the creditors recovery
uponthedeathofthedebtor?
Where a person names himself
beneficiary in a policy he takes on the A:
life of another, he must have insurable GR:Limitedtotheamountofhisinterest(the
interestinthelifeofthelatter. amountowingtohim).

Q:Forwhoselifeandhealthdoesapersonhave XPN: If the debtor is the insured and the
aninsurableinterest? creditorisnamedbeneficiary,thecreditorwill
be entitled to the whole proceeds of the
A: Of himself, of his spouse and of his children policy upon the debtors death, though his
(Sec.10[a]) creditmaybemuchless.

Q: Is the insured beneficiary required to prove Note:Thedebtorwastheonewhoappliedfor
insurableinterest? theinsurance,toinsurehisownlife.

A: No, because he is presumed to have an XPNtoXPN:
insurable interest on the life of his spouse or his 1. If debtor applied for insurance and
children. designated creditor in compliance with
creditors requirement that debtor will
Thehusbandandwifeaswellasparentandchild take insurance to insure creditors
do have some pecuniary interest in each others interest.
lifesincetheyarelegallyobligedtosupporteach
other.

65

2. Apersonmaytakeapolicyonthelifeof 1. An existing interest The existing
hisbusinesspartnerbecausethelatters interestinthepropertymaybelegalor
death may result in an interruption of equitabletitle.
business operations which can be in
turncausefinancialloss. Examples of insurable interest arising
3. Abusinessfirmcantakeoutapolicyon fromlegaltitle:
the life of its officers or employees a. Trustee,asinthecaseoftheseller
whose services proved valuable to the ofpropertynotyetdelivered;
business. The proceeds are not taxable b. Mortgagor of the property
incomebutconstituteindemnitytothe mortgaged;
employer for the loss which the c. Lessorofthepropertyleased
businesssuffersbecauseofthedeathof
avaluedofficeroremployee. Examples of insurable interest arising
fromequitabletitle:
Q:Istheconsentofthepersoninsuredessential a. Purchaser of property before
tothevalidityofthepolicy? delivery or before he has
performed the conditions of the
A: No. So long as it could be proved that the sale
insuredhasaninsurableinterestattheinception b. Mortgageeofpropertymortgaged;
of the policy, the insurance is valid even without c. Mortgagor, after foreclosure but
suchconsent. beforetheexpirationoftheperiod
within which redemption is
Q:Whenmustinsurableinterestexist? allowed

A: 2. An inchoate interest founded on an
1.Lifeorhealthinsurance existinginterest

GR: Insurable interest in life or health Example:Astockholderhasaninchoate
must exist when the insurance takes interest in the property of the
effect, bur need not exist thereafter or corporationofwhichheisastockholder,
whenthelossoccurs.(Sec.19) whichisfoundedonanexistinginterest
arising from his ownership of shares in
XPN: thecorporation
a. Whentheinsuranceistakenbythe
creditor on the life of the debtor, 3. Anexpectancycoupledwithanexisting
thecreditorisrequiredtohavean interest in that out of which the
insurable interest not only at the expectancyarises.
timeofthecontractbutalsoatthe
timeofthedebtorsdeathbecause Note:Expectancytobeinsurablemustbe
in this case, it is considered as a coupled with an existing interest or
contractofindemnity. foundedonanactualrighttothethingor
b. Whentheinsuranceistakenbythe uponanyvalidcontractforit.(Sec.16)
employer on the life of the
employee. Q: If the owner sold the property subject of
insuranceandwasdestroyedbyafirebeforehe
3. Property Insurance When the was able to redeem the same, is the insurer
insurance takes effect and when the liable?
loss occurs, but need not exist in the
meantime.(Sec.19) A:No.Atthetimeoftheloss,hewasnolonger
theownerofthepropertyinsuredashefailedto
B.INPROPERTY redeem the property. The law requires in
propertyinsurancethatapersoncanrecoverthe
Q: What may consist an insurable interest in proceedsofthepolicyifhehasinsurableinterest
property? atthetimeoftheissuanceofthepolicyandalso
at the time when the loss occurs. At the time of
A: fire,theownernolongerhadinsurableinterestin
thepropertyinsured.

66
MERCANTILELAWTEAM:
INSURANCE CODE
Q: Angela, owner of a condominium unit, interestisrequisitetotheexistencethereof.Itis

insured the same against fire with the ELM sufficient that the insured is so situated with
InsuranceCo.,andmadethelosspayabletohis referencetothepropertythatwouldbeliableto
sister, Antonette. In case of loss by fire of the lossshoulditbeinjuredordestroyedbytheperil
saidcondominiumunit,whomayrecoveronthe against which it is insured. Anyone has an
fireinsurancepolicy? insurable interest in property who derives a
benefit from its existence or would suffer loss
A:Angelacanrecoveronthefireinsurancepolicy from its destruction. (Gaisano Cagayan, Inc. v.
forthelossofsaidcondominiumunit.Hehasthe Insurance Company of North America, G.R. No.
insurable interest as ownerinsured. As 147839,June8,2006)
beneficiaryinthefireinsurancepolicy,Antonette
cannot recover on the fire insurance policy. For Q: What is the extent of insurable interest of a
thebeneficiarytorecoveronthefireorproperty commoncarrierordepositoryinathingheldby
insurancepolicy,itisrequiredthatshemusthave him?
insurableinterestinthepropertyinsured.Inthis
case,Antonettedoesnothaveinsurableinterest A:Totheextentofhisliabilitybutnottoexceed
inthecondominiumunit.(2001BarQuestion) thevaluethereof(Sec.15).Thisissobecausethe
lossofthethingbythecarrierordepositorymay
Q: A piece of machinery was shipped to Joeben cause liability against him to the extent of its
on the basis of C&F Manila. Pablo insured said value.
machinery with the Talaga Merchants Ins. Co.
(Tamic) for loss or damage during the voyage. C.DOUBLEINSURANCEANDOVERINSURANCE
ThevesselsankenroutetoManila.Joebenthen
filed a claim with Tamic which was denied for Q: What are the distinctions between double
thereasonthatpriortothedelivery,Joebenhad insuranceandoverinsurance?
noinsurableinterest.Decidethecase.
A:
A: Jeoben had an existing insurable interest on DOUBLEINSURANCE OVERINSURANCE
the piece of machinery he bought. The purchase
Theremaybenoover
of goods under a perfected contract of sale Whentheamountof
insuranceaswhenthe
alreadyvestsequitableinterestonthepropertyin theinsuranceis
sumtotaloftheamounts
favor of the buyer even while it is pending beyondthevalueof
ofthepoliciesissueddoes
delivery.(1991BarQuestion) theinsuredsinsurable
notexceedtheinsurable
interest.
interestoftheinsured.
Q: If the owner sold the property subject of
Theremaybeonlyone
insuranceandwasdestroyedbyafirebeforehe
insurer,withwhom
was able to redeem the same, is the insurer theinsuredtakes
liable? Twoormoreinsurers.
insurancebeyondthe
valueofhisinsurable
A:No.Atthetimeoftheloss,hewasnolonger interest.
theownerofthepropertyinsuredashefailedto Prohibitedbylaw
redeem the property. The law requires in Notprohibitedbylaw,
becauseitisa
propertyinsurancethatapersoncanrecoverthe unlessthereisa
wageringcontractand
stipulationtothe
proceedsofthepolicyifhehasinsurableinterest nolongeracontractof
contrary.
atthetimeoftheissuanceofthepolicyandalso indemnity.
at the time when the loss occurs. At the time of
fire,theownernolongerhadinsurableinterestin Q:Whendoesdoubleinsuranceexist?
thepropertyinsured.
A: Double insurance exists where the same
Q: What is the measure of insurable interest in person is insured by several insurers separately,
property? inrespecttothesamesubjectandinterest.(Sec.
93)
A: The extent to which the insured might be
damnified by loss or injury thereof. (Sec. 17). Q:Givetherequisitesofdoubleinsurance.
Insurableinterestinpropertydoesnotnecessarily
imply a property interest in, or lien upon, or A:STRIP
possession of, the subject matter of the 1. Personinsuredisthesame
insurance, and neither title nor a beneficial
67

2. Two or more insurers insuring A:
separately 1. To prevent an increase in the moral
3. Subjectmatteristhesame hazard
4. Interestinsuredisthesame 2. Topreventoverinsuranceandfraud
5. Riskorperilinsuredagainstisthesame
Q: What is the effect of nondisclosure of the
Q: What is the purpose of the rule on double existence of other insurances covering the
insurance? subject matter of the insurance being applied
for,iftheapplicantisrequiredtodoso?
A: To prevent overinsurance and thus avert the
perpetration of fraud. The public, as well as the A:Theinsuredcannotrecoverfromtheinsurance
insurer,isinterestedinpreventingthesituationin because he is guilty of violation of warranty/
which a loss would be profitable to the insured condition.
(Pioneer Insurance and Surety Corp v. Yap, G.R.
No.L36232,Dec.19,1974) Q:Whataretheruleswheretheinsuredisover
insuredbydoubleinsurance?
Q:Isdoubleinsuranceprohibitedbylaw?
A:
A: No. A person may therefore procure two or 1. Theinsured,unlessthepolicyotherwise
more insurances to cover his property. What is provides, may claim payment from the
prohibitedbylawisoverinsurance. insurersinsuchorderashemayselect,
up to the amount which the insurers
Q: The building worth P70 Million was totally are severally liable under their
razedbyfire.Iftheownerdecidestoclaimfrom respectivecontracts.
Eastern Insurance Corp. only P50 Million, will
theclaimprosper?Explain. 2. Where the policy under which the
insured claims is a valued policy, the
A:Yes,theclaimwillprosperiftheownerdecides insured must give credit as against the
toclaimfromEasternInsuranceCorporationonly valuation for any sum received by him
P50 Million because the amount sought to be under any other policy without regard
claimed does not exceed the value of his totheactualvalueofthesubjectmatter
insurableinterest.EasternInsuranceCorporation, insured.
however, can recover from Northern Insurance
Corporation and Southern Insurance Corporation 3. Where the policy under which the
theirproportionateshareoftheamountitpaidto insured claims is an unvalued policy he
theowner.(2008BarQuestion) must give credit, as against the full
insurablevalue,foranysumreceivedby
Q: Can an insurer provide that the insured may himunderanypolicy.
notprocureadditionalinsurance?
4. Where the insured receives any sum in
A:Yes,theinsurermayinsertanotherinsurance excess of the valuation in the case of
clausewhichwillprohibitdoubleinsurance.The valuedpolicies,oroftheinsurablevalue
rationale is to prevent the danger that the in the case of unvalued policies, he
insuredwilloverinsurehisproperty. must hold such sum in trust for the
insurers, according to their right of
Q:Whatisadditionalorotherinsuranceclause? contributionamongthemselves.

A:Aconditioninthepolicyrequiringtheinsured 5. Each insurer and the other insurers, to
to inform the insurer of any other insurance contribute ratably to the loss in
coverageofthepropertyinsured.Itislawfuland proportion to the amountfor which he
specificallyallowedunderSec.75whichprovides isliableunderhiscontract.(Sec.94)
that a policy may declare that a violation or a
specified provision thereof shall avoid it, Q: What is the nature of the liability of the
otherwise the breach of an immaterial provision severalinsurersindoubleinsurance?Explain.
doesnotavoidit.
A: In double insurance, the insurers are
Q:Whatareitspurposes? considered as coinsurers. Each one is bound to
contributeratablytothelossinproportiontothe
68
MERCANTILELAWTEAM:
INSURANCE CODE
amountforwhichheisliableunderhiscontract. asecurity.Ininsuringtheproperty,heis
Thisisknownastheprincipleofcontributionor not insuring the property itself but his
contribution clause. (Sec. 94 [e]) (2005 Bar interestorlienthereon.
Question)
Note: In case of an insurance taken by the
D.MULTIPLEORSEVERALINTERESTSONSAME mortgageealoneandforhisbenefit,themortgagee,
PROPERTY after recovery from the insurer, is not allowed to
retain his claim against the mortgagor but it passes
Q:Whataretheinstanceswheremorethanone by subrogation to the insurer to the extent of the
insurable interest may exist in the same insurancemoneypaid.
property?
VI.PERFECTIONOFACONTRACT
A:
1. In trust, both trustor and trustee have Q:Whatisapolicyofinsurance?
insurable interest over the property in
trust. A: It is the written instrument in which the
2. In a corporation, both the corporation contractofinsuranceissetforth(Sec.49).Itisthe
and its stockholders have insurable written document embodying the terms and
interestovertheassets. stipulationsofthecontractofinsurancebetween
3. In partnership both the firm and theinsuredandinsurer.Itisnotnecessaryforthe
partners has insurable interest over its perfectionofthecontract.
assets.
4. In assignment both the assignor and Q:Whatistheformofaninsurancecontract?
assigneehasinsurableinterestoverthe
propertyassigned. A:Maybeverbalorinwriting,orpartlyinwriting
5. In lease, the lessor, lessee and sub andpartlyverbal.However,thelawprovidesthat
lesseeshaveinsurableinterestoverthe nopolicyofinsuranceshallbeissuedordelivered
propertyinlease. unless in the form previously approved by the
6. In mortgage, both the mortgagor and InsuranceCommission.
mortgageehaveinsurableinterestover
thepropertymortgaged. Q:Whenistheinsurancecontractperfected?

Q: Is the insurable interest of mortgagor and A: When the assent or consent is manifested by
mortgagee in case of a mortgaged property the themeetingoftheofferandtheacceptanceupon
same? the thing and the cause which are to constitute
the contract. Mere offer or proposal is not
A:Eachhasaninsurableinterestintheproperty contemplated. (De Lim v. Sun Life Assurance Co.,
mortgaged and this interest is separate and G.R.No.L15774,Nov.29,1920)
distinct from the other. Therefore, insurance
taken by one in his name only and in his favor A.OFFERANDACCEPTANCEININSURANCE
alonedoesnotinuretothebenefitoftheother. CONTRACT
The same is not open to objection that there is
doubleinsurance.(Sec.8) Q. How offer is made in property and liability
insurance?
Q: What is the extent of insurable interest of
mortgagorandmortgagee? A. It is the insured who makes an offer to the
insurer,whoacceptstheoffer,rejectsit,ormakes
A: a counteroffer. The offer is usually accepted by
1. Mortgagor To the extent of its value aninsuranceagentonbehalfoftheinsurer.
as owner of the property. The loss or
destructionofthepropertyinsuredwill Q. How offer is made in Life and Health
not extinguish the mortgage debt. The Insurance?
exceptionisinmarineinsurance.
A.itdependsuponwhethertheinsuredpaysthe
2. MortgageeTotheextentofthedebt. premiumatthetimeheappliesforinsurance.
Such interest continues until the
mortgage debt is extinguished. The 1. If he does not pay the premium, his
propertyreliedonasmortgagedisonly application is considered an invitation
to the insurer to make an offer, which

69

he must then accept before the insured, the policy is considered
contractgoesintoeffect. constructively delivered if insured
2. If he pays the premium with his diedbeforereceivingthepolicy.
application, his application will be b. ByagentIfdeliveredtotheagent
consideredanoffer. of the insurer, whose duty is
ministerial, or delivered to the
Q.Whenisthereanacceptance? agent of the insured, the policy is
considered constructively
A. Where the application for insurance delivered.
constitutes an offer by the insured, a policy is
issued strictly in accordance with the offer is an Q:Whatistheimportanceofdelivery?
acceptanceoftheofferthatperfectsthecontract.
A:
Q. When can there be an issuance of policy 1. It becomes the evidence of the
withoutacceptance? makingofacontractandofitsterms;
2. It is considered as communication of
A. If the issued policy does not conform to the the insurers acceptance of the
insuredsapplication,itisanoffertotheinsured insuredsoffer;
whichhemayacceptorreject. 3. It becomes the determination of
policyperiod;
Q.Whatistheeffectofdelay? 4. It marks the end of insurers
opportunitytodeclinecoverage.
A. Unreasonable delay in returning the premium
raises the presumption of acceptance of the B.PREMIUMPAYMENT
insurance application. (Gloria v. Philippine
AmericanLifeIns.Co.,[CA}73O.G.[No.37]8660) Q:Whatispremium?

Q:Whendoesthepolicybecomebinding? A:Itisanagreedpriceforassumingandcarrying
the risk that is, the consideration paid an
A: insurer for undertaking to indemnify the insured
1. When all the conditions precedent againstaspecifiedperil.
stated in the offer have been satisfied;
and Q:Whatisthedifferencebetweenpremiumand
2. Whendelivered assessment?

Q:Whataretherequisitesforavaliddelivery? A:Premiumisleviedandpaidtomeetanticipated
losses, while assessment are collected to meet
A: actual losses. Also, while premium is not a debt,
1. Intention of the insurer to give legal assessment properly levied, unless otherwise
effectasacompletedinstrument; expresslyagreed,isadebt.
2. Word or act by insurer putting the
instrumentbeyondhislegal,thoughnot Q: When does payment of premium become a
necessarilyphysicalcontrol; debtorobligation?
3. Insured must acquiesce in this
intention. A:
1. In fire, casualty and marine insurance,
Note:Possessionofthepolicybytheinsuredraises the premium payable becomes a debt
thepresumptionofdelivery,whilethepossessionby assoonastheriskattaches.
theinsurerisprimafacieevidenceofnodelivery. 2. Inlifeinsurance,thepremiumbecomes
adebtonlywhen,inthecaseofthefirst
Q:Whatarethe2typesofdelivery? premium, the contract has become
binding, and in the case of subsequent
A: premiums, when the insurer has
1. Actual delivery to the person of the continued the insurance after maturity
insured. ofthepremium,inconsiderationofthe
2. Constructive insuredsexpressorimpliedpromiseto
a. By mail If policy was mailed pay.
alreadyandpremiumwaspaidand
nothing is left to be done by the
70
MERCANTILELAWTEAM:
INSURANCE CODE
Q: Does nonpayment of balance of premiums payment,insurerisdeemedtohaveacceptedthe

cancelthepolicy? promissorynoteinpaymentofthepremium.This
renderedthepolicyimmediatelyoperativeonthe
A: No, a contrary rule would place exclusively in dateitwasdelivered.(CapitalInsurance&Surety
the hands of the insured the right to decide Co. Inc. v. Plastic Era Co., Inc. G.R. No. L22375,
whether the contract should stand or not. July18,1975)
(Philippine Phoenix Surety & Insurance, Co., Inc.,
v. Woodworks, Inc., G.R. No. L22684, Aug. 31, Q:Canfortuitouseventexcusetheinsuredfrom
1967) notpayingthepremiums?
Q: What are the effects of nonpayment of

A:
premiums?
GR: No, nonpayment of premiums does not
merely suspend but put an end to an

A: Nonpayment of the first premium unless
insurance contract since the time of the
waived, prevents the contract from becoming
payment is peculiarly of the essence of the
binding notwithstanding the acceptance of the
contract.
applicationortheissuanceofthepolicy.

XPN:
Nonpayment of the subsequent premiums does
1. The insurer has become insolvent and
not affect the validity of the contracts unless, by
hassuspendedbusiness,orhasrefused
express stipulation, it is provided that the policy
without justification a valid tender of
shallinthateventbesuspendedorshalllapse.
premiums. (Gonzales v. Asia Life Ins.
Co.,G.R.No.L5188,Oct.29,1952)
Q:Isthefireinsurancepolicyabindingoneeven
2. Failure to pay was due to the wrongful
ifthepremiumstatedinthepolicyisnotpaid?
conductoftheinsurer.
3. The insurer has waived his right to

A: No, insurance is a contract whereby one
demandpayment.
undertakes for a consideration to indemnify

another against loss, damage or liability arising
Q:Whatistheeffectofacceptanceofpremium?
fromanunknowncontingentevent.

A: Acceptance of premium within the stipulated

The consideration is the premium. The premium
periodforpaymentthereof,includingtheagreed
must be paid at the time and in the way and
graceperiod,merelyassurescontinuedeffectivity
manner specified in the policy, and if not, the
of the insurance policy in accordance with its
policywilllapseandbeforfeitedbyitsownterms.
terms.(Stokev.MalayanInsuranceCo.,Inc.,G.R.
No.L34768,Feb.28,1984)
The nonpayment of consideration constitutes

inability of the agreement (Philippine Surety and
Where an insurer authorizes an insurance agent
InsuranceCompanyv.Woodwork,Inc.,G.R.No.L
or broker to deliver a policy to the insured, it is
25317,Aug.6,1979)
deemedtohaveauthorizedsaidagenttoreceive
thepremiuminitsbehalf.Theinsurerisboundby
Q: If the applicant failed to pay premium and its agents acknowledgment of the receipt of
instead execute a promissory note in favor of paymentofpremium.
the insurer payable within 30 days which was
accepted by the latter, is the insurer liable in Q:Whatistheeffectofpaymentofpremiumby
caseofloss? postdatedcheck?

A: Yes, the insurer is liable because there has A: Delivery of a promissory note or a check will
beena perfected insurance contract. The insurer notbesufficienttomakethepolicybindinguntil
acceptedthepromiseoftheapplicanttopaythe the said note or check has been converted into
insurancepremiumwithinthirty30daysfromthe cash. This is consistent with Article 1249 of the
effective date of policy. By so doing, it has CivilCode.
implicitly agreed to modify the tenor of the
insurance policy and in effect, waived any Note: Payment by means of a check or note,
provision therein that it would only pay for the acceptedbytheinsurer,bearingadatepriortothe
lossordamageincasethesameoccursafterthe loss, assuming availability of the funds thereof,
payment of the premium. Considering that the wouldbesufficientevenifitremainsunencashedat
insurance policy is silent as to the mode of the time of the loss. The subsequent effects of
71

encashment would retroact to the date of the 6. Whenthepublicinterestsorequires,as
instrumentanditsacceptancebythecreditor. determined by the Insurance
Commissioner
Q:Whatiftherewasnopremiumpaid,maythe
insurer recover the unpaid premium from the E.g.: In compulsory motor vehicle
insured? insurance,ifthepolicywasissuedwithout
payment of premium by the vehicle
A:No,thecontinuanceoftheinsurersobligation owner,theinsurerwillstillbeheldliable.
isconditioneduponthepaymentofthepremium, Toruleotherwisewouldprejudicethe3rd
so that no recovery can be had upon a lapsed partyvictim.
policy, the contractual relation between the
partieshavingceased.Iftheperilinsuredagainst Q: What is the effect of acknowledgment of
hadoccurred,theinsurerwouldhavehadavalid receiptofpremiuminpolicy?
defenseagainstrecoveryunderthepolicy.
A:Conclusiveevidenceofitspayment,insofaras
Q:Whatisthecashandcarryrule? to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding
A: untilthepremiumisactuallypaid(Sec.78).
GR:Nopolicyorcontractof insuranceissued
byaninsurancecompanyisvalidandbinding When the policy contains such written
unless and until the premium thereof has acknowledgment, it is presumed that the insurer
been paid. Any agreement to the contrary is has waived the condition of prepayment. It
void.(2003BarQuestion) hereby creates a legal fiction of payment. The
presumption is however, extended only to the
XPN:Apolicyisvalidandbindingevenwhen questionofthebindingeffectofthepolicy.
thereisnonpaymentofpremium:
As far as the payment of the premium itself is
1. In case of life or industrial life policy concerned, the acknowledgment is only a prima
whenever the grace period provision facie evidence of the fact of such payment. The
applies. insurer may still dispute its acknowledgment but
only for the purpose of recovering the premium
2. When there is acknowledgment in a due and unpaid. Whether payment was indeed
policy of a receipt of premium, which madeisaquestionoffact.
the law declares to be conclusive
evidence of payment, even if there is Q: Is the insurance company liable when a car,
stipulation therein that it shall not be boughtoninstallmentbasis,metanaccidentbut
binding until the premium is actually thecarisnotyetfullypaid?
paid.Thisiswithoutprejudicehowever
to right of insurer to collect A:Yes,wheninsuredandinsurerhaveagreedto
correspondingpremium.(Sec.77) the payment of premium by installments and
partial payment has been made at the time of
3. When there is an agreement allowing loss, then the insurer becomes liable. When the
the insured to pay the premium in car loss happened on the 5th month, the six
installments and partial payment has months agreed period of payment had not yet
been made at the time of loss (Makati elapsed. The owner may recover from Peninsula
Tuscany CondominiumCorp.v.CA,G.R. InsuranceCompany,butthelatterhastherightto
No.95546,Nov.6,1992). deduct the amount of unpaid premium from the
insuranceproceeds.(2006BarQuestion)
4. When there is an agreement to grant
the insured credit extension for the C.NONDEFAULTOPTIONSINLIFEINSURANCE
payment of the premium. (Art. 1306,
NCC), and loss occurs before the Q: What are the devices used to prevent the
expiration of the credit term. (UCPB forfeiture of a life insurance after the payment
General Insurance v. Masagana ofthefirstpremium?
Telemart, G.R. No. 137172, Apr. 4,
2001). A:
1. GraceperiodAfterthepaymentofthe
5. When estoppel bars the insurer to firstpremium,theinsuredisentitledto
invokenonrecoveryonthepolicy. a grace period of 30 days within which
72
MERCANTILELAWTEAM:
INSURANCE CODE
to pay the succeeding premiums. (Sec. D.REINSTATEMENTOFALAPSEDPOLICY

227,(a)).
Q. What is purpose of the Reinstatement
2. CashsurrendervalueTheamountthe Provision?
insurer agrees to pay to the holder of
the policy if he surrenders it and A. The purpose of the provision is to clarify the
releases his claim upon it. (Cyclopedia requirementsforrestoringapolicytopremium
rd
LawDictionary,3 ed.,1077) paying status after it has been permitted to
lapsed.
3. Extended insurance It is where the
insured is given a right, upon default, Q. Within what period shall the holder of the
after payment of at least three full policy be entitled to reinstatement of the
annual premiums (see Sec. 227 [f]) to contract?
havethepolicycontinuedinforcefrom
the date of default for a time either A. The law requires that the policy owner be
stated or equal to the amount as the permitted to reinstate the policy, subject to the
netvalueofthepolicytakenasasingle violations specified, any time within three (3)
premium, will purchase. (De Leon, The years from the date of default of premium
Insurance Code of the Philippines payment.Alongerperiod,beingmorefavorable
Annotated,2006) totheinsured,maybeused.

4. PaidupInsuranceTheinsuredisgiven Q. Is reinstatement of a lapsed policy an
aright,upondefault,afterthepayment absoluterightoftheinsured?
of at least three annual premiums to
havethepolicycontinuedinforcefrom A.Reinstatementisnotanabsoluterightofthe
thedateofdefaultforthewholeperiod insured, but discretionary on the part of the
of the insurance without further insurer, which has the right to deny
payment of premiums.(ibid.) It results reinstatement if it were not satisfied as to the
toareductionoftheoriginalamountof insurability of the insured, and if the latter did
insurance, but for the same period not pay all overdue premiums and other
originally stipulated.(6 Couch 2d., 355; indebtedness to the insurer. (McGuire vs.
37C.J.S.364) ManufacturersLifeIns.Co.,87Phil.370).

5. AutomaticLoanClauseAstipulationin Q.WhatdoesEvidenceofInsurabilityincludes?
thepolicyprovidingthatupondefaultin
paymentofpremium,thesameshallbe A.EvidenceofInsurabilityisbroaderphrasethan
paid from the loan value of the policy Evidence of Good Health and includes such
until that value is consumed. In such a otherfactorsastheinsuredsoccupation,habits,
case,thepolicyiscontinuedinforceas financial condition, and other risk selection
fully and effectively as though the factors.
premiumshadbeenpaidbytheinsured
from funds derived from other Q. A life insurance policy lapsed. The insured
sources.(6Couch2d.,383) appliedforreinstatementofthepolicyandpaid
only a part of the overdue premiums.
6. Reinstatement Provision that the Subsequently,theinsureddied.Wastheinsurer
holderofthepolicyshallbeentitledto liable?
reinstatement of the contract at
anytimewithin3yearsfromthedateof A.Theinsureriswasnotliableasthepolicywas
default in the payment of premium, notreinstated.Thefailuretopaythebalanceof
unless the cash surrender value has theoverduepremiumspreventedreinstatement
been paid, or the extension period and recovery of the face value of the policy.
expired,uponproductionofevidenceof (Andresvs.CrownLifeIns.Co.,55O.G.3483).
insurabilitysatisfactorytothecompany
and the payment of all overdue
premiumsandanyindebtednesstothe
company upon said policy. (Sec. 227,
(j)).

73

E.REFUNDOFPREMIUMS ii. In case of overinsurance by
several insurers, the insured is
Q: When is the insured entitled to recover entitled to a ratable return of
premiumsalreadypaidoraportionthereof? the premium, proportioned to
the amount by which the
A: aggregate sum insured in all
1. Whole: the policies exceeds the
a. When no part of the thing insured insurable value of the thing
has been exposed to any of the insured(Sec.82).
perilsinsuredagainst(Sec.79)
b. When the contract is voidable E.g.Wherethereisatotalover
because of the fraud or insuranceofP500,000.00inan
misrepresentations of the insurer aggregateP2,000,000.00policy
ofhisagent(Sec.81). (P1,500,000.00 is only the
c. When the insurance is voidable insurable value), 25%
becauseoftheexistenceoffactsof (proportion of P500k to P2M)
which the insured was ignorant of the premiums paid to the
withouthisfault(Sec.81). several insurers should be
d. When the insurer never incurred returned.
any liability under the policy
because of the default of the Q: When insured not entitled to return of
insured other than actual fraud premiumspaid?
(Sec.81).
e. When rescission is granted due to A:
insurers breach of contract (Sec. 1. The risk has already attached and the
74). riskisentireandindivisible;
2. Inlifepolicies;
2. Prorata: 3. If contract is void ab initio because of
a. When the insurance is for a fraudbytheinsured;
definite period and the insured 4. If contract is illegal and the parties are
surrenders his policy before the inparidelicto.
termination thereof; (Sec. 79 [b]);
except: VII.RESCISSIONOFINSURANCECONTRACTS
i. Policy not made for a definite
periodoftime; Q.Whataretheinstanceswhereinacontractof
ii. Short period rate is agreed insurancemayberescinded?
upon;
iii. Lifeinsurancepolicy. A.
1.Concealment
b. When there is overinsurance. The 2.Misrepresentation/omission
premiums to be returned shall be 3.Breachofwarranties
proportioned to the amount by
which the aggregate sum insured A.CONCEALMENT
in all the policies exceeds the
insurablevalueofthethingatrisk. Q:Whatisconcealment?
(Sec.82)
i. In case of overinsurance by A:Concealmentisaneglecttocommunicatethat
doubleinsurance,theinsureris whichapartyknowsandoughttocommunicate.
not liable for the total amount (Sec.26)
of the insurance taken, his
liability being limited to the Q:Whataretherequisitesinconcealment?
property insured. Hence, the
insurer is not entitled to that A:
portion of the premium 1. Apartyknowsafactwhichheneglects
corresponding to the excess of tocommunicateordisclosetotheother
the insurance over the party
insurable interest of the 2. Such party concealing is duty bound to
insured. disclosesuchfacttotheother
74
MERCANTILELAWTEAM:
INSURANCE CODE
3. Such party concealing makes no Q: What are the matters that need not be
warrantyastothefactconcealed disclosed?
4. The other party has no means of
ascertainingthefactconcealed A:
5. Thefactmustbematerial GR: The parties are not bound to
communicate information of the following
Q:Whatisthetestofmateriality? matters:
1. Thosewhichtheotherknows
A:Itisdeterminednotbytheevent,butsolelyby 2. Thosewhich,intheexerciseofordinary
the probable and reasonable influence of the care, the other ought to know and of
factsuponthepartytowhomthecommunication which, the former has no reason to
isdue,informinghisestimateoftheadvantages supposehimignorant
of the proposed contract, or in making his 3. Those of which the other waives
inquiries.(Sec.31) communication
Q: What is the presumption when the insured 4. Thosewhichproveortendtoprovethe
failed to convey the nature of the facts to the existence of a risk excluded by a
insurer? warranty, and which are not otherwise
material
A: 5. Those which relate to a risk excepted
GR:Thefailureoftheinsuredtocommunicate from the policy and which are not
isintentionalratherthaninadvertent. otherwisematerial;
6. Thenatureoramountoftheinterestof
XPN: In the absence of evidence of the one insured (except if he is not the
uninsurability of a person afflicted with ownerofthepropertyinsured,Sec.34).
chronic cough, concealment thereof is no
groundforannulmentofthepolicy. XPN:Inanswertoinquiriesoftheother.(Sec.
30)
Note: As long as the facts concealed are material.
Sec. 27 states concealment, whether intentional or Note: Neither party is bound to communicate,
not. even upon inquiry, information of his own
judgment, because such would add nothing to
Q:Howdoesitdifferfrommaterialityinmarine theappraisaloftheapplication.
insurance?
The parties are bound to know all the general
A: Rules on concealment are stricter since the causes which are open to his inquiry, equally
insurerwouldhavetodependalmostentirelyon withtheother,andallgeneralusagesoftrade.
the matters communicated bythe insured. Thus,
in addition to material facts, each party must Q:Whatarethemattersthatmustbedisclosed
disclose all the information he possesses which evenintheabsenceofinquiry?
are material to the information of the belief or
expectation of a third person, in reference to a A:
material fact. But a concealment in a marine 1. Thosematerialtothecontract
insurance in any of the following matters 2. Thosewhichtheotherhasnomeansof
enumerated under Section 110, Insurance Code ascertaining
does not vitiate the entire contract, but merely 3. Those as to which the party with the
exoneratestheinsurerfromalossresultingfrom duty to communicate makes no
theriskconcealed. warranty

Q:Whatisthetestinascertainingtheexistence Note: Matters relating to the health of the insured
ofconcealment? are material and relevant to the approval of the
issuance of the life insurance policy as these
A: If the applicant is aware of the existence of definitely affect the insurers action to the
some circumstances which he knows would application. It is wellsettled that the insured need
notdieofthediseasehehadfailedtodisclosetothe
influence the insurer in acting upon his
insurer, as it is sufficient that his nondisclosure
application, good faith requires him to disclose
misled the insurer in forming his estimates of the
thatcircumstance,thoughunasked.
risks of the proposed insurance policy or in making
inquiries (Sunlife Assurance Company of Canada v.
CA,G.R.No.105135,June22,1995).
75

Informationastothenatureofinterestneednotbe Reason: Information is no longer material as it will
disclosedexceptInpropertyinsurance,iftheinsured no longer influence the other party to enter into
isnottheowner.Ifsomebodyisinsuringproperties suchcontract.
ofwhichheisnottheowner,hemustdisclosewhy
he has insurable interest that would entitle him to Q: Joanna applied for a nonmedical life
ensureit. insurance.TheJoannadidnotinformtheinsurer
that one week prior to her application for
Q:Maytherighttoinformationofmaterialfacts insurance,hewasexaminedandconfinedatSt.
bewaived? Lukes Hospital where she was diagnosed for
lungcancer.Theinsuredsoonthereafterdiedin
A:Yes. a plane crash. Is the insurer liable considering
1. Bythetermsofthecontract thatthefactconcealedhadnobearingwiththe
2. By the failure to make an inquiry as to causeofdeathoftheinsured?Why?
such facts, where they are distinctly
implied in other facts from which A: No. The concealed fact is material to the
informationiscommunicated.(Sec.33) approvalandissuanceoftheinsurancepolicy.Itis
Q:Whataretheeffectsofconcealment? well settled that the insured need not die of the
disease she failed to disclose to the insurer. It is
A: sufficient that his nondisclosure misled the
1. If there is concealment under Section insurerinforminghisestimateoftherisksofthe
27, the remedy of the insurer is proposedinsurancepolicyorinmakinginquiries.
rescission since concealment vitiates (2001BarQuestion)
thecontractofinsurance.
2. The party claiming the existence of Q:Whataretheinstanceswherebyconcealment
concealmentmustprovethattherewas madebyanagentprocuringtheinsurancebinds
knowledgeofthefactconcealedonthe theprincipal?
part of the party charged with
concealment. A.
3. Good faith is not a defense in 1. Where it was the duty of the agent to
concealment. Concealment, whether acquire and communicate information
intentionalorunintentionalentitlesthe ofthefactsinquestion;
injured party to rescind the contract of 2. Where it was possible for the agent, in
insurance.(Sec.27) the exercise of reasonable diligence to
4. The matter concealed need not be the havemadeoftheinsurancecontract.
causeofloss.
5. To be guilty of concealment, a party Note: Failure on the part of the insured to
must have knowledge of the fact disclose such facts known to his agent, or
concealed at the time of the effectivity whollyduetothefaultoftheagent,willavoid
ofthepolicy. the policy, despite the good faith of the
insured.
Q:Whenshouldconcealmenttakeplaceinorder
thatthepolicymaybeavoided? B.MISREPRESENTATION/OMMISON

A: At the time the contract is entered into and Q:Whatisrepresentation?
not afterwards. The duty of disclosure ends with
thecompletionofthecontract.Waiverofmedical A: An oral or written statement of a fact or
examination in a nonmedical insurance contract condition affecting the risk made by the insured
renders even more material the information totheinsurancecompany,tendingtoinducethe
required of the applicant concerning previous insurertoassumetherisk.
condition of health and diseases suffered, for
such information necessarily constitutes an Q:Whatarethekindsofrepresentation?
important factor which the insurer takes into
consideration in deciding whether to issue the A:
policyornot.Failuretocommunicateinformation 1. Oralorwritten;(Sec.36)
acquiredaftertheeffectivityofthepolicywillnot 2. Affirmative;(Sec.39)or
beagroundtorescindthecontract. 3. Promissory.(Sec.42)

76
MERCANTILELAWTEAM:
INSURANCE CODE
Q:Whatisanaffirmativerepresentation? appears that it was merely a statement of belief or

anexpectationthatissusceptibletopresent,actual
A: Any allegation as to the existence or non knowledge.Thestatementofanerroneousopinion,
existenceofafactwhenthecontractbegins.(e.g. belief or information, or of an unfulfilled intention,
thestatementoftheinsuredthatthehousetobe will not avoid the contract of insurance, unless
insuredisusedonlyforresidentialpurposesisan fraudulent.
affirmativerepresentation).
Q:Whatisthetestofmateriality?
Q:Whatisapromissoryrepresentation?
A: It is to be determined not by the event, but
A: Any promise to be fulfilled after the contract solely by the probable and reasonable influence
has come into existence or any statement of the facts upon the party to whom the
concerning what is to happen during the representation is made, in forming his estimates
existenceoftheinsurance. ofthedisadvantagesoftheproposedcontractor
inmakinghisinquiries(similarwithconcealment).
Q:Whenshouldrepresentationbemade? (Sec.46)

A: At the time of, or before, issuance of the Q:Whataretheeffectsofmisrepresentation?
policy.(Sec.37)
A:
Q:Whatismisrepresentation? 1. It renders the insurance contract
voidable at the option of the insurer,
A: It is an affirmative defense. To avoid liability, although the policy is not thereby
the insurer has the duty to establish such a rendered void ab initio. The injured
defense by satisfactory and convincing evidence. party entitled to rescind from the time
(Ng Gan Zee v. Asian Crusader Life Assn. Corp., when the representation becomes
G.R.No.L30685,May30,1983) false;
2. When the insurer accepted the
Note: In the absence of evidence that the insured payment of premium with the
has sufficient medical knowledge to enable him to knowledgeofthegroundforrescission,
do distinguish between peptic ulcer and tumor, thereiswaiverofsuchright;
the statement of deceased that said tumor was 3. There is no waiver of the right of
associated with ulcer of the stomach should be rescission if the insurer had no
considered an expression in good faith. Fraudulent knowledge of the ground therefore at
intent of insured must be established to entitle the time of acceptance of premium
insurer to rescind the insurance contract. payment.
Misrepresentation, as a defense of insurer, is an
affirmativedefensewhichmustbeproved.(NgGan Q: What is the effect of collusion between the
Zee v. Asian Crusader Life Assn. Corp., G.R. No. L insurersagentandtheinsured?
30685,May30,1983)
A: It vitiates the policy even though the agent is
Q: What are the requisites of a false actingwithintheapparentscopeofhisauthority.
representation(misrepresentation)? The agent ceases to represent his principal. He,
thus, represents himself; so the insurer is not
A: estoppedfromavoidingthepolicy.
1. The insured stated a fact which is
untrue; Q: What are the characteristics of
2. Such fact was stated with knowledge representation?
that it is untrue and with intent to
deceiveorwhichhestatespositivelyas A:
true without knowing it to be true and 1. Notapartofthecontractbutmerelya
whichhasatendencytomislead; collateralinducementtoit
3. Such fact in either case is material to 2. Oralorwritten
therisk. 3. Made at the time of, or before issuing
thepolicyandnotafter
Note: A representation cannot qualify an express 4. Altered or withdrawn before the
provision in a contract of insurance but it may
insuranceiseffectedbutnotafterwards
qualify an implied warranty. A representation as to
5. Mustbepresumedtorefertothedate
the future is to be deemed a promise unless it
thecontractgoesintoeffect.(Sec.42)

77

Q:Whatarethesimilaritiesofconcealmentand 6. Proofofdeathwasnotgiven.(Sec.242)
representation? 7. That the conditions of the policy
relating to military or naval service.
A: (Secs.227[b],228[b])
1. Refer to the same subject matter and 8. That the action was not bought within
both take place before the contract is thetimespecified.(Sec.62)
entered.
2. Concealmentorrepresentationpriorto Q: What is the remedy of the injured party in
loss or death gives rise to the same caseofmisrepresentation?
remedy; that is rescission or
cancellation. A:Ifthereismisrepresentation,theinjuredparty
3. The test of materiality is the same. is entitled to rescind from the time when the
(Secs.31,46) representationbecomesfalse.
4. The rules of concealment and
representation are the same with life Q:Whenshouldtherighttorescindthecontract
andnonlifeinsurance. beexercised?
5. Whetherintentionalornot,theinjured
partyisentitledtorescindacontractof A:Therighttorescindmustbeexercisedprevious
insuranceongroundofconcealmentor to the commencement of an action on the
falserepresentation. contract.(theactionreferredtoisthattocollecta
6. Sincethecontractofinsuranceissaidto claimonthecontract)
beoneofutmostgoodfaithonthepart
of both parties to the agreement, the Q.WhatisOmission?
rules on concealment and
representation apply likewise to the A. The failure to communicate information of
insurer. mattersprovingortendingtoprovethefalsityof
warranty.
Q: How does concealment differ from
misrepresentation?
Q.WhatistheeffectofOmission?
A: In concealment, the insured withholds the
information of material facts from the insurer, A.Thecontractofinsurancemayberescinded.
whereasinmisrepresentation,theinsuredmakes
erroneous statements of facts with the intent of Q.IncaseofOmission,whoisentitledtorescind
inducing the insurer to enter into the insurance thecontract?
contract.
A.Theinsurerisentitledtorescindthecontract.
Q: How is concealment and misrepresentation
appliedincaseoflossordeath? C.BREACHOFWARRANTIES

A: Q:Whatarewarranties?
GR: If the concealment or misrepresentation
isdiscoveredbeforelossordeath,theinsurer A: Statements or promises by the insured set
cancancelthepolicy.Ifthediscoveryisafter forth in the policy itself or incorporated in it by
lossordeath,theinsurercanrefusetopay. proper reference, the untruth or nonfulfillment
ofwhichinanyrespect,andwithoutreferenceto
XPN: The incontestability clause under whether the insurer was in fact prejudiced by
paragraph2ofSection48. such untruth or nonfulfillment render the policy
voidablebytheinsurer.
XPNtoXPN:
1. Nonpayment of premiums. (Secs. 77, Q:Whatisthepurposeofwarranties?
22[b],228[b],203[b])
2. Violation of condition. (Secs. 227 [b], A: To eliminate potentially increasing moral or
228[b]) physical hazards which may either be due to the
3. Noinsurableinterest acts of the insured or to the change of the
4. Cause of death was excepted or not conditionoftheproperty.
covered
5. Fraudofavicioustype
78
MERCANTILELAWTEAM:
INSURANCE CODE
Q:Whatisthebasisofwarranties? materialityinorderto
defeatanactiononthe
A: The insurer took into consideration the policy.
conditionofthepropertyatthetimeofeffectivity
ofthepolicy. Q:Whataretheeffectsofbreachofwarranty?

Q:Whatarethekindsofwarranties? A:
1. Material
A:
1. Express an agreement contained in GR:Violationofmaterialwarrantyorof
the policy or clearly incorporated materialprovisionofapolicywillentitle
therein as part thereof whereby the theotherpartytorescindthecontract.
insured stipulates that certain facts
relating to the risk are or shall be true, XPN:
or certain acts relating to the same a. Loss occurs before the time of
subjecthavebeenorshallbedone. performanceofthewarranty;
b. The performance becomes
2. Implied It is deemed included in the unlawful at the place of the
contract although not expressly contract;and
mentioned. c. Performance becomes
impossible.
Peculiar only to marine insurance, and
therefore is deemed included in the 2. Immaterial
contract, although not expressly
mentioned: GR:Itwillnotavoidthepolicy.

a. Thattheshipwillnotdeviatefrom XPN: When the policy expressly
theagreedvoyageunlessdeviation provides or declares that a violation
isproper thereofwillavoidit.
b. That the ship will not engage in
illegalventure For instance, an Other Insurance
c. Warranty of neutrality, that the Clause which is a condition in the
ship will carry the requisite policy requiring the insured to inform
documents of nationality or the insurer of any other insurance
neutrality where such nationality coverageoftheproperty.Aviolationof
orneutralityiswarranted the clause by the insured will not
d. Presenceofinsurableinterest constitute a breach unless there is an
e. That the ship is seaworthy at the additional provision stating that the
timeofthecommencementofthe violation thereof will avoid the policy.
insurancecontract. (Sec.75)

Q: What are the distinctions between warranty Q: What is the effect of a breach of warranty
andrepresentation? withoutfraud?

A: A: The policy is avoided only from the time of
WARRANTY REPRESENTATION breach(Sec.76)andtheinsuredisentitled:
Consideredpartsof Collateralinducementto
thecontract. thecontract. 1. To the return of the premium paid at a
Alwayswrittenon pro rata from the time of breach if it
Maybewritteninatotally
thefaceofthe occurs after the inception of the
disconnectedpaperormay
policy,actuallyorby contract;or
beoral.
reference. 2. To all premiums if it is broken during
Mustbestrictly Onlysubstantialproofis theinceptionofthecontract.
compliedwith. required.
Itsfalsityornon
Itsfalsityrendersthepolicy
fulfillmentoperates
voidonthegroundof
asabreachof
fraud.
contract.
Presumedmaterial. Insurermustshowits

79

VIII.CLAIMSSETTLEMENTANDSUBROGATION A:Whentheinsurer:MaJoRDeW

A.NOTICEANDPROOFOFLOSS 1. Writestotheinsuredthatheconsiders
the policy null and void as the
Q:Whatislossininsurance? furnishing of notice or proof of loss
wouldbeuseless;
A:Theinjury,damageorliabilitysustainedbythe 2. Recognizeshisliabilitytopaytheclaim;
insured in consequence of the happening of one 3. Deniesallliabilityunderthepolicy
ormoreoftheperilsagainstwhichtheinsurer,in 4. Joinsintheproceedingsfordetermining
considerationofthepremium,hasundertakento the amount of the loss by arbitration,
indemnifytheinsured.Itmaybetotal,partial,or making no objections on account of
constructiveinMarineInsurance. noticeandpreliminaryproof;or
5. Makes Objection on any ground other
Q:Whatisnoticeofloss? than the formal defect in the
preliminaryproof.
A: It is the more or less formal notice given the
insurerbytheinsuredorclaimantunderapolicy Q:Whenisdelayinthepresentationofnoticeor
oftheoccurrenceofthelossinsuredagainst. proofoflossdeemedwaived?

Q: What are the conditions before the insured A:Ifcausedby:
mayrecoveronthepolicyaftertheloss? 1. Anyactoftheinsurer;and
2. By failure to take objection promptly
A: andspecifically uponthatground.(Sec.
1. Theinsuredorsomepersonentitledto 91)
the benefit of the insurance, without
unnecessary delay, must give notice to Q:Whatisproofofloss?
theinsurer;(Sec.88)
2. When required by the policy, insured A:Itisthemoreorlessformalevidencegiventhe
must present a preliminary proof loss company by the insured or claimant under a
whichisthebestevidencehehasinhis policy of the occurrence of the loss, the
poweratthetime.(Sec.89) particulars thereof and the data necessary to
enablethecompanytodetermineitsliabilityand
Q:Whatarethepurposesofnoticeofloss? theamountthereof.

A: Q:Whatisthetimeforpaymentofclaims?
1. Togiveinsurerinformationbywhichhe
may determine the extent of his LIFEPOLICIES NONLIFEPOLICIES
liability; 1Maturing upon the
2. To afford the insurer a means of expiration of the term
detectinganyfraudthatmayhavebeen the proceeds are
practiceduponhim;and immediately payable to The proceeds shall be
the insured, except if paidwithin30daysafter
3. Tooperateasacheckuponextravagant
proceeds are payable in thereceiptbytheinsurer
claims.
installments or annuities of proof of loss and
ascertainmentoftheloss
whichshallbepaidasthey
Q:Whatistheeffectoffailuretogivenoticeof becomedue ordamagebyagreement
loss? of the parties or by
2. Maturing at the death arbitration but not later
A: of the insured, occurring than 90 days from such
FIREINSURANCE OTHERTYPESOFINSURANCE prior to the expiration of receipt of proof of loss,
Failuretogivenoticewillnot the term stipulated the whether or not
Failuretogive
exoneratetheinsurer,unless proceeds are payable to ascertainment is had or
noticedefeatsthe
thereisastipulationinthe thebeneficiarieswithin60 made.(Sec.243)
rightoftheinsured
policyrequiringtheinsured days after presentation of
torecover.
todoso. claimandfilingofproofof
death(Sec.242)
Q: What are the instances when the defects in
the notice or proof of loss are considered
waived?

80
MERCANTILELAWTEAM:
INSURANCE CODE
B.GUIDELINESONCLAIMSSETTLEMENT 5. Compelling policyholders to institute

suits to recover amounts due under its
Q.WhatisClaimSettlement? policies by offering without justifiable
reason substantially less than the
A.Claimsettlementistheindemnificationof the amounts ultimately recovered in suits
sufferedbytheinsured.Theclaimantmaybethe broughtbythem.(Sec.241,Par.1)
insured or reinsured, the insurer who is entitled
to subrogation, or a third party who has a claim Q. What is the sanction for the insurance
againsttheinsured. companies which engaged to unfair settlement
practices?
Q.WhataretherulesinClaimSettlement?
A. Sec. 241 enumerates the grounds which shall
A. be considered as sufficient as sufficient cause of
1. No insurance company doing business the suspension or revocation of an insurance
in the Philippines shall refuse, without companyscertificateofauthority.
justifiablecause,topayorsettleclaims
arising under coverages provided by its Q. What is the obligation of the insurer with
policies, nor shall any such company regard to the insureds decision to compromise
engage in unfair claim settlement thirdpartyclaim?
practices.
A. Where a policy gives the insurer a control of
2. Evidence as to numbers and types of the decision to settle claim or to litigate it, the
valid and justifiable complaints to the insurer nevertheless is required to observe a
Commissioner against an insurance certainmeasureofconsiderationfortheinterest
company, and the Commissioners oftheinsured.Therulehascometobegenerally
complaint experience with other accepted that while the express terms of the
insurance companies writing similar policy do not impose of the insurer the duty to
linesofinsuranceshallbeadmissiblein claim settle the claim at all costs, there is an
evidenceinanadministrativeorjudicial implieddutyonhisparttogivedueconsideration
proceeding brought under this section totheinterestoftheinsuredinitsexerciseofthe
(Sec.241) option to reject a compromise settlement and
proceed with litigation. In insurance contracts,
Q.Whatisthepurposeoftherule? the law requires strict observance of the
standards of good faith and fair dealing on the
A.Toeliminateunfairclaimsettlementpractices. partoftheinsurer.

Q.Whataretheactswhichconstituteunfair Q:Whatistheeffectofrefusalorfailuretopay
claimsettlementpractices? theclaimwithinthetimeprescribed?

A. A:Secs.242,243and244providethattheinsurer
1. Knowinglymisrepresentingtoclaimants shall be liable to pay interest twice the ceiling
pertinent facts or policy provisions prescribed by the Monetary Board which means
relatingtocoveragesatissue. twice 12% per annum (legal rate of interest
prescribed in CB No. 416) or 24% per annum
2. Failingtoacknowledgewithreasonable interest on the proceeds of the insurance from
promptness pertinent communications the date following the time prescribed in Secs.
with respect to claims arising under its 242 or 243 until the claim is fully satisfied
policies. (Prudential Guarantee and Assurance, Inc. v.
TransAsia Shipping Lines, Inc. G. R. No. 151890,
3. Failing to adopt and implement June20,2006)
reasonable standards for the prompt
investigation of claims arising under its Note: Refusal or failure to pay the loss or damage
policies. will entitle the assured to collect interest UNLESS
suchrefusalorfailuretopayisbasedontheground
4. Not attempting in good faith to thattheclaimisfraudulent.
effectuate prompt, fair and equitable
settlementofcalimssubmittedinwhich
liabilityhasbecomereasonablyclear;or

81

Q:Whataretherulesontheprescriptiveperiod? Q. From what time shall the period of
prescription be computed in case the insured
A: askedforreconsiderationofthedenialofclaim?
1. The parties to a contract of insurance
mayvalidlyagreethatanactiononthe A.Incasetheclaimwasdeniedbytheinsurerbut
policy should be brought within a theinsuredfileapetitionforreconsideration,the
limited period of time, provided such prescriptive period should be counted from the
period is not less than 1 year from the date the claim was denied at the first instance
timethecauseofactionaccrues.Ifthe and not from the denial of the reconsideration.
period agreed upon is less than 1 year To rule otherwise would give the insured a
from the time the cause of action scheme or devise to waste time until any
accrues, such agreement is void. (Sec. evidencewhichmaybeconsideredagainsthimis
63) destroyed. (Sun life Office, Ltd. vs. CA, 195 SCRA
193;Asked,V[a},1996BarExams.).
a. The stipulated prescriptive period
shallbegintorunfromthedateof Q.Whatistheprescriptiveperiodofprescription
theinsurersrejectionoftheclaim inmotorvehicleinsurance?
filed by the insured or beneficiary
andnotfromthetimeofloss. A.Itisoneyearfromdenialoftheclaimandnot
b. Incasetheclaimwasdeniedbythe fromthedateoftheaccident.
insurer but the insured filed a
petition for reconsideration, the Q.WhatisthePrincipleofSubrogation?
prescriptive period should be
counted from the date the claim A.Iftheplaintiffspropertyhasbeeninsured,and
was denied at the first instance he has received indemnity from the insurance
and not from the denial of the company for the injury or loss arising out of
reconsideration (Sun Life Office, wrong or breach of contract complained of, the
Ltd.vs.CA,GR.No.89741,Mar13, insurance company shall be subrogated to the
1991) rightsoftheinsuredagainstthewrongdoerorthe
personwhohasviolatedthecontract.(Art.2207,
2. If there is no stipulation or the NCC)
stipulation is void, the insured may
bringtheactionwithin10yearsincase Q:Shouldtherebeacontractbeforetheinsurer
thecontractiswritten. besubrogated?

3. In a comprehensive motor vehicle A: The principle of subrogation inures to the
liability insurance (CMVLI), the written insurer without any formal assignment or any
notice of claim must be filed within 6 express stipulation to that effect in the policy.
months from the date of the accident; Saidrightisnotdependentuponnordoesitgrow
otherwise, the claim is deemed waived out of any private contract. Payment to the
even if the same is brought within 1 insured makes the insurer a subrogee in equity.
yearfromitsrejection.(Vda.DeGabriel (Malayan Insurance Co., Inc. v. CA, G.R. No. L
vs.CA,GRNo.103883,Nov14,1996) 36413,Sept.26,1988)

4. The suit for damages, either with the Note: Incapacity of the insured will not affect the
proper court or with the Insurance capacity of the subrogee because capacity is
Commissioner, should be filed within 1 personaltotheholder(LorenzoShippingv.Chuband
yearfromthedateofthedenialofthe Sons,Inc.,G.R.No.147724,June8,2004).
claim by the insurer, otherwise,
claimants right of action shall Q:Whataretherulesonindemnity?
prescribe.(Sec.384)
A:
Q: What is the prescriptive period in 1. Applies only to property insurance
commencinganaction? except when the creditor insures the
lifeofhisdebtor
A: Within one year from time cause of action
accrues. 2. Insurance contracts are not wagering
contractsorgamblingcontracts.

82
MERCANTILELAWTEAM:
INSURANCE CODE
Note:Wageringcontractsarethosewhere 4. Where the insurer pays the insured for

the parties contemplate gain through alossorrisknotcoveredbythepolicy
merechance.
5. Lifeinsurance
Q:Whatarethepurposesofsubrogation?
6. For recovery of loss in excess of
A: insurancecoverage.
1. To make the person who caused the
losslegallyresponsibleforit

2. To prevent the insured from receiving
double recovery from the wrongdoer
andtheinsurer

3. To prevent the tortfeasors from being
free from liability and is thus founded
onconsiderationofpublicpolicy
Q:Whataretherulesonsubrogation?
A:
1. Applicable only to property insurance
the value of human life is regarded as
unlimited and therefore, no recovery
from a third party can be deemed
adequate to compensate the insureds
beneficiary.

2. Therightofinsureragainstathirdparty
is limited to the amount recoverable
fromlatterbytheinsured.
Q: What if the amount paid by the insurance

companydoesnotfullycovertheinjuryorloss?

A:Theaggrievedpartyshallbeentitledtorecover
thedeficiencyfromthepersoncausingthelossor
injury.(Art.2207,NCC)
Q: What are the instances where the right of

subrogationdoesnotapply?

A:
1. Where the insured by his own act
releases the wrongdoer or third party
liableforlossordamagefromliability

2. The insurer loses his rights against the
wrongdoersincetheinsurercanonlybe
subrogated to only such rights as the
insuredmayhave

3. Wheretheinsurerpaystheinsuredthe
value of the loss without notifying the
carrierwhohasingoodfaithsettledthe
insuredclaimforloss

83

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UST GOLDEN NOTES 2011

insurance, or employees under Labor IV.CLASSESOFINSURANCE

connected with provide the vessel

Insurance Co v. Hamilton Fraser 5. The use of false and simulated papers.

Q: In an insurance upon cargo, what is the

of a vessel, acting for all the interest

Theliabilityisdirectbut Liability is direct and can

This nofault claim does not apply to property

Q: Angela, owner of a condominium unit, interestisrequisitetotheexistencethereof.Itis

Q: Does nonpayment of balance of premiums payment,insurerisdeemedtohaveacceptedthe

Q: What are the effects of nonpayment of

merely suspend but put an end to an

3. The insurer has waived his right to

A: Acceptance of premium within the stipulated

to pay the succeeding premiums. (Sec. D.REINSTATEMENTOFALAPSEDPOLICY

Q:Whatisanaffirmativerepresentation? appears that it was merely a statement of belief or

B.GUIDELINESONCLAIMSSETTLEMENT 5. Compelling policyholders to institute

Note:Wageringcontractsarethosewhere 4. Where the insurer pays the insured for

Q: What if the amount paid by the insurance

Q: What are the instances where the right of

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