LAW ON INSURANCE It has its roots on equity.

It is designed to promote and to

accomplish justice and is the mode which equity adopts to compel
What laws govern insurance? the ultimately payment of debt by one who justice and good
conscience ought to pay.
1. RA 10607 – Insurance Code of the Philippines
2. New Civil Code What are the principal purposes of subrogation conditioned on
policy?
The provisions dealing with insurance are Articles 739 and 2012 (on
void donations), Art. 2011 (on the applicability of the Civil Code), 1. To make the person who caused the loss, legally
Arts. 2021- 2027 (life annuity contracts), Art. 2186 (compulsory responsible for it.
motor vehicle liability insurance), and Art. 2207 (insurer’s right of 2. To prevent the insured from receiving a double recovery
subrogation) from the wrongdoer and the insurer.
3. To prevent tortfeasors from being free from the liabilities.
Insurance contracts are governed primarily by the Insurance Code
but if it does not specifically provide for a particular matter in It is said that the right of subrogation under Art. 2207 applies only to
question, the provisions of the Civil Code on contracts and other property, and not to life insurance. Why?
special laws shall govern.
The value of human life is regarded as unlimited, and no recovery
R.A. No. 10607 amended PD 602 and introduced new concepts and from a 3rd party can be deemed adequate to compensate the
provisions. For example, the law now includes a provision on insured’s beneficiary. The pecuniary value of human life to the
microinsurance, banc assurance, trust operations of insurance beneficiary of a life insurance policy can seldom be determined with
companies, and self-regulatory organizations. The new law accuracy.
strengthened the regulatory provisions of the Code. These include
but are not limited to: (1) increase of the paid-up capital and net Life insurance contracts are not ordinary contracts of indemnity.
worth requirements for insurers; (2) new requirements for The privity of contract or assignment by insured claim is not
unimpaired capital or assets and reserved; (3) new provisions on essential.
financial reporting framework; (4) adoption of corporate governance
rules; (5) changes in the provisions on margin of solvency; (6) The right of subrogation is not dependent upon, not does it grow out
changes in the provisions on investments; (7) fixing the term of the of, any privity of contract or upon written assignment of claim. It
Insurance Commissioner to six years; and (8) changes in the accrues simply upon payment of the insurance claim by the insurer.
jurisdiction of the Insurance Commission over insurance claims.
Other changes merely expressly adopted prevailing jurisprudence. Is presentation of evidence of the insurance policy indispensable
For instance, the law now expressly allows in Section 77 a credit before the insurer may recover?
extension for the payment of premium. Another example is the No, the subrogation receipt itself is sufficient to establish not only
deletion in Section 3 of the provision regarding minors. the relationship of the insurer and the insured, but also the amount
The New Civil Code specifically deals with the right of the insurer to to settle the insurance.
subrogation. Article 2207 of the New Civil Code provides that “if the What if the insurer pays the insured for a loss which is not risk
plaintiffs property has been insured, and he has received indemnity covered by the policy, effecting thereby “voluntary payment,” does
from the insurance company for the injury or loss arising out of the the insurer have a right of subrogation?
wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the No, under Art. 2207, the cause of loss or injury must be risk covered
wrongdoer or the person who has violated the contract. If the by the policy to entitle the insurer to subrogation. Nevertheless, the
amount paid by the insurance company does not fully cover the insurer may recover from the 3rd party responsible for damage to
injury or loss, the aggrieved party shall be entitled to recover the the insured property under Art. 1236 of the New Civil Code.
deficiency from the person causing the loss or injury.”
The right of subrogation given to the insurer prevents the insured
3. Special laws from obtaining more than the amount he loss. It is a method of
implementing the principle of indemnity which is the heart of
Insofar as Civil Code is concerned, the Code of Commerce is insurance. The right exists after indemnity has been paid by insurer
considered a special law to the insured who can no longer go after the 3 rd party. He can only
a. GSIS law recover once.
b. SSS law What if the amount paid by the insurance company does not fully
What is the doctrine of subrogation? cover the injury or loss?

It is basically a process of legal subrogation. The insurer, after paying It is the aggrieved party or the insured, not the insurer, who is
the amount covered by the insurance policy, steps into the shoes of entitled to recover the deficiency from the person responsible for
the insured, as it were, and avails himself of the latter’s rights that the loss or injury. This is true in case of under-insurance.
exist against the wrongdoer at the time of the loss.

1
The insurer cannot defeat the insured’s claim for indemnity on the A contract of suretyship shall be deemed to be an insurance
ground that the insured has a right to be indemnified by a 3 rd contract, within the meaning of this Code, only if made by a surety
person. who or which, as such, is doing an insurance business as hereinafter
provided.
Having been paid a premium to make good the insured’s loss, the
insurer cannot compel him to seek indemnity elsewhere. The term "doing an insurance business" or "transacting an insurance
business", within the meaning of this Code, shall include:
The right of insurer against 3 rd party is limited to amount
recoverable from the latter by the insured. (a) making or proposing to make, as insurer, any insurance contract;

As the insurer is subrogated merely to the rights of the insured, it (b) making or proposing to make, as surety, any contract of
can necessarily recover only the amount recoverable by the insured suretyship as a vocation and not as merely incidental to any other
from the party responsible for the loss. It cannot recover in full the legitimate business or activity of the surety;
amount it paid to the insured if it is greater than that which the
insured could lawfully lay claim against the person causing the loss. (c) doing any kind of business, including a reinsurance business,
specifically recognized as constituting the doing of an insurance
Is the exercise of the right of subrogation by the insurer mandatory business within the meaning of this Code;
or discretionary?
(d) doing or proposing to do any business in substance equivalent to
Discretionary. Whether or not the insurer should exercise the rights any of the foregoing in a manner designed to evade the provisions of
of the insured to which it has been subrogated lies solely within the this Code.
former’s sound discretion.
In the application of the provisions of this Code the fact that no
When is the right of subrogation loss by act of insured or insurer? profit is derived from the making of insurance contracts, agreements
or transactions or that no separate or direct consideration is
If the insured, after receiving payment from the insurer, release by received therefor, shall not be deemed conclusive to show that the
his own act the wrongdoer or 3rd party responsible for loss or making thereof does not constitute the doing or transacting of an
damage from liability, the insurer loses his rights against the insurance business.
wrongdoer since the insurer can be subrogated to only such rights as
the insured may have. A contract of insurance is an agreement by which one party (insurer)
for a consideration (premium) paid by the other party (insured),
For defeating the insurer’s right of subrogation, the insured is under promises to pay money or its equivalent or to do some act valuable
obligation to return to the insurer the amount paid thereby entitling to the latter (or his nominee), upon the happening of a loss, damage,
the latter to recover the same. liability, or disability arising from an unknown or contingent event.
Also, where the insurer pays the insured the value of the lost goods The elements in determining the existence of contract of insurance:
without notifying the carrier who has in good faith settled the claim
for loss of the insured, the settlement is binding on both the insured 1. Subject matter – refers to the thing insured.
and the insurer, and the latter cannot bring an action against the a. Fire and marine insurance – thing insured is the
carrier on his right of subrogation. property
b. Life, health, or accident insurance – it is the
What is the effect of assignment by insured of its rights against 3 rd health of the person that is the subject matter.
party to insurer? c. Casualty – the insured’s risk of loss or liability.
The case is not between the insured and the insurer but one 2. Consideration – the premium paid by the insured. Its
between the shipper, and the carrier, because the insurance amount is principally based on the probability of loss and
company merely stepped into the shoes of the shipper. And if the extent of liability for which the insurer may become liable
shipper has a direct cause of action against the carrier on account of under the contract.
damage to cargo, such action can be availed of by insurer as a 3. Object and Purpose – the transfer & distribution of risk of
subrogee of the insured and the carrier cannot set up as a defense loss, damage, or liability arising from an unknown or
any defect in the insurance policy because it is not privy to it. contingent event through the payment of a consideration
by the insured to the insurer under a legally binding
SUPPLETORY APPLICATION OF THE CIVIL CODE contract to reimburse the insured for losses suffered on
the happening of the stipulated event.
Insurance contracts are governed primarily by the Insurance Code
but if it does not specifically provide for a particular matter in Characteristics of a contract of insurance:
question, the provisions of the New Civil Code on contracts and
other special laws shall govern. 1. Consensual – if an insurance has not been either accepted
or rejected, there is no contract yet.
A contract of insurance is an agreement whereby one undertakes for 2. Voluntary – not compulsory and parties may incorporate
a consideration to indemnify another against loss, damage or such terms and conditions as they may deem convenient
liability arising from an unknown or contingent event. provided, they do not contravene any provision of law and

2
 are not opposed to public policy. Exceptions: Motor Distinguishing elements of the contract of insurance:
vehicles, employees.
1. The insured has an insurable interest;
An insurance may arise by operation of law 2. The insured is subject to a risk of loss by the happening of
the designated peril;
Ex: War Damage Corporation Act, GSIS, SSS, etc. 3. The insurer assumes the risk;
3. Aleatory – it depends upon some contingent event. But it 4. Such assumption of risk is part of a general scheme to
is not a contract of chance although the event may never distribute actual losses among a large group of persons
occur. -one of the parties or both reciprocally bind bearing a similar risk: and
themselves to give or do something in consideration of 5. In consideration of the insurer’s promise, the insured pays
what the other shall give or do upon the happening of an a premium.
event which is uncertain, or which is to occur at an If the contract only possesses three elements, it is only a risk-shifting
indeterminate time. device and not a contract of insurance which is a risk-distributing
4. Unilateral – contract imposing legal duties only to the device. The device of insurance serves to distribute the risk of
insurer who promises to indemnify in case of loss. It is economic loss among as many as possible of those who are subject
executed as to the insured after payment of the premium to the same kind of risk.
and executory on the part of the insurer in the sense that
it is not executed until payment for a loss. It provides protection against absorbing one’s loss alone. This broad
sharing of economic risk is the Principle of Risk Distribution.
The payment of the premium is a condition precedent to the
inception of the contract The character of insurance is determined by the exact nature of the
contract actually entered into whatever form it takes or by whatever
5. Conditional – it is subject to conditions the principal one of name it may be called.
which is the happening of the event insured against. It also
includes other conditions such as payment of premium or Provisions of insurance policy shall be examined and interpreted in
performance of some other act. consonance with each other.
6. Contract of indemnity – except for life and accident
insurance where the result is death. In case of doubt, contracts of insurance are to be construed or
interpreted liberally in favor of the insured and strictly against the
No person may secure insurance upon property in which he has no insurer resolving all ambiguities against the latter so as to effect its
interest. If the insured has no insurable interest, the contract is void dominant purpose of indemnity or payment to the insured,
and unenforceable as being contrary to public policy. especially where forfeiture is involved.

7. Personal – each party having in view the character, credit A contract of insurance is a contract of adhesion, that is, most terms
and conduct of the other. of the contracts do not result from mutual negotiation between the
parties as they are prescribed by the insurer in final printed forms
As a rule, the insured cannot assign, before the happening of the which the insured may reject or to which he may “adhere” if he
loss, his rights under a property policy to others without the consent chooses but which he cannot change.
of the insurer. Also, the obligation of the insurer to pay does not
attach to or run with the property whether it be real or personal Does the fact that no profit is derived from the making of insurance
property. contracts or that no separate or direct consideration is received
therefor, or it states that it is not an insurance policy conclusive to
All contracts of insurance share a common trait of “personalness” show that the making thereof does not constitute transacting of an
Examples: insurance business?

a. Life, accident, and disability insurance are plainly No, a company may be found to be engaged in an insurance
personal business even though it expressly disclaims any intention to sell
b. Liability insurance insurance.
c. Property insurance – the insurance is on the Principal Object and Purpose Test – if the principal object is
insured’s interest in the property and not on the “indemnity”, the contract constitutes insurance, but if it is “service”,
property itself. It is damage to the personal risk transfer and distribution being merely incidental, then the
interest and not on the property that is being arrangement is not insurance and, therefore, not subject to laws
reimbursed. regulating insurance.
d. Life insurance – generally assignable or
transferrable as they are in the nature of The main function of insurance is risk-bearing. The financial losses of
property. the few are equitably distributed over the many out of a fund
8. Property in legal contemplation – but unlike property contributed by all. What it does is to spread the losses over a large
policies, life insurance policies are assignable or number of persons.
transferrable.
SECONDARY FUNCTIONS

3
 o Stimulates business enterprises Subject matter of insurance

Insurance helps maintain the present-day large scale commercial In general, anything having appreciable pecuniary value which is
and industrial organizations. subject to loss or deterioration, or of which one may be deprived so
that his pecuniary interest is prejudiced, may properly constitute the
o Encourages business efficiency and enterprise subject matter of insurance.
The natural result of the elimination of risk is an increase in business Both property and persons may be the subjects of insurance. But the
efficiency. It also increases the willingness to invest new capital in term subject matter is ordinarily used in reference to the insurance
business enterprise. of property.
o Promotes loss-prevention a. In property insurance it is the risk of loss of such property
that is primarily involved.
Insurers encourage loss-prevention through a system of rating which
b. In health, life, and accident insurance, the matter is
allows discounts for good features and impose special conditions
generally viewed as one in reference to the insured as
where the risk is unsatisfactory.
party to the contract.
o Encourage savings c. In casualty insurance, the subject matter is the risk
involved in its use, or the insured’s risk of loss, or liability
By protecting the individual against unforeseen events, insurance that he may suffer.
provides a climate in which savings are encouraged.
Under Sec. 3, the contingency or unknown event must be such that
o Solves social problems its happening will:

Examples: GSIS, SSS a. Damnify or cause loss to a person having an insurable

interest;
INDIRECT FUNCTIONS
b. Create a liability against him.
o Investment of funds
The unknown event may be past or future.
The funds of the insurers are invested so that they not only earn In contract of insurance, when is the insurer liable for the fortuitous
interest to be added to the funds but they also make available huge event?
resources for underwriting industrial, agricultural, cultural, and
other projects. o If it is the event or peril insured against; and
o It is the proximate cause of the loss.
o Use of reserve funds
May a married woman take out an insurance on her life or that of
The reserve funds are not static but are used productively. If the
her children without the consent of her husband?
reserve funds were not used, the income they earn would have to
be obtained through higher premiums. Yes, she may also take out insurance on her paraphernal or separate
property, or on property given to her by her husband.
o Effect on prices
A minor may enter into a valid contract of insurance (health, life, and
The cost of insurance is less than the cost of risk without insurance. accident) provided that certain requisites are present. What are
o As a basis of credit these?

In case of mortgage upon real estate, no mortgagee is willing to lend 1. He is 18 years of age or over;
money unless he knows that the value of the property is protected 2. The contract is for life, health or accident insurance;
from destruction by fire. 3. The insurance is taken on his life;
4. The beneficiary or the person to receive the proceeds of
REQUISITES OF A CONTRACT OF INSURANCE: the insurance upon the happening of the event insured
against is any of the enumerated by law.
1. Subject matter in which the insured has insurable interest;
2. Event or peril insured against which may be any future, What if the minor entered into by a minor is a contract of insurance
contingent or unknown event, past or future, and a other than life, health or accident insurance such as fire, or maritime
duration for the risk thereof; insurance, what is the effect?
3. Promise to pay or indemnify in a fixed or ascertainable
amount; A contract of insurance other than life, health, or accident insurance
4. A consideration for the promise known as the premium; such as fire, or maritime insurance, entered into by a minor is not
5. A meeting of minds of the parties upon all foregoing entirely void. It is merely voidable, that is, valid until annulled in a
essentials. proper action in court by the minor or his legal representative.

The parties must also be competent to enter into the contract. In case of voidable insurance contract, what if the minor did not
disaffirm the contract?
4
The insurer cannot escape liability by pleading minority as a defense No. This person may be the beneficiary designated in the policy. It is
because persons who are capable cannot allege incapacity of those also possible that insured may assign the proceeds of the insurance
with whom they contracted. to someone else.

A minor cannot recover the premiums he paid if he cannot return The relation between the insurer and the insured is that of a
the benefits received. The result is that an insurance company contingent debtor and creditor, subject to the conditions of the
contracting with a minor is bound by the contract; the minor policy and not that of trustee and cestui que trust.
ordinarily is not.
If the wife insures the life of her husband for her own benefit, who is
The ownership of a modern life insurance policy is devided between the assured and the insured respectively?
whom?
The wife is the assured and the husband is the insured.
It is divided between the insured and the beneficiary. The insured is
the owner of the various marketing and sales features such as loan Who is the beneficiary?
and cash surrender values. He is the person designated by the terms of the policy as the one to
One who takes a policy of insurance on his own life becomes a party receive the proceeds of the insurance. He is the 3 rd party in a
to the contract, even though the benefits of the insurance are to contract of life insurance for whose benefit the policy is issued and
accrue to someone else known as the beneficiary. to whom the loss is payable.

The nature of interest of the beneficiary depends on what? Who may be an insurer?

It depends on the terms of the insurance contract including the o Foreign or domestic insurance company or corporation.
existing statutes. o Individual, partnership, or association

Upon the death of the original owner of the policy of insurance What is the requirement before an individual, partnership,
taken out by him on the life or health of a minor, all rights and title corporation or company may transact insurance business in the
and interest in the policy shall be automatically vest in the minor Philippines?
unless otherwise provided for in the policy.
1. They must first obtain a certificate of authority for that
Can the sweepstake holder insure himself against the failure of his purpose from the Insurance Commissioner who may
ticket to win a prize? refuse to issue such certificate of authority if in his
judgment such refusal will best promote the interests of
No, because even if he were not to win, it cannot be said that he the people of this country.
suffered a loss of the prize. The failure to win a prize would not 2. They must be “possessed of the capital assets required of
indemnify or create a liability against him. an insurance corporation doing the same kind of business
in the Philippines and invested in the same manner.”
While a contract of insurance is based on contingency, it is not a
contract of chance and is not used for profit. Insurance Corporation – corporations formed or organized to save
any person or persons or other corporations harmless from loss,
Who are the 2 parties in a contract of insurance?
damage, or liability arising from any unknown or future or
1. Insurer – the party who assumes or accepts the risk of loss contingent event, or to indemnify or to compensate any person or
and undertakes for a consideration to indemnify the persons or other corporations for any such loss, damage, or liability,
insured or to pay him a certain sum on the happening of or to guarantee the performance of or compliance with contractual
specified contingency or event; it is synonymous with obligations or the payment of debt of others (Sec. 185).
assurer or underwriter.
The last part of the definition refers to suretyship.
2. Insured – the “second party” to the contract or the person
in whose favor the contract is operative and who is For the purpose of this Code, the terms “insurer” and
indemnified against or is to receive a certain sum upon the “insurance company” shall include all individuals,
happening of a specified contingency or event; it is partnerships, associations, or corporations, including
synonymous with assured. government-owned or controlled corporations or entities,
engaged as principals in the insurance business, excepting
Can the business of insurance be carried on by individuals?
mutual benefit associations. Unless the context otherwise
Yes. It can be carried on by individuals just as much as by requires, the terms shall also include professional
corporations and associations. It has been stated also that the State reinsurers defined in section two hundred eighty (Sec.
itself may go into insurance business. 184).

Is the insured always the person to whom the proceeds are paid? Who may be insured?

1. Natural Person
a. He must be competent to make a contract.

5
 b. He must possess an insurable interest in the Where the mortgagee, independently of the mortgagor, insures in
subject of the insurance. his own interest in the mortgaged property, he is entitled to the
c. He must not be a public enemy. proceeds of the policy in case of loss before the payment of the
2. Juridical Person (Partnerships, etc.) mortgage.
a. Exception: public enemy
What is the effect of subrogation of insurer to the right of
Note that Sec. 3 specifically authorizes minors, 18 years or more to mortgagee?
take out insurance payable to limited class of beneficiaries.
The mortgagee is not allowed to retain his claim against the
Public Enemy – designates a nation with whom the Philippines is at mortgagor but it passes by subrogation to the insurer to the extent
war, and it includes every citizen or subject of such nation. It may of the insurance money paid.
also mean alien enemy.
What is the effect of change of creditor?
Control Test – under this test, a corporation is deemed to have the
same citizenship as the controlling stockholders in time of war. The payment of the insurance to the mortgagee by reason of the
loss does not relieve the mortgagor from his principal obligation but
An insurance policy ceases to be valid and enforceable as soon as an only changes the creditor.
insured becomes public enemy. The termination of the war does not
revive the contract. Consequently, the insurer is not liable even if Mortgagor may insure his own interest as owner for his own benefit.
the loss is suffered by the insured after the end of the war. In case of loss the insurance proceeds do not inure to the benefit of
the mortgagee.
United States Rule declares that the contract is not merely
suspended but is abrogated by reason of nonpayment of premiums, What are the ways where the mortgagee may be made the
since the time of the payment is peculiarly of the essence of the beneficial payee?
contract. However, the insured is entitled to cash or reserve value of 1. He may become the assignee of the policy with the
the policy which is the excess of premiums paid over the actual risk consent of the insurer.
carried during the years when policy had been in force. 2. He may be the mere pledgee without such consent.
The mortgagor and the mortgagee have each an insurable interest in 3. A rider, making the policy payable to the mortgagee “as
the property mortgaged and this interest is separate and distinct his interest may appear” may be attached.
from the other. 4. A “standard mortgage clause” containing a collateral
independent contract between the mortgagee and the
If the insurance is taken by one in his own name only and in his own insurer may be attached.
favor alone, it does not inure to the benefit of the other. 5. The policy, though, by its terms payable absolutely to the
mortgagor; may have been procured by a mortgagor
What is the extent of insurable interest of mortgagor? under a contract duty to insure for the mortgagee’s
The mortgagor of property, as owner, has an insurable interest benefit, in which case the mortgagee acquires an equitable
therein to the extent of its value, even though the mortgage debt lien upon the proceeds.
equals such value. What are the legal effects where the mortgagor of property effects
This is because the loss or destruction of the property insured will insurance in his own name providing that the loss shall be payable to
not extinguish his mortgage debt. the mortgagee, or assigns a policy of insurance?

What is the extent of the insurable interest of mortgagee? 1. The contract is deemed to be upon the interest of the
mortgagor; hence, he does not cease to be a party to the
The mortgagee or his assignee as such has an insurable interest in contract.
the mortgaged property to the extent of the debt secured, since the 2. Any act of the mortgagor prior to the loss, which would
property is relied upon as security thereof, and in insuring, he is not otherwise avoid the insurance affects the mortgagee even
insuring the property itself but his interest or lien thereon. if the property is in the hands of the mortgagee.
3. Any act which under the contract of insurance is to be
His interest is prima facie the value mortgaged and extends only to performed by the mortgagor may be performed by the
the amount of debt, not exceeding the value of the mortgaged mortgagee with the same effect.
property. Such interest continues until the mortgage debt is 4. In case of loss, the mortgagee is entitled to the proceeds
extinguished. to the extent of his credit.
5. Upon recovery by the mortgagee to the extent of his
What is the extent of amount of recovery?
credit, the debt is extinguished.
The mortgagor cannot recover upon the insurance beyond the full
The rule on subrogation by the insurer to the right of the mortgagee
amount of his loss and the mortgagee, in excess of the credit at the
time of the loss nor the value of the property mortgaged. does not apply in this case.

What is the effect if a fire insurance policy contains a “standard or

What is the right of mortgagee in case of loss?
union mortgage clause”?
6
The acts of the mortgagor do not affect the mortgagee. This clause What will happen in case of assignment or transfer of a fire
aims to make a separate and distinct contract of insurance on the insurance policy?
interest of the mortgagee.
A fire insurance policy before it becomes a fixed liability is not
What is an “open or loss-payable mortgage clause”? subject to assignment, being strictly a personal contract, in the
absence of provision in the contract or subsequent consent of the
It merely provides for the payment of loss, if any, to the mortgagee insurer.
as his interest may appear and under it, the acts of the mortgagor
affect the mortgagee. This is because insurer is naturally concerned about the moral
character of the insured and should not be compelled to become an
What if the policy is obtained by the mortgagor with a loss-payable insurer to an assignee to whom he would have declined to issue
clause in favor of the mortgagee as his interest may appear? policy and who would materially alter the risks assumed by the
The mortgagee is only a beneficiary under the contract and insurer without his consent.
recognized as such by the insurer; it does not make him a party to What will happen in case of assignment or transfer of a marine
the contract itself. insurance policy?
Any act of the mortgagor which defeats his right will also defeat the It is assignable even without the consent of the insurer unless
right of the mortgagee. required by the terms of the policy. However, it is believed that just
If the insurance contains a mortgage clause reads, “loss, if any, shall like a fire insurance, it is not assignable without the consent of the
be payable to mortgagee as its interest may appear subject to the insurer.
terms of this policy”, this is clearly a simple loss payable clause and What will happen in case of assignment or transfer of a casualty
not a standard mortgage clause. insurance policy?
The contract of policy is primarily with the mortgagor, but the Insurer’s consent is also required. This type of insurance involves
mortgagee is a 3rd party beneficiary. The mortgagee is a Conditional moral hazards at least as great as those of fire insurance.
Appointee of the mortgagor entitled to receive so much of any sum
that may become due under the policy as does not exceed his What will happen in case of assignment or transfer of a life
interest. Upon the occurrence of the loss, such right becomes insurance policy?
absolute.
The policy may freely be assigned before or after the loss occurs, to
o If the loss happens when the credit is not due, the any person whether he has an insurable interest or not.
mortgagee is entitled to receive the money to apply to the
extinguishment of the debt. However, an assignment of a life insurance without an insurable
o If the loss happens after the credit has matured, the interest, which the insured makes in bad faith and under such
circumstances as where there was a preconceived agreement that
mortgage may apply the proceeds to the extent of his
the policy was to be assigned for the purpose of accomplishing an
credit.
illegal purpose will not be upheld.
What is the effect of insurance by the mortgagee on behalf of the
The right of mortgagor to assign or transfer an insurance policy is
mortgagor?
recognized under Sec. 8.
o Discharge of Debt – upon the destruction of the property,
Effect of new contract between insurer and mortgagee-assignee
the mortgagee is entitled to receive payment from the
insured, but such payment discharges the debt if equal to The assignment of a fire insurance policy by the mortgagor to the
it, and if greater than the debt, the mortgagee holds the mortgagee with the consent of the insurer does not convert the
excess as trustee for the mortgagor. contract into one of indemnity to the mortgagee. The contract
o Right to Subrogation – if there is such stipulation that the remains with the mortgagor as it is his interest alone that is covered.
insurer shall be subrogated to the rights of the mortgagee, The assignment operates merely as an equitable transfer of the
the payment of the policy will not discharge the debt even policy so as to enable the mortgagee to recover the amount due in
though the mortgagee may have procured the policy by case of loss subject to the conditions of the policy.
arrangement with the mortgagor.
However, where a new and distinct consideration passes between
What is the effect of an assignment or transfer of the insurance from the mortgagee to the insurer, a new contract is created
policy? between them. A novation of the original contract takes place.
Hence, the act of the mortgagor cannot affect the right of the
The effect is to substitute the assignee or transferee in place of the
mortgagee, the assignee.
original insured in respect to the right to claim indemnity or
payment for a loss as well as the obligation to perform the Sec. 10. Every person has an insurable interest in the life and health:
conditions, if any, of the policy. The assignee, unless he makes a new
contract with the insurer, acquires no greater right under the (a) Of himself, of his spouse and of his children;
insurance than the assignor had, subject to the insurer’s defenses.
7
(b) Of any person on whom he depends wholly or in part for Those taken out by the insured upon his life for the benefit of
education or support, or in whom he has a pecuniary interest; himself, or his estate, in case it matures only at his death, or for
the benefit of a third person who may be designated as
(c) Of any person under a legal obligation to him for the payment of beneficiary.
money, or respecting property or services, of which death or illness
might delay or prevent the performance; and An application therefor does not usually present an insurable
interest question.
(d) Of any person upon whose life any estate or interest vested in
him depends. 2. Insurance Upon Life of Another.

Insurable Interest is one of the most basic of all requirements in Taken out be the insured upon the life of another. In this case,
insurance. It is the interest which the law requires the owner of an such person must have an insurable interest in the life of that
insurance policy to have in the person or thing insured. person.

Pecuniary in nature – where the insured has a relation or The question of insurable interest is immaterial where the policy is
connection with or concern with the subject matter that he will procured by the person whose life is insured.
derive pecuniary benefit or advantage from its preservation and will
suffer pecuniary loss or damage from its destruction, termination or o Insurance taken out by the insured in his life for the
injury. benefit of another – where insurable interest is really
required only as evidence of the good faith of the parties.
State the difference between the price and the interest in a thing. The mere fact that a man on his own motion insures his
life for the benefit either of himself or of another is
The price is the measure while the latter refers to every benefit or sufficient evidence of good faith to validate the contract.
advantage arising out of or depending on such thing. o When the insurance regarded a wager policy – this is the
Exception: With regard to life insurances, to have an insurable exemption to the abovementioned rule.
interest in the life of a person, the expectation of the benefit from
What are the requirements for a wagering policy?
the continued life of that person need not necessarily be of a
pecuniary nature. 1. That the original proposal to take out insurance was that
of the beneficiary;
What is the effect of the presence or absence of such interest?
2. That premiums are paid by the beneficiary; and
Its existence gives a person the legal right to insure the subject of 3. That the beneficiary has no interest, economic or
the policy. In the absence of which, the person insuring would be emotional in the continued life of the insured.
gambling which is prohibited by law. Thus, it is necessary to the
A person has an insurable interest in his own life. Yet if the policy is
validity of an insurance and a policy issued to a person without
applied for and owned by someone other than the insured, the
interest in the subject matter is a mere wager and is void for
applicant-owner must have an insurable interest in the life of the
illegality.
insured.
State the reasons why the law makes such requirement that the
1. Insurance for Benefit of the Insured – the policy of the law
person insuring must have insurable interest over the subject.
requires that the assured shall have an interest to preserve
1. As deterrence to the insured and which renders wager the life insured in spite of the insurance, rather than
policies invalid. A wager policy is contrary to public destroy it because of the insurance.
interest and is demoralizing in that: 2. Insurance for the Benefit of a Third Party – when the
a. It allows the insured to have an interest in the owner of the policy insures the life of another and
destruction of the subject matter rather than its designates third party as beneficiary, both of them must
preservation. have an insurable interest in the life of the cestui que vie.
b. It affords inducement or temptation to bring to
The insurable interest must be pecuniary or founded upon the close
pass the event so that the insurance becomes
relationship between the parties. Thus, the mere fact the two
payable.
persons are engaged to be married does not give one an insurable
2. As a measure of limit of recovery.
interest in the life of another.
The insurable interest accordingly is the measure of proper limit of
When mere blood relationship sufficient – in U.S. cases, pecuniary
his provable loss under the contract. The insurance should not be a
benefit is not the only test, blood relationship is also considered.
means of making a net profit from the happening of the event
Accordingly, natural affection is considered sufficient and more
insured against.
powerful to protect the life of the insured than any other
2 Classes of Life Policies: consideration. The policy should be obtained in good faith.

1. Insurance Upon One’s Life. The following have an insurable interest in each other’s life since
they are obliged to support each other (Art. 195 of Family Code):

8
Art. 195. Subject to the provisions of the succeeding articles, the What is the effect if the whole amount has been discharged?
following are obliged to support each other to the whole extent set
forth in the preceding article: In such case, recovery on the policy is no longer permissible. Where
insurance taken by debtor for the benefit of creditors where a
ii. The spouses; debtor in good faith insures his life for the benefit of the creditor,
iii. Legitimate ascendants and descendants; full payment of the debt does not invalidate the policy; in such case
iv. Parents and their legitimate children and the legitimate the proceeds shall go to the estate of the debtor.
and illegitimate children of the latter;
v. Parents and their illegitimate children and the legitimate Where debt becomes legally unenforceable – like if it is already
and illegitimate children of the latter; and barred by the stature of limitations or of the debtor’s discharge in
vi. Legitimate brothers and sisters, whether of full or half- insolvency—does not cut off the insurable interest of the creditor
blood although there is no reasonable expectation of the debtor becoming
solvent so as to be able to pay his debt.
Art. 196. Brothers and sisters not legitimately related, whether of
the full or half-blood, are likewise bound to support each other to BASIS: the moral and equitable obligation of the debtor to pay his
the full extent set forth in Article 194, except only when the need for debt is not destroyed by the discharge which only affects the legal
support of the brother or sister, being of age, is due to a cause obligation to pay.
imputable to the claimant's fault or negligence. Yet on our law, it is clear that a creditor may not insure the life of
When pecuniary benefit essential – Yet, in other cases, mere blood the debtor unless the latter has a legal obligation to him for the
relationship does not create an insurable interest in the life of payment of money.
another. Under the law, there must be an expectation of pecuniary One may insure the life of a person where the continuation of the
benefit in the life of the insured to sustain the insurance. estate or interest vested in him who takes the insurance depends
Nonetheless, the expectation need not have a legal basis whatever; upon the life insured.
it is sufficient that it be actual.
BENEFICIARY
INSURABLE INTEREST OF A PERSON IN LIFE OF ANOTHER UNDER A
LEGAL OBLIGATION TO HIM Who is a beneficiary?

1. Related by contract or commercial relation- that a right He is the person who is named or designated in a contract of life,
possessed by him will be extinguished or impaired by the health, or accident insurance as the one who is to receive the
death or illness of the other may lawfully procure benefits which become payable upon the death of the insured.
insurance on the other’s life.
This also refers to those persons who though not parties to the
e.g. Employer to the Employee and vice versa; a partner to his contract but are mentioned in it as the intended recipients of the
co-partner; a surety to his principal. proceeds or benefits of the insurance if the insured risk occurs.

2. Risk that performance of obligation might be delayed or A beneficiary is also one who secures insurance for their own benefit
prevented-it must appear that the death or illness of the upon the lives of others.
insured person who is under a legal obligation might delay
or prevent its performance. Kinds of beneficiary:

e.g. A partner has no insurable interest against another if both 1. Insured himself – he may himself be the person who
have no capital invested and neither is indebted to the other. procures the contract and pay the premiums necessary to
maintain it; an immediate party to the contract. He is the
Extent of Interest – for the purpose of protecting his debt but only assured.
to the extent of the amount of the debt and the cost of carrying the 2. Personal representatives; and
insurance on the debtor’s life. Yet it should not be so 3. Someone other than the insured:
disproportionate to the amount of debts and liens thereon plus the a. Third person who paid a consideration – third
cost of the insurance that the policy is merely a wagering or person named as beneficiary may have paid a
speculative one. valuable consideration for his selection as such;
insured may have taken the policy for the
Right of debtor in insurance taken by the creditor – the contact is benefit of a creditor or to secure some other
between the insurer and the insuring creditor inasmuch as by law, obligation.
the creditor is given an insurable interest on the life of the debtor. It b. Third person through mere bounty of insured
does not inure to the benefit of the debtor unless the contrary is beneficiary may be one who gives no
stipulated. consideration whatsoever but is designated as
Extent of the amount that may be recovered by the insuring recipient of the proceeds of the policy through
creditor – principle of indemnity applies in this kind of insurance as mere bounty of the insured.
in the case of property insurance. Creditor can only recover such
amounts as remain unpaid at the time of the death of the debtor.
9
In these cases, the proceeds of the life insurance policy become the delivery. Thus, he has a property right on the policy which could not
exclusive property of the beneficiary upon the death of the insured. be deprived without his consent.

What if the insured before dying became insolvent, who should be Neither can a new beneficiary be added for this would in effect
entitled to the proceeds? reduce the latter’s vested rights.

It should be paid to the beneficiary and not to the assignee in Can the insured destroy the contact by refusing to pay the
insolvency. premiums?

What are the limitations in the appointment of the beneficiary? No, the beneficiary can always pay them to protect his interest.
Accordingly, the fulfillment of the obligation may be made by a third
A person may take out a policy of insurance on his own life and person even against the will of the debtor and if he has an interest in
make it payable to whomsoever he pleases whether the beneficiary the fulfillment of the obligation, even if against the will of the
lacks insurable interest or not. However, he should act in good faith creditor.
and without intent to make the transaction merely a wagering
contract. How do we measure the insurable interest of the beneficiary in a
policy?
Exceptions: Article 2012 of the NCC in relation to Art. 739.
It should be measured on its full value and not on its cash surrender
Art. 2012. Any person who is forbidden from receiving any donation value.
under Article 739 cannot be named beneficiary of a life insurance
policy by the person who cannot make any donation to him, What will happen in case the beneficiary dies before the insured?
according to said article.
1. View that beneficiary’s representative is entitled to
Art. 739. The following donations shall be void: insurance proceeds – where the right to change the
designated beneficiary is expressly waived, that if the
(1) Those made between persons who were guilty of adultery or beneficiary dies before the insured, his rights so vested
concubinage at the time of the donation; should pass to his representatives. Thus, upon the death of
(2) Those made between persons found guilty of the same criminal the insured, the proceeds of the policy should belong to
offense, in consideration thereof; the representatives of the beneficiary.
2. View that the estate of the insured is entitled to
(3) Those made to a public officer or his wife, descedants and insurance proceeds – especially where the designation is
ascendants, by reason of his office. subject to the express condition to pay the beneficiary if
he survives the insured or “if surviving.”
In the case referred to in No. 1, the action for declaration of nullity
may be brought by the spouse of the donor or donee; and the guilt Words used in designating the beneficiaries of a life policy will not
of the donor and donee may be proved by preponderance of be given their technical significance but will be construed broadly in
evidence in the same action. order that the benefit of the insurance shall be received by those
intended by the insured and the object of his bounty.
For the prohibition to apply, is it not necessary that there be
previous conviction for adultery or concubinage. The following may be designated as beneficiaries:

The proceeds of the policy accrue, in the absence of any beneficiary 1. Insured or his estate;
named in the life insurance policy or where the designated 2. Specifically designated person or persons; and
beneficiary is disqualified, to the estate of the deceased insured. 3. Class or classes of persons
a. Children – include an adopted child; or an adult
Whether or not the policy reserves to the insured the right to child not forming part of the household of the
change the beneficiary, he has the power to so change the insured; or afterborn children of a marriage
beneficiary without the consent of the latter who acquires no vested subsequently contracted. It means a descendant
right but only an expectancy of receiving the proceeds under the of the first degree and is never intended to
insurance. include grandchildren.
The right or the insured’s power to extinguish the beneficiary’s If the children were named individually, other
interest must be exercised while the former is alive. Thus, it ceases children cannot share in the proceeds unless the
at his death and cannot be exercised by his personal representatives insured amend his designation to include them.
or assignees.
b. Husband, wife or widow – the word “wife” is
What is the effect if the right to change is waived? regarded as a descrtiptio personae. Thus, the fact
In such case, the insured has no power to make such change without that one who otherwise answers the description
does not have the legal status of the wife of the
the consent of the beneficiary. In such case, the beneficiary acquires
an absolute and vested interests from the date of its issuance and insured does not prevent her from taking as

10
 beneficiary as when she is designated by name b. Death by self-destruction – death by suicide is not by
although the words “his wife” are added. implication exempted from the risks assumed by the
insurer especially where the insurance is for the benefit of
But if the beneficiary is not named but is designated another rather than the insured.
merely by status, the legal husband etc. as
ascertained at the death of the injured is entitled to Sec. 87. An insurer is not liable for a loss caused by the willful act or
the benefits of such insurance. through the connivance of the insured; but he is not exonerated by
the negligence of the insured, or of the insurance agents or others.
c. Husband and children; wife and children – if the
designation is made to the insured’s “wife and In such circumstance, the death is still caused by the voluntary act of
children” or “my wife and children”, the the insured, he knowing and intending that his death shall be the
insurance is deemed for the benefit of all the result of his act. But death which is purely accidental even if due to
children of the insured whether by the named his own carelessness or negligence is not excluded from the
wife or those of another. coverage by the words “self-destruction” or “death by his own
d. Family – the court in this case will ascertain hands” and the like.
whether that person was so regarded by the
insured. If he was so regarded, he will be c. Death by suicide while insane – in the absence of express
allowed to participate although in no way conditions to the contrary, the suicide of an insured while
related to the insured. insane does not discharge the insurer from his liability on
e. Heirs or legal heirs – these terms will not be his contract. It must have known to that the insured was
construed as indicating merely the heirs at law subject and the unwitting act of self-destruction is as much
but rather that class of persons who would take the consequence of that disease.
the property of the insured in case he died d. Death caused by beneficiary – where the beneficiary
intestate. intentionally brings about the death of the insured under
f. Estate or legal representatives of the deceased – such circumstances as to amount to a felony, he cannot
to be construed in their strict technical sense receive any benefit under the contract of insurance.
and the courts will ordinarily assume that they Thus, his interest shall be forfeited, and the nearest relative of the
are used to mean executors or administrators, insured shall receive the proceeds of the said insurance if not
unless it appears that the insured intended to otherwise disqualified.
use these expressions in the sense of heirs or
next of kin. Exception: When such killing was accidental or in self-defense or
where the beneficiary was insane, the rights of the beneficiary under
If no beneficiary is designated, the proceeds will go to his legal heirs the policy are not affected. The same is true where the insured’s
in accordance with law. death was not intentionally caused.
Interest – the right of the beneficiary to receive the proceeds of the Thus, it is well-settled that a deliberate killing of the insured by the
life insurance policy. It does not mean insurable interest since the beneficiary suffices to work a forfeiture.
beneficiary need not have an insurable interest in the life of the
insured. e. Death caused by violation of law – the mere fact that the
insured dies while he was committing a felony or violating
Who are the nearest relatives of the insured? a law would not warrant denial of liability. To avoid
o The legitimate children; liability, the insurer must establish that the commission of
o The father and mother, if living; the felony or the violation of law was the cause or had a
causal connection with the accident resulting in the death
o Grandfather and grandmother, or ascendants nearest in
of the insured.
degree, if living;
o The illegitimate children; An act or omission punishable by a special law is not a felony but
o The surviving spouse; and more of the general term-crime, offense, transgression, or infraction
o Collateral relatives, to wit: of law. Thus, the act of driving a motorcycle without the license to
o Brothers and sisters of the full blood; do so (although a violation of the Land Transportation and Traffic
o Brothers and sisters of the half-blood; and Code) would not constitute a felony. It must be shown that the
o Nephews and nieces violation of law was the cause or had causal connection with the
o In default of the above, the State accident.

What is the liability of the insurer on death of insured? Insurable Interest in Property may be in the property itself
(ownership) or any relation thereto (interest of a trustee), or liability
a. Death at the hands of the law – the death of the insured in respect thereto (interest of a carrier).
at the hands of the law—as by legal execution—is one of
the risks assumed by the insurer in the absence of a valid Who has an insurable interest in property?
policy exception.

11
Anyone who derives benefit from its existence or would suffer loss 6. A judgment debtor whose property has been seized under
from its destruction. The occurrence of the loss may be uncertain execution until the right to redeem or the right to have the
and it is not necessary that the interest is such that the event sale set aside has been lost;
insured against would necessarily subject the insured to loss. 7. Builders and constructors of buildings pending the
payment of the construction price;
In an insurance of property, is title or right to possession not 8. Purchaser of an option to buy real estate.
essential?
Is an inchoate right considered as sufficient?
No, title in the property as well as possession or right to possession
is not essential. It is enough that he will suffer loss as the proximate Yes, but it must be founded on an existing interest.
result of its damage or destruction.
o A stockholder in the property of the corporation of which
A mortgagor who sold the mortgaged premises to a vendee has an he is a stockholder—his insurable interest is limited to the
insurable interest in the property because of his personal liability for extent of the value of his interest or to his share in the
the debt and his right to be subrogated to the mortgage security in distribution of the corporate assets upon dissolution. Note
case he should be compelled to make payment. that a stockholder has neither legal nor equitable title to
assets of the corporation.
Insurable interest is more of a concern in the conservation of the o A partner with respect to property of the firm.
property and such a relation to or connection with it as will
necessarily entail a pecuniary loss in case of its injury or destruction. What about an expectancy, will that qualify as an insurable interest?
Nonetheless, the expectation of benefit must have a basis of legal
right although the person insured has no title. Yes, but it must be coupled with an existing interest in that out of
which such expectancy arises.
Is a mere factual expectation of loss sufficient?
A farmer may insure future crops if the same are to be grown on
No, such expectation not arising from any legal right or duty in land owned by him at the time of the issuance of the policy or are to
connection with the property does not constitute an insurable be raised by him in the land of another, provided that it will belong
interest. to him when produced.

Yet, this type of interest of “factual expectation,” though is A business owner with respect to a contingency which may cause
insufficient in strict indemnity insurance, will suffice in life insurance. loss of profits.

Does the interest in a property need to be an existing one? Sec. 15. A carrier or depository of any kind has an insurable
interest in a thing held by him as such, to the extent of his
No, it may consist merely of an inchoate interest or expectancy.
liability but not to exceed the value thereof.
An Existing Interest – legal title or equitable title.
The basis of this provision is that the loss of the thing may cause
Examples of persons who have insurable interest arising from legal liability to the carrier or depositary to the extent of its value.
title:
This includes bailees to protect him against the loss of the benefits
1. Trustee – in case of seller of property not yet delivered; to which he is entitled.
2. Mortgagor – in case of a property mortgaged;
Under the General Bonded Warehouse Act — a warehouse man
3. Lessee and sub lessee; and
licensed to engage in the business of receiving commodities for
4. Assignee of property for the benefit of creditors.
storage is required to insure the same against fire.
A representative (an executor, administrator, trustee, or receiver)
Sec. 16. A mere contingent or expectant interest in
who holds legal title in such capacity has sufficient insurable interest
anything, not founded on an actual right to the thing, nor
for the purpose of taking out insurance on the property under his
upon any valid contract for it, is not insurable.
control but nay proceeds from such insurance are to be held for the
benefit of those whose benefit the representative is acting. A mere hope or expectation of benefit uncoupled with any present
legal right will not support a contract of insurance.
Examples of persons who have insurable interest arising from
equitable title: A father cannot insure his son’s property nor can a son insure the
property that he expects to inherit from his father as his interest is
1. Purchaser of property before delivery;
merely an expectancy.
2. Mortgagee;
3. Mortgagor after foreclosure but before expiration of the Can a general or unsecured creditor insure specific property of his
period within which redemption is allowed; debtor who is alive?
4. Beneficiary under a deed of trust;
5. Creditors under a deed of assignment; No, even though destruction of such property would render
worthless any judgment he might obtain. But an unsecured creditor
may insure the property of a deceased debtor since all personal

12
liabilities ceases with the death of the debtor. The proceedings to LIABILITY INSURANCE CONTRACTS
subject the estate to the payment of the debt of the deceased
debtor are in rem. These are contracts of indemnity against liability and not against
loss. Accordingly, the insurer’s promise is to pay the proceeds of the
A judgment creditor has an insurable interest in the debtor’s policy in behalf of the insured to a third person to whom the insured
property as he has been held to have insurable interest in the is liable. Hence, if the insured suffers no loss because the liability to
debtor’s property as he has a right to levy on such property as may third persons cannot be enforced, the insurer has no obligation to
be necessary to satisfy the judgment. Yet, he has to show that the pay the proceeds.
debtor has no other property out of which the judgment may be
satisfied. LIFE INSURANCE CONTRACTS

An unsecured creditor has an insurable interest in the life of his There are not contracts of indemnity. The amount fixed payable is
debtor to the extent of the amount of the debt. Also, a person not considered as the true value of the thing insures because the life
named as beneficiary in a will has no insurable interest in a property of a person is priceless. It is simply a measure of indemnity which
designated before the testator’s death. Accordingly, the will can be the insurer has bound himself to pay the insured.
revoked any time before the death of the testator unless he has The amount for which a person is insured is governed by the amount
expressly waived this right in the policy. of premium that he contracted to pay.
Sec. 17. The measure of an insurable interest in property is the PERSONAL ACCIDENT INSURANCE CONTRACTS
extent to which the insured might be damnified by loss or injury
thereof. There are not contracts of indemnity. Life and limb are not
susceptible to exact or uniform valuation. But if a person effects a
A contract of insurance is one of indemnity. Thus, any contract that personal accident insurance on the life of another person, the
gives to the insured more than indemnity against his actual loss that amount recoverable is the loss sustained by the person who effected
may be suffered is in the nature of a wagering policy contrary to the policy.
public policy and void.
In theory, such contract becomes a contract of indemnity, but it is
Sec. 18. No contract or policy of insurance on property shall be often impossible to exactly assess the injury suffered.
enforceable except for the benefit of some person having an
insurable interest in the property insured. HEALTH INSURANCE CONTRACTS

BASIS: Principle of Indemnity. Thus, an insurance taken out by a There are not contracts of indemnity. But those covered by medical
person on property in which he has no insurable interest is void. expenses are contracts of indemnity.
Example where the rule will not apply:
HEALTH CARE AGREEMENT
In case the real intention was to insured the goods for P 15,000.00
but instead it was the building in which the goods were stored (and An agreement with a health maintenance organization (HMO) is in
which was not owned by the insured or had any insurable interest the nature of non-life insurance which is primarily a contract of
thereto). In such case, the insured can recover in case of loss of the indemnity. The payment must be made to the party who incurred
goods. the expenses.

If the insurance is void, the premium will be returned to the insured Sec. 19. An interest in property insured must exist when the
unless he is in pari delicto with the insurer. In a life insurance taken insurance takes effect, and when the loss occurs, but not exist in the
by a person on his own life, the beneficiary need not have an meantime; and interest in the life or health of a person insured must
insurable interest in the life insured. exist when the insurance takes effect, but need not exist thereafter
or when the loss occurs.
The Doctrine of Waiver or Estoppel apply in the aforesaid situation
since the public has an interest in the matter independent of the BASIS: To prevent the issue of wagering policies.
consent or concurrence of the parties. When should insurable interest in property exist?
CONTRACTS OF MARINE OR FIRE INSURANCE 1. On the date of the execution of the contract.
The amount of indemnity may be determined after the loss or is 2. On the date of the occurrence of the risk secured against.
previously fixed in the contract. The insured cannot recover in What is the effect if the above rule is not met?
excess of his actual loss. In valued policies however, the valuation of
the thing insured is conclusive between the parties thereto in the The policy is void. Hence, if a fire occurs after the sale or alienation
adjustment of loss. of the property, the former owner cannot recover on the policy.

The principle of indemnity will not also apply in case the insurer What about in life insurance, when is the insurable interest
agreed to repair or replace the thing insured with a new one even requirement satisfied?
though the cost of the undertaking may exceed the original amount
of the insurance.

13
If the same exists at the time the policy is procured, even if it has o A transfer of interest by one of several partners, joint
ceased to exist at the time of the insured’s death. In liability owners, or owners in common, who are jointly insured, to
insurance, questions of insurable interest are not particularly the others;
important. It necessarily exists when the liability of the insured to a o When a policy is so framed that it will inure to the benefit
third-party attaches. of whomsoever, during the continuance of the risk, may
become the owner of the interest insured;
LIFE INSURANCE PROPERTY INSURANCE
o Where there is an express prohibition against alienation in
As to time when insurable interest must exist
the policy, in case of alienation, the contract of insurance
At the time the policy takes It is necessary that the
is not merely suspended but is avoided.
effect and need not exist at the insurable interest must exist
time of the loss. when the insurance takes DIVISIBLE CONTRACT INDIVISIBLE CONTRACT
effect and when the loss As to the effect
occurs, but need not to exist in
The cause of consideration is The cause or consideration is
the meantime.
made up of several parts. entire or single transaction.
As to expectation of benefit to be derived
It need not have any legal There must be legal basis,
basis. A reasonable probability however remote, to constitute if the things are separately If the things are insured under
is sufficient without more. an insurable interest. insured in one policy, the one policy for a gross sum and
contract is divisible and the for an entire premium, the
violation of a condition which contract is indivisible; change
No legal right to support if An heir cannot insure the avoids the policy with respect of interest in one or more of
there is reasonable ground for property he expects to inherit. to one or more of the things the things will also avoid the
believing that the support will does not affect the others. insurance as to the others
be continued. A stockholder may insure the
property of the corporation
although he has no legal Whether the contract is entire or severable is a question of intention
interest whatsoever in such to be determined by the language employed by the parties.
property.
As to extent of insurable interest Sec. 23. A change on interest, by will or succession, on the death of
Unlimited Limited to the actual value of the insured, does not avoid an insurance; and his interest in the
the interest thereon. insurance passes to the person taking his interest in the thing
insured.

The transfer of interest of a thing insured does not transfer the The insurance on property passes automatically on the death of the
policy but suspends it until the same person becomes the owner of insured to the heir, legatee or devisee who acquired interest in the
both policy and the thing insured. thing insured. The right to succession is transmitted from the
moment of the death of the decedent.
BASIS: Sec. 19 of the Insurance Code
Sec. 24. A transfer of interest by one of several partners, joint
The contract in this case is not rendered void but is merely owners, or owners in common, who are jointly insured, to the others,
suspended by a change of interest. does not avoid an insurance even though it has been agreed that the
State the purpose of the rule against alienation. insurance shall cease upon an alienation of the thing insured.

It is to provide against changes which might supply a motive to What is the effect of transfer of interest in the insured property by a
destroy the property or might lessen the interest of the insured in partner, joint owner, etc. to others who are jointly insured?
protecting and guarding it. It will not avoid the insurance. The rule is the same even if there is a
Transfer of Interest means absolute transfer of the property insured stipulation that the insurance shall cease upon alienation of the
such as the conveyance of the property by means of an absolute thing insured.
deed of sale. Thus, interest in the property does not pass by mere That is so because each partner is interested in the whole property
execution of a pledge or mortgage. and the hazard is not increased because the purchasing partner has
As a general rule, change of interest suspends the insurance. acquired a greater interest in the property by such transfer.
Exceptions: Exemption:

o In life, health, and accident insurance; If the transfer occurs without the consent of the insurer and before
o A change of interest in the thing insured after the the loss occurs.
occurrence of an injury which results in a loss; What is the effect if the transfer is to a stranger?
o A change of interest in one or more of several things,
separately insured by one policy; Such will avoid the policy. It ends the contract of insurance to as to
o A change of interest by will or succession on the death of him (the partner) but does not affect the insurance as to the others.
the insured;

14
Sec. 25. Every stipulation in a policy of insurance for the payment of outside of those risks that fall definitely within the ocean
loss whether the person insured has or has not any interest in the marine category.
property insured, or that the policy shall be received as proof of such
interest, and every policy executed by way of gaming or wagering, is This insurance may be in the form of property insurance,
void. indemnifying the insured for loss or damage to property or in the
form of liability insurance protecting the insured against liability for
What are the stipulations which are declared void under this loss or damage to property or for personal injury, illness or death of
section? another person.

1. Stipulation for the payment of loss whether the person What is the scope of ocean marine insurance?
insured has or has no interest in the subject matter of the
insurance; It provides protecting for:
2. Stipulation that the policy shall be received as proof of 1. Ships or hulls;
insurable interest- the insurer can always show lack of 2. Goods or cargoes;
insurable interest after the issuance of the policy 3. Earnings such as freight, passage, money, commission, or
insurance. profits; and
What is a wager policy? 4. Liability (known as protection and indemnity insurance).

It is a pretended insurance where the insured has not interest in the What are the risks or losses covered in ocean marine insurance?
thing insured and can sustain no loss by the happening of the All risks and losses may be insured against, except such as are
misfortunes insured against. repugnant to public policy or positively prohibited.
Who has the right to raise the defense of the absence of an insurable What is the effect if a general marine insurance policy does not state
interest? the risks assured?
It is available only to the insurer being the only party to the The same is valid and covers the usual marine risks; and in marine
insurance contract who has a legitimate in interest in raising such policy, the general enumeration of “all other perils” etc. extends
defense. only to marine damage of like kind to those enumerated.
The insurable interest requirement intends to deter the insured To sustain a recovery on a marine policy, the loss must have been
from the temptation to bring about by unnatural means the results occasioned by a risk or peril insured against.
of the contingent event.
A contract of insurance on freight is that the perils insured against
CLASSES OF INSURANCE shall not prevent the ship from earning full freight for the insured in
Marine Insurance – a marine insurance is an insurance against loss that voyage; such contract does not undertake that the goods shall
or damage to any kind of property or loss of life or injury to person be delivered in a sound or merchantable state or that the vessel
in connection with any and all risks or peril of navigation, transit or shall be safe from the dangers of the sea.
transportation. An insurance on time by no means contains an engagement that any
Transportation Insurance – is concerned with the perils of property particular voyage undertaken by the insured within the prescribed
in (or incidental to) transit as opposed to property perils at a period shall be performed before the expiration of the policy but
generally fixed location. only that the shop shall be capable of performing the voyage
undertaken notwithstanding any loss or injury which may occur to
It does not include normal motor vehicle insurance which is treated her during the time for which she is insured.
separately by law. It is usually known as marine insurance.
In marine policies, the insurer may except liability from certain
Two major divisions of transportation insurance: causes. In marine insurance, the goods are presumed to be shipped
under deck—below the weather deck of the vessel.
1. Ocean Marine Insurance—it has to do with the insurance
of sea perils. What is the effect if the goods are shipped on deck?

The old law defines ocean marine insurance as an insurance They are not covered by the policy unless special notice of the
against risk connected with navigation, to which a ship, cargo, stowage is given to the underwriter, and he accepts the enhanced
freightage, profits or other insurable interest in movable risk.
property, may be exposed during a certain voyage or a fixed
period of time. Accordingly, the deck of a vessel is not designed to carry goods. Its
function is to make the holds watertight and to protect the cargo
2. Inland Marine Insurance – covers primarily the land or laden in the holds. Goods carried on a deck are subject to weather
over the land transportation perils of property shipped by damage, sea damage, and the hazard of being washed overboard.
railroads, motor trucks, airplanes, and other inland
waterway transportation and other waterborne perils

15
But certain goods, dangerous in themselves are, by custom and It covers all losses during the voyage whether arising from a marine
sometimes by law, required to be shipped on deck so that they will peril or not.
not endanger the other cargo and can, if necessity arise, be quickly
thrown overboard. Who has the burden of proof to establish damage or loss that has
occurred is excluded from the coverage?
Perils of the Sea include only those casualties due to the unusual
violence or extraordinary action to wind and wave, or to other It is the duty to the insurance company to establish that said loss or
extraordinary causes connected with navigation. damage falls within the exceptions provided for by law; otherwise, it
is liable therefor.
It embraces all kinds of marine insurance casualty:
The insurer can avoid coverage upon demonstrating that a specific
a. Shipwreck provision expressly excludes the loss from coverage.
b. Foundering
c. Stranding Generally, the burden of proof is upon the insured to show that a
d. Collision, and loss arose from a covered peril. Yet, in this case, the burden is not on
e. Every specie of damage done to the ship or goods at sea the insured to prove the precise cause of loss or damage for which it
by violent action of the wind and waves; or seeks compensation.
f. Losses occasioned by the jettisoning of cargo; The insured has the initial burden of proving that the cargo was in
g. Barratry. good condition when the policy attached and that the cargo was
What is barratry? damaged when unloaded from the vessel; thereafter, the burden
then shifts to the insurer to show the exception to the coverage.
It is any willful misconduct on the part of the master or crew in
pursuance of some unlawful or fraudulent purpose without the What are the classes of inland marine insurance?
consent of the owners, and to the prejudice of the owner’s interest. 1. Property insurance in goods in transit by railroad, express, mail,
It must be willful and intentional act. motor truck, aircraft and partly by water;
What are the perils not covered by such insurance? 2. Property insurance on goods of certain specified types, wherever
It does not cover losses resulting from ordinary wear and tear or they may be, against any peril, even though not in the course of
other damage usually incident to the voyage. Perils of the Sea is a transportation;
relative term. 3. Property insurance on fixed property such as bridges, tunnels, and
PERILS OF THE SEA PERILS OF THE SHIP the like;
Include only such losses as are A loss which results from: 4. Property insurance on a few of the means of transportation such
or extraordinary nature or a. the natural and
as small boats, railroad cars and the like; and
arise from some overwhelming inevitable action of
power which cannot be the sea; 5. Liability insurance to protect transportation carriers,
guarded against by the b. From the ordinary warehousemen, processors and other bailees from the
ordinary exertion of human wear and tear of the
consequences of legal responsibility for property of customers while
skill or prudence as ship; and
in their custody.
distinguished from the c. From the negligent
ordinary wear and tear of the failure of the ship’s To be eligible for inland marine contract, the risk must involve an
voyage. owner to provide the element of transportation. Either the property is actually in transit
vessel with the
held by persons (bailees) who are not its owners, or at a fixed
proper equipment to
location but an important instrument of transportation, or is a
convey the cargo
under ordinary movable type of goods which is often at different locations.
conditions.
4 Divisions or Classes of Inland Marine Insurance:

The Insurer does not 1. Property in Transit – protection for property frequently
undertake to insure against the exposed to loss while it is in transportation from one
perils of the ship. location to another;
2. Bailee Liability – protection to persons who have
temporary custody of the goods or personal property of
Perils of the sea must be the proximate cause of the loss.
others, such as carriers, laundrymen, warehousemen, and
What is an all-risk marine insurance policy? garage keepers;
3. Fixed Transportation Property – bridge, tunnels, and
It insures against all causes of conceivable loss or damage except as other instrumentalities of transportation and
otherwise excluded in the policy or due to fraud or intentional communication although they are fixed properties.
misconduct on the part of the insured. It evolved to grant greater Accordingly, they are essential part of the transportation
protection than that afforded by the “perils clause.” system; and
16
 4. Floater – an inland marine insurance provides insurance to The lender in bottomry is entitled to receive a high rate of interest to
follow the insured property wherever it may located, compensate him for the risk of losing his loan. Where the vessel is
subject to the territorial limits of the contract. Floater bottomed, the owner has an insurable interest only in the excess of
policies may be issued for such items as jewelry, furs, its value over the amount of the bottomry loan. The insurable
works of art, contractor’s equipment etc. interest of the lender on bottomry in the vessel given as security is
to the extent of the loan.
Sec. 100. The owner of a ship has in all cases an insurable interest in
it, even when it has been chartered by one who covenants to pay Sec. 102. Freightage, in the sense of a policy of marine insurance,
him its value in case of loss: Provided, that in this case the insurer signifies all the benefits derived by the owner, either from the
shall be liable for only that part of the loss which the insured cannot chartering of the ship or its employment for the carriage of his own
recover from the charterer. goods or those of others.

Marine insurance is invalid unless supported by an insurable interest What is freightage?

in the thing insured. There can be no valid insurance unless there is
something to insure. It is also known as freight. It is the benefit which is to accrue to the
owner of the vessel from its use in the voyage contemplated or the
What is the extent of the insurable interest of owner of a ship? benefit derived from the employment of the ship.

The insurable interest is the extent of its value even if he has What are the sources of freightage?
mortgaged the same or has chartered it to a third person who
agrees to pay him its value in case of loss. In the latter case, the o The chartering of the ship;
insurer is liable only for that part of the loss which the insured o Its employment for the carriage of his own goods;
cannot recover from the charterer. o Its employment for the carriage of the goods of others.

The insurable interest is commonly possessed by the owner, and Sec. 103. The owner of a ship has an insurable interest in expected
also if money has been borrowed by one who holds mortgage on the freightage which according to the ordinary and probable course of
vessel. things he would have earned but for the intervention of a peril
insured against or other peril incident to the voyage.
In case of cargo, the insurable interest is with the shipper or the
consignee depending upon the terms of sale. The shipowner includes:

Enumerate and define the different common terms of sale. a. Legal owner;
b. Charterer who expects to earn in the transportation of
1. F.O.B (Free on Board): goods of others.
a. F.O.B Factory – the buyer assumes responsibility
when the goods leave the factory; and What is included in “freight money assured to the shipowner”?
b. F.O.B Point of Destination – the buyer does not
o Freight, in its ordinary acception, to be earned and payable
assume responsibility until the goods are
upon the completion of the voyage;
received from the carrier.
o The hire of the vessel, payable by the charterer;
2. C.I.F (Cost, Insurance, and Freight) – the seller assumes
o The benefit accruing to the owner from the use of his
complete responsibility for securing all necessary
vessel in the way of profits upon carriage of his own
insurance; and
goods.
3. C&F (Cost, and freight) – the buyer procures his own
insurance. The owner of ship has an insurable interest in expected freightage
which he may not earn in case of the intervention of peril insured
What is the basis of interest of the vendee or consignee?
against or other peril incident to the voyage. This rule is the same
His interest over the goods is based on the perfected contract of sale although the freight has been paid in advance.
between him and the shipper of the goods which operates to vest in
Where the agreement is payable in any event, whether the vessel is
him an equitable title even before delivery or before he performed
lost or is not lost, the shipowner has no insurable interest in such
the conditions of the sale.
freight. The shipper who has prepaid the freightage under such
Such equitable title vests in the vendee an existing interest over the condition, has an insurable interest on the same.
goods sufficient to be the subject of insurance.
INSURABLE INTEREST IN PASSAGE OF MONEY
Sec. 101. The insurable interest of the owner of the ship
Passage money is customarily payable in advance. It cannot be
hypothecated by bottomry is only the excess of its value over the
recovered if the vessel is lost before the completion of the passage.
amount secured by bottomry.
Passenger can insure his advances of passage money but the
What is a loan on bottomry? shipowner may not insure it unless it is payable upon the completion
of the voyage.
It is one which is payable only if the vessel, given as a security for the
loan, completes in safety the contemplated voyage.
17
INSURABLE INTEREST IN EXPECTED FREIGHTAGE IN A CHARTER The charterer has also an insurable interest in the profits he expects
PARTY to earn by carrying in the goods in excess of the amount he agreed
to pay for the charter of the vessel.
To give an insurable interest in expected freightage, the insured
must have an inchoate right to freight, that is, he must be in such What is a charter party?
position with regard to freight that nothing could prevent him from
ultimately having a perfect right to itbut the intervention of the It is a contract by which an entire ship or some principal part thereof
perils insured against. is lent by the owner to another person for a specified time or use.

a. Where freight is the price to be paid for hire of the ship What are the types of charter parties?
under charter party, the shipowner has an inchoate right a. Charter Party or Demise Charter – a lease of an
to freight as soon as there is an inception of performance unfurnished house. It is the charterer who shall provide a
by the ship under the charter party. crew and victuals and supplies and fuel for her during the
b. Where the inchoate right to freight accrues as soon as the term of the charter. the charterer becomes, in effect, the
goods are actually put on board and where part of the owner of the voyage or service stipulated, subject to the
goods has been loaded and the balance is ready, there is liability for damages caused by negligence.
an insurable interest in the whole freight. b. Contract of Affreightment – the owner of the vessel leases
c. Where the shipowner has made a binding contract for part or all of its space to haul goods for others.
freight and the ship is in the readiness to receive the
goods, he has an insurable interest. The owner of the vessel retains the possession, command and
navigation of the ship, the charterer or freighter merely having use
What are the interests where there are no insurable interest in the of the space in the vessel in return for payment of the charter hire or
freight? freight.
1. Where there is no contract and no part of the goods What are the 2 types of contracts of affreightment?
expected to be carried are on board, there is no insurable
interest in freight although there are goods ready for 1. Voyage charter or trip charter
shipment or the master is provided with funds for the 2. Time charter
purpose of purchasing a cargo.
2. Where the vessel is a mere seeking ship or a vessel looking Sec. 107. In marine insurance each party is bound to communicate,
for the cargo to be transported, the owner has no in addition to what is required by section twenty-eight, all the
insurable interest in freight to be earned on goods not information which he possesses, material to the risk, except such as
loaded. is mentioned in Section thirty, and to state the exact and whole truth
in relation to all matters that he represents, or upon inquiry discloses
Sec. 105. One who has an interest in the thing from which profits are or assumes to disclose.
expected to proceed has an insurable interest in the profits.
What is concealment in maritime insurance?
One having a reasonable expectation of profits from a marine
adventure may take out an insurance to protect such profits. The It is the failure to disclose any material fact or circumstance which in
interest in the goods or adventure out of which the profits are fact or law, is within or which ought to be within the knowledge of
expected to be realized should be a legal interest although such one party and of which the order has no actual or presumptive
interest may be contingent like a commission to an agent or knowledge.
consignee. The rule applies to both the assured and the underwriter and the
Thus, the owner of the cargo to be carried on a trading voyage has rests upon the doctrine of good faith as well as the prevention of
an insurable interest not only on the value of the cargo but also on fraud.
the expected profit from the sale of the cargo which is liable to be What is the reason for the stricter rules?
affected by the perils of the sea.
This is due to the difference in the character of the property and the
The insured has sufficient interest if it is based on a valuable greater facility of the insurer possesses in obtaining information as
consideration paid. to its conditions and surrounding circumstances in cases of
Sec. 106. The charterer of a ship has an insurable interest in it, to the insurance on buildings, etc. than the vessels, which are often insured
extent that he is liable to be damnified by its loss. when absent or afloat. To constitute concealment, it is sufficient that
the insured is in possession of the material fact concealed although
CHARTER PARTY he may not be aware of it.

The insurable interest of a charterer of a ship is up to the extent that Sec. 108. In marine insurance, information of the belief or
he is liable to be damnified by its loss. One who charters a vessel, expectation of a third person, in reference to a material fact, is
with a stipulation to pay its value in case of loss, has an insurable material.
interest to the extent of its value.

18
In marine insurance, the rule is quite strict because the insured is policies generally have been held to apply to marine insurance
bound to communicate to the insurer not only facts but also: policies.

o Beliefs or opinions of third persons; The general rule that a representation is material where it would
o Expectations of 3rd persons. influence the judgment of a prudent insurer in fixing the premium or
in determining whether he would take the risk, is applicable to
The only requirement is that the information be in reference to a marine insurance.
material fact.
What is the effect of false representation by insured?
PRESUMPTIVE KNOWLEDGE BY THE INSURED OF PRIOR LOSS
o Intentional – avoids the policy
The rebuttable presumption of knowledge of a prior loss on the part o Not intentional – the insurer may rescind the contract
of the insured applies if the information might possibly have reached from the time the representation becomes false
him in the usual mode of transmission and at the usual rate of o Materiality of representations
communication.  Age
What is the reason for the presumption?  Equipment
 Particular condition or rating of the
The reason is the quickness in the transmission of news by means of vessel repaired in a certain place
modern communications. Because of the rapidly advanced means of  She has arrived at her port of
transportation, the presumption that the loss of a vessel due to destination
disaster of the seas was duly communicated to the insured becomes  Was at a certain place at a certain time
stronger.  Other underwriters had insured her at
a certain rate
When is the rule not applicable? When having no cause to expect
information the insured omits to call at the post office where a letter Statements of the nature and amount of the cargo, where she was
was received in the morning of the day the insurance was affected, not overloaded or where the underwriter did not rely thereon, have
containing the material information, he is not guilty of negligence been held to be immaterial.
which will vitiate the policy.
Sec. 112. The eventual falsity of a representation as to expectation
Sec. 110. A concealment in a marine insurance, in respect to any of does not, in the absence of fraud, avoid a contract of marine
the following matters, does not vitiate the entire contract, but insurance.
merely exonerates the insurer from a loss resulting from the risk
concealed: Differentiate representations of expectation from promissory
representations.
(a) The national character of the insured;
REPRESENTATIONS OF PROMISSORY
(b) The liability of the thing insured to capture and detention; EXPECTATION REPRESENTATIONS
Statements of future facts or
(c) The liability to seizure from breach of foreign laws of trade; events which are in their
nature contingent and which
(d) The want of necessary documents;
the insurer is bound to know
Concealment of any of the matters indicated from paragraphs a to e that the insured could not
of Sec. 110 does not avoid the policy ab initio. If the vessel was lost have intended to as known
facts but as intentions and
due to any of the causes mentioned which was concealed, the
expectations merely.
insurer is not liable; but if the vessel is lost due to the perils of the
sea, like a storm, the insurer is not exonerated from liability.
Unless made with fraudulent
Is the national character of the vessel material? intent, their failure to
fulfillment is not a ground for
Generally, no. But facts lying within the knowledge of the insured rescission.
which will expose the property to belligerent risks of seizure and
condemnation for violation of the trade or navigation laws of
another country must be disclosed. In what statements will this rule apply?

Sec. 111. If a representation by a person insured by a contract of a. Statements of the time a vessel will sail or is expected to
marine insurance, is intentionally false in any material respect, or in sail;
respect of any fact on which the character and nature of the risk b. Nature of the cargo to be shipped;
depends, the insurer may rescind the entire contract. c. Amount of profits expected;
d. Destination of the vessel;
Applicability of rules on representation to marine insurance The e. That the insured has no doubt that he can get insurance
general rules governing representations with respect to insurance effected for a certain premium.

19
Sec. 113. In every marine insurance upon a ship or freight, or presumption of negligence, is liable to the total value of the damage
freightage, or upon anything which is the subject of marine or loss.
insurance, a warranty is implied that the ship is seaworthy.
Sec. 114. A ship is seaworthy when reasonably fit to perform the
What is warranty in marine insurance? service and to encounter the ordinary perils of the voyage
contemplated by the parties to the policy.
It refers to a stipulation, either expressed or implied, forming part of
the policy as to some fact, condition, or circumstances relating to What constitutes seaworthiness?
the risk.
It is a relative term depending on the nature of the ship, the voyage,
What are implied warranties in marine insurance? and the service in which she is at the time engaged. Generally, for a
vessel to be seaworthy, it must be adequately equipped for the
The insurer will not be liable for any loss under this policy in case the voyage and manned with a sufficient number of competent officers
vessel: and crew.
a. is unseaworthy at the inception of the insurance; What if there is failure of a common carrier to maintain in seaworthy
b. deviates from the agreed voyage; condition the vessel?
c. engages in an illegal venture;
d. the ship will carry the requisite documents of nationality It is a clear breach of its duty prescribed in Art. 1755 of Civil Code.
or neutrality of the ship or cargo where such nationality or
neutrality is expressly warranted. What should be the nature of the ship to comply with
seaworthiness?
What will the admission of seaworthiness by the insurer mean?
The vessel must be in a fit state as to repair, equipment, crew, and in
o That the warranty of seaworthiness is to be taken as all other respects to perform the voyage insured and to encounter
fulfilled; ordinary perils or navigation. She must also be in a suitable condition
o That the risk of unseaworthiness is assumed by the to carry the cargo put on board or intended to be put on board.
insurer.
It is not necessary that the cargo itself shall be seaworthy.
What if the unseaworthiness is unknown to the owner of the cargo
What should be the nature of the voyage?
insured?
It is reasonable fitness to encounter the perils expected to arise in
The implied warranty of seaworthiness attaches to whoever is
the course of the voyage vary, naturally with the character of the
insuring the cargo, whether he be the shipowner or not. The fact
particular voyage.
that the unseaworthiness of the ship was unknown to insured is
immaterial in ordinary marine insurance and may not be used by What is the rule as to the nature of service?
him as a defense in order to recover on the marine insurance policy.
The requirement is that she shall be reasonably capable of safely
The shipper may have no control over the vessel but he has full carrying the cargo to its port of destination.
control in the choice of the common carrier that he will transport his
goods. What are the criteria as to seaworthiness of a vessel?

A charterer of a vessel has no obligation before transporting its 1. Physical and mechanical condition;
cargo to ensure that the vessel it chartered complied with all the 2. The extent of its fuel and provisions supply;
legal requirements. 3. The quality of its officers and crew;
4. Adaptability for the service in which they are employed.
The duty rests upon the common carrier simply for being engaged in
public services. Because of the implied warranty of seaworthiness, When is the commencement of the risk?
shippers of goods are not expected when transacting with common
carriers, to inquire into the vessels’ unseaworthiness, genuineness of The general rule is that the warranty of seaworthiness is complied
with if the ship be seaworthy at the time of the commencement of
licenses, and compliance with all maritime laws.
the risk. Prior or subsequent unseaworthiness is not a breach of the
What if the vessel is found unseaworthy? warranty, nor is it material that the vessel arrives in safety at the
end of her voyage.
A shipowner is also presumed to be negligent since it is tasked with
the maintenance of its vessel. Though its duty can be delegated, the Exceptions:
shipowner must exercise close supervision over its men.
1. In the case of time policy, the ship must be seaworthy at
Give an exception to the limited liability doctrine which limits the the commencement of every voyage she may undertake.
liability to it pro rata share in the insurance proceeds. 2. In the case of cargo policy, each vessel upon which the
cargo is shipped or transshipped must be seaworthy at the
When the damage is due to the fault of the shipowner and the commencement of each particular voyage.
captain. In such case, the shipowner, unless it overcomes the

20
 3. In case of voyage policy, contemplating a voyage in The stages must be separate and distinct in order to have a different
different stages, the ship must be seaworthy at the degree of seaworthiness for particular parts.
commencement of each portion.
What if the ship becomes unseaworthy during the voyage? The
The unexplained sinking of the vessel creates the presumption of general rule is that there is no implied warranty that the vessel will
unseaworthiness. The shipowner cannot escape liability by remain in a seaworthy condition throughout the life of the policy.
presenting in evidence a certificate that tends to show that at the
time of dry-docking and inspection. When the vessel becomes unseaworthy during the voyage, it is the
duty of the master, as the shipowner’s representative, to exercise
A Time Policy provides coverage for a fixed period of time, at the due diligence to make it seaworthy again, and if loss should occur
expiration of which the insurance will lapse. because of his negligence in repairing the defect, the insurer is
relieved of liability but the contract of insurance is not affected as to
A Voyage Policy covers the subject matter for the voyage named in any other risk or loss covered by the policy and not caused or
the policy until the specified voyage ends, regardless of the time it increased by such particular defect.
takes to complete the voyage.
What is the rule as to the seaworthiness as to cargo?
TIME POLICY VOYAGE POLICY
Gives protection for a Particularly adapted to tramp The seaworthiness of a vessel is also to be determined with regard
stipulated period and steamers and sailing vessels to the nature of the cargo which she undertakes to transport, the
therefore avoids the because those do not move requirement being that she shall be reasonably capable of safely
annoyance of constant over fixed routes and their conveying the cargo to its port of destination.
attention to the termination of travel may be more easily
voyages and the renewal of described by separate voyage A ship which is seaworthy for the purpose of insurance upon the
policies. policies. ship may yet be unseaworthy for the purpose of insurance upon the
cargo.
On hulls (vessels), they are Because cargoes are subject to
common type. sea risk for short periods, the How is a warranty of national character be known?
voyage policy is frequently
used. It is gathered from the language of the policy describing the vessel
By means of time policy, the
insured avoids the necessity of as the “Philippine,” “American,” “British,” “Spanish” etc.
continually describing separate
A warranty of nationality does not mean that the vessel was built in
voyages many of which are
such country but that the property belongs to a subject thereof. It
over similar routes.
refers to the beneficial ownership rather than to legal title.

What is the import of warranty of neutrality?

Seaworthiness requires:
It imports that the property insured is neutral in fact, and shall be so
a. Vessel must have the equipment and appliances
in appearance and conduct, that the property shall belong to
appropriate to voyage in which it is engaged and the cargo
neutrals, and no act of insured or his agent shall be done which can
it carries;
legally compromise its neutrality.
b. It must have sufficient fuel, stores, and provisions to last
for the entire voyage; The warranty extends to insured’s interest in all the property
c. It must have sufficient number of competent officers and intended to be covered by the policy, but not to the interest of a 3 rd
men; person not covered by the policy.
d. If the insurance is on cargo, the same must be properly
loaded, stowed, dunnaged and secured so as not to Explain the implied warranty to carry requisite documents.
imperil the navigation of the vessel or to cause injury to
The warranty of nationality also requires that the vessel be
vessel or cargo.
conducted and documented as of such nation, and a breach of
The carrying of the cargo on deck raises the presumption of warranty in either particular will avoid the policy. The warranty of
unseaworthiness unless it can be shown that the deck cargo will not nationality requires that the insured property shall be accompanied
interfere with the proper management of the ship. by documentary evidence of its neutral character and not by any
other papers which compromise such character.
What is the rule regarding voyage in stages? Where the policy
contemplates a voyage in different stages during which the subject Deviation – any excused departure from the regular course or route
matter insured will be exposed to different degrees or kinds of of the insured voyage or any other act which substantially alters the
perils, or the ship will require different degrees or kinds of perils, or risk constitutes deviation.
the ship will require different kinds of equipment, she must be
Cases of deviation in marine insurance:
seaworthy at the commencement of each stage, but it is sufficient if
at the commencement of each stage, she is seaworthy for the
purpose of that stage.

21
 o Departure from the course of sailing fixed by mercantile These are embodied in:
usage between the places of beginning and ending
specified in the policy; Art. 587 – The ship agent shall also be civilly liable for the
o Departure from the most neutral, direct, and indemnities in favor of third persons which may arise from the
conduct of the captain in the care of the goods which he loaded on
advantageous route between the places specified if the
the vessel; but he may exempt himself therefrom by abandoning the
course of sailing is not fixed by mercantile usage;
vessel with all her equipments and the freight it may have earned
o Unreasonable delay in pursuing the voyage;
during the voyage.
o The commencement of an entirely different voyage.
Art. 590 – The co-owners of a vessel shall be civilly liable in the
There are 2 kinds of deviation:
proportion of their interests in the common fund, for the results of
o Proper the acts of the captain, referred to in Article 587.
o Improper
Each co-owner may exempt himself from this liability by the
Proper deviation occurs when: abandonment, before a notary, of the part of the vessel belonging to
him.
a. When the ship is compelled to head for another port by
stress of weather; Art. 837. The civil liability incurred by the shipowners in the cases
b. Where a departure from the course is made to take on a prescribed in this section, shall be understood as limited to the value
pilot when necessary to the safety of the adventure; of the vessel with all its appurtenances and freightage earned during
c. Proceed to a place where the ship will meet a convoy if the the voyage.
policy warrants that the ship will not proceed from one
These articles precisely intend to limit the liability of the shipowner
port to another without convoy;
or agent to the value of the vessel, its appurtenances and freightage
d. To escape capture
e. Where the master seeks another port of discharge when earned in the voyage, provided that the owner or agent abandons
the water of the river is too shallow for his vessel to enter. the vessel.

A deviation for the purpose of saving life does not constitute a In case the vessel is totally lost and there is no vessel to abandon,
breach of warranty. abandonment is not required. Because of such total loss, the liability
of the shipowner or agent for damages is extinguished.
Sec. 126. An insurer is not liable for any loss happening to the thing
insured subsequent to an improper deviation. Exception: a shipowner or ship agent may be held liable for damages
when the sinking of the vessel is attributable to the actual fault or
The insurer becomes immediately absolved from further liability negligence of the shipowner or its failure to ensure seaworthiness of
under the policy for losses occurring subsequent the deviation. the vessel.

Sec. 127. A loss may be either total or partial. Constructive Loss is also known as technical total loss in which the
loss although not actually total, is of such a character that the
Sec. 128. Every loss which is not total is partial. insured is entitled, if he thinks fit, to treat as total by abandonment.
Sec. 129. A total loss may be either actual or constructive. In case of actual total loss, no abandonment is necessary, but if the
In total loss, the underwriter is liable for the whole of the amount loss is merely constructively total, an abandonment becomes
insured. necessary in order to recover as for a total loss.

Sec. 130. An actual total loss is cause by: When is there a presumption of actual total loss? Where a vessel is
not heard of at all within reasonable time after sailing, or for a
(a) A total destruction of the thing insured; reasonable time after she was last seen, she will be presumed to
have been lost from peril insured against.
(b) The irretrievable loss of the thing by sinking, or by being broken
up; How will the presumption be laid down?

(c) Any damage to the thing which renders it valueless to the owner It is enough to prove that the vessel was not heard of at her port of
for the purpose for which he held it; or departure after she sailed without calling witnesses from her port of
destination.
(d) Any other event which effectively deprives the owner of the
possession, at the port of destination, of the thing insured. What is the liability of the insurer in case of reshipment?

Actual loss exists when the subject matter of the insurance is wholly If the original ship is disabled, and the master, acting with a wise
destroyed or lost or when it is so damaged as no longer to exist in its discretion, as the agent of the merchant and the shipowners,
original character. Complete physical destruction is NOT necessary forwards cargo in another ship, such necessary and justifiable
to constitute actual total loss. change of ship will not discharge the underwriter on the goods from
liability for any loss which may take place on goods subsequently to
What is the limited liability rule? such reshipment.
22
Exception: Where resort must be had to distant places to procure a of interest sacrificed, so that the cost of the sacrifice shall fall equally
vessel, and there are serious impediments in the way of putting upon all.
cargo on board.
What are the requisites to the right to claim general average
The insurer may require an additional premium if the hazard is contribution?
increased by extension of liability.
1. There must be a common danger to the vessel or cargo;
ADDITIONAL LIABILITY OF INSURER OF GOODS 2. Part of the vessel or cargo was sacrificed deliberately;
3. The sacrifice must be for the common safety or for the
The insurer is liable for the expenses necessary to complete the benefit of all;
transportation of cargo reshipped in addition to any loss or damage 4. It must be made by the master or upon his authority;
which may take place on the goods, due to the perils insured 5. It must not be caused by any fault of the party asking the
against. contribution;
Sec. 135. Upon an actual total loss, a person insured is entitled to 6. It must be necessary.
payment without notice of abandonment. What is the liability for the insurer for general average?
RIGHT OF INSURED TO PAYMENT UPON ACTUAL TOTAL LOSS He is liable for his proportion of all general average loss assessed
CONSTRUCTIVE LOSS ACTUAL LOSS upon the thing insured. Article 859 of the Code of Commerce
provides that: “The insurers of the vessel of the freightage, and of
An abandonment by the The right of the insured to
insured is necessary in order to claim the whole insurance is the cargo shall be obliged to pay for the indemnification of the gross
recover for total loss in the absolute. He need not give average, insofar as is required of each one of these objects
absence of any provision to the notice of abandonment nor respectively.”
contrary in the policy. formally abandon to the
What is the liability of insurer for particular average?
insurer anything that may
remain of the insured Policies of marine insurance frequently contain stipulations with
property. respect to certain class of goods which are perishable or peculiarly
subject to damage under which the insurer will not be liable for loss,
partial or total, arising from perils of the sea. The purpose of such is
Sec. 136. Where it has been agreed that an insurance upon a
to protect the insurer.
particular thing, or class of things, shall be free from particular
average, a marine insurer is not liable for any particular average loss SCOPE OF INSURANCE AGAINST ACTUAL TOTAL LOSS
not depriving the insured of the possession, at the port of
destination, of the whole of such thing, or class of things, even Where the insurance is against absolute total loss or actual total
though it becomes entirely worthless; but such insurer is liable for his loss, the insurer will not be liable for constructive or technical total
proportion of all general average loss assessed upon the thing loss.
insured.
If the insured is deprived of the possession of the entire thing
AVERAGE insured at the port of destination, the insurer is liable because the
permanent non-arrival thereof is really an actual total loss.
It is any extra-ordinary or accidental expenses incurred during the
voyage for the preservation of the vessel, cargo, or both and all What is abandonment?
damages to the vessel and cargo from the time it is loaded and the
voyage commenced until it ends and the cargo unloaded. The act of the insured in notifying the insurer that owing to damage
done to the subject of the insurance, he elects to take the amount of
What are the kinds of average? the insurance in the place of the subject thereof, the remnant of
which he ceded to insurer.
1. Gross or general average – must be borne equally by all of the
interests concerned in the venture. What are the requisites for valid abandonment?

2. Simple or particular – damages to the vessel which have not 1. There must be an actual relinquishment by the person
inured to the common benefit and profit of all persons interested in insured of his interest in the thing insured;
the vessel and the cargo. It is suffered by and borne alone by the 2. There must be a constructive total loss;
owner of the cargo or of the vessel, as the case may be. 3. The abandonment be neither partial nor conditional;
4. It must be made within a reasonable time after receipt of
PRINCIPLE OF GENERAL AVERAGE CONTRIBUTION reliable information of the loss;
5. It must be factual;
It is decided by the master of a vessel acting for all the interests
6. It must be made by giving notice thereof to the insurer
concerned, to sacrifice any part of a venture exposed to a common
which may be done orally or in writing;
and imminent peril in order to save the rest, the interests so saved
7. The notice of abandonment must be explicit and must
are compelled to contribute ratably or proportionately to the owner
specify the particular cause of the abandonment.

23
Abandonment is not applicable to cases where the injury or average Give instances justifying abandonment.
was occasioned by the shipowner’s own fault. When the loss is only
technically total, the insured cannot claim the whole insurance o Total loss under a marine insurance policy
without showing due regard to the interest which the underwriter o Capture
may take in the abandoned property. o Seizure
o Detention of the ship or cargo
What are the rules in constructive total loss? o Restraint by blockade or embargo
o With no fault of the owner, the funds for repair cannot be
1. English rule – when the subject matter of the insurance,
raised
while still existent in specie, is so damaged as not to be
o Voyage is absolutely lost
worth, when repaired, the cost of repairs
o Under urgent necessity, the master of a vessel at an
2. American rule – when it is so damaged that the cost of
repairs would exceed ½ of the value of the thing as immediate port, makes a sale of the insured property.
required. It is also known as the fifty percent rule. Should the information be direct or positive?
3. In the Philippines, the insured may not abandon the thing
insured unless the loss or damage is more than ¾ of its NO. The protest of the master, a newspaper report, the report of a
value. pilot, or a letter from an official or an agent, is sufficient.

What is the rule in abandonment where insurance is divisible and What should be the form of notice of abandonment?
where it is indivisible?
o The notice may be made orally or in writing unless the
Any part of the thing insured separately valued by the policy may be policy requires it to be in writing;
separately abandoned as it is deemed separately insured. Whether o If the notice is done orally, the insured must submit to the
the contract is entire or severable is a question of intention to be insurer within 7 days from such oral notice, a written
determined by the language employed by the parties. notice of the abandonment.

What should be the criterion as to the extent of loss? The abandonment need not necessarily be made by the insured but
may be made by an authorized agent, and an agent having an
It must be in reference to the general market value immediately
authority to insure has prima facie an authority to abandon.
before the disaster. This is the proper rule even though the policy is
valued. The value of the policy is the proper criterion in the event The abandonment may be made to an agent of the underwriter and
that there is an express stipulation. abandonment to a broker who is agent for parties is sufficient.

In determining the extent of the loss, the expenses incurred or to be Should the notice of loss be explicit?
incurred by the insured recovering the thing insured are taken into
account. Yes, there must be an intention to abandon, apparent from the
communication to the insurer and a relinquishment of all rights to
Sec. 140. An abandonment must be neither partial nor conditional. the insurer.

Sec. 141. An abandonment must be made within a reasonable time The grounds for abandonment must be stated with such
after receipt of reliable information of the loss, but where the particularity as to enable the underwriter to determine whether or
information is of a doubtful character, the insured is entitled to a not he is bound to accept the offer.
reasonable time to make inquiry.
Sec. 145. An abandonment can be sustained only upon the cause
When the insured has received notice of loss, he must elect within a specified in the notice thereof.
reasonable time whether he will abandon to the insurer, and if he
If the insured assigns an insufficient cause or causes which do not in
elects to abandon, he must give notice thereof.
fact exist, the proof of other causes will not be admitted in suing for
What is reasonable time is a question depending on the facts and a total loss.
circumstances in each case.
Sec. 146. An abandonment is equivalent to a transfer by the insured
The right of the insured to abandon and recover for a total loss of his interest to the insurer, with all the chances of recovery and
depends upon the state of facts at the time of the offer to abandon indemnity.
and not upon the state disclosed by the information received, or
Valid abandonment transfers to the insurer the interests in the
upon the state of loss at a prior or subsequent time.
subject matter covered by the policy subject to the rights and
If the abandonment when made is good, the rights of the parties are interests, if any, of third persons. This insurer acquires thereby the
definitely fixed, and do not become changed by any subsequent entire interest insured, together will all its incidents, including rights
events. of action which the insured, together will all its incidents including
the rights of action which the insured has against third persons for
Insured cannot abandon when the thing insured is safe, or when he the inquiry.
knew at the time of his offer to abandon that the vessel has been
repaired and is successfully pursuing her voyage.
24
Sec. 147. If a marine insurer pays for a loss as if it were an actual Sec. 156. A valuation in a policy of marine insurance in conclusive
total loss, he is entitled to whatever may remain of the thing insured, between the parties thereto in the adjustment of either a partial or
or its proceeds or salvage, as if there had been a formal total loss, if the insured has some interest at risk, and there is no
abandonment. fraud on his part; except that when a thing has been hypothecated
by bottomry or respondentia, before its insurance, and without the
The insurer is entitled to whatever may remain of the thing insured, knowledge of the person actually procuring the insurance, he may
or its proceeds or salvage. show the real value. But a valuation fraudulent in fact, entitles the
From the moment of valid abandonment, the master of the vessel insurer to rescind the contract.
and agents of the insured become the agents of the insurer and the What is the effect of valuation?
latter becomes responsible for all the expenses and liabilities in
respect thereof. To fix in advance the value of the property and thus avoid the
necessity of proving its actual value in case of loss.
Insurers are liable for the wages of seaman earned subsequent to
the loss but take free from any lien or liability for wages earned prior To be conclusive, the valuation must be?
thereto.
a. The insured has some interest at risk;
Sec. 149. Where notice of abandonment is properly given, the rights b. There is no fraud on his part.
of the insured are not prejudiced by the fact that the insurer refuses
to accept the abandonment. When is the insured considered as co-insurer in marine insurance?

Acceptance is in no case necessary if the abandonment is properly If the value of his interest exceeds the amount of insurance.
made. The insured’s right to abandon, in policy of marine insurance, LOSS OF PROFITS SEPARATELY INSURED
is absolutely when justified by the circumstances.
If the profits to be realized are separately insured from the vessel or
What is the form of acceptance of abandonment? cargo, the insured is entitled to recover, in case of loss, such portion
a. An insurer’s acceptance of an offered abandonment need of the profits as the value of the property lost bears the value of the
not to be express; whole property.
b. It may be implied by conduct; What if only a part of the cargo or freightage insured is exposed to
c. Mere silence after notice would not operate as an risk?
acceptance.
The valuation will be reduced proportionately. The insurer is bound
Once acceptance of abandonment is made: to return such portion of the premium ad corresponds with the
o He becomes at once liable for the whole amount of the portion of the cargo which had been exposed to the risk.
insurance, and also becomes entitled to all rights which What are the rules for estimating loss under an open policy of
insured possessed in the thing insured; marine insurance?
o Acceptance fixed the rights of the parties. It is conclusive
upon them; The real value of the thing insured must be proved by the insured in
o Acceptance stops the insurer to rely on insufficiency in the each case.
form, time, right of abandonment.
1. The value of the vessel is to be taken as of the
Freightage earned subsequent to the loss belongs to the insurer of commencement of the risk and not its value at the time
said freightage. she was built.
2. The value of the cargo is its actual cost to the insured
Sec. 154. If an insurer refuses to accept a valid abandonment, he is when laden on board, or where the cost cannot be
liable as upon actual total loss, deducting from the amount any established, its market value at the time and place of
proceeds of the thing insured which may have come to the hands of shipment.
the insured. 3. The value of the freightage is the gross freightage and not
the net freightage. Primage is excluded in the gross
What is the effect of refusal to accept a valid abandonment of
freightage.
insurer’s liability?
4. The cost of the insurance is always added in calculating the
o The insurer is liable as upon actual loss less any proceeds value of the ship, cargo, or freightage or other subject
the insured may have received on account of damaged matter in an open policy.
property as when the insured succeeds in selling the
Sec. 162. If cargo insured against partial loss arrives at the port of
property as damaged.
destination in a damaged condition, the loss of the insured is
o If the abandonment was improper, the insured may
deemed to be the same proportion of the value which the market
recover the extent of damage proved.
price at that port, of the thing so damaged, bears to the market
Sec. 155. If a person insured omits to abandon, he may nevertheless price it would have brought if sound.
recover his actual loss.
25
This provision applies if the cargo is insured against partial loss and it OCEAN MARINE FIRE POLICIES
suffers damage as a result of which the market value at the port of A policy of insurance on vessel Where the hazard is fire alone
destination is reduced. engaged in navigation although and the subject is an
it insures the vessel against fire unfurnished vessel, never
The general rule is that the insurer is liable for any general average risks only. afloat for a voyage.
loss where it is payable or has been paid by the insured in
consequence of the peril insured against.
Why is distinction important?
In what instances there can be no recovery for general average?
1. In marine insurance, the rules on constructive total loss
o After the separation of the interests liable to contribution and abandonment apply but not in fire insurance
or after the cargo liable for contribution has been removed 2. In case of partial loss of a thing insured for less than its
from the vessel; actual value, the insured in a marine insurance policy is a
o When the insured has neglected or waived his right to co-insurer of the uninsured portion, while the insured may
contribution. only become co-insurer in a fire insurance if expressly
agreed upon by the parties.
FIRE INSURANCE
What are the requisites for an alteration in thing insured to entitle
It is a contract of indemnity by which the insurer for a stipulated the insurer to rescind the contract?
premium, agrees to indemnify the insured against loss of, damage
to, a property caused by hostile fire. 1. The use or condition of the thing is specifically limited or
stipulated in the policy;
What are allied lines? 2. Such use or condition as limited by the policy is altered;
It protects against loss by lightning, windstorm, etc. but not only 3. The alteration is made without the consent of the insurer;
when such risks are covered by extension to fire insurance policies 4. The alteration is made by means within the control of the
or under separate policies subject to the payment of additional insured;
premiums. 5. The alteration increases the risk.

There should be distinction between fire insurance alone and fire- The contract of fire insurance is not affected by any act of the
and-extended coverage. insured subsequent to the execution of the policy which does not
violate its provisions even though it increases the risk and is the
What is the nature of fire insurance? cause of the loss.

It is a contract of indemnity. INCREASE OF RISK OR HAZARD IN GENERAL

What is the concept of fire under the Code? There is an implied promise or undertaking on the part of the
insured that he will not change the premises or character of the
Spontaneous combustion is usually a rapid oxidation. Fire is business carried there so as to increase the risk of loss by fire.
oxidation which is so rapid to produce either a flame or a glow.
An increase of hazard takes place whenever the insured property is
Under our jurisdiction, fire may not be considered a natural disaster put to some new use, and the new use increases the chance of loss.
or calamity since it almost always arises from some act of man, or by
human means. It cannot be an act of God unless caused by some The increase should be substantial in character
lightning or natural disaster or casualty not attributable to human
agency. Give alterations which will avoid the policy.

What are the risks and losses covered? The scope, and coverage of o Where the risk of loss is increased.
insurance policy and the intention of the parties, as indicated by o Where the increase no longer exist at the time of loss.
their contract controls.
What are the alterations which will not avoid the policy?
What is loss of profits insurance or business interruption insurance?
o Where the risk of loss is not increased;
The attachment of a consequential loss from the standard fire o Where questioned articles required by insured’s business;
insurance extends the coverage to such consequential losses. o Where insured property would be useless if questioned
acts were prohibited.
KINDS OF INDIRECT LOSSES
What are the effects where the insured has no control or knowledge
a. Physical damage caused to other property which is not of alteration?
usually covered by the basis insurance policy.
b. Loss of earnings. o The insurer’s liability is not affected;
c. Extra expense or additional expenditure or charges o Insured’s knowledge is presumed in case of act of the
incurred by insured following damage or destruction of insured’s tenant.
buildings or contents by an insured peril.
26
If the policy does not contain any prohibition limiting the use or It includes all the forms of insurance against loss or liability arising
condition of the thing insured, an alteration in said use or condition from accident or mishap excluding certain types of loss or liability
does not constitute a violation of the policy. which are not within the scope of other types of insurance such as:

What is the measure of the indemnity under an open policy? a. Marine

b. Fire
The insured is entitled only to recover the amount of actual loss c. Suretyship
sustained and the burden is upon him to establish the amount of d. Life
such loss by a preponderance of evidence.
What are the risks or losses covered?
The liability of the insurer shall in no event exceed what it would
cost the insured to repair, or replace the thing insured o Accident – Violent mishap proceeding from an unknown or
unexpected cause.
In case of personal property having a market value which can readily o Burglary, robbery or theft not includes because of the
be determined, such market value may be applied in determining
opportunity to defraud the insurer (moral hazard).
the actual loss sustained.
What are the two general divisions of casualty insurance?
What is the effect of valuation in a fire insurance policy?
1. Insurance against specified perils which may affect the
1. Valuation is conclusive as to parties
person or property of the insured such as personal
2. In case of total loss, the insured can recover the whole
accident, robbery, theft, damage to or loss of motor
amount and in case of partial loss, the full amount of the
vehicle, insolvency of debtors, defalcation of employees.
partial loss.
2. Insurance against specified perils which may give rise to
3. If the thing is insured under 2 or more policies, each policy
liability on the part of the insured for claims for injuries to
shall contribute pro rata to the payment of such whole or
others for damage to their property such as workmen’s
partial loss.
compensation, motor vehicle liability, professional liability,
The insured is NOT presumed to be a co-insurer under fire policies in products liability.
the absence of stipulation.
What is liability insurance?
CO-INSURANCE CLAUSE IN FIRE INSURANCE
A contract of indemnity for the benefit of the insured and those in
It is a clause requiring the insured to maintain insurance to an privity with him, or those to whom the law upon the grounds of
amount equal to the value or specified percentage of value of the public policy extends the indemnity against liability.
insured property under penalty of becoming coinsurer to the extent
What is the liability insurable in case of quasi-delict or non-
of such deficiency.
fulfillment of contract?
This clause aims to prevent the property owners from taking out
It is only civil injury and not a felony or crime which is a public injury.
such small amount of insurance and thereby reducing the premium
payment and thereby increasing the rates of premium for all. What is the liability insurable in case of criminal negligence?

What is an option to rebuild clause? It is criminal but also insurable on the ground that they are
incidental. But liability consequences of deliberate criminal acts are
A stipulation concerning the repairing, rebuilding, or replacing of
not insurable.
buildings or structures wholly or partially damaged or destroyed.
The insurer is given the option to reinstate or replace the property What is the insurable interest in liability insurance?
damaged or destroyed or any part thereof, instead of paying the
amount of the loss or damage. The insurable interest is to be found in the interest the insured has
in the safety of persons who may maintain, or in the freedom from
Sec. 173. No policy of fire insurance shall be pledged, hypothecated, damage of property which may become the basis of suits against
or transferred to any person, firm or company who acts as agent for him in case of injury or destruction.
or otherwise represents the issuing company, and any such pledge,
hypothecation, or transfer hereafter made shall be void and of no When is liability insurance in policy payable?
effect insofar as it may affect other creditors of the insured.
The insurer assumes the obligation of paying the injured third
After the loss, the insured may pledge, hypothecate, or transfer a person from the moment that the insured becomes liable to third
fire insurance policy or rights thereunder even without the consent persons.
of, or notice, to insurer.
May the injured person sue the insurer of party at fault? It depends
CASUALTY INSURANCE on whether the contract insurance is intended to benefit third
persons also or only the insured.

1. Indemnity Against Third Party Liability – the third persons can

sue directly the insurer upon the occurrence of the injury or event
27
upon which the liability depends. It becomes operative as soon as Sec. 175. A contract of suretyship is an agreement whereby a party
the liability of the person indemnified arises irrespective of whether called the surety guarantees the performance by another party
or not he has suffered actual loss. called the principal or obligor of an obligation or undertaking in
favor of a third party called the obligee. It includes official
2. Indemnity Against Actual Loss or Payment – third persons cannot recognizances, stipulations, bonds or undertakings issued by any
proceed against insurer, the contract being solely to reimburse the company by virtue of and under the provisions of Act No. 536, as
insured for liability actually discharged by him through payment to amended by Act No. 2206.
third persons. Prior payment by insured is necessary in order that
obligation of insurer may arise. What are the undertakings within the scope of suretyship?

What is the basis of the insurer’s liability? 1. Official recognizes;

o Contract of insurance 2. Stipulations, bonds, undertakings by any company by virtue of

o Sum limited in the contract Act. 536;

What is Accident Insurance? Sec. 176. The liability of the surety or sureties shall be joint and
several with the obligor and shall be limited to the amount of the
It reimburses the insured in an accident bond. It is determined strictly by the terms of the contract of
suretyship in relation to the principal contract between the obligor
What is Health Insurance?
and the obligee. (As amended by Presidential Decree No. 1455).
It reimburses the insured for pecuniary loss arising out of disease-
The liability of surety is solidary. It is limited to the amount of the
related illness.
bond. It is contractual which means it is determined in relation to
Accident and health insurances are frequently combined. the principal contract.

In accident insurance, the insured’s beneficiary has the burden of SURETYSHIP PROPERTY INSURANCE
proof Accessory contract Principal contract in itself
There are 3 parties: 2 parties:
What is accident or accidental as used in accident policy? a. Surety a. Insurer
b. Principal debtor b. b. insured
It is an event that takes place without one’s foresight or expectation c. Creditor
or an event which proceeds from an unknown cause or unusual It is more of credit Contract of indemnity.
effect of unknown cause and not expected. It may include causes accommodation.
attributable to fault or negligence. Surety is entitled to No right of recovery except
reimbursement from principal when the insurer is entitled to
What is the rule as to death or injury resulting from accidental or and his guarantors for loss it subrogation.
accidental means? may suffer under the contract.
A bond can only be cancelled May be cancelled unilaterally.
General rule is that death or injury does not result from accidental
with the consent of olbligee or
means within the terms of an accident policy if it is the natural result
by Court of competent
of the insured’s voluntary act, unaccompanied by anything jurisdiction.
unforeseen except the death or injury. Requires acceptance of oblige Does not need the acceptance
before it becomes valid. of any third party.
What is the rule as to suicide and willful exposure to needless peril?
Risk-shifting device. Risk distributing device.
It will ordinarily negate the accidental character of whatever
followed from the known danger.
GUARANTY SURETYSHIP
Suicide is the positive act of ending one’s life Collateral undertaking Surety is an original
promissory
The willful exposure on the other hand indicates reckless risking of it
that is almost suicide in intent. Surety is an original Surety is primarily liable
promissory
What do you mean by intentional?

It implies the exercise of the reasoning faculties, consciousness, and Guarantor binds himself to Surety undertakes to pay if
volition. pay if the principal cannot principal does not pay
pay
What is the effect of No Action Clause in policy of liability insurance? Insurer of solvency of debtor Insurer of the debt
It cannot prevail over the Rules of Court aimed at avoiding
multiplicity of suits. Guarantor can avail of the Surety cannot avail of the
benefit of excussion and benefit of excussion and
SURETYSHIP division in case creditor division

28
 proceeds against him Sec. 180. An insurance upon life may be made payable on the death
of the person, or on his surviving a specified period, or otherwise
Secondarily or subsidiarily Primarily liable contingently on the continuance or cessation of life.
liable
Every contract or pledge for the payment of endowments or
annuities shall be considered a life insurance contract for purpose of
Is not bound to take notice of Ordinarily led to know every
the non-performance of his default of his principal this Code.
principal In the absence of a judicial guardian, the father, or in the latter's
absence or incapacity, the mother, or any minor, who is an insured
Often discharged by the mere Will not be discharged either or a beneficiary under a contract of life, health or accident
indulgence of the creditor of by mere indulgence of the insurance, may exercise, in behalf of said minor, any right under the
the principal, and is usually not creditor of the principal or by
policy, without necessity of court authority or the giving of a bond,
liable unless notified of the want of notice of the default of
where the interest of the minor in the particular act involved does
default of the principal the principal, no matter how
much he may be injured not exceed twenty thousand pesos. Such right may include, but shall
thereby not be limited to, obtaining a policy loan, surrendering the policy,
receiving the proceeds of the policy, and giving the minor's consent
to any transaction on the policy.
What are the rules on payment of premiums?
Life Insurance is an insurance payable on death of a person or on his
o The premium becomes a debt as soon as the contract of surviving a specified period, or otherwise, contingently on the
suretyship or bond is perfected and delivered to obligor; continuance or cessation of title.
o The contract of suretyship or bonding shall be valid and
binding unless and until the premium has been paid; It is also a mutual agreement by which a party agrees to pay a given
o Where the obligee has accepted the bond, it shall be valid sum of money on the happening of a particular event contingent on
and enforceable notwithstanding that the premium has the duration of human life, in consideration of the payment of a
not been paid; smaller sum immediately, or in periodical payments by other party.
o If the contract of suretyship or bond is not accepted by or The parties involved in a policy of life insurance:
filed with obligee, the surety shall collect only reasonable
amount; 1. Owner of the policy – one who has the power to name or
o If the non-acceptance of the bond de due to the fault of change the beneficiary or to assign the policy
negligence of surety, no service fee, stamps, or taxes 2. The person whose life is the subject of the policy, also
imposed shall be collected by surety; known as the cestui que vie
o In the case of continuing bond, the obligor shall pay the 3. The beneficiary to whom the proceeds are paid
subsequent annual premium as it falls due until the
What is the nature of life insurance?
contract is cancelled.
o It is not one of indemnity.
What are the types of surety bonds?
o Liability is absolutely certain.
1. Contract bonds- connected with construction and supply o Amount of insurance generally without limit.
contracts o Life policy is a valued policy.
a. Performance bonds o Direct pecuniary loss not required.
b. Payment bonds- payment of laborers and
material men LIFE INSURANCE MARINE AND FIRE POLICY
2. Fidelity bonds Not a contract of indemnity Contracts of indemnity
a. Industrial bond-required by private employers to but a contract of investment
cover loss through dishonesty of employees
b. Public official bond
3. Judicial bond Always regarded as a valued May be:
a. Injunction bonds policy a. Open
b. Attachment bonds b. Valued
c. Replevin bonds
d. Bail bonds May be transferred or assigned The transferee or assignee
e. Appeal bonds to any person even if he has no must have the insurable
insurable interest interest in the thing insured
LIFE INSURANCE
The consent of the insurer is Such consent in the absence of
Sec. 179. Life insurance is insurance on human lives and insurance
not essential to the validity of waiver by the insurer is
appertaining thereto or connected therewith. the assignment of a life policy essential in the assignment of a
unless expressly required fire or marine insurance policy

29
 1. Ordinary Life Policy – the insured is required to pay a
Insurable interest in the life or The insurable interest in the certain fixed premium annually or at more frequent
health of the person insured property insured must exist intervals throughout his entire life and the beneficiary is
need not exist after the not only when the insurance entitled to receive payment under the policy only after the
insurance takes effect or when takes effect but also when the death of the insured. Also known as whole life or regular
the loss occurs loss occurs life or straight life or cash-value insurance
2. Limited Payment Life Policy – premiums are payable only
The contingency that is The contingency insured during a limited period of years, usually 10, 15 or 20. It is
contemplated is certain event, against may or may not occur also payable only at the death of the insured. It is also
the only uncertainty being the known as limited premium insurance policy.
time when it will take place 3. Term Insurance Policy - provides coverage only if the
insured dies during a limited period. Also known as
Insurable interest need not Insurable interest must have temporary insurance.
have any legal basis legal basis 4. Endowment Policy – the insurer binds himself to pay a
fixed sum to the insured if he survives for a specified
The liability of the insurer to Liability is uncertain because period or if he dies within such period, to some other
make payment is certain the happening of the peril is
person indicated.
uncertain thus, usually a long-
term contract What is the scope of life insurance?

The loss of earning power by persons results from:

,
o Death
o Injury
The loss to the beneficiary The loss can be measured
o Illness
caused by the death of the accurately
o Old age
insured can seldom be
measured accurately o Loss of employment

What are the kinds of death from the economic standpoint?

Although may be terminated May be cancelled by either
by insured, cannot be party and is usually for a term 1. Actual Death – casket death
cancelled by the insurer, thus, of one year
usually long-term contract 2. Living Death – permanent disability
The beneficiary is under no The insured is required to
3. Retirement Death – living beyond the period of earning capacity
obligation to prove actual submit proof of his actual
represents this classification of death.
financial loss as a result of pecuniary loss as a condition
death of the insured in order precedent to collecting in ALEATORY CONTRACT OF LIFE ANNUITY
to collect the insurance insurance
The debtor binds himself to pay an annual pension or income during
the life of one or more determinate persons in consideration of a
capital consisting of money or other property, whose ownership is
May a of insurance policy be attached and sold at public auction? transferred to him at once with the burden of the income.
No (Rule 39. Sec. 12). All moneys, benefits, privileges, or annuities Annuity – also called as the upside-down application of the life
accruing or in any manner growing out of any life insurance are insurance principle. It is based on the notion that the purpose of the
exempt from execution regardless of the amount of the annual annuity is the scientific liquidation of an estate.
premiums paid.
ANNUITY CONTRACTS ORDINARY LIFE POLICIES
In what instances can the exemption be applied to accident Insures against economic
insurance? problems resulting from a long
life rather than early death
When accident insurance regarded as life insurance – the risk
More of an investment Indemnity
insured is the death of the insured by accident, then such accident
insurance may also be regarded as life insurance.
“transiency” “longevity”
In accident insurance, the insured’s beneficiary has the burden of
proving that the cause of death is due to the covered peril. Once The lump sum is paid to the Insured pays to the insurer an
that fact is established, the burden of proof then shifts to the insurer insurer immediately and the annuity and his beneficiary
to show any excepted peril that may have been stipulated by the annuitant receives the annuity receives at the insured’s death
parties. payments as longs as he lives the lump sum payment

What are the kinds of life insurance policies? Provides protection from a substantial risk.
30
 Civil code provisions govern these contracts.

What are the instances where the insurer is liable in case of suicide?

1. The suicide is committed after the policy has been in force

for a period of 2 years from date of its issue or of its last
reinstatement;
2. The suicide is committed after a shorter period provided in
the policy although within the 2-year period;
3. The suicide is committed in the state of insanity regardless
of the date of commission, unless suicide is an excepted
risk.

Sec. 181. A policy of insurance upon life or health may pass by

transfer, will or succession to any person, whether he has an
insurable interest or not, and such person may recover upon it
whatever the insured might have recovered.

What if the assignment is used as a cloak to hide an illegal scheme?

The courts will not permit the process of assignment to be used as

cloak to hide an illegal inetent to make contracts on human life.

Sec. 182. Notice to an insurer of a transfer or bequest thereof is not

necessary to preserve the validity of a policy of insurance upon life or
health, unless thereby expressly required.

If the policy does not expressly require the insured to give notice of
an assignment or transfer of the policy to the insurer, such notice is
not essential to the validity of the assignment.

Sec. 183. Unless the interest of a person insured is susceptible of

exact pecuniary measurement, the measure of indemnity under a
policy of insurance upon life or health is the sum fixed in the policy.

The extent of the amount of indemnity payable on death of the

insured under a policy of insurance upon life or health is the amount
fixed in the policy.

There can be no exact pecuniary measurement of a person’s interest

in his life or the life of another. The exception is when the person
insures the life of another, as where a creditor insures the life of his
debtor.

31