April 2 – Commercial Law Review

Lack of knowledge of the basic concepts. Required diligence of common carriers – extraordinary
diligence. This is very important gyud.

Do not present your answer in a concluding manner.

 Review the guidelines in answering the bar questions
 Use the language of the law; f you need to memorize the keywords. Requisites, definition. So
you don’t need to think of the right words to support your answer.
 Always always support your answer with legal basis. I don’t care what you think. All I care is
you support your answer with legal basis.
 Use the language of the law. Please make up.
 Present your answers well in a manner that will let you earn credit.
 If you need a one on one with Dean.

Topics that you should focus:

Incontestability
Devices
Insurable interest
What is include in marine

Casualty insurance - done

No fault clause - done
CTPL – compulsory third-party liability - done
Theft clause - done
Malicious damage clause
Authorized clause

After Midterms: onsite (all other dates, face to face class)

XPN:
April 30 – NY
May 14 - PALS

Page 1 of 30
  Representation—
o Kinds: 
a)Affirmative affirmation of a fact when the contract begins.
b)Promissory— promise to be performed after the policy was issued.

o Test of Materiality 
 Determined by the probable and reasonable influence of the facts on the party on
whom communication is due, in forming his estimate of the contract, risks and
premium. (Secs. 31 & 46)
o What is the Effect of Misrepresentation? 
 The injured party is entitled to rescind from the time when the representation
becomes false. 

 Warranty—
o Kinds: 
1) Express
2) Implied-warranties that are deemed included in the contract, although
not expressly mentioned. (Note: only in Marine Insurance)
3) Affirmative- asserts the existence of a fact or condition at the time it is made.
4) Promissory—the insured stipulates that certain facts or conditions shall exist or
thing shall be done or omitted.

o What is the Effect of Warranty? 

 General Rule: It gives the insurer the right to rescind. (Secs. 74-76) 
 Exceptions: 
a) loss occurs before the time of performance of the warranty.
b) performance becomes unlawful.
c) performance becomes Impossible (Sac. 73)

o What is the Effect of Immaterial Provisions? 

 General Rule: Do not avoid the policy (Sec. 75)
 Exception: When the parties stipulate that violation of particular provision,
though normally Immaterial, shall avoid the policy: converted into
material provisions.

q Other Insurance Clause (More relevant in property insurance)

 Procurement of Additional Insurance Without the Consent of the Insurer 

o A provision stating that the policy shall be void if the insured procures additional
insurance without the consent of the insurer is valid. The purpose is to prevent over
insurance and thus avert the possibility of perpetuation of fraud. (Pioneer Insurance
and Surety Corp. V. Yap, 61 SCRA 426, 1974) 

 May the "other Insurance clause" be subject to waiver? 

o YES. But the waiver must be express or if it is to be implied from the conduct mainly.
said conduct must be clearly indicative of a clear intent to waive such right. There
must be clear showing that the insurer knew about the violation of the
clause. (Pioneer Insurance) 

Page 2 of 30
  What would be a ground to rescind the policy In property Insurance? 
o Upon discovery of other insurance coverage that makes the total insurance in
excess of the value of the property insured. (Sec. 64) 

 Problem 
o A fire Insurance policy in favor of the insured contained a stipulation that the
insured shall give notice to the company of any insurance already effected or which
may subsequently be effected, covering the property Insured, and unless such notice
be given before the occurrence of any loss, all benefits shall be forfeited. The face of
the policy bore the annotation "Co-insurance declared." The things insured were
burned. it turned out that several insurance were obtained on the same goods for the
same term. The insurer refused to pay on the ground of concealment. May the
Insured recover? 

 YES. There was no violation of the other insurance clause". The face of the
policy contains a notation "Co-insurance declared". This means that the
insurer is deemed notified of the existence of other insurance contracts on
the property insured. (General Insurance and Surety Corp. v. Ng. G.R. No.
L-14373, 1960) 

q INCONTESTABILITY CLAUSE 
 What is the Rule on incontestability Clause? 
o After a policy of LIFE INSURANCE made payable on the death of the insured shall
have been in force during the time of the insured for a period of 2 years from the date
of its issue or of its last reinstatement, the insurer cannot prove that the policy is void
ab initio or is rescindable by reason of the fraudulent concealment or
misrepresentation of the insured or his agent (Sec 48) 
 Requisites 
a) Insurance is a life insurance policy payable on the death of the insured, and 
 Note: Health or accident insurance is included within the purview of
life insurance for the purpose of the incontestability clause, provided that
under such health or accident insurance policy, the proceeds are payable in
the event of death of the insured.
b) It has been in force during the lifetime of the insured for at least 2 years from its
date of issue or of its last reinstatement. 
 Note: The period may be shortened, but it cannot be extended. 

 Problem
o A life insurance policy was issued in favor of M. X on October 6, 2013 and the
insured died on March 26, 2014. The insurer rescinded the contact on the ground of
material concealment and returned the premium on August 11, 2014. The beneficiary
claims that the insurance policy can no longer be rescinded under the incontestability
clause because the insured died within the 2 year period without the insurer having
rescinded the same, is the argument of the beneficiary tenable? 

Ans: NO. The insurer has 2 years from the date of issuance of the insurance contract
or of its last reinstatement within which b contest the policy whether or not, the
insured still lives within such period. The phrase during the lifetime simply means
that the policy is no longer considered in force der the insured has died (Tanv.
CA. 174 SCRA 403. 1989)

Note that in Manila Barker Lite Insurance Corporation : Cresencia Aban. G.R. No
175666, the Court held: "After the two-year period lapses, or when the insured dies
within the period, the insurer must make good on the policy, even though the policy
was obtained by fraud, concealment, or misrepresentation. This is not to say that
insurance fraud must be rewarded, but that insurers who recklessly and
indiscriminately solicit and obtain business must be penalized, for such recklessness
and lack of discrimination ultimately work to the detriment of bona fide takers of
Insurance and the public in general." 

Page 3 of 30
  Problem
o Marco was issued a life insurance policy on January 2, 2000. He concealed the fact
that 3 years prior to the issuance of his life insurance policy, he had been seeing a
doctor about his heart ailment. On March 1, 2002. Marco died of heart failure. May
the heirs file a claim on the proceeds of the life insurance policy of Marco?
 YES. The life insurance policy s issued on January 2, 2000 and Renaldo
died on March 1, 2002. i.e. after the lapse of 2 years. The policy is a life
insurance policy and was in force for more than 2 years during the lifetime of
the insured. Under the rule, the insurer cannot prove that such policy is void
ab initio or is rescindable by reason of the fraudulent concealment or
misrepresentation of the insured.

 Defenses Not Barred by Incontestability Clause 

1) The person taking the insurance lacked insurable interest as required by low
2) The cause of the death of the insured is an excepted risk
3) The premiums have not been paid [Sec. 77. 233(b), 234(b), 236(b)]
4) The conditions of the policy relating to military or naval service have been
violated [Secs. 233(6), 234(B)]
5) The fraud is of a particular vicious type
6) The beneficiary failed to furnish proof d death or to comply with any condition
imposed by the policy after the loss has happened
7) The action was not brought within the time specified by law.

 What is "vicious fraud? 

o One which is shocking to the Conscience of man .

 Problem
o Marco had been suffering from advanced tuberculosis. Only one-fourth of his lungs
was left due to the onslaught of the disease. He applied for a life insurance with XYZ
Corp. When he was asked to submit to a physical and medical examination, he had
Peter, a very healthy person, take his place, especially in the X-ray examination. As a
result, he was issued a life insurance policy: 3 years later Marco died. Can his
beneficiary recover? 
 NO. Marco was guilty of vicious fraud and thus the incontestability clause
does not apply.

 Problem
o The assured answers "No to the question in the application for a life policy. Are you
suffering from any form of heart illness? In fact, the assured has been a heart patient
for many years. On September 9, 2011, the assured is killed in a plane crash. The
insurance company denies the claim for insurance proceeds and returns the premium
paid. Is the decision of the insurance company justified?
 YES, if the incontestability clause does not apply. This is so if the life
insurance policy has been in force for at least 2 years from the issuance of
the policy or its last reinstatement, during the lifetime of the assured. The
"No answer of the insured to the question constitutes fraudulent
concealment, the truth being that the insured was a heart patient for many
years.
 NO, the incontestability cause applies, ie, the life policy has been in force for
at least 2 years from the issuance or the last reinstatement, during the
lifetime of the assured, even if there was concealment.
 
q DOUBLE INSURANCE
 When is there Double Insurance? 
o Where the same person is insured by several insurers separately in respect to
the same subject and interest. (Sec. 95)
o It is not prohibited by law, but it may be prohibited by other insurance clause.

 Requisites 

Page 4 of 30
 1) Person insured is the same,
2) Two or more insurers insuring separately.
3) Subject matter is the same;
4) Interest insured is also the same; and
5) Risk or peril insured against is likewise the same.

 Effects of Double Insurance and Over-insurance 

o Unless the policy otherwise provides, the insured may claim payment from
the insurers in such order as he may select, up to the amount for which the
insurers are severally liable under their respective contracts.
o Each insurer is bound, as between the insured and other insurers, to contribute
ratably to the loss in proportion to the amount for which the insurer is liable under
its contract.

 Effects of Double Insurance and Over-insurance 

o If a Valued Policy – Any sum received by the insured under any other policy shall be
deducted from the value of the policy without regard to the actual value of the subject
matter insured.
o If a Non-Valued Policy Any sum received by the insured under any policy shall be
deducted against the full insurable value, for any sum received by the insured under
any policy.

o What happens if the insured receives any sum in excess of the valuation
in case of valued policy or the insurable value in case of non-valued policy? 
 The insured must hold the sum received in trust for the insurers, according
to their right of contribution among themselves. 

q REINSURANCE 
 What is Reinsurance or "Reinsurance Cession"? 
o A contract through which the insurer procures a third person to insure him against
loss or liability by reason of such original insurance. The original contract of insurance
and the contract of reinsurance are separate and distinct from each other and
covered by separate policies. 

 What is the nature of a Reinsurance Contract? 

o Presumed to be a contract of indemnity against liability and not merely
against damage. 

 How is Reinsurance undertaken? 

o Through a Treaty-where there is a prior agreement for the reinsurer to accept the
insurance ceded by the reinsured original insurer 
o Facultative-where the insurer may refuse to accept the ceded policy. 

 Is there privity between the original insured and the reinsurer? 

o NO. The original insured has no interest in a contract of reinsurance. (Sec. 100)

 Can the original insured file an action to recover from the reinsurer? 
o NO. Even if he has difficulty in recovering from the original insurer.
o Exception: 
 If the reinsurance policy contains a stipulation pour autrui in favor of
the original insured. 

□ Distinctions between Ordinary Insurance and Reinsurance

ORDINARY INSURANCE REINSURANCE

Written document Any contract by which the
embodying the terms and insurer procures a third
stipulations of the contract person to injured him

Page 5 of 30
 of insurance between the against loss or liability by
insured and the insurer. reason of an original
insurance.
There is no original There must be an original
insurance. insurance.
The insured is not an The insured is generally an
insurer. original insurer.

□ Distinctions between Double Insurance and Reinsurance

DOUBLE INSURANCE REINSURANCE

Involves the same interest Insures different interests.
Insurer remains in such Insurer becomes an
capacity insured in relation to the
reinsurer
Insured in the first contract Original insured has no
is a party in interest in the interest in the contract
second contract interest in the second
contract
Subject of insurance is Subject of insurance is the
property original insurer's risk
Insured has to give his Consent of the original
consent insured is not necessary

q DOUBLE INSURANCE AND REINSURANCE 

 Problems: 
o Suppose that Lucky owns a house valued at PhP 1 Million and insured the
same against fire with 3 insurance companies as indicated below. In the absence of
any stipulation in the policies, from which insurance company or companies
may Lucky recover in case fire should destroy his house completely?
A- PhP 800,000, B - PhP 200,000: C-PHP 500,000 
 From any two or all of the insurers provided that the total amount that he
will recover does not exceed his loss.

o If each of the policies obtained by Lucky is an open policy and it was

immediately determined after the fire that the value of the house was PhP2 Million,
how much may he collect from A, B, and C? 
 The full amount of the coverage from each insurer. Since the total amount
of the insurance coverage is less than the actual loss, Lucky may recover
the full amount covered by the respective insurance covered by A, B, and C.

o If each of the policies obtained by Lucky in problem 2 is a valued policy and

the value of the house was fixed in each policies at PhP1.3 Million, how much may
he recover from B if he fully collected from A and C?
 None, since the total amount collected would be PhP 1.3 Million which is
equivalent to the value of the house fixed in each policies.

Page 6 of 30
□ LOSS AND CLAIMS SETTLEMENT
● Under what cases is the insurer liable?
1) loss, the proximate cause of which is the peril insured against. (Sec. 86)
2) loss, the immediate cause of which is the peril insured against except where the
proximate cause is an excepted peril. (Sec. 88)
3) loss through negligence of the insured except where there was gross negligence
amounting to willful act.
4) loss caused by efforts to rescue the thing from the peril insured against— if during
the course of rescue. the thing is exposed to a peril not insured against, which
permanently deprives the insured of its possession, in whole or in part. (Sec. 87)

● Under what cases is the insurer not liable?

1) loss by insured's willful act or gross negligence.
2) loss due to connivance of the insured. (Sec. 89)
3) loss where the excepted peril is the proximate cause.

□ NOTICE AND PROOF IN FIRE INSURANCE

● What is the effect of failure to give notice of loss to the insure in case of fire?
◦ The insurer will be exonerated (absolved). (Sec. 90)

● What type of proof is needed in case proof is required under the policy?
◦ It is sufficient that the insured give the BEST EVIDENCE HE HAS IN HIS POWER
TO PRESENT AND NEED NOT SUBMIT PROOF THAT IS NECESSARY IN
COURT. (Sec. 91)
◦ Substantial compliance is sufficient even if there is a provision in the policy
specifying the kind of proof needed.

● Is a stipulation in a policy of insurance requiring that the consent of the insurer must
first be obtained before any payment by the person responsible for the loss in the
settlement of the claim against the insured can be made valid?
◦ YES. The stipulation is valid, the purpose of which is to avoid collusion between the
insured and the claimant. (Peda Compania De Seguros v. CA, 185 SCRA 741)

□ CLAIMS SETTLEMENT

● Rules in case of Life Insurance— ● Rules in case of Property

◦ If there is a maturity date, the proceeds shall be paid Insurance—
immediately upon the maturity of the policy. ◦ Proceeds shall be paid within 30 days after
◦ If the policy matures by the death of the insured, proof of loss is received by the insurer and
within 60 days after presentation of the claim and filing ascertainment of the loss or damage is made
of the proof of death of the insured. (Sec.248) either by agreement or by arbitration.
◦ If no ascertainment is made within 60 days
after receipt of the proof of loss, the loss shall
be paid within 90 days after such receipt. (Sec.
249)

● Effects of Delay in Payment by the Insurer

◦ The beneficiary is entitled to payment of:
a) interest for the duration of the delay at the rate of twice the legal interest;

Page 7 of 30
 b) attorney's fees and other litigation expenses;
c) appropriate damages under the Civil Code (e.g., moral and exemplary damages)
when warranted. (Sec. 250; Tio Kho Chio v. CA, 202 SCRA 119, 1991)

● When is the insurer liable to pay damages and interest under Secs. 249 and 250?
◦ Only when the Court finds that there was unreasonably delay or refused by the
insurer in the payment of the claim.
◦ The legal rate is 6%. (Art. 2209, NCC)

● Collateral Source Rule

◦ If an injured person receives compensation for his injuries from a source wholly
independent of the
tortfeasor, the payment should not be deducted from the damages which he would
otherwise collect from the tortfeasor.

● When is the Collateral Source Rule Not Applicable?

◦ Cases involving no-fault insurances where the insured is indemnified or losses by
insurance companies, regardless of who was at fault in the incident generating the
losses.
◦ Thus, a no-fault insurer cannot be obliged to pay the hospitalization expenses of the
insured which had already been paid by separate health insurance providers of the
insured. (Mitsubishi Motors Philippines Salaried Employees Union)

□ PRESCRIPTIVE PERIOD

● What is the prescriptive period to file an action based on the insurance contract?
◦ 10 years, in the absence of an express stipulation in the policy.

● Can the parties agree on a shorter period?

◦ YES. Provided it is not less than I year from the time the cause of action accrues.
(Sec. 63)

● When does the cause of action accrue?

◦ From the final rejection of the claim of the insured; NOT from the time of the loss.

● Where an insurance policy provides for a prescriptive period of 1 year from the time
the cause of action accrues, when should the I-year period commence to run if the
insured files a MR upon the initial denial of his claim?
◦ From the denial of the claim, NOT from the resolution of the MR. (Sun Insurance
Office Ltd. v. CA, 195 SCRA 193)

● When does the 10-year period under the Civil Code apply?
a) If the policy is silent as to the prescriptive period; or
b) when there is a stipulation which is void.

● When should a notice of claim under the CMVLI policy be made? What is the effect if
no such notice is filed?
◦ Within 6 months from the date of accident; otherwise it shall be deemed waived.

● When should an action involving a CMVLI policy be instituted? What effect no such
action is filed?
◦ Within 1 year from the denial of the claim; otherwise the right of action shall

Page 8 of 30
 prescribe.
◦ The action must be filed with the Commission or the courts, as the case may be
(Jacqueline Jimenez Vda. De Gabriel v. CA, G.R. No. 103883, 1996)

□ RIGHT OF SUBROGATION
● What is the principle of subrogation under insurance law? When does the right of
subrogation accrue?
◦ It is a normal incident of indemnity of property insurance as a legal effect of
payment; it inures to the insurer without any formal assignment or any express
stipulation to that effect in the policy.
◦ It accrues upon payment by the insurer of the insurance claim. It is not dependent
upon, nor does it grow out of any privity Of contract. Payment to the insured makes
the insurer an assignee in equity. (Art. 2207, NCC; Pan Malayan Ins. v. CA, 184
SCRA 54, 1990)

● What can the insurer recover from the third person?

◦ Only what the insured could have recovered from the third person. Hence, it cannot
recover if the insurer voluntarily paid even if the loss is not covered by the policy.

● What must the insurer present to prove the extent of its coverage?
◦ The insurance policy. (Wallen Phil. Shipping Inc. v. Prudential Guarantee
Assurance, G.R. No. 152158, 2003)

● When is there NO Right of Subrogation?

1) The insured by his own act releases the wrongdoer/third person liable for the loss.
2) Where the insurer pays the insured for a loss or risk not covered by the policy.
(Pan Malayan Insurance)
3) In life insurance.
4) For recovery of loss in excess of the insurance coverage.

□ MARINE INSURANCE
● What does Marine Insurance include?
1) Vessels, craft, aircraft, vehicles, goods, freights, cargoes. merchandise, effects,
disbursements, profits, moneys, securities, choses in action, evidences of debts,
valuable papers, bottomry, and respondentia interests and all other kinds of property
and interests therein, in respect to, appertaining to or in connection with any and all
risks or perils of navigation, transit or transportation, or while being assembled,
packed, crated, baled, compressed or similarly prepared for shipment or while
awaiting shipment, or during any delays, storage, transshipment, or reshipment
incident thereto, including war risks, marine builder's risks, and all personal property
floater risks:

2) Person or property in connection with or appertaining to a marine, inland marine,

transit or transportation insurance, including liability for loss of or damage arising out
of or in connection with the construction, repair, operation, maintenance, or use of the
subject matter of such insurance;
◦ Note: Does not include life insurance or surety bonds, insurance against
loss by reason of bodily injury to any person arising out of ownership,
maintenance. or use of automobiles
3) Precious stones, jewels, jewelry, precious metals, whether in course of
transportation or otherwise;

Page 9 of 30
 4) Bridges, tunnels and other instrumentalities of transportation and communication
(excluding buildings, their furniture and furnishings, fixed contents and supplies held
in storage); piers, wharves, docks and ships, and other aids to navigation and
transportation, including dry docks and marine railways, dams and appurtenant
facilities for the control of waterways.

● What does "Marine Protection and Indemnity Insurance" mean?

◦ Insurance against, or against legal liability of the insured for loss, damage, or
expense incident to ownership, operation, chartering, maintenance, use, repair, or
construction of any vessel, craft or instrumentality in use of ocean or inland
waterways, including liability of the insured for personal injury, illness or death or for
loss of or damage to the property of another person.

● Can cargoes be the subject of marine insurance?

◦ YES. Once it is entered into, the implied warranty of seaworthiness immediately
attaches to whoever is insuring the cargo, whether he be the ship owner or not.
Although he has no control over the vessel, the shipper has control in the choice of
vessel. (Roque v. mc, 139 SCRA 596)

● What are the Implied Warranties in marine insurance?

◦ The ship is seaworthy at the inception of the insurance. (Sec. 115)
◦ The ship will not deviate from the agreed voyage unless deviation is proper. (Secs.
123-136)
◦ The ship will not engage in an illegal venture.
◦ Warranty of possession of documents of neutrality. (Sec. 122)
◦ Presence of insurable interest.

● What is the nature of Implied Warranties in marine insurance?

◦ These are warranties which are expressly provided by the Insurance Code. They
are implied in the sense that even if nothing is mentioned about them in the marine
insurance policy, they are said to be part and parcel of or incorporated in the policy.

● What does "warranty of possess of documents of neutrality" mean?

◦ That the ship will carry the requisite documents of nationality or neutrality of the ship
or cargo where such nationality or neutrality is expressly warranted. (Sec. 122)

● What is the insurable interest in marine insurance?

◦ Shipowner—
a) Over the value of the vessel (even if chartered and the charterer agreed to pay the
shipowner the value of the vessel in case of loss).
▪ Note: But the shipowner can recover only the amount not
recoverable from the charterer. (Sec. 102)
▪ What if the ship is hypothecated by a bottomry loan?
Insurable interest is only up to the excess of the value of the vessel over the
loan. (Sec. 103)
b) Over expected freightage.

◦ Cargo owner / Shipper—

a) Over the cargo.
b) Over the expected profits. (Sec. 107)

◦ Charterer—

Page 10 of 30
 a) Over the vessel up to the extent of the amount he is liable to the shipowner if the
ship is lost or damaged during the voyage. (Sec. 108)
b) Over his expected profits or freightage if he accepts cargoes from other persons
for a fee.
c) Over his own cargo or his clients cargo.

● Distinction between Perils of the Sea vs. Perils of the Ship

Perils of the Sea / Perils Perils of the Ship
of Navigation
Those due to the influence Inherent in or arising out of
or effect of the forces of the nature and structure of
nature on the vessel and/or the vessel.
the cargo like strong winds,
big waves, storm, typhoon,
tornado and similar natural
calamities.

Include only such losses Loss which in the ordinary

as are extraordinary nature course of events, results
or arise from some from:
overwhelming power which (a) the ordinary, natural,
cannot be guarded against and inevitable action of the
by the ordinary execution sea;
of human skill or prudence (b) ordinary wear and tear
as distinguished from the of the ship; and
ordinary wear and tear of (c) the negligent failure of
the voyage and from the ship's owner to provide
injuries suffered by the the vessel with the proper
vessel in consequence of equipment to convey the
her not being unseaworthy. cargo under ordinary
conditions.

● What risks are insured against in the absence of express stipulation?

◦ Only perils of the sea. (Go Tiaco Y Hermanos vs. Union Insurance Society of
Canton, 40 Phil 40)

● What is an "All-Risks Policy"?

o A policy that covers all risks, unless expressly excepted, just like a comprehensive
insurance policy. Hence,
no need to distinguish between perils of the sea and perils of the ship. The burden
rests on the insurer to prove that the loss is caused by a risk that is excluded. (Filipino
Merchants Ins. Co.)

● What is "Barratry"?
◦ It is the willful misconduct on the part of the master or crew in pursuance of some
unlawful or fraudulent purpose without the consent of the owners, and to the prejudice
of owner's interest. This may be expressly covered by the policy.
◦ No honest error of judgment or mere negligence, unless criminally gross, can be
barratry. (Roque v. IAC, 139 SCRA 596, 1985)

● What is the rule on Opinions and Beliefs in relation to Marine Insurance?

◦ Belief and expectation of a third person in reference to a material fact is material and
must be disclosed in marine insurance. (Sec. 109)

● What are those matters, although concealed, ordinarily will not vitiate the contract
unless they caused the loss:

Page 11 of 30
 ◦ national character of the insured;
◦ liability of insured thing to capture or detention;
◦ liability to seizure from breach of foreign laws;
◦ want of necessary documents; and
◦ use of false or simulated papers.

● Distinctions between General Average Loss and Particular Average Loss

General Average Loss Particular Average Loss

Includes damages and Includes all damages and
expenses which are expenses caused to the
deliberately caused by the vessel or to her cargo
master of the vessel or which have not inured to
upon his authority, in order the common benefit and
to save the vessel, her profit of all persons
cargo, or both at the same interested in the vessel
time from a real or known and her cargo.
risk.
Insurer of the vessel or Insurer of the vessel or
cargo saved is liable cargo saved is not liable,
unless covered by the
policy.
The general average loss Unfortunate owners are not
is borne equally by all of entitled to receive
the interests concerned in contributions from the
the venture. owners concerned in the
venture where a vessel
accidentally runs aground
and goes to pieces after
the cargo is saved.

● Requisites to the Right to Claim General Average Contribution:

1) There must be a common danger to the vessel or cargo;
2) Part of the vessel or cargo was sacrificed deliberately;
3) The sacrifice must be for the common safety or for the benefit of all;
4) It must be made by the master or upon his authority;
5) It must be successful, i.e., resulted in the saving of the vessel; and
6) It must be necessary.

● What is the extent of the marine insurer's liability in case of partial loss?
◦ A marine insurer is liable upon a partial loss only for such proportion of the amount
insured by him as the loss bears to the value of the whole interest of the insured in
the property insured.

●Example Problem:
◦ The vessel owned by "X" valued at PhP10 Million, is on the way to Indonesia to deliver the
goods belonging to A, B, and C. The value of the cargoes belonging to each of them are
valued at PhP3 Million each (a total of PhP 9 Million worth of cargoes are on board the vessel).
Later, a strong typhoon placed the vessel at peril forcing the captain and its crew to lighten its
load by jettisoning the cargoes belonging to A. As a result, the vessel and the cargoes of B and
C safely reached Indonesia. The vessel is insured with Avengers Insurance company for its full
value while the cargoes of C are fully insured with Marvel Insurance company. Can A recover
from Avengers and Marvel?
▪ YES. A can recover from Avengers and Marvel because the circumstances involve a
general average, hence, those who benefited from the loss incurred by A are liable for
the general average contribution. Since the cargoes of B and C were saved, the

Page 12 of 30
 insurers of X and C are also liable.

● What is a Co-insurance Clause?

◦ It arises where the property is insured for less than its value, thus, the insured is
considered a co-insurer for the difference between the amount of insurance and the
value of the property.

● When is there Co-insurance in marine insurance?

◦ There is co-insurance in marine insurance if the following requisites are present:
a.) the loss is partial; and
b.) the amount of insurance is less than the value of the property insured.

● When is there Co-insurance in fire insurance?

◦ When there is an express stipulation relating to co-insurance.

● Problem:
◦ A vessel valued at PhP 10 Million owned by B was insured for only PhP8 Million with X
Insurance Corp. The vessel was damaged because of a storm and the extent of the damage
was determined to be PhP2 Million. How much can B recover from X Insurance Corp.?

Remember this formula:

▪ Only PhP1.6 Million computed as follows:

▫ Actual Damage / Total Value x Amount of Insurance Coverage
▫ (PhP 2/ PhP 10) X PhP 8 = PhP 1.6 Million
▪ The co-insurance clause operates because the vessel was insured for less than the
value of the property and there was only partial loss. Under the law, a marine insurer
is liable upon a partial loss, only for such proportion of the amount insured by him as
the loss bears to the value of the whole interest of the insured in the property insured.
(Sec. 159)
◦ What if the vessel above was totally destroyed? How much will be recovered?
▪ The FULL AMOUNT.

● When is a ship considered seaworthy?

◦ When reasonably fit to perform the service, and to encounter the ordinary perils of
the voyage, contemplated by the parties to the policy. (Sec. 116)
◦ There should be due consideration to the nature of the ship, the voyage and the
service to be performed. (Caltex [Phils.] Inc. v. Sulpicio Lines Inc., 315 SCRA 709)

● What does "seaworthiness of the vessel" consist of?

◦ The ship should be in good condition as to its structure, must be properly laden, and
provided with a competent master, a sufficient number of competent officers and
seamen, and the requisite appurtenances and equipment such as ballast, cabin, and
anchors, cordage and sails, food, water, fuel and lights, and other necessary or
proper stores and implements for the voyage. (Sec. 118)

● When should a ship be seaworthy?

◦ At the time of the commencement of the risk.

Page 13 of 30
 ◦ Except:
▪ Time policy (when the insurance is made for a specified length of time)—at
the commencement of every voyage it undertakes during that time.
(Sec.117[a])

▪ Insurance is upon the cargo, which by the terms of the policy, description of
the voyage, or established custom of the trade, or is to be transhipped at an
intermediate port- at the commencement of each particular voyage. (Sec.
1176)

▪ Where different portions of the voyage contemplated by the policy differ in

respect to the things requisite to make the ship seaworthy at the
commencement of each portion, the ship is seaworthy with reference to that
portion. (Sec. 119)

▪ When the ship was seaworthy at the commencement of the voyage but
becomes unseaworthy during the voyage which an insurance relates
unreasonable delay in repairing the defect exonerates the insurer on ship or
shipowner's interest from liability from any loss arising therefrom. (Sec. 120

● If the vessel is unseaworthy, is the insurer of the cargo liable even if the owner of the
cargo was not even aware of the unseaworthiness of the vessel?
◦ NO. It is immaterial if the unseaworthiness of the ship was unknown to the insured
and the insured may not use such defense to recover on the marine insurance policy.
It is the obligation of the cargo owner to look for a common carrier which keeps its
vessel in seaworthy condition. The shipper of the cargo may have no control over the
vessel, but it has full control in the choice of the common control that will transport his
goods. (Roque v. CA, 139 SCRA 596)

Page 14 of 30
● What is the effect of payment made by the insurer to the insured for the latter's lost
cargo? What is the extent of such affect?
◦ It operates as waiver of the insurer's right to enforce the implied warranty of
seaworthiness.
◦ But the waiver extends only in favor of the insured. There is no waiver in favor of the
camer that transported the cargo. The insurer can still claim payment against the
carrier for breach of contract based on the insurer's right of subrogation. (Delsan
Transport Lines, Inc. K. CA, GR No. 127897. 2001)

● What is a "Deviation"?
◦ It is the departure of vessel from course of voyage, or an unreasonable delay in
pursuing voyage, or the commencement of an entirely different voyage. (Sec. 125)

● When is Deviation Proper?

1) If due to circumstances outside the control of the ship captain or ship owner,
2) If done to comply with a warranty or to avoid a peril whether or not the peril is
insured against;
3) If made in good faith and upon reasonable grounds of belief in its necessity to
avoid a peril; or
4) If made to save human life or relieve another vessel in distress.

● When is Deviation Improper?

◦ When made not under any of the situations considered as proper deviation

● When is the effect of an Improper Deviation?

◦ An insurer is not liable for any loss happening to the thing insured subsequent to an
improper deviation.

● Problems:
◦ In a voyage insured from Manila to Cebu, the usual route of the vessel is between
Batangas and Mindoro. However, when the vessel got out of Manila Bay, it was
forced by strong currents to drift into China Sea, thereby compelling the vessel to take
the route to the western side of Mindoro. Was the deviation proper?
▪ YES. Because it was caused by circumstances over which neither the
captain nor the ship owner had any control.

◦ In making the voyage insured from Manila to Cebu, the usual route of the vessel is
between Batangas and Mindoro. However, when the vessel got out of Manila Bay, the
captain ordered the vessel to take the route west of Mindoro in order to avoid a
tornado between Batangas and Mindoro. Was the deviation proper?
▪ YES. In this case, the deviation was anchored not on the actual existence
of the peril being avoided, but on the good faith of the captain and upon his
reasonable grounds of belief in the necessity to avoid peril.

● Loss
◦ What are the different funds of Losses?
a.) Actual Total Loss (Sec. 132):
1. Total destruction:
2. Loss by sinking.
3. Damage rendering the thing valueless; or
4. Total deprivation of owner of the possession of the thing insured.

b.) Constructive Total Loss (Sec. 133. in rel. to Sec 141)

1. Actual loss of more than 74 of the value of the object
2. Damage reducing value by more than % of the value of the vessel and of
cargo, and
3. Expenses of shipment exceed % of value of cargo.

● In what situation may the insured abandon the goods or vessel and how is it done?

Page 15 of 30
 ◦ In case of Constructive Total Loss.
◦ It is done by:
1.) abandoning the goods or vessel to the insurer and claiming for the whole
insured value, or
2.) without abandoning the vessel, by claiming for partial actual loss.

● Abandonment
◦ What is "Abandonment"
▪ The act of the insured by which, after a constructive total loss, he declares
the relinquishment to the insurer of his interest in the thing insured. (Sec.
140)
▪ In other words, the insured ship owner is actually telling the insurer that he
is leaving to the insurer to recover whatever remains of the thing insured and
he only wants to be paid for the whole value of the vessel.

● Requisites for Valid Abandonment

1) There must be an actual relinquishment by the person insured of his interest in the
thing insured. (Sec. 40)
2) There must be a constructive total loss. (Sec. 141)
3) The abandonment be neither partial nor conditional (Sec. 142)
4) It must be made within a reasonable time after receipt of reliable information of the
loss. (Sec 143)
5) It must be factual. (Sec. 144)
6) It must be made by giving notice thereof to the insurer which may be done orally or
in writing. (Sec. 145)
7) The notice of abandonment must be explicit and must specify the particular cause
of the abandonment. (Sec. 146)

● In what situation where abandonment, although considered absolute and irrevocable,

would have no effect whatsoever?
◦ When the basis of the abandonment is false, e.g., when the abandonment was
made on the basis of the information that the vessel sank, when in truth and in fact
nothing happened to the vessel.

● What is the effect of when there is no actual total loss and the insured fails to
abandon?
◦ The insured is entitle to recover the actual partial loss, but not the constructive total
loss.

□ FIRE INSURANCE:
● What is a Fire Insurance?
◦ It is a contract of indemnity by which the insurer for a consideration agrees to
indemnify the insured against loss of, or damage to, property by fire.
◦ It may include insurance against loss by lightning, windstorm, tornado, or
earthquake and other allied risks when such risks are covered by extension to fire
insurance policies or under separate policies.

● Kinds of Fire:
a) Friendly fire- one which is found in the place where it is supposed to be and is
useful to man,
b) Hostile Fire- one which is found in the place where it not supposed to be and is
harmful to man.

● What kind of fire, causing loss or damage to the thing insured, entitles the insured to
recover the proceeds under a fire insurance policy?
◦ HOSTILE FIRE.

● What is the extent of liability of an insurer under an open policy?

◦ The actual loss, as determined, will represent the total indemnity due to the insured,
except only that the total indemnity shall not exceed the total value of the policy.

Page 16 of 30
 (Development Insurance Corporation v IAC, 143 SCRA 62)

● Problems:
◦ Pedro insured his bakery under a fire insurance policy. Due to the heat generated by
the fire under the oven, the chimney was destroyed and it fell. Is Jose entitled to
recover the value of the chimney under the fire Insurance policy?

▪ NO. The fire which was the proximate cause of the damage was a friendly fire, not a
hostile fire. The fire was found under the oven where it was supposed to be and it
was useful to Pedro in helping him bake the bread in the oven. The heat that
destroyed
from that friendly fire under the oven.

◦ Alex insured his bakery, together with the building where the bakery was located
under a fire insurance policy. The building beside the bakery building of Alex got
burned and the fire transferred to Alex's building, thereby burning the same. Is Alex
entitled to recover under the fire insurance policy for the loss of the building and the
bakery?
▪ YES. The proximate cause of the loss was a hostile fire, and not a friendly
fire. Since the proximate cause of the loss of the building and the bakery
was hostile fire, the insured is entitled to recover for the loss of the building
and the bakery under the fire insurance policy.

◦ Suppose X constructed a house in 2013 at a cost of PhP5 Million, which he insured

against fire for the said amount. The policy for PhP Million was renewed every year.
This year, when the the said house was already PhP 10 Milion, one half of the house
was destroyed by fire. How much can X recover from the insurer?
▪ PhP2.5 Million if the policy is a valued policy.
▪ PhP5 Million if the policy is an open policy

● What is the effect of an “Alteration” in the use or condition of a thing insured from
that to which is limited by the policy?
◦ If made without the consent of the insurer, by means within the control of the
insured, and increasing the risk, it entitles the insurer to rescind a contract of fire
insurance. (Sec. 170)

● Requisites to entitle the insured to a Claim?

a) The use or condition of the thing insured is specially limited or stipulated in the
policy;
b) Such use or condition is altered;
c) The alteration is made without the consent of the insurer;
d) The alteration is made by means within the control of the insured;
e) The alteration increases the risk; and
f) There must be a violation of a material policy provision.

● Examples of Material Alteration

◦ Converting an insured residential house to a factory.
◦ Transfer of the insured machineries and equipment from one building to another
was not stipulated in the policy without the consent of the insurer because such
transfer changes the condition of the thing insured. (Malayan Insurance Company v
PAP Co. Ltd., 2013)

● Problems:
◦ Monica insured his residential house against fire. The use of the house for
residential purposes is stated in the policy. Induced by the amount of rental which the
operator of a gambling casino offered to him for the lease of the house, Monica
entered into a contract of lease of the house with the operator of gambling casino for
the house to be used for the said purpose. Is the insurer entitled to rescind the
contract of fire insurance?

Page 17 of 30
 ▪ YES. The use of the thing insured was altered from that to which it is
limited by the policy without the consent of the insurer, by means within the
control of the insured, and increasing the risk thereby. When the house was
converted into a gambling casino, the risk of fire was increased because it is
now exposed to the public and the gamblers do not care if the house would
catch fire so much so that they are not careful in throwing their cigarette
butts which certainly increases the risk.

● What is the Role of Proximate Cause in Fire Insurance?

◦ The insured can recover for the loss or damage suffered by the property insured
ONLY when the proximate cause of the loss or damage is the risk insured against

● What is Proximate Cause?

◦ The cause, uninterrupted by another independent cause, without which the loss or
damage would not have taken place.

● Doctrine of the Extension of the Doctrine of Proximate Cause

◦ Alex took a fire insurance policy covering his house and furniture. In the policy,
storm, lightning, earthquake and typhoon were excluded. The house eventually was
burned with fire as the proximate cause. While the house was burning, Alex, with the
help of some friends, was able to remove the furniture from the house and brought it
to the yard to be safe from fire. After doing this, Alex and his friends returned to help
put out the fire and to save the house. The fire was put out on time and the house
was saved. When Alex went back to the yard to look after the furniture, he found out
that the furniture was gone. Can Alex recover the proceeds under the fire
insurance policy for the value of the furniture?
▪ YES. The right to recover is based on the doctrine of the extension of the
doctrine of proximate cause. The furniture was saved from the fire which
was the risk insured against, but in the process of saving the furniture, the
insured was deprived of the possession of the furniture due to theft which is
not the risk insured against.

□ CASUALTY INSURANCE:

● What Is a Casualty Insurance?

◦ An insurance covering loss or ability arising from accident or mishap, excluding
those falling under other types of insurance such as fire or marine. (Sec. 176)

● Rules in case of Third-Party Liability covered by a Casualty Insurance

◦ Casualty Insurance may provide for third-party liability in the nature of stipulation
pour autrui for personal injury and even damage to property), in which case, the third
party may directly sue the insurer upon the occurrence of the loss.
But the insurer is not solidaniy liable with the insured or the tortfeasor for the latter's
obligation. (First Integrated Bonding and Ins. Co. v. Hernando, 199 SCRA 769, 1991)
If the insurer pays the third person, the right of subrogation operates.

● If there is no stipulation pour autrui but the insurance is an insurance against liability
to third persons, can a third person who might be injured may sue the insurer?
◦ NO. Only the insured (sought to be held liable by the third person) can recover from
the insurer. (Guingon v. Del Monte, 20 SCRA 1043, 1991)

● What is the rule on liability of insurer if the insured committed a felony?

◦ Liabilities arising out of acts of negligence, which are also criminal, are also
insurable on the ground that such acts are accidental.
▪ Example: Motor insurance policy covering the insured's liability for
accidental injury caused by his negligence, even though gross and attended
by criminal consequences (e.g., homicide through reckless imprudence) will
not be void as against public policy.
◦ Liability Consequences of deliberate criminal acts are not insurable.

Page 18 of 30
□ COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (CMVLI)

● Mandatory Insurance Rule

◦ It is unlawful for any land transportation operator at owner of a motor vehicle to
operate the same in public highways, unless there is an insurance or guaranty to
indemnify the death or bodily injury of a third party or passenger arising from the use
thereof (Sec. 387)

● Mechanisms to Ensure compliance

◦ Registration of any vehicle will not be made or renewed without complying with the
requirement.
◦ May be complied with using: (a) an insurance policy. (b) surety bond, or (c) cash
bond.

● "Passenger
◦ Any fare paying person being transported and conveyed in and by a motor vehicle
for transportation of passengers for compensation, including persons expressly
authorized by law or by the vehicle operator's or his agents to ride without fare.

● "Third-Party"
◦ Any person other than a passenger, excludes a member of the household, or a
member of the family within the second degree of consanguinity or affinity of a motor
vehicle owner or land transportation operator, or his employee in respect of death,
bodily injury, or damage to property arising out of and in the course of employment.

● "Owner" or "Motor Vehicle Owner"

◦ The actual legal owner of a motor vehicle, in whose name such vehicle is duly
registered with the LTO. "

● “Land Transportation Operator”

◦ The owner or owners of motor vehicles for transportation of passengers for
compensation, including school buses. "

● Purpose of Compulsory Third-Party Liability Insurance (CTPL)

◦ To give immediate financial assistance to victims of motor vehicle accidents
and/or their dependents, especially if they are poor regardless of the financial
capability of motor vehicle owners or operators responsible for the accident
sustained. (Shafer v. Judge, RTC, 167 SCRA 386; First Integrated Bonding and Ins.
Co., Inc. Hemando, 199 SCRA 746)

● "No-Fault" Clause
◦ Injured party or passenger is given option to file a claim for death or injury without
the necessity of proving fault or negligence of any kind under the following conditions:
a) The total indemnity in respect of any persons shall not exceed PHP15,000; (Sec.
391; Ins. Memo Circ. 4-2006)
b) The following proofs of loss, when submitted under oath, shall be sufficient
evidence to substantiate the claim.
1.) Police report of the accident; and
2.) Death certificate and evidence sufficient to establish the proper payee; or
3.) Medical report and evidence of medical or hospital disbursement in
respect of which refund is claimed; and
c) Claim may be made against motor vehicle only

● From whom should the injured recover?

◦ In the case of an occupant of a vehicle – from the insurer of the vehicle in which the
occupant is riding, mounting or dismounting.
◦ If not an occupant – from the insurer of the directly offending vehicle.
◦ Note: In all cases, the right of the party paying the claim to recover against the

Page 19 of 30
 owner of the vehicle responsible for the accident shall be maintained.

● Period to File Notice

◦ Within 6 months from the date of the accident, otherwise the claim is deemed
waived
(Sec. 397. ICP: Traveller's Insurance Surety Corporation v. CA, 272 SCRA 536.
1997)

● Prescriptive Period

● Processing and Payment Period

◦ If there is an agreement – insurance company shall ascertain the truth and extent of
the claim and make payment within 5 working days after reaching an agreement.
(Sec. 398)
◦ If no agreement is reached – the insurance company shall pay only the "no-fault”
indemnity without prejudice to the claimant from pursuing his claim further, in which
case, he shall not be required or compelled by the insurance company to execute any
quit claim or document releasing it from liability under the policy of insurance or surety
bond issued. (Sec. 398)

● May the Third Person sue the insurer directly?

◦ YES, if the policy provides for indemnity against the liability.
◦ NO, if the policy provides for “reimbursement after actual payment by the insured,"
or for the indemnity against loss. (Sec. 53. Bonifacio Brothers v Mora, 20 SCRA 261)

● Is the Insurer Solidarily liable with the Insured?

◦ NO. While the insurer's liability may be direct, it does not mean that the insurer can
be held solidarily liable with the insured. The insurer's liability is based on contract
that of the insured is based on torts. Further, the insurer's liability is limited to the
amount of the insurance coverage. (Pan Malayan Insurance Corporation v. CA. 184
SCRA 54)

● May the proceeds of a TPLI be garnished?

◦ YES. In a TPLI, the insurer assumes the obligation of paying the injured party to
whom the insured is liable. The insurer becomes liable as soon as the liability of the
insured attaches. From the moment the insured becomes table to the third person,
the insured acquires Interest in the insurance contract, which interest may be
garnished just like any other credit.

● Should summons be served upon the insurer for liability purposes?

◦ NO. The writ of garnishment is enough. By such service, the garnishee becomes a
“virtual party” or a “forced intervenor". (Perla Campania de Seguros, Inc. v.
Ramolete, 203 SCRA 487)

● Coverage of Liability
◦ PHP100,000 (plus additional PhP 100,000 if what is involved is used as public
utility) (Ins. Memo Circ. 4-2006)
◦ PHP70,000 plus PhP30,000 funeral expenses Death Indemnity

● Limit of Liability
◦ The SC previously ruled that the insurer's maximum liability will not exceed
PhP100,000 (plus another PHP100,000 if common carrier or PHP200,000) regardless
of the number of passengers killed or injured. (First Quezon City Co., Inc. v. Ca, 218
SCRA 525)
◦ But LTFRB M.C. No. 2014-02, dated January 23, 2014 provides that THE LIMIT IS
NOW PER PERSON/INJURY.

● Authorized Driver Clause

◦ A stipulation in a motor vehicle insurance which prohibits that the driver, other than
the insured owner, must be duly licensed to drive the motor vehicle, otherwise the

Page 20 of 30
 insurer is excused from liability. (Villacorta v. IC. 100 SCRA 467, 1980)

● What is the legal effect of an Authorized Driver Clause?

◦ The insurer will indemnify the insured owner against loss or damage to the car
provided that the use of the insured vehicle is limited to the insured himself or any
person who drives on his order or with his permission.

● Does the insured need to prove that he had a driver's license at the time of accident if
he was the driver?
◦ NO.

● Is a Driver (not the insured) who holds an expired driver's license considered an
authorized driver?
◦ NO. (Gutierrez v. Capital Ins. Co., 130 SCRA 618)

● Theft Clause
◦ Where the risks insured against in the policy includes theft and the vehicle was
unlawfully taken, the insurer is liable and the authorized driver clause does not apply.
The injured can recover if the thief has no driver's license. (Perla Compania de
Seguros)
◦ Hence, where the motor vehicle is unlawfully and wrongfully taken without the
owner’s consent or knowledge, such taking constitutes theft, and it is the THEFT
CLAUSE and NOT the Authorized Driver Clause that should apply. The fact that the
driver using the car before it was carnapped had an expired license does not matter.
(Perla Campania de Seguros)

● Does the Theft Clause apply in the following cases?

◦ An employee (or any person without juridical possession) took the vehicle of his
employer without the latter's consent and the employee did not have a driver's
license.
▪ YES. (Villacorta)
◦ Vehicle which was taken with intent to gain without the consent of the insured was
returned and the vehicle was stolen by the driver of the insured.
▪ YES. (Alpha Insurance and Surely Company v Castor, G.R. No. 198174,
2013)
◦ Vehicle was taken to the owner of a repair shop for the purpose of repair and in
order to attach accessories.
▪ YES. (Paramount Insurance vs Sps. Remondeulaz. G.R. No 173773, 2012)

● Is Theft covered by the Malicious Damage Clause?

◦ NO.. Malicious Damage Clause
◦ Clause excluding malicious damage from the risk insured against, or that which is
the direct result from the deliberate or willful act of the insured, members of his family,
and any person in the insured's service, whose clear plan or purpose was to cause
damage to the insured vehicle for purposes of defrauding the insurer, (Alpha Ins.)

□ VARIABLE CONTRACT
● Any policy or contract on either a group or individual basis issued by an insurance company
providing for benefits or other contractual payments or values themselves thereunder to vary
so as to reflect investment results of any segregated portfolio of investment.

● What is a variable contract?

o Any policy or contract on either a group or on an individual basis issued by an
insurance company providing for benefits or other contractual payments or values
thereunder to vary so as to reflect investment results of any segregated portfolio of
investments or of a designated separate account in which amounts received in
connection with such contracts shall have been placed and accounted for separately
and apart from other investments and accounts. (Sec. 238(6), RA 10607, amending
old Insurance Code)
o It may also provide benefits or values incidental thereto payable in fixed or variable

Page 21 of 30
 amounts, or both.

● Are variable contracts considered "security"?

o NO. It shall not be deemed a security or securities defined in The Securities Act, as
amended, or in the Investment Company Act, as amended, nor subject to regulations
under said Acts. (lbid.)

● What may insurance company cover under the variable contracts?

o Any insurance company issuing variable contracts may in its discretion issue
contracts providing a combination of fixed amount and variable amount of benefits
and for option lump-sum payment of benefits. (Sec. 239)

● Are foreign insurance companies authorized to issue variable contracts in the

Philippines?
o YES, if they are likewise authorized to do so by the laws of their domicile. (Sec.
238(a))

● What is the rule on separate variable accounts?

o All amounts received by the company in connection with any variable contract
which are required by the terms thereof, to be allocated or applied to one or more
designated separate variable accounts shall be placed in such designated account or
accounts. The assets and liabilities of each such separate variable account shall at all
times be clearly identifiable and distinguishable from the assets and liabilities in all
other accounts of the company. Notwithstanding any provision of law to the contrary,
the assets held in any such separate variable account shall not be chargeable with
liabilities arising out of any other business the company

may conduct but shall be held and applied exclusively for the benefit of thee owners
or beneficiaries of the variable contracts applicable thereto. (Sec. 243)

● Who has preference over such accounts in case of insolvency of the company?
o The owners or beneficiaries of the variable contracts. In the event of the insolvency
of the company, the assets of each such separate variable account shall be applied to
the contractual claims of the owners or beneficiaries of the variable contracts
applicable thereto.

● What is the limitation on sale, exchange or other transfer of assets of the company?
o Except as otherwise specifically provided by the contract, no sale, exchange or
other transfer of assets may be made by a company, between any of its separate
accounts or between any other investment account and one or more of its separate
accounts, unless in the case of a transfer into a separate account, such transfer is
made solely to establish the account or to support the operation of the contracts with
respect to the separate account to which the transfer is made, or in case of a transfer
from a separate account, such transfer would not cause the remaining assets of the
account to become less than the reserves and other contract liabilities with respect to
such separate account. Such transfer, whether into or from a separate account, shall
be made by a transfer of cash, or by a transfer of securities having a valuation which
could be readily determined in the market place AND approved by the Insurance
Commissioner.

● May an insurance company invest and reinvest all or any part of the assets allocated
to any variable account in certain securities and investments?
o YES. Provided that in case of investment in common stocks, it shall not invest in
excess of 10% of the assets of any such separate variable accounts in any one
corporation issuing such common stock.

□ SURETYSHIP
● What is Suretyship?
o Agreement whereby the surety guarantees the performance by another of an
undertaking or an obligation in favor of a third party. (Sec. 177)

Page 22 of 30
 ● Kinds of Suretyship Contracts under Insurance Law
1) Fidelity Bond – contract of insurance against loss from misconduct.
2) Fidelity Guaranty Insurance – a contract whereby one, for a consideration, agrees
to indemnify the assured against loss arising from the want of integrity, fidelity, or
honesty of employees or other persons holding positions of trust.

□ LIFE INSURANCE
● What is a Life Insurance?
o Insurance on human life and insurance appertaining thereto or connected therewith
which includes every contract or undertaking for the payment of endowments or
annuities. (Sec. 181)

● Are contracts of the payment of annuities or payment of lump sum under a retirement
program managed by a life insurance company as trustee considered insurance
contract?
o YES. (Sec.181)

● What is the Effect of Death of Insured through Suicide?

o The insurer is not liable, except when:
a) the suicide was committed after the policy has been in force for a period of 2 years
from the date of its issue or its last reinstatement, unless the policy provides a shorter
period, or
b) the suicide was committed while in a state of insanity.
▪ Under item (b), the insurer is liable regardless of the date of the
commission of the offense. (Sec. 183)

● Kinds of Life Insurance

a) Ordinary Life, General Life or Old Line Policy – insured pays a premium every year
until he dies. Surrender value is after 3 years.
b) Limited Payment Policy – insured pays premium for a limited period. If he dies
within the period, his beneficiary is paid; if he outlives the period, he does not get
anything.
c) Endowment Policy – insured pays premium for a specified period. If he outlives the
period, the face value of the policy is paid to him; if not, his beneficiaries receive the
benefit.
d) Term Insurance – insured pays premium only once, and he is insured for a
specified period. If he dies within the period, his beneficiaries receive the benefit; if he
outlives the period, no person benefits from the insurance.
e) Industrial Life – life insurance entitling the insured to pay premiums weekly; or
where premiums are payable monthly or oftener

□ INSURANCE COMMISSION
● Vested with power to regulate insurance companies.

□ Jurisdiction of ICE
● Concurrent jurisdiction (with regular civil courts) – cases where any single claim does not
exceed PhP 5 Million involving liability arising from:
a) insurance contract,
b) contract of suretyship;
c) reinsurance contract; and
d) membership certificate issued by members of mutual benefit associations. (Sec.
439)
● Primary and exclusive jurisdiction – claim for benefits involving pre-need plans where the
amount of the benefits does not exceed PhP100,000. (Sec. 55)

□ Does the IC have jurisdiction to decide the legality of a contract of agency entered into
between an insurance company and its agent?
● NO. It is not covered by the term "doing or transacting insurance business". It is not also
covered by Sec. 439 which grants the IC adjudicatory powers.

Page 23 of 30
□ Grounds to Revoke the Certificate of Authority issued to the Domestic or Foreign Company by
the lC:
1) Company is in an unsound condition;
2) Company has failed to comply with the provisions of law or regulations obligatory upon it;
3) Its condition or method of business is such as to render its proceedings hazardous to the
public or to its policyholders;
4) It's paid-up capital stock, in the case of a domestic stock corporation, or its available cash
assets, in the case of a domestic mutual company, or its security deposits, in the case of a
foreign company, is impaired or deficient;
5) The margin of solvency required of such company is deficient.

□ When can the IC order the liquidation of an insurance company?

● If the company is determined by the IC to be insolvent or cannot resume business and public
interest so requires.

GR: Concealment – good faith is not a defense.

XPN: appreciated in a case by case basis – like when it is a matter of opinion.

Q: payment of premium

Page 24 of 30
BUSINESS ORGANIZATIONS INTRO

Page 25 of 30
 General Concepts

q Basic Types of Business Organizations

1) Sole Proprietorship – simplest business form; an unincorporated business with one owner (sole
proprietor) who owns business, pays personal income tax on profits from the business, and is
personally liable for its debts.
2) Partnership – a contract whereby two or more persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profits among themselves.
3) Joint Account (cuentas en participacion) – transaction of merchants where other merchants agree to
contribute the amount of capital agreed upon and participating in the favorable or unfavorable results
thereof in the proportion they may determine (Art. 239, Code of Commerce)
4) Business Trust – a legal relation whereby one person called the trustor, conveys a property to another
for the benefit of a person called the beneficiary. The person in whom confidence is reposed as
regards the property is called the trustee. (Art, 1440 Civil Code)
5) Joint Venture – a business arrangement in which two or more parties agree to pool their resources for
the purpose of accomplishing a specific task and generally characterized by shared ownership,
shared returns and risks, and shared governance. (usually for a specific task)
6) Cooperative – an autonomous and duly registered association of persons, with a common bond of
interest, who have voluntarily joined together to achieve their social, economic, and cultural needs
and aspirations by making equitable contributions to the capital required, patronizing their products
and services, and accepting a fair share of the risks and benefits of the undertaking in accordance
with universally accepted cooperative principles. (RA 9520)
7) Corporation – is an artificial being created by operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law or incidental to its existence. (Sec. 2
RCCP). A corporation LIKE A PARTNERSHIP – note both have distincts personality. Do not be
confused. Sayop baya ka ani.

Sole Proprietorship

q Does a Sole Proprietorship possess a juridical personality?

 NO. A sole proprietorship does not possess a juridical personality and has no legal personality to
file or defend an action in court. (Mangila v. CA, GR No. 125027, 2002).

q What needs to be done before a Proprietor can validly operate a business?

 It is required to register his nosiness name other than his true name with the Bureau of Trade
Regulation and Consumer Protection of the Department of Trade and Industry. (Sec. 1, Act No.
3883)

q What is a Business Name?

 Refers to any name that is different from the true name of an individual which is used or signed in
connection with his/her business on any written or printed receipts including receipts for business
taxes, duties and fees and withdrawal or delivery receipts; any written or printed evidence of any
agreement or business transaction; and any billboard conspicuously exhibited in plain view in or
at the place of her/his business or elsewhere, announcing her/his business.

q Is registration of business name required for entities registered with the SEC?
 NO. Unless such entities operate using a different business name.

q Prohibited Names
a) Name of the nature of business itself which is illegal, offensive, scandalous, or contrary to propriety;
Names which are identical or resemble a business name already registered with the DTI, SEC, CDA,
IPO, FDA, DOLE, or any other government office authorized by law to register names, as likely to
b) cause confusion or mistake in the minds of the public;
c) Names composed of purely organic or geographic words;
d) Names which by law or regulation cannot be appropriated;
e) Names, words, or terms or expressions used to designate or distinguish or suggestive of quality of
any class of goods, articles, merchandise, or service;
f) Names of abbreviation of names used by the government in its governmental functions;

Page 26 of 30
 g) Names or abbreviation of names of any nation, inter-governmental or international organization; and
h) Names which are deceptive, misleading or which misrepresent the nature of the business. (DTI
Department Order No. 10-01, as amended)
 NOTE: Separate registration of a branch or satellite office is required and must have a business
name similar to the business name of the head office.

q Merchants
 Merchants – individuals who, having legal capacity to engage in commerce, habitually devote
themselves thereto, as well as partnerships and corporations duly organized in accordance with
law and registered with the SEC.

 Three Elements:
a) Natural (at least 18 years of age) or juridical person;
b) Legal capacity (to do acts with legal effects); and
c) Habituality (test is intention, not the number of acts).

 Habituality – repetition and continuation of commercial acts in such a manner that they are related to
each other by reason of the commercial purpose or end which they tend to have, which is the
exchange or circulation of products; may be shown by a single act of there is manifestation to engage
habitually in commerce.

 When is “habituality” Presumed?

o The moment a person who intends to engage in commerce announces through circulars,
newspapers, handbills, posters exhibited to the public, or in any other manner whatsoever,
an establishment which has for its object some commercial acts.

q Who are Absolutely Disqualified to Engage in Commerce?

1) Those serving the penalty of civil interdiction;
2) Those judicially declared insolvent until they would have obtained a discharged; and
3) Those who are absolutely disqualified under special laws. (Art. 13, Code of Commerce)

q Is Article 14 (Relative Disqualifications) of the Code of Commerce still in effect?

 NO. Since such article was in the nature of pollical law extended by Spain to the Philippines, it
was necessarily abrogated upon the change of sovereignty from Spain to the U.S. (Macariola
v.Asuncion, 114 SCRA 77, 1982)

 NOTE:
o Pursuant to Berin v Judge Barte, AM No. MTJ-02-1444 (2002), judges are still disqualified
from engaging in commerce within their jurisdiction despite the abrogation of Art. 14, CC.
Rule 5.02 of the Code of Judicial Conduct supplies the void created by the abrogation.
o Hence, a judge is enjoined to refrain from the financial and business dealings that tend to
reflect adversely on the court’s impartiality or interfere with the proper performance of judicial
activities or increase involvement with lawyers or persons likely to come before the court.

q Who are Disqualified to Engage in Commerce by virtue of Constitutional Mandate?

1) Senators and Congressman – not directly or indirectly, be interested financially in any contract with or
in any franchise or special privilege granted by the government during his term of office. He shall not
intervene in any matter before any office of the government for his pecuniary benefit or where he may
be called upon to act in account of his office. (Art. VI, Sec 14)
2) President, Vice-President, Members of the Cabinet and their Deputies or Assistants during their
tenure – not practice any profession, participate in any business, be financially interested in any
contract or franchise granted by the Government, and avoid conflict of interest in the conduct of their
office. (Art. VII, Sec. 13)
3) Member of the Constitutional Commission – not engage in the practice of any profession or active
management of business which may be affected by the functions of his office, not shall he be
financially interested with any contract or franchise with the government (Art. IX, Sec. 2)
4) President, Vice-President, Members of the Cabinet, Congress, Supreme Court and Constitutional
Commission, Ombudsman during their tenure – no loan, guaranty or other form of financial
accommodation for any business purpose any be granted by any government owner or controlled
bank (Art. XI, Sec 16)

Page 27 of 30
 5) Practice of Profession – generally foreigners are disqualified, unless the law provide otherwise (Art.
XII, Sec. 14)
 NOTE: Foreigners are now allowed by statute a number of profession like civil engineering,
architecture, interior design and other profession (See latest Investment Negative List)

Partnership

q Partnership
- By the contract of partnership two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves. (Art. 1767, 1 st
par.)

q Nature of Partnership?
1) A contractual relationship between and among the partners.
2) A means or medium of doing business, through the structure of separate juridical personality, or as
the basis of creating multi-level contractual relations among various parties; and
3) A going concern, i.e., it is a business enterprise or a business venture.
4) It has a juridical personality separate and distinct form that of each of the partners, even in case of
failure to comply with the requirements of Article 1772, 1st paragraph. (Art. 1768)
o Thus, it can sue and be sued, acquire any kind of property, etc.

q Partnership for the Exercise of Profession

- Two or more persons may also form a partnership for the exercise of a profession. (Art. 1767, 2nd par.)
- While the practice of a profession is not a business or an enterprise for profit, the law allows the joint
pursuit thereof by two or more persons as partners. In such a case, it is the individual partners, and
not the partnership, who engage in the practice of the profession and are responsible for their own
acts as such.
- Note: Practice of profession cannot be pursued through a corporate vehicle.

q Principal Characteristics of Partnership?

1) Nominate – it is given a specific name under the Civil Code.
2) Principal – it does not depend for its existence or validity upon some other contracts.
3) Consensual – it is perfected by mere consent, i.e., upon the express or implied agreement of two or
more persons.
4) Onerous – each of the parties aspires to procure for himself a benefit through the giving of something,
i.e., the contribution of money, property or services to a common fund.
5) Bilateral – it is entered into by two or more persons and the rights and obligations arising therefrom
are always reciprocal.
6) Commutative – the undertaking of each of the partners is concerned as the equivalent of that of the
others.
7) Preparatory and Progressive – it is serves as a base upon which other contracts and other
transactions are to be pursued and, once the partnership is created, all the incidents therefrom
become a continuing obligation of the partners and partnership until liquidation.

q Essential Features of Partnership

1) There must be a valid contract;
2) The parties (two or more persons) must have legal capacity to enter into the contract;
3) There must be a mutual contribution of money, property, or industry to a common fund;
4) The object must be lawful; and
5) The primary purpose must be to obtain profits and to divide the same among the parties.

q Can a Partnership enter into another Partnership?

- Yes. There is no prohibition under the New Civil Code or other applicable laws.

q Can a Corporation enter into a Partnership?

- GR: NO, a corporation is without capacity or power to enter into a contract of partnership, unless it is
authorized by statute or by its charter. (Mendiola v. CA, 497 SCRA 346)

- Basis for the Prohibition: PUBLIC POLICY. Since in a partnership the corporation would be bound

Page 28 of 30
 by the acts of persons who are not duly appointed and authorized agents and officers which would be
entirely inconsistent with the policy of the law that the corporation shall manage its own affairs,
separately and exclusively.

- Exception: A corporation may enter into a joint venture.

- Conditions for The Exception:

1) The articles of incorporation of the corporations involved must expressly authorize the corporation
to enter into contracts of partnership with others in the pursuit of its business.
2) The agreement or articles of partnership must provide that all the partners will manage the
partnership; and
3) The articles of partnership must stipulate that all the partners are and shall be jointly and
severally liable for all the obligations of the partnership. (SEC Opinion dated 29 February 1980)

- Yes, under the Revised Corporation Code! (Sec. 10, RA 11232)

o Any person, partnership, association or corporation, singly or jointly with others but not
more than fifteen (15) in number, may organize a corporation for any lawful purpose.

q Object to be Contributed
- Property to be contributed may be movable, immovable or intangible property. If not property, then at
least service. (Note: Contributions may differ for each of the partners.)

q Lawful Object or Purpose

- A partnership must have a lawful object or purpose, and must be established for the common benefit
or interest of the partners. (Art. 1770, 1st par.)
- The primary objective of partnership is to make profits.
-
o Effect if a Stipulation Excludes One or More Partners from Sharing in the Profits: The
contract of partnership is VOID.

- Sharing of profits need not be equal and sharing ratios are determined by the partners’ agreement,
and if none, based on the ratio of the partners’
- contributions. Sharing ratios for losses will be the same as the sharing ratios for profits, unless
otherwise stipulated.
- Note: industrial partners do not share in losses. (Art. 1797, 2nd par.)

q How is Partnership created?

- It is perfected like any other consensual contracts.
o Consent: The meeting of the minds between two or more persons to form a partnership
either to pursue jointly a business enterprise or to jointly exercise a profession.
o Object or Subject Matter: The creation of a common fund for the purpose of undertaking a
business venture with the intention of dividing the profits among themselves, or in the case of
a professional partnership, to exercise together a common profession.
o Consideration: The contribution of money, property, or service to the business enterprise or
venture.
- A partnership begins from the moment of the execution of the contract, unless it is otherwise
stipulated. (Art. 1784)

q Persons Forming the Partnership

- The term “persons” includes natural persons and juridical persons.
- It is essential that the contracting parties must have capacity to enter into the contract.

Hence, the following cannot give their consent to a contract of partnership:

a) Unemancipated minors;
b) Insane or demented person;
c) Deaf-mutes who do not know how to write;

Page 29 of 30