INSURANCE

Lecture Outline
Judge Nelita Jesusa Bacaling
College of Law
University of San Agustin
Iloilo City

Lecture 3
SY 2019-2020

1. What is meant by Insurable Interest? -Insurable Interest is an important concept

because it is what distinguishes the contract of insurance from all other kinds of
contracts.
a. Insurable Interest is present when one person holds an interest over the
subject matter such that he will derive a pecuniary or financial benefit from
the preservation of such subject matter and will suffer pecuniary loss or
damage from its destruction, termination or injury, by the happening of the
event insured against.

2. What may be insured? (Note: Although the title says “What May Be Insured”
under Title 1, the Section that follows, Section 3, does not talk about what may
be insured, in the sense that we will not get a list of things that may be subject of
insurance contract. Note that Section 3 talks about what may be insured
against).

Sec.3. Any contingent or unknown event, whether past or future, which

may damnify a person having an insurable interest, or create liability against
him, may be insured against, subject to the provisions of this chapter.

The consent of the spouse is not necessary for the validity of an insurance
policy taken out by a married person on his/her life or that of his/her children.

All rights, title and interest in the policy of insurance taken out by an
original owner on the life or health of the person insured shall automatically vest
in the latter upon the death of the original owner, unless otherwise provided for in
the policy.

2.1 What is being insured is a subject matter. The person who takes out
an insurance has a financial interest over the preservation of the said
subject matter. He/she will suffer financial loss or damage if the
subject matter of the insurance policy is lost or damaged.
2.2 What is being insured against is an event. It is usually contingent or
unknown, whether past or future, but its occurrence would damage,
destroy or diminish the subject matter
2.3 Example: The subject matter of a Fire Insurance contract is the
house owned by B. The peril insured against is Fire. The person who
has insurable interest over the house is the owner B.
2.4 Neither does Sec. 4 tells us what may be insured. Instead it tells us
what may not be insured even if the owner suffers loss or damage
upon the happening of a future event, thus:
Sec.4. The preceding section does not authorize an insurance for or
against the drawing or any lottery, or for or against any chance or
ticket in a lottery drawing a prize.
 5.5 What may be insured then? As far as the subject matter is
concerned, anything which is within the commerce of man may be
the subject matter of a contract of insurance, taking into account
the rules on insurable interest, and the general provisions of the civil
code that the agreement must not be contrary to law, public order,
public policy, public morals etc.

III. INSURABLE INTEREST

3.1 Insurable Interest in Life Insurance

Sec. 10. Every person has an insurable interest in the life and health:

a) Of himself, of his spouse and of his children;

b) Of any person on whom he depends wholly or in part for education or support, or
in whom he has a pecuniary interest;
c) 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;

d) Of any person whose life any estate or interest vested in him depends.

3.1 This section talks about Insurable Interest in LIFE and/or HEALTH of persons. The
section enumerates those persons upon whom another person may insure. The list is
exclusive thus no other person, no matter how intimate the relationship is with the one
insuring him/her, may be allowed to insure his life or health, other than those enumerated
by the law.

3.2 the rationale:

3.2.1 Insurance over one’s own life – Every person has an understandable
unlimited insurable interest over his very own life.

3.2.2 Insurable interest over wife and children – this is an exception to the
concept that insurable interest is present because the loss of the thing insured will cause
some pecuniary damage to the one who took out the insurance or the beneficiary. In
this case, the loss goes beyond pecuniary benefit because of the familial relations existing
between the one who took out the policy and the person insured.

-note however that this familial relation is exclusive to the person’s wife and
children.

3.2.3 Insurance taken over the life of someone on whom he depends wholly or
in part for his education or support, or in whom he has a pecuniary interest.

- One can insure the life of a person who gives him financial support for his
education and sustenance. That is because he will suffer a loss once such person,
his benefactor suffers ailment, injury or will die.

3.2.4 Of any person under a legal obligation to him for the payment of money, or
respecting property services, of which death and illness might delay or prevent
the performance;
 - large corporations insure the lives of their top personnel because they have
insurable interest over the lives of these personnel who hold sensitive information
regarding company.
- The same is true with chefs, accountants and even lawyers. Their employers will
suffer pecuniary loss in case of their death or disability.
-lenders also insure the lives of their borrowers for the same reason

3.2.5. Of any person whose life any estate or interest vested in him depends.

-example is an administrator of an estate who has knowledge and skill to

manage the affairs of the estate. An estate administrator is usually someone who
the heirs trust. He or she is the one who transacts on any and all matters relating
to the estate. He collects debts due to the estate, therefore he knows the
debtors of the estate. He keeps records of all transactions involving the
estate, the debts of the estate, the status of the properties, or any claim against
the estate, among others. Thus, the estate itself has an insurable interest over the
administrator’s life.

IV. INSURABLE INTEREST IN PROPERTY INSURANCE

1.1 Even in property insurance, Insurable Interest must be present otherwise

the contract shall not be considered enforceable.
1.2 Sec. 13. Every interest in property, whether real or personal, or any
relation thereto, or liability in respect thereof, such nature that
contemplated peril might directly damnify the insured, is an insurable
interest.

-the test in determining whether or not insurable interest exists over a

property is whether the insured will suffer pecuniary loss upon the loss or
destruction of the thing insured, and will benefit or experience pecuniary
advantage when that thing is preserved.

1.3 Kinds of Insurable Interest

Sec 14. An insurable interest in property may consist in:

a) An existing interest;
b) An inchoate interest founded on an existing interest;
c) An expectancy, coupled with an existing interest in that out of which
the expectancy arises.

Sec. 16. A mere contingent or expectant interest in anything, not

founded on an actual right to the thing, nor upon any valid contract for
it, is not insurable.

1.3.1 Existing Interest

A. includes interest of an owner, but title or ownership is not always

essential.

Thus, even if they are not owners, they have insurable interest:
a. Lessee
 b. Depositary
c. Usufructuary
d. Borrower in commodatum

Example. Carrier, shipper and Consignee/Vendee

Sec. 15. 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.

B. Insurable Interest in property exists in any of the following cases, because

the insured will suffer pecuniary loss in case of the happening of the peril
insured against:
1. When the insured possess a legal title to the property insured, whether
vested or contingent, defeasible or indefeasible;
2. When he has equitable title of whatever character and in whatever
manner acquired. (Example: Contract to Sell, Deed of Assignment)
3. When he possesses a qualified right, proprietary or possessory, in the
subject matter of the insurance;
4. When he has mere possession or right of possession;
5. When he has neither possession of property nor any other legal
interest in it but stands in such relation with respect to it that he may
suffer from its destruction, loss of legal right dependent upon its
continued existence.

1.3.2 Inchoate Interest

-must be founded upon an existing interest

Example: Insurance taken by a partner over partnership properties
Insurance taken by a co-owner over properties in the co-
ownership

1.3.3 Expectancy
-must be founded on an existing interest
Examples: - Insurance taken over pregnant animals or cattle
- Insurance taken over projected crops

C. Extent of Insurable Interest

Sec. 17. The measure of an insurable interest in property is the extent to

which the insured might be damnified by loss or injury thereof.

1.4 INSURABLE INTEREST OF THE MORTGAGOR AND MORTGAGEE

"Section 8. Unless the policy otherwise provides, where a mortgagor of

property effects insurance in his own name providing that the loss shall be
payable to the mortgagee, or assigns a policy of insurance to a mortgagee,
the insurance is deemed to be upon the interest of the mortgagor, who does
not cease to be a party to the original contract, and any act of his, prior to
the loss, which would otherwise avoid the insurance, will have the same
effect, although the property is in the hands of the mortgagee, but any act
 which, under the contract of insurance, is to be performed by the
mortgagor, may be performed by the mortgagee therein named, with the
same effect as if it had been performed by the mortgagor.

"Section 9. If an insurer assents to the transfer of an insurance from a

mortgagor to a mortgagee, and, at the time of his assent, imposes further
obligations on the assignee, making a new contract with him, the acts of
the mortgagor cannot affect the rights of said assignee.

1.4.1 This section defines the roles of mortgagors and mortgagees and
their relative insurable interest over a property. The law recognizes the fact that
both parties hold separate and distinct insurable interests over the same property
subject matter of the mortgage.

1.4.2 An insurance policy taken by either one in his name alone, will
not benefit the other. The mortgagor has insurable interest over the property to
the extent of the value of the property, because he owns the property, while the
mortgagee has insurable interest only up to the extent of the debt, or the balance
thereof if partially paid.

1.4.3 Section 8 says that the mortgagor, even if he assigns the insurance
that he took over the mortgage property that he owns under his name, and the
assignment is in favor of a mortgagee, he never ceases to be a party to the
insurance contract. Thus, even in instances when the property is in the possession
of the mortgagee, any act of the mortgagor which will have an effect as to annul
the contract will apply and the insurer may use such acts of the mortgagor to
refuse any claim in case of loss or damage to the property. However, any act
which is supposed to be performed by the mortgagor, may be performed by the
mortgagee with the same effect as if it has been performed by the mortgagor
such as the payment of premium, observance of the terms and conditions and
compliance with prohibitions.

Note that the provision says, all these rules are followed by the clear
provision of the law, unless the contrary or a different agreement is stipulated by
the parties.

1.4.4 Under Section 9, if the insurance contract is assigned to a mortgagee

and the insurer assents to the transfer but imposes further obligations on the
assignee, the law will consider the imposition as a new contract with the assignee
and the acts of the mortgagor will not affect the rights of the assignee.

1.4.5 Examples: Madonna as owner of a house insures the same

but mortgages the house to Doinisia, if she assigns the insurance to Dionisia,
Madonna actually does not cease to be a party to the insurance contract.
Even if the house is in the possession of Dionisia, Madonna cannot violate
the terms of the insurance contract, (example storing inflammable
materials into the house which is prohibited under the fire insurance
contract). Should there be a loss, the insurance company may use this act
of Madonna as a ground for refusing to honor her or Dionisia’s claim.
However, should there be obligations imposed on Madonna,
Dionesia may perform the same (fulfill the obligation according to the
 insurance contract) and the Insurer must honor (accept as faithful
fulfillment of the obligation under the insurance contract) the said
performance as if the same was done by the Madonna. An example is
the acceptance of premium payments.

1.4.6 If the insurer, upon its acceptance of Madonna’s assignment of the

insurance contract in favor of the mortgagee/assignee Dionisia, imposes
further conditions or obligations on Dionisia, this will be considered as a new
agreement between the insurer and Dionisia. If Madonna performs acts in
violation of such further impositions, her actions will not have any effect on
the insurance policy and said acts may not be used by the Insurer as a
ground to deny any claim in case of loss.

1.4.7 Mortgage clauses ”- these are clauses included in insurance contracts

when the property is mortgaged. The clause may provide either

a.1 Loss payable clause - The mortgagee has no participation -

except that he is recognized as the payee of the insurance proceeds to the
extent of his credit should there be loss of the mortgaged property. He is very
much like a beneficiary who is not a party to the insurance contract.

a.2 Union or Standard Mortgage Clauses – where the mortgagee is

not merely a beneficiary who is entitled to the claim in case of loss but becomes
a party to collateral independent contracts. Thus, acts of the mortgagor will not
affect or prejudice the insurance claim of the mortgagee. This class of loss
payable clauses is the subject of Sec. 9.

1.5 INSURABLE INTEREST OF THE MORTGAGEE

-In a mortgage contract, there is a loan secured by a property that is the

subject of the property insurance. Thus, there is a need to define who benefits
from insurance proceeds (in case of loss of that same property) because of two
separate interests over one and the same property exists that is, the interest of the
mortgagor who is the debtor and who uses his property to secure his debt, then
there is the mortgagee who is the creditor, who extends the loan but demands
that a property must be mortgaged in his favor to secure the loan.

May the Mortgagee take out an insurance over the same property subject
of the mortgage under his own name?

(In Sec. 8, we talked about insurance policies that were ASSIGNED in favor
of the mortgagee or who is made a beneficiary of the policy to the extent of his
credit).

 The rule is that a mortgagee may, independently of the mortgagor,

insure the mortgaged property in his own name and for his own interest.
In such a case, the mortgagee is entitled to the insurance proceeds in
 case of loss, but he is not allowed to retain his claim against the
mortgagor. The claim is passed by subrogation to the insurer to the
extent of the money paid.

 What happens to the mortgage debt in case the mortgagee was paid
by the Insurance Company to the extent of his debt?
- The mortgagee WRITES OFF the debt of the mortgagor,
and the Insurance company who paid the mortgagee is
subrogated in the former’s right to go after the debt of the
debtor/mortgagor.
-

1.6 WHEN MUST INSURABLE INTEREST EXIST?

“SEC. 19. An interest in property insured must exist when the insurance takes
effect, and when the loss occurs, but need not exist in the meantime; and interest
in the life or health of a person insured must exist when the insurance takes effect,
but need not exist thereafter or when the loss occurs.

“SEC. 20. Except in the cases specified in the next four sections, and in the cases
of life, accident, and health insurance, a change of interest in any part of a thing
insured unaccompanied by a corresponding change of interest in the insurance,
suspends the insurance to an equivalent extent, until the interest in the thing and
the interest in the insurance are vested in the same person.

“SEC. 58. The mere transfer of a thing insured does not transfer the policy,
but suspends it until the same person becomes the owner of both the policy
and the thing insured.

“SEC. 21. A change of interest in a thing insured, after the occurrence of an injury
which results in a loss, does not affect the right of the insured to indemnity for the
loss.

“SEC. 22. A change of interest in one or more of several distinct things, separately
insured by one policy, does not avoid the insurance as to the others.

“SEC. 23. A change of interest, by will or succession, on the death of the insured,
does not avoid an insurance; and his interest in the insurance passes to the person
taking his interest in the thing insured.

“SEC. 24. A transfer of interest by one of several partners, joint owners, or owners
in common, who are jointly insured, to the others, does not avoid an insurance
even though it has been agreed that the insurance shall cease upon an alienation
of the thing insured.

“SEC. 25. Every stipulation in a policy of insurance for the payment of loss whether
the person insured has or has not any interest in the property insured, or that the
policy shall be received as proof of such interest, and every policy executed by
way of gaming or wagering, is void.

“SEC. 57. A policy may be so framed that it will inure to the benefit of
whomsoever, during the continuance of the risk, may become the owner of the
interest insured.