above deductible.
Simply put, the liability of the
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INDEMNITY
Discuss the Principle of Indemnity.
The purpose of the insurance contract is to restore
the insured to the same financial condition he was in
at the time of the loss subject to the application of
deductible, depreciation and average clause. The
total sum insured serves as a cap to the potential
liability of the insurer and not the amount the
insurer will pay in case of a loss. The amount of the
indemnity is subject to evaluation by the insurer in
order to determine the actual extent of loss of the
insured.
If an insured has received indemnity from the
insurance company for the injury or loss arising out
of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the
rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount
paid by the insurancecompany does not fully cover
the injury or loss, the insured shall be entitled to
recover the deficiency from the person causing
the loss or injury. (See New Civil Code of the
Philippines, Article 2207)
Enumerate some of the exceptions to this principle.
1. Valued policies like life insurance and
insurance of paintings. Under this type of
policy, the amount of liability of insurer is
pre-determined. In the case of Personal
Accident, they refer to a Schedule of
Indemnity.
2. Penal or forfeiture bonds. Under these types
of bonds, a default will result in the
forfeiture of the face amount of the bond.
The said amount is not necessarily the
amount of damages suffered by the Obligee.
3. Replacement cost insurance. As general rule,
the amount of settlement shall be based on
the depreciated or sound value of the insured
property. In replacement cost insurance, the
amount of settlement is based on the cost to
replace the damaged property.
What is deductible?
Deductible works in two ways, to wit:
a. It is a bar to a claim, if the amount of loss is below
deductible.
b. It is a deduction to a claim, if the amount of loss is
insurer becomes net of deductible.
To illustrate, Bentot owns a Ferrari 488 worth
Php30,000,000 which is insured with Matibay
Insurance Co. Based on tariff, the deductible for a
Private Car is 0.5% of the car's Fair Market Value or
Php2,000, whichever is higher. The deductible is
therefore Php150,000.
In case Bentot got involved in a collision accident,
and the damage to the Ferrari 488 amounted to
Php149,000, Matibay Insurance Co. has zero liability
because the loss is below Php150,000.
In case the loss is Php151,000, the liability of
Matibay Insurance Co. is only Php1,000.
What is depreciation?
It is the decrease in value of a property over time.
In Motor Car Insurance, this refers to the amount
equivalent to a certain percentage (%) (depending on
the age of the vehicle) to be deducted from the
proceeds of a claim under Section III of the Motor Car
Policy. However, depreciation is not applicable in
case of total loss. There is a Schedule of Depreciation
in the Motor Car Policy Forms showing the rates of
depreciation.
What is average clause?
A clause in a policy requiring that, where assets are
insured for less than their full value, the insured is
required to bear a proportion of any loss. The
proportion is the amount by which the assets are
under insured expressed as a percentage of its
indemnity value, at the time of the loss.
To illustrate, if a property worth Php2,000,000 is
insured for Php1,500,000, the property is 25%
under-insured. In case the damage to the property is
Php1,000,000, the insured shall shoulder
Php250,000 as penalty for under-insuring the
property.
Kardo insured his property against fire for Php
3,000,000.00 with Mabilis Insurance Co. The
property was totally burned and the value of the
house was determined to be Php 2,800,000.00 only.
How much will be the indemnification of Kardo? It is
Php 2,800,000.00 or Php 3,000,000.00?
Mabilis Insurance Co is liable to pay Kardo for Php
2,800,000.00 only since it is the actual loss he
suffered from the fire incident. The total sum
insured is only the maximum limit of liability to
assumed by the insurer. It is not a statement of the
amount to be paid in case of a loss. To pay
Php3,000,000 will be in violation of the principle of
indemnity. Under the said principle, the
indemnification shall be limited to the actual loss
suffered by the insured - no more, no less.
SUBROGATION
Subrogation is another principle that closely related
with the principle of indemnity. It seeks to prevent
insurer from profiting from the insurance contract.
Consequently, the amount that the insurer can
recover against the offending party is limited to the
amount it has actually paid to its insured.
It is the legal effect of the payment of claim by the
insurer. Upon payment of the claim, the insurer
assumes all the legal rights and remedies available to
the insured against any and all parties liable for the
loss.
The cause of the loss or injury must be a risk covered
by the policy to entitle the insurer to
subrogation. (New Civil Code, Article 2207)
Discuss the principle of subrogation.
It is the legal effect of the payment of claim by the
insurer. Consequently, -
1. There is no need for a written assignment of
rights in order to enforce one’s right of
subrogation. However, the Supreme Court
stated that the signing of a Loss and
Subrogation Receipt was a valid pre-condition
before the insurer could be compelled to
turn over the whole amount of the insurance
to the insured. (Rizal Surety & Insurance
Company vs. CA, 261 SCRA 69)
2. The insurer can only recover from the
offending party up to the amount it had paid
to the insured.
3. The insured can no longer recover from the
offending party what was paid to him by the
insured. However, the insured can still
recover for the deficiency if the actual
damages were more than what the insurer
paid. (Aquino, Timoteo and Sundiang, Jose,
Reviewer on Commercial Law. 2003 Edition,
52.)
Enumerate cases when there is no right of
subrogation?
They are as follows:
1. When the insurer pay the insured for a loss
not covered by the policy.(Sveriges
Angfartygs Assurans Forening vs Qua Chee
Gan, 21 SCRA 12 [1959])
2. The insurer by his own act releases the
wrongdoer. (Pan Malayan Insurance Co. vs.
Court of Appeals, 184 SCRA 54 [1990])
3. In case of life insurance.
4. Recovery of loss in excess of the limits
provided by the policy.
CONTRIBUTION
The principle of contribution follows the concept of
indemnity and it applies if there is reinsurance. In
case of a loss, all the co-insurers shall share in the
loss in proportion to their participation in the risk.
Reinsurance is insurance that is purchased by an
insurance company (the "ceding company" or
"cedent" or "cedant" under the arrangement) from
one or more insurance companies (the "reinsurer")
directly or through a broker as a means of risk
management, sometimes in practice including tax
mitigation and other reasons described below. The
ceding company and the reinsurer enter into a
reinsurance agreement which details the conditions
upon which the reinsurer would pay a share of the
claims incurred by the ceding company. The
reinsurer is paid a "reinsurance premium" by the
ceding company, which issues insurance policies to
its own policyholders. (Wikipedia)
The maximum retention of an insurer per risk should
not exceed twenty (20) percent of its net
worth. (Insurance Code of the Philippines, Section
221)
The purpose of this principle is to prevent the
insured from recovering more than the full amount
of his loss where two (2) or more policies exist over
the subject matter of insurance.
Frodo insured his Php 2,000,000.00 property
against fire for Php 2,000,000.00 each with
Mabagal and Mabilis Insurance Company,
respectively. The property was partially burned
and the value of the loss was determined to be Php
1,200,000.00.
If you were Frodo’s insurance consultant, what will
be your advice to him?
Frodo may file a claim against either one or both
insurers, provided his aggregate claim will not
exceed Php1,200,000.00. Thus, he can do any of the
following:
1. File a claim against either insurer for the full
amount of loss.
2. File two simultaneous claims against the
insurers based on their pro-rata share
amounting to Php 600,000.00 each.
He cannot collect Php 1,200,000.00 against each
insurer at the same time since it will violate the
principle of indemnity. The liability of either insurer
should not exceed its proportionate share in the
loss. In order to determine each insurer’s share in
the loss, the computation shall be as follows:
Mabagal
____________________
Mabagal + Mabilis multiply by the amount of loss =
Mabagal’s share
Php 2,000,000.00 x Php 1,200,000.00 = insurances covering the subject matter of the
Php 600,000.00
Php 4,000,000.00
Distinguish co-insurance from re-insurance. (1994
Bar Exams)
CO-INSURANCE is the percentage in the value of the
insured property which the insured himself assumes
or undertakes to act as insurer to the extent of the
deficiency in the insurance of the insured property.
In case of loss or damage, the insurer will be liable
only for such proportion of the loss or damage as the
amount of insurance bears to the designated
percentage of the full value of the property
insured.
REINSURANCE is where the insurer procures a third
party, called the reinsurer, to insure him against
liability by reason of such original insurance.
Basically, a reinsurance is an insurance against
liability which the original insurer may incur in favor
of the original insured.
When does double insurance exist? (2005 Bar
Exams)
There is double insurance when there is over-
insurance with two or more companies, covering the
same property, the same insurable interest and the
same risk. Double insurance exists where the
same person is insured by several insurers
separately in respect of the same subject matter and
interests. (Section 93, Insurance Code and Geagonia
v. Court of Appeals, G.R. No. 114427, February 6,
1995)
Julie and Alma formed a business partnership.
Under the business name Pino Shop, the partnership
engaged in a sale of construction materials. Julie
insured the stocks in trade of Pino Shop with WGC
Insurance Co for P350th. Subsequently, she again
got an insurance contract with RSI for P1m and then
from EIC for P200th. A fire of unknown origin gutted
the store of the partnership. Julie filed her claims
with the three insurance companies. However, her
claims were denied separately for breach of policy
condition which required the insured to give notice
of any insurance effected covering the stocks
in trade. Julie went to court and contended that she
should not be blamed for the omission, alleging that
the insurance agents for WGC, RSI and EIC knew of
the existence of the additional insurance coverages
and that she was not informed about the
requirement that such other or additional insurance
should be stated in the policy. Is the contention of
Julie tenable? Explain. May she recover on her fire
insurance policies? Explain. (1993 Bar Exams)
1) No. An insured is required to disclose the other
insurance being applied for. (New Life Ent vs CA,
207 SCRA 669)
2) No, because she is guilty of violation of a
warranty/condition.
What is the nature of the liability of the several
insurers in double insurance? Explain. (2005 Bar
Exams)
Each insurer is bound, as between himself and other
insurers, to contribute ratably to the loss in
proportion to the amount for which he is liable under
his contract. (Sec. 94, Insurance Code)
X borrowed from CCC Bank. She mortgaged her
house and lot in favor of the bank. X insured her
house. The bank also got the house insured. (A) Is
this double insurance? Explain your answer. Is this
legally valid? Explain your answer. (2012 Bar
Exams)
No, there is no double insurance. Double insurance
exists where the same person is insured by several
insurers separately with respect to the same subject
and interest. (Sec. 93, Insurance Code). X's basis of
insurable interest is based on ownership of the
property while CCC's Bank's insurable interest is
based on the loan.
UTMOST GOOD FAITH
An insurance contract is one of perfect good faith
not for the insured alone, but equally so for the
insurer; in fact, it is more so for the latter, since its
dominant bargaining position carries with it a stricter
responsibility. (Fieldmen’s Insurance Co., Inc. vs.
Vda. De Songco, 25 SCRA 70 [1968])
It refers to duty of both the insurer and insured to
exercise honesty in dealing with each other. Both
parties are obligated to declare all facts that are
considered material to the contract of insurance.
The application of the concept of utmost good is
applied and discussed in the section dealing
concealment and misrepresentation.
Define concealment.
It is the neglect to communicate that which a party
knows and ought to communicate. A concealment
whether intentional or unintentional entitles the
injured party to rescind a contract of
insurance. (Insurance Code of the Philippines,
Section 26-27). However, it will only be a ground for
rescission if it is pertains to a material fact.
Define misrepresentation.
It refers to a false statement of fact made by one
party to another party, which has the effect of
inducing that party into the contract.
How is materiality determined?
It is to be determined not by the event, but solely by
the probable and reasonable influence of the facts
upon the party to whom the communication is due,
in forming his estimate of the disadvantages of the
proposed contract, or in making his
inquiries. (Insurance Code of the Philippines, Section
31)
Cite examples of facts/circumstances which are
deemed material.
The following facts/circumstances were deemed to
be material which was the basis for denial of claim:
a. That the insured is suffering from:
1. Incipient pulmonary tuberculosis (Musngi vs.
West Coast Life Ins. Co, 61 Phil. 864 [1939])
2. Cerebral congestion and Bells Palsy (Argente
vs. West Coast Life Ins. Co,51 Phil. 725
[1928])
3. Cardiovascular disease (St. Ferdinand
Memorial Park, Inc. vs. Great Pacific Life
Assurance Corp., I.C. Case Nov. 20 [1977])
4. Acute Bronchitis (Canilang vs. Court of
Appeals, 42 SCAD 455, 223 SCRA 443 [1993])
b. That he has been treated or hospitalized from
some ailment like pneumonia, diabetes or
syphilis (De Leon vs. Crown Life Ins. Co., C.A. L-
44842 [1993])
c. That he was hospitalized for two (2) weeks prior
to his application for insurance. (Sunlife Assurance
Co. of Canada, 64 SCAD 24, 245 SCRA 268 [1995])
Kardo bought a Ford Mustang worth Php2.85M and
insured it with Naloko Insurance Company. He
wanted the inception date to be October 15, 2017
instead of December 5, 2017. Unknown to Naloko
Insurance Company, the car was totally wrecked on
November 30, 2017 or 5 days before the request for
policy issuance. Can Kardo recover against his
motor policy?
Kardo likewise bought a life insurance worth
Php10M with Naisahan Life Insurance Company. The
inception date is December 5, 2017. Unknown to
Naisahan Life Insurance Company, he was diagnosed
with cancer 12 months ago. Is Kardo covered?
The answer to both questions is no. Pre-existing
conditions should be disclosed by the insured and
failure to do so is a violation of the principle of
utmost good faith. It could be in the form of either
concealment (not disclosing a material fact) and
misrepresentation (disclosing a material fact that is
untrue in order to induce the insurer to issue the
policy). Both are grounds for denial or rescission of
an insurance contract, including bonds.
Marine insurance was secured upon goods on board
a ship which departed from Madagascar to Manila,
without any disclosure to the insurer of the fact
that the ship had been reported at Lloyd’s of
London as seen at sea, deep in water and leaky.
This report turned out to be wrong because the ship
was at no time during the voyage leaky or in
trouble, but was lost thru another insured risk. The
insurer refuses to pay the insured, claiming
concealment. The insured counters that the fact not
disclosed was erroneous and did not increase the
risk and therefore immaterial. Decide the dispute
with reasons. (1979 Bar Examination)
The insured may not recover under the marine
insurance. While the report was erroneous, it
nonetheless was lost through another risk. This is
material because it could influence the decision of
the underwriter in deciding whether to provide
insurance cover or otherwise.
Atty. Roberto took out a life insurance policy from
the Dana Ins Co (DIC) on 1 Sep 1989. On 31 Aug
1990, Roberto died. DIC refused to pay his
beneficiaries because it discovered that Robert had
misrepresented certain material facts in his
application. The beneficiaries sued on the basis
that DIC can contest the validity of the insurance
policy only within 2 years from the date of issue
and during the lifetime of the insured. Decide
the case. (1991 Bar Exams)
I would rule in favor of DIC. Since the death
happened within the 2-year incontestability period,
the defense of misrepresentation is still available to
DIC.
Renato was issued a life insurance policy on January
2, 1990. 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, 1992, Renato died of heart failure. May
the heirs file a claim on the proceeds of the life
insurance policy of Renato? (1998 Bar Exams)
Yes, because more than 2 years had elapsed when
Renato, the insured, died. After two years, the
defenses of concealment or misrepresentation, no
matter how patent or well founded, is no longer
available to the insurer.
“A” applied for a non-medical life insurance. The
insured did not inform the insurer that one week
prior to his application, he was examined and
confined at St. Luke’s Hospital where he was
diagnosed for lung cancer. The insured soon
thereafter died in a plane crash. Is the insurer
liable considering the fact concealed had no bearing
with the cause of death of the insured? Why? (2001
Bar Examination)
No. The concealed fact is material to the approval
and issuance of the insurance policy. The insured
need not die of the disease he failed to disclose to
the insurer.
Simba insured his vessel with Hakuna Matata
Insurance Company effective September 21, 2001.
Three days after, it was discovered that the vessel
had sunk a week before the effectivity of the policy.
Can Simba recover against his marine insurance
with Hakuna Matata Insurance Company?
Yes. Under a marine insurance, past unknown event
can be covered, thus, coverage may be have for a
vessel which had already sunk. The presumption is
Simba acted in good faith when he sought cover for
his vessel. The burden of proving otherwise lies on
the part of the insurer.
An insured, who gains knowledge of a material fact
already after the effectivity of the insurance
policy, is not obliged to divulge it. The reason for
this is that the test of concealment of material fact
is determined. (2011 Bar Exams)
(A) at the time of the issuance of the policy.
(B) at any time before the payment of premium.
(C) at the time of the payment of the premium.
(D) at any time before the policy becomes effective.
X insured his life for P20 million. X, plays golf and
regularly exercises everyday, hence is considered in
good health. He did not know, however, that his
frequent headache is really caused by his being
hypertensive. In his application form for a life
insurance for himself, he did not put a check to the
question if he is suffering from hypertension,
believing that because of his active lifestyle, being
hypertensive is a remote possibility. While playing
golf one day, X collapsed at the fairway and was
declared dead on arrival at the hospital. His death
certificate stated that X suffered a massive heart
attack.
a. Will the beneficiary of X be entitled to the
proceeds of the life insurance under the
circumstances, despite the non-disclosure that he is
hypertensive at the time of application?
b. If X died in an accident instead of a heart attack,
would the fact of X's failure to disclose that he is
hypertensive be considered as material
information? (2016 Bar Exams)
a. If depends on when the death happened. If it
happened within the 2 year incontestability period,
the insurer can rescind the contract because
hypertension is a material fact. If it happened
outside the incontestability period, then the insurer
will honor the claim.
b. The answer will remain the same. The insured
need not die of the disease he had failed to disclose
to the insurer. It is sufficient that his non-disclosure
misled the insurer in forming his estimates of the
risks of the proposed insurance policy or in making
inquiries (Henson v. The Philippine American Life
Insurance Co., 56 O.G. No. 48 [1960]).
INSURABLE INTEREST
Define insurable interest. (1965 Bar Examination)
The legal relationship of the insured with the subject
matter of insurance whereby the former stands to
benefit from the preservation of the latter or be
prejudiced by the loss thereof. Consequently, no
contract of insurance on property shall be
enforceable except for the benefit of some person
having insurable interest in the property
insured. (Insurance Code of the Philippines, Section
18.)
Also, the following stipulations shall be void:
1. for the payment of loss whether the person
insured has or has not any interest in the
property insured;
2. that the policy shall be received as proof of
such interest; and
3. every policy executed by way of gaming or
wagering. (Insurance Code of the Philippines,
Section 25)
Notes:
1. The requirement of an insurable interest to
support a contract of insurance is based upon
considerations of public policy which render
wager policies invalid. A wager policy is
obviously contrary to public interest. (De
Leon, Hector. The Insurance Code of the
Philippines Annotated. 2002 Edition: 87)
2. Insurable interest over the thing insured
minimize, if not eliminate, the temptation to
destroy it in order gain from the proceeds of
the policy.
3. A policy issued to a person without insurable
interest in the subject matter is a mere
wager policy having nothing in common with
insurance except name and form and is void
and unenforceable on grounds of public
policy. (C.J. 1110 citing Hamburg-Bremen P.
Ins. Co. vs. Lewis, 4 App. 66)
4. A carrier or depositary of any kind has an
insurable interest in a thing held by him as
such, to the extent of his liability but not to
exceed the value thereof.(Insurance Code of
the Philippines, Section 15.)
What is the purpose of the law in requiring that the
insured must have an insurable interest in the life
of the person insured?
The purpose of the law in requiring the existence of
insurable interest in the life of the insured is to
eliminate the temptation to destroy the life of the
insured on account of his life insurance.
When may there be insurable interest in the life of
another. (1966 Bar Examination)
A person may have insurable in the life another in
the following situations:
1. Of any person on whom he depends wholly or
in part for education or support, or in whom
he has a pecuniary interest;
2. Of any person under a legal obligation to him
for the payment of money, or respecting
property or services, of which death or
illness might delay or prevent the
performance; and
3. Of any person upon whose life any estate or
interest vested in him depends. (Insurance
Code of the Philippines, Section 10).
Define insurable interest in life. (1966 Bar
Examination)
An insurable interest in life may be the in the
following forms:
1. Of himself, of his spouse and of his children;
2. Of any person on whom he depends wholly or
in part for education or support, or in whom
he has a pecuniary interest;
3. Of any person under a legal obligation to him
for the payment of money, or respecting
property or services, of which death or
illness might delay or prevent the
performance; and
4. Of any person upon whose life any estate or
interest vested in him depends. (Insurance
Code of the Philippines, Section 10.)
In what cases has corporation an insurable interest
in the lives of its officers? (1965 Bar Examination)
A corporation may have insurable interest in the
lives of its officers when the death or illness of said
officers would materially and injuriously affect the
corporation.
What does insurable interest in property consist of?
Explain your answer. (1953 and 1967 Bar
Examination)
An insurable interest in property may consist of the
following:
1. An existing interest. An example of which
includes ownership over a property
2. An inchoate interest founded on an existing
interest. Examples of which includes the
stockholder’s interest in the property of the
corporation and partner’s interest in the
partnership’s property.
3. An expectancy coupled with an existing
interest in that of which the expectancy
arises. An example of which a farmer’s
interest future crops to be grown on the land
he owned. (Insurance Code of the
Philippines, Section 14)
Give an example of insurable inchoate right in the
property? (1955 Bar Examination)
The following are examples of insurable inchoate
right in the property:
1. Contractor’s interest in the completed
building for unpaid construction cost;
2. Lessor’s interest in the improvement made
by the lessee;
3. Naked owner’s interest over property which
another person has beneficial
title. (Miravite, Jorge. Bar Review Materials
in Commercial Law. 11th Edition, 135)
How is insurable interest measured?
It depends on the type of insurance, thus:
In Property Insurance, the measure of insurable
interest in a property is the extent to which the
insured may be damnified by loss or injury
thereof. (Insurance Code of the Philippines, Section
17)
In Life Insurance, insurable interest cannot be
measured on account of the fact that the value of
one’s life cannot be estimated or even valued for
that matter. According to some financial planners,
the rule of thumb is determining the maximum total
sum insured is 5 times of the annual salary of the
insurance applicant. The rationale behind this is that
it is assumed that a family of the decedent will take
at least five (5) years to adjust to the financial loss
brought about by the death of breadwinner.
However, in the case of creditor-debtor relationship
where the creditor insures the life of the debtor, the
limit of insurable interest by the creditor is equal to
the amount of debt.
Madugas is the lessee of Makunat Corporation
(Makunat). Under the lease agreement, Madugas
cannot insure the properties stored in the leased
property without first obtaining the consent of
Makunat. If consent is not obtained, the policy is
deemed assigned and transferred to the lessor for
its own benefit. Madugas insured the merchandize
in the leased property without obtaining the
consent of the lessor. A fire broke out which
destroyed the merchandize stored.
Is the lessor entitled to the proceeds of the policy?
No. Makunat is not entitled to the proceeds of
insurance. It has no insurable interest over the
merchandize insured because it is owned by
Madugas. The automatic assignment of the policy is
void for being contrary to law and public
policy. (Spouses Nilo Cha vs. Court of Appeals, G.R.
No. 124520. [August 18, 1997])
(2000)
IS, an elderly bachelor with no known relatives,
obtained life insurance coverage for P250,000.00
from Starbrite Insurance Corporation, an entity
licensed to engage in the insurable business under
the Insurance Code of the Philippines (PD1460). He
also insured his residential house for twice that
amount within the same corporation. He
immediately assigned all his rights to the insurance
proceeds to BX, a friend-companion living with him.
Three years later, IS died in a fire that gutted his
insured house two days after he had sold it. There
is no evidence of suicide or arson or involvement of
BX in these events. BX demanded payment of the
insurance proceeds from the two policies, the
premiums for which IS had been faithfully paying
during all the time he was alive. Starbrite refused
payment, contending that BX had no insurable
interest and therefore was not entitled to receive
the proceeds from IS’s insurance coverage on his life
and also on his property. Is Starbrite’s contention
valid? Explain? (2000 Bar Exams)
With respect to the property insurance, Starbrite is
correct. BX, being a mere friend-companion of
IS, has no insurable interest in the residential house
of IS. BX is therefore not entitled to receive the
proceeds from IS’s insurance on his property.
With respect to the life insurance, BX is entitled to
receive the proceeds. There is no requirement that
BX should have insurable interest in the life of IS. It
was IS himself who took the insurance on his own
life.
Distinguish insurable interest in property insurance
from insurable interest in life insurance. (2002 Bar
Examinations)
The differences are as follows:
1. As to the existence thereof. In the former, it
must exist both at the inception of the policy
and at the time of the loss, whereas, in the
latter, it need not exist at the time of the
loss.
2. As to the extent thereof. In the former, it is
limited by the actual value of interest in the
property, whereas, in the latter, there is no
limit, except the one taken by creditor on
the life of the debtor.
John took out a life insurance on the life of his wife
Marsha. Two months after the decree of annulment
of their marriage became final, she died.
Can John recover under the life insurance?
Yes. At the time he took out the life insurance, he
still has insurable interest over the life of his wife.
The subsequent annulment of their marriage will not
effect his right to recover under the policy.
In life insurance, what is required is that insurable
interest must exist at the inception of the policy but
need not exist when the loss occurs.
What is the legal effect of the change in insurable
interest after the loss?
The change in insurable interest after the loss will
not affect the insurer’s liability. Upon the happening
of the loss, the liability of the insurer becomes
fixed. (Insurance Code of the Philippines, Section
21.)
The answer would have been different if the change
occurred before the loss. In the case, the claim will
be denied on account of the insured’s lack of
insurable interest.
In a civil suit, the Court ordered Benjie to pay Nat
P500,000.00. To execute the judgment, the sheriff
levied upon Benjie’s registered property (a parcel
of land and the building thereon),and sold the same
at public auction to Nat, the highest bidder. The
latter, on March 18, 1992, registered with the
Register of Deeds the certificate of sale issued to
him by the sheriff. Meanwhile, on January 27, 1993,
Benjie insured with Garapal Insurance
for P1,000,000.00 the same building that was sold
at public auction to Nat. Benjie failed to redeem the
property by March 18, 1993.
On March 19, 1993, a fire razed the building to
the ground. Garapal Insurance refused to make good
its obligation to Benjie under the insurance
contract. 1) Is Garapal Insurance legally justified in
refusing payment to Benjie? 2) Is Nat entitled to
collect on the insurance policy?
1) Yes. Because at the time of the loss, Benjie was no
longer the owner of the property insured because of
his failure to redeem the property. Insurable interest
must be present at the time of the issuance of the
policy and also at the time when the loss occurs in
order to successfully claim against the policy.
Unfortunately, at the time of loss, Benjie no longer
had insurable interest in the property insured.
2) No. While at the time of the loss he had
insurable interest in the building by virtue of
ownership, he has no legal personality to file a claim
against the policy. Insurance is a personal
contract. There was no automatic transfer clause in
the policy that would give him such interest in the
policy.
What is the legal effect of the death of insured?
The death of the insured will not affect the liability
of the insurer to pay. The interest in the insurance
shall automatically pass on to the insurer’s heirs.
A piece of machinery was shipped to Mr. Pablo on
the basis of C&F, Manila. Mr. Pablo insured the said
machinery with Talaga Merchants Insurance Corp.
(TAMIC) for loss or damage during the voyage. The
vessel sank en route to Manila. Mr. Pablo then filed
a claim with TAMIC which was denied for the reason
that prior to delivery, Mr. Pablo had no insurable
interest. Decide the case. (1991 Examination)
The reasoning of the insured is untenable. The
purchase of goods under a perfected contract of sale
already vests equitable interest on the property in
favor of the buyer pending the delivery.
On February 3, 1987, while Jose Palacio was in the
hospital preparatory to a heart surgery, he called
his only son, Boy Palacio, and showed the latter a
will naming his son as the sole heir to all the
father’s estate including the family mansion in
Forbes Park. The following day, Boy Palacio took
out a fire insurance on the Forbes Park mansion.
One week later, the father died. After the father’s
death, Boy Palacio moved his wife and his children
to the family mansion which he inherited. On March
30, 1987, a fire occurred razing the mansion to the
ground. Boy Palacio then proceeded to collect on
the fire insurance he took earlier on the house.
Should the insurance company pay? (1987
Examination)
No. In property insurance, the insured is required to
have insurable interest over the property at the
inception of the policy and at the time of the loss. At
the time the policy was issued, the owner of the
mansion is his father Palacio.
Also, the insurable interest must be an existing.
Unfortunately for Boy Palacio, the fact that he was
the expected sole heir of the property does not give
rise to an existing interest over the mansion prior to
the death of his father Palacio.
JQ, owner of the condominium unit, insured the
same against fire with XYZ Insurance Co., and made
the loss payable to his brother, MLQ. In case of loss
by fire of the said condominium unit, who may
recover on the fire insurance policy? State the
reason(s) for your answer. (2001 Bar Examination)
JQ is the one entitled to receive the proceeds of
insurance being the owner thereof. MLQ despite
being the designated as the payee in case loss cannot
be entitled to receive the premium since he has no
insurable interest over the condominium unit.
Is it necessary for the beneficiary to have an
insurable interest in the life of the insured (1949
Bar Examination)?
It depends.
If the policy is secured by the insured on his own
life, the designated beneficiaries need not have an
insurable interest in the life of the insured.
If the policy is secured by a third person on the life
of the insured and said third person designates
himself as the beneficiary, the third person must
have insurable interest on the life of the insured as
at the inception of the policy.
Juan takes an insurance policy on the life of his
friend Luis, becoming himself as the beneficiary. Is
the policy valid? (1946 Bar Examination)
Yes. However, the designation of Juan as beneficiary
is not valid. Juan does not have an insurable interest
in the life of Luis. Mere friendship is not enough to
create insurable interest on the life of another
person.
Batman secured a loan from Superman in the
amount of Php 1,000,000.00. To guarantee payment
of the loan in case something happens to Batman,
Superman bought an insurance on the life of the
Batman equal to the amount of the latter’s loan. Six
(6) months later, Batman died. Prior to that,
Batman was able to pay-off the eighty percent
(80%) of his loan already.
How much can Superman collect from the insurer?
Superman can collect only up to Php 200,000.00. His
insurable interest over Batman’s life was reduced to
20% on account of the payments made by Batman
prior to his death. Accordingly, the payment by the
insurer shall be reduced in proportion to his reduced
insurable interest.
A obtains a fire insurance on his house and as a
generous gesture names his neighbor as his
beneficiary. If A’s house is destroyed by fire, can B
successfully claim against the policy? (1997 Bar
Examination)
No. B has no insurable interest over the house of A.
In fire insurance, No contract or policy of insurance
on property shall be enforceable except for the
benefit of some person having an insurable interest
in the property insured.
Unlike life insurance, fire insurance does not have a
provision for beneficiary designation unlike life
insurance. A could have just assigned his rights under
policy in favor of B after the loss.
Who may insure a mortgaged property?
Both the mortgagor and mortgage may insure the
mortgage property as their interest may appear. It is
a settled that a mortgagor and mortgagee have a
separate and distinct insurable interest in the same
mortgaged property. (Filipino Merchants Insurance
Co. vs. Court of Appeals, G.R. 85144 [November 28,
1989])
Differentiate the interest of a mortgagee and the
mortgagor.
Both the mortgagee and the mortgagor have each as
separate and distinct insurable interest in the
mortgaged property. They may procure separate
policies with the same or different insurance
companies. (Rodriguez, Rufus. The Insurance Code
of the Philippine Annotated 1999 Edition. 27).
1. The basis of insurable interest of the former
is the loan by the debtor which is supported
by its property, whereas, the latter’s interest
is based upon his ownership over the
property.
2. The extent of insurable interest of the
former’s insurable interest is the value of the
property mortgage, whereas, the latter’s
extent of insurable interest is the extent of
debt secured.
Glenn secured a loan from Jaypee in the amount of
Php 10,000,000.00. As a guarantee for the loan,
Glenn mortgaged his house for worth the same
amount to Jaypee. On the other hand, Jaypee
insured Glenn’s house for Php 10,000,000.00 which
is equivalent to the value of the latter’s
indebtedness to the former. Six (6) months later, a
fire occurred which burned Glenn’s house to the
ground. Prior to that, Glenn was able to pay-off the
fifty (50%) of the loan already.
How much can Jaypee collect from the insurer?
Jaypee can collect Php 5,000,000.00 from the
insurer. His insurable interest over Glenn’s
mortgaged property was reduced to 50% on account
of the payments made by Glenn during the lifetime
of the policy. Accordingly, the payment by the
insurer shall be reduced proportionately.
Is it possible for both Jaypee and Glenn insure the
same property without violating the principle of
indemnity?
Yes. The basis of insurable interest of the Jaypee is
the loan which is secured by the mortgagor’s
property, whereas, the Glenn’s interest is based
upon his ownership over the property.
What are rules in case the insurance is taken by the
mortgagor?
The rules are as follows:
1. A mortgagor may take an insurance payable
either to: (1) himself, or (2) the mortgagee.
2. If the mortgagor takes an insurance for his
own benefit, only he can recover from the
insurer but the mortgagee has a lien on the
proceeds by virtue of the mortgage.
3. Where the mortgagor takes an insurance
payable to the mortgagee or where the
mortgagor assigns the policy taken by him to
the mortgagee, the legal effects are: a. The
insurance is still deemed to be upon the
interest of the mortgagor, 2. The mortgagor
does cease to be a party to the insurance
contract, 3. Any act prior to the loss which
would otherwise render the insurance null
and void still renders it null and void
although the property is in the hands of the
mortgagee and the proceeds are payable to
the mortgagee.
4. In case of loss, the mortgagee is entitled to
the proceeds to the extent of his credit. The
remaining balance shall accrue in favor of the
mortgagor.
5. Upon recovery by the mortgagee to the
extent of his credit, the debt is extinguished
and the mortgagor is released from his
indebtedness. (Rodriguez, Rufus. The
Insurance Code of the Philippines Annotated
1999 Edition. 30)
What are the rules in case the insurance is taken by
the mortgagee?
The rules are as follows:
1. The mortgagee is entitled to the proceeds of
the policy in case of a loss to the extent of
his credit.
2. If the proceeds are more than the total
amount of this credit, the mortgagor has no
right to collect the balance.
3. If the proceeds are equal to the amount of
the credit, the mortgagee can no longer
recover the mortgagor’s indebtedness since
the insurer is subrogated to the mortgagee’s
rights.
4. If the proceeds are less that the total amount
of credit, the mortgagee can still recover
from the mortgagor for deficiency.
5. Upon payment, the insurer is subrogated to
the rights of the mortgagee against the
mortgagor to the extent of the amount paid.
The insurer can therefore collect the debt of
the mortgagor to the mortgagee.
“A” owns a house valued at Php 50,000.00 which he
had insured against fire for Php 100,000.00. He
obtained a loan from “B” in the amount of Php
100,000.00, and to secure payment thereof, he
executed a deed of mortgage on the house, but
without assigning the insurance policy to the latter.
For “A”’s failure to pay the loan on maturity, “B”
initiated a foreclosure proceedings and in the
ensuing public sale, the house was sold by the
sheriff to “B” as highest bidder. Immediately upon
issuance of the sheriff’s certificate of sale in his
favor, “B” insured the house against fire for Php
120,000.00 with another insurance company. In
order to redeem the house, “A” borrowed Php
100,000.00 from “C” and, as a security device, he
assigned the insurance policy of Php 100,000.00 to
“C”. However, before “A” could pay “B” his
obligation of Php 100,000.00, the house was
accidentally and totally burned.
Does “A”, “B” or “C” have any insurable interest in
the house, if so, how much? May “A”, “B” or “C”
recover under the policies? If so, how much? (1982
Bar Examination)
Insofar as “A” is concerned, he has an insurable
interest in the property as the owner thereof. At the
time of the loss, it was still within the redemption
period, thus, the title has yet to be consolidated
under the name of the “B.” However, “A”’s
insurable interest over the property is up to the
actual value of house which is Php 50,000.00. Since
he is over-insured, he can seek reimbursement for
the excess premium paid to the insurer.
Insofar as “B” is concerned, he has an inchoate
insurable interest in the property on account of the
foreclosure of the property in his favor. “B”’s
insurable interest over the property amounts to Php
50,000.00 which is the actual value of house.
Insofar as C is concerned, he cannot recover under
the policy since the assignment was made without
the prior consent of the insurer.
A owns a house worth P500,000. He insured it
against fire for P250,000.00 for the period from
January 1, 1977 to January 1, 1978. At the instance
of B, who is a judgment creditor of A, the said house
was levied upon by the sheriff and sold at a public
auction on March 15, 1997.It was adjudicated to B
for P150,000 at the auction sale. B insured the
house against fire for P150,000 for the period from
March 16, 1977 to March 16, 1978. The house was
accidentally burned on April 1, 1977.
May A recover under his policy? Give reasons.
May A recover under his policy? Give reasons. (1947
and 1974 Bar Examination)
Yes to both.
Insofar as A is concerned, he can recover since he is
the owner of the property. While his property was
already sold at a public auction, the loss occurred
within the one-year redemption period.
Insofar as B is concerned, he can also recover since
he has an inchoate right over an existing right as the
auction buyer of the property. The extent of his
insurable interest is equal to the amount he paid at
the auction.
“X” insured his house for Php 8,000.00 on
September 1, 1972. The house is worth Php
20,000.00. On said date “X” obtained a loan from
“Y” and the latter insured the said house for Php
5,000.00 because the total loan was without
security. On September 10, 1978, “X” sold the
house to “Y” without transferring his policy to “Y.”
On September 27, 1972, the house was totally
burned by fire of accidental origin. Can “X” and
“Y” recover on their respective policies? Explain
fully. (1972 Bar Examination)
Insofar as “X”’s policy, both “X” and “Y” cannot
recover thereunder.
“X” cannot recover because he is no longer the
owner of the property at the time of the loss, thus,
he lacks insurable interest.
“Y” cannot recover because “X’s” policy was not
endorsed under his name. While he has insurable
interest by virtue of being the new owner thereof,
he cannot claim against the policy of “X” for not
being a party thereto. He has no legal personality to
file a claim against the policy.
Insofar as “Y”’s policy, “Y” cannot recover
thereunder.
PROXIMATE CAUSE
Define proximate cause.
The efficient and dominant cause of the loss in a
chain of continuous event, unbroken by any new
independent cause. Simply put, it is the ultimate
cause of the loss. Under this principle, an insurance
contract will respond to a claim unless the peril
covered is the proximate cause of the loss.
A marine insurance policy on a cargo states that
“the insurer shall be liable for losses incident to
perils of the sea.” During the voyage, seawater
entered the compartment where the cargo was
stored due to the defective drainpipe of the ship.
The insured filed an action on the policy for
recovery of the damages caused to the cargo. May
the insured recover damages? (1998 Bar
Examination)
No. Perils of the sea refer to losses attributable to
the unusual or extraordinary action of wind or wave
or to other extraordinary causes connected with
navigation. Clearly, the defective drainpipe is not a
peril of the sea. It was incidental to ordinary usage of
the ship. The proximate cause of the loss not being a
peril of the sea, the claim should be denied.
An insurance company issued a marine insurance
policy covering a shipment by sea from Mindoro to
Batangas of 1,000 pieces of Mindoro garden stones
“against total loss only”. The stones were loaded in
two lighters, the first with 600 pieces and the
second with 400 pieces. Because of the rough seas,
damage was caused to the second lighter resulting
loss of 325 out of the 400 pieces. The owner of the
shipment filed claims against the insurance
company on the ground of constructive total loss as
more than three-fourths of the value of the stones
had been lost in one of the lighters. (1992 Bar
Examination)
Is the insurance company liable under its policy?
No. The insurance company is not liable to pay since
its policy covers “total loss” claims only. The
contention of the insured regarding the existence of
a constructive total loss is misplaced. While the
stones were loaded in two separate lighters, the
subject matter did not become two (2) separate
risks. There is no constructive total loss since only
32.5% of the stones were lost.
What is/are the exceptions to the principle of
proximate cause?
Under this principle, an insurance contract will not
respond to a claim unless the peril covered is the
proximate cause of the loss. The exceptions are as
follows:
1. If the proximate cause of the loss in an
excluded peril under the policy.
2. Loss by willful act or through the connivance
of the insured.
Malas bought a standard fire insurance which covers
fire and lightning only. A few weeks later, there was
an earthquake which caused fire. The property of
Malas was burned to the ground. Is the claim of
Malas payable or not?
While the immediate cause of the loss is fire, the
proximate cause of the loss is earthquake, which is
an excluded peril. Section 6 of the standard fire
policy provides:
This insurance does not cover any loss or damage
occasioned by or through or in consequence,
directly or indirectly, of any of the following
occurrences, namely:-
(a) Earthquake, volcanic eruption of other
convulsion of nature. (emphasis supplied)
(b) Typhoon, hurricane, tornado, cyclone or other
atmospheric disturbance.
(c) War, invasion, act of foreign enemy, hostilities
or warlike operations (whether war be declared or
not), civil war.
(d) Mutiny, riot, military or popular rising,
insurrection, rebellion, revolution, military or
usurped power.
Based on the foregoing, the insurer of Malas is not
liable to pay him.
Dorobo is financially bleeding because sales are
substantially down. Despite efforts from his
marketing team, his stocks remain unsold. Out of
desperation, he intentionally burned his property
including the unsold stocks. Is he entitled to recover
against his fire insurance policy?
No, because the fire is not accidental in nature.
Arson is a form of willful act of the insured.
However, if arson was committed by a third person
and it can proven that there was no connivance on
the part of Dorobo, then his claim will be
compensable.
Section 21 of the standard fire insurance provides a
list of what constitute prima facie evidence of
arson:
1. If the fire started simultaneously in more than
one part of the building or establishment.
2. If substantial amount of flammable substances
or materials are stored within the building not
necessary in the business of the offender nor for
household use.
3. If gasoline, kerosene, petroleum or other
flammable or combustible substances or materials
soaked therewith or containers thereof, of any
mechanical, electrical, chemical or electronic
contrivance designed to start a fire, or ashes or
traces of any of the foregoing are found in the ruins
or premises of the burned building or property.
4. If the building or property is insured for
substantially more than its actual value at the time
of the insurance of the policy.
5. If during the lifetime of the corresponding fire
insurance policy more than two fires have occurred
in the same or other premises owned or under the
control of the offender and/or insured.
6. If shortly before the fire, a substantial portion
of the effects insured and stored in a building or
property had been withdrawn from the premises
except in the ordinary course of business.
7. If a demand for money or other valuable
consideration was made before the fire in exchange
for the resistance of the offender or for the safety
of the person or property of the victim.
Courts are to regard "with extreme jealousy"
limitations of liability found in insurance policies
and to construe them in such a way as to preclude
the insurer from non-compliance with his obligation.
In other words, to quote a noted authority on the
subject, "a contract of insurance couched in
language chosen by the insurer is, if open to the
construction contended for by the insured, to be
construed most strongly, or strictly, against the
insurer and liberally in favor of the contention of
the insured, which means in accordance with the
rule contra proferentem."
(TAURUS TAXI CO., INC., FELICITAS V. MONJE, ET
AL. vs. THE CAPITAL INSURANCE & SURETY CO.,
INC. G.R. No. L-23491 July 31, 1968)
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