PRINCIPLES OF INSURANCE 

The business of insurance is guided by 6 principles, namely:

1. Indemnity
2. Subrogation
3. Contribution
4. Utmost Good
5. Insurance Interest
6. Proximate Cause 

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 insurance company 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 above deductible. Simply put, the liability of the 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. (Article 2207, New
Civil Code)

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. (Section 221, New
Insurance Code)

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          = 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 insurances covering the subject matter of the 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, New 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. (Section 26-27, New Insurance
Code). 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. (Section 31, New Insurance Code)

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. (Section 18, New
Insurance Code)

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. (Section 25, New Insurance Code)
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. (Section 15, New Insurance Code)

 
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. (Section 10, New Insurance Code).

 
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. (Section 10,  New Insurance Code)
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. (Section 14, New Insurance Code)

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.