Quiz No.

7 – Insurance Code (Concept to Insurable Interest)

I
ET, deceased husband of respondent JT, applied for a health care coverage with petitioner
Philamcare Health Services, Inc. The application was approved for a period f one year from
March 1, 1988 to March 1, 1989. Accordingly, he was issued Health Care Agreement No.
P010194. Under the agreement, respondent’s husband was entitled to avail of hospitalization
benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of
“outpatient benefits” such as annual physical examinations, preventive health care and other
outpatient services. Was the agreement an insurance contract? (10%)

Answer: Aquino, p. 6-7

Yes. The health care agreement was in the nature of non-life insurance, which is primarily a
contract of indemnity. In this, the insurable interest of respondent’s husband in obtaining the
health care agreement was on his own health. Once the member incurs hospital, medical or any
other expense arising from sickness, injury or other stipulated contingent, the health care
provider must pay for the same to the extent agreed upon under the contract. (Philamcare Health
Systems, Inc. vs. Court of Appeals and Julita Trinos, G.R. No. 125678, March 18, 2002).

II
Under the agreement with the PHCP, Inc., the member pays the PHCP a predetermined
consideration in exchange for hospital, medical and professional services rendered by the
petitioner’s physician or affiliated physician to him. In case of availment by a member of the
benefits under the agreement, PHCP does not reimburse or indemnify the member as the latter
does not pay any third party. Instead, it is the petitioner who pays the participating physicians
and other health care providers for the services rendered at pre-agreed rates. The member does
not make any such payment. According to the agreement, a member can take advantage of the
bulk of the benefits anytime, e.g., laboratory services, x-ray, routine annual physical examination
and consultations, vaccine administration as well as family planning counseling. Even in the
absence of any peril, loss or damage on his or her part. In case of emergency, petitioner is
obliged to reimburse the member who receives care from a non-participating physician or
hospital. However, this is only a very minor part of the list of services available. The assumption
of the expense by petitioner is not confined to the happening of a contingency but includes
incidents even in the absence of illness or injury. Can the contract between the member and the
PHCP be considered an insurance contract?

Answer: Aquino, pp. 7-8

No. The contract is not an insurance contract. Not all the necessary elements of a contract of
insurance are present in petitioner’s agreements. To begin with, there is no loss, damage or
liability on the part of the member that should be indemnified by PHCP. In other words, there is
nothing in the agreement that gives rise to a monetary liability on the part of the member to any
third party-provider of medical services which might in turn necessitate indemnification from
petitioner. The terms “indemnify” or “indemnity” presupposes that a liability or claim has
already been incurred. There is no indemnity precisely because the member merely avails of
medical services to be paid or already paid in advance at a pre-agreed price under the
agreements. Indemnity of the member is not the focal point of the agreement but the extension of
medical services to the member at an affordable cost, it did not partake of the nature of a contract
of insurance.

While PHCP undertakes a business risk when it offers to provide health services: the risk that it
might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar
only to insurance companies. Insurance risk, also known as actuarial risk, it the risk that the cost
of insurance claims might be higher than the premium paid. The amount of premium is
calculated on the basis of assumptions made relative to the insured.
However, assuming that the PHCP’s commitment to provide medical services to its members can
be construed as an acceptance of the risk that it will shell out more than the prepaid services, it
still will not qualify as an insurance contract because petitioner’s objective is to provide medical
services at reduced costs, not to distribute risk like an insurer. (Philippine Health Care Providers,
Inc. vs. CIR, G.R. No. 167330, September 18, 2009).

III
TKC Marketing was the owner/consignee of some 3,189,171 metric tons of soya bean meal
which were loaded on board the ship, MV Al Kaziemah, for carriage from the port of Rio del
Grande, Brazil, to the port of Manila. Said cargo was insured by Malayan Insurance under two
marine cargo policies. While the vessel was docked in Durban, South Africa en route to Manila,
civil authorities arrested and detained the vessel because of a lawful suit on a question of
ownership and possession. As a result, the insured notified the insurer and made a formal claim
for non-delivery of the cargo. The insurer replied that the arrest of the vessel by civil authority
was not a peril covered by the policies. The cargo was sold in Durban, South Africa due to its
perishable nature which could no longer stand a voyage of twenty days to Manila and another
twenty days for the discharge thereof. The policy incorporated the Institute of War clauses which
included risks of capture, seizure, arrest, restraint or detainment and the consequences thereof, of
hostilities or warlike operations, whether there be declaration of war of not. The insurer argued
that the arrest covered by the policy was one arising from political or executive acts, and the
arrest of the vessel by judicial authorities was an excluded risk or the arrest of the vessel by civil
authorities on a question of ownership was an excepted risk under the marine insurance policies.
Was the contention of the insurer correct? (10%)

Answer: Perez, p. 362-363

The insurer was wrong in arguing that it assumed the risks of arrest caused solely by executive or
political acts of government of the seizing state and thereby excluded “arrests” caused by
ordinary legal processes. If the risks of arrest occasioned by ordinary legal processes were
expressly indicated as an exception in the policies, there would have been no controversy with
respect to the interpretation of the subject clauses. Be that as it may, exceptions to the general
coverage are construed most strongly against the company (insurer). Even an express exception
in a policy is to be construed against the underwriters by whom the policy is framed, and for
whose benefit the exception is introduced. Limitations of liability should be regarded with
extreme jealousy and must be construed in such a way as to preclude the insurer from
noncompliance with its obligation. (Malayan Insurance Corp. vs. Court of Appeals, 270 SCRA
243).

IV
Juan de la Cruz was issued Policy No. 8888 of the Midland Life Insurance Co. on a whole life
plan for P20,000 on August 19, 1989. Juan is married to Cynthia with whom he has three
legitimate children. He, however, designated Purita, his common-law wife, as the revocable
beneficiary. Juan referred to Purita in his application and policy as the legal wife. Three (3) years
later, Juan died. Purita filed her claim for the proceeds of the policy as the designated beneficiary
therein. The widow, Cynthia, also filed a claim as the legal wife. To whom should the proceeds
of the insurance policy be awarded? (10%)

Answer: 1998 Bar; Dimaampao, p. 90

The estate is entitled to claim for the proceeds of the insurance policy. As a general rule, the
insured may designate anyone he wishes to be his/her beneficiary. However, Art. 2012 of the
Civil Code, which applies suppletorily to the Insurance Code, provides that any person who is
forbidden from receiving any donation under Art. 739 cannot be named beneficiary of a life
insurance policy by the person who cannot make any donation to him, according to said article.
Art. 739 specifically bars the donations as between persons who were guilty of adultery or
concubinage. Since Purita is a common-law wife of Juan, she falls squarely in to this category
therefore she is disqualified to receive insurance proceeds and when this happens, the estate of
the deceased is the one entitled to the proceeds (Insular Life Assurance Company, Ltd. v.
Capronia Ebrado, G.R. No. L-44059, Oct. 28, 1977).

Alternative Answer: (UP Law Center)

The proceeds of the insurance policy shall be awarded to the estate of Juan de la Cruz. Purita, the
common-law wife, is disqualified as the beneficiary of the deceased because of illicit relation
between the deceased and Purita, the designated beneficiary. Due to such illicit relation, Purita
cannot be a done of the deceased. Hence, she cannot also be his beneficiary.

V
Jose, the only son of Don Peping, is a drug addict. Out of love and concern for Jose, Don Peping
decided to execute a last will and testament bequeathing upon his son his mansion in Laguna.
Jose learned about this and immediately secured insurance over the property. Does Jose have
insurable interest over the mansion?

Answer: Dimaampao, pp. 98-99

No. An heir has no insurable interest over the property that he will inherit. Jose’s expectation has
no legal basis since the will has no legal effect before the death of Don Peping. The will may be
revoked at any time before the death of the testator. Jose does not have any actual property right
in the mansion during the lifetime of Don Peping.

VI
In 2012, P joined Alpha Corporation as President thereof. Alpha took out a life insurance on the
life of P designating itself as the beneficiary. Alpha also carried a fire insurance on a house
owned by it, but temporarily occupied by P, again with the company as beneficiary.

A year later, P resigned from Alpha and purchased the company house he had been occupying. A
few days later, a fire broke out resulting in the death of P and the destruction of the house.

What are the rights of Alpha on the life and fire insurance policies? (10%)

Answer: Dimaampao, p. 99-100

Alpha has a right to recover the proceeds of the life insurance policy taken on the life of P.
Although P had already resigned from the company at the time of his death, the rule is that in life
insurance, insurable interest must exist only at the time the insurance is taken, and need not exist
at the time of the loss. The severance of the employment relationship between Alpha and P will
not affect the insured’s right to recover under the life insurance policy.

However, with respect to the fire insurance, Alpha may not recover the proceeds therefrom. The
rule in property insurance is that insurable interest must exist at the time of insurance is taken
and at the time of the loss. Upon his resignation, P bought the house from Alpha so that at the
time the fire occurred, ownership over the house has been transferred to P. Alpha lost its
insurable interest over the property, and thus, it may not recover the proceeds from the policy.

VII
A owns a house worth P2 million. He insured it against fire for P2.5 million for one year from
January 2010 to January 2011. At the instance of B, who is a judgment creditor of A, the house
was levied upon by the sheriff and sold at public auction on March 15, 2010. It was adjudicated
to B for P1.5 million at the auction sale. B insured the house against fire for P1.5 million from
March 16, 2010 to March 17, 2011. The house was burned on April 1, 2010. Who may recover
on the policy? (10%)

Answer: Dimaampao, pp. 101-102

Both can recover. The rule in property insurance is that the insurable interest must exist at the
time the insurance is obtained, and at the time of the loss, but need not exist in the meantime.

A, the owner, may recover under his policy. His insurable interest thereon existed despite the
sale at public auction. A still had one year within which to redeem the property. What is crucial
is that A had insurable interest at the time he obtained the policy and at the time of the loss.

B, the highest bidder at the auction sale, may likewise recover under his own policy. He has
inchoate right over the house, founded on an existing interest. He acquired insurable interest at
the time he bought the property at the auction sale. Such insurable interest existed even at the
time of the loss because A has yet to redeem the property.

The jurisprudential test in determining insurable interest in property is this:

Anyone has an insurable interest in property who derives a benefit from its existence or suffers
loss from its destruction. (43 Am. Jur. 2D 943). Simply stated, there exists insurable interests in
property if he derives pecuniary benefit from its existence or preservation or would sustain
pecuniary loss or damage from its loss or destruction. (32 CJS 1111).

VIII
A fire insurance policy in favor of the insured contained a stipulation that the insured shall give
notice to the company of any insurance already effected or which may subsequently be effected,
covering the property insured and unless such notice be given before the occurrence of any loss,
all benefits shall be forfeited. The face of the policy bore the annotation “Co-insurance
declared.” The things insured were burned, it turned out that several insurances were obtained on
the same goods for the same term. The insurer refused to pay on the ground of concealment. May
the insured recover? Reason. (10%)

Answer: Aquino, p. 282

Yes, the insured may recover from the insurer. The insurer cannot claim that there was material
concealment. The problem states that the face of the policy bore an annotation, “Co-insurance
declared.” This annotation is notice to the insurer as to the existence of other insurance contracts
on the property insured. The insurer should have inquired about the details of such other
insurance if it was really concern about them. (General Insurance and Surety Corporation vs. Ng
Hua, G.R. No. L-14373, January 30, 1960).

IX
On May 26, 2014, Jess insured with Jack Insurance his 2014 Toyota Corolla sedan under a
comprehensive motor vehicle insurance policy for one year. On July 1, 2014, Jess’ car was
unlawfully taken. Hence, he immediately reported the theft to the Traffic management Command
(TMC) of the PNP, which made Jess accomplish a complaint sheet as part of its procedure. In the
complaint sheet, Jess alleged that a certain Silat took possession of the subject vehicle to add
accessories and improvements thereon. However, Silat failed to return the subject vehicle within
the agreed 3-day period. As a result, Jess notified Jack of his claim for reimbursement of the
value of the vehicle under the insurance policy. Jack refused to pay claiming that there is no theft
as Jess gave Silat lawful possession of the car. Is Jack correct? (10%)

Answer: 2014 Bar

No. Jack is not correct. The “theft clause” of a comprehensive motor vehicle insurance policy
has been interpreted by the Court in several cases to cover situations like (1) when one takes the
motor vehicle of another without the latter’s consent even if the motor vehicle is later returned,
there is theft—there being intent to gain as the use of the thing unlawfully taken constitutes gain,
or (2) when there is taking of a vehicle by another person without the permission or authority
from the owner thereof.
In Paramount Insurance vs. Spouses Remondeulaz, G.R. No. 173773, November 28, 2012, the
insurance policy over the vehicle likewise contained a theft clause. Possession of the vehicle
entrusted to another to a certain Sales who was supposed to introduce repairs who permanently
deprived the owners of possession thereof. Hence, there was theft of the vehicle. Although there
was turn-over of physical possession of the vehicle, there was no transfer of juridical possession.
The failure of the owner of the repair shop to return the subject vehicle to insured owner
constitutes theft and the insurer is liable for the loss of insured vehicle under the “theft clause.”
(Annotation in Aquino – pp. 416-417).

Petitioner argues that the loss of respondents’ vehicle is not a peril covered by the policy. It
maintains that it is not liable for the loss, since the car cannot be classified as stolen as
respondents entrusted the possession thereof to another person.

We do not agree.

Adverse to petitioner’s claim, respondents’ policy clearly undertook to indemnify the insured
against loss of or damage to the scheduled vehicle when caused by theft, to wit:

SECTION III – LOSS OR DAMAGE

1. The Company will, subject to the Limits of Liability, indemnify the insured against loss
of or damage to the Scheduled Vehicle and its accessories and spare parts whilst thereon:

(a) by accidental collision or overturning, or collision or overturning consequent upon

mechanical breakdown or consequent upon wear and tear;
(b) by fire, external explosion, self-ignition or lightning or burglary, housebreaking or
theft;
(c) by malicious act;
(d) whilst in transit (including the process of loading and unloading) incidental to such
transit by road, rail, inland waterway, lift or elevator.7

Apropos, we now resolve the issue of whether the loss of respondents’ vehicle falls within the
concept of the "theft clause" under the insurance policy.

In People v. Bustinera,8 this Court had the occasion to interpret the "theft clause" of an insurance
policy. In this case, the Court explained that when one takes the motor vehicle of another without
the latter’s consent even if the motor vehicle is later returned, there is theft – there being intent to
gain as the use of the thing unlawfully taken constitutes gain.

Also, in Malayan Insurance Co., Inc. v. Court of Appeals,9 this Court held that the taking of a
vehicle by another person without the permission or authority from the owner thereof is
sufficient to place it within the ambit of the word theft as contemplated in the policy, and is
therefore, compensable.

Moreover, the case of Santos v. People10 is worthy of note. Similarly in Santos, the owner of a
car entrusted his vehicle to therein petitioner Lauro Santos who owns a repair shop for carburetor
repair and repainting. However, when the owner tried to retrieve her car, she was not able to do
so since Santos had abandoned his shop. In the said case, the crime that was actually committed
was Qualified Theft. However, the Court held that because of the fact that it was not alleged in
the information that the object of the crime was a car, which is a qualifying circumstance, the
Court found that Santos was only guilty of the crime of Theft and merely considered the
qualifying circumstance as an aggravating circumstance in the imposition of the appropriate
penalty. The Court therein clarified the distinction between the crime of Estafa and Theft, to wit:
x x x The principal distinction between the two crimes is that in theft the thing is taken while in
estafa the accused receives the property and converts it to his own use or benefit. However, there
may be theft even if the accused has possession of the property. If he was entrusted only with the
material or physical (natural) or de facto possession of the thing, his misappropriation of the
same constitutes theft, but if he has the juridical possession of the thing his conversion of the
same constitutes embezzlement or estafa.11

In the instant case, Sales did not have juridical possession over the vehicle. Hence, it is apparent
that the taking of respondents’ vehicle by Sales is without any consent or authority from the
former.

Records would show that respondents entrusted possession of their vehicle only to the extent that
Sales will introduce repairs and improvements thereon, and not to permanently deprive them of
possession thereof. Since, Theft can also be committed through misappropriation, the fact that
Sales failed to return the subject vehicle to respondents constitutes Qualified Theft. Hence, since
respondents’ car is undeniably covered by a Comprehensive Motor Vehicle Insurance Policy that
allows for recovery in cases of theft, petitioner is liable under the policy for the loss of
respondents’ vehicle under the "theft clause."

All told, Sales’ act of depriving respondents of their motor vehicle at, or soon after the transfer of
physical possession of the movable property, constitutes theft under the insurance policy, which
is compensable.12

Alternative Answer: (UP Law Center)

Jack Insurance is not correct. Ric Silat was merely given physical possession of the car. He did
not have juridical possession over the same. It is also apparent that the taking by Silat of the car
of Jess is without the consent or authority of the latter. Thus, the act of Silat in depriving Jess of
his car, soon after the transfer of physical possession of the same to him, constitutes theft under
the insurance policy that is compensable. (Paramount Insurance vs. Spouses Remondeulaz, G.R.
No. 173773, November 28, 2012).

X
To secure a loan of P10M, Mario mortgaged his building to Armando. In accordance with the
loan arrangements, Mario had the building insured with First Insurance Company for P10M,
designating Armando as the beneficiary. Armando also took insurance on the building upon his
own interest with Second Insurance Company for P5M. The building was totally destroyed by
fire, a peril insured against under both insurance policies. It was subsequently determined that
the fire had been intentionally started by Mario and that in violation of the loan agreement, he
had been storing inflammable materials in the building.

a. How much, if any, can Armando recover from either or both insurance companies? (5%)
b. What happens to the P10M debt of Mario to Armando? Explain. (5%)

Answer: (Bar Exam Problem)

a. Armando can receive P5M from Second Insurance Company. As mortgagee, he had an
insurable interest in the building. Armando cannot collect anything from First Insurance
Company. First Insurance Company is not liable for the loss of the building. First, it was due to a
willful act of Mario, who committed arson. Second, fire insurance policies contain a warranty
that the insured will not store hazardous materials within the insured’s premises. Mario breached
this warranty when he stored inflammable materials in the building. These two factors exonerate
First Insurance Company from liability to Armando as mortgagee even though it was Mario who
committed them.

b. Since Armando would have collected P5M from Second Insurance Company, this amount
should be considered as partial payment of the loan. Armando can only collect the balance of
P5M. Second Insurance Company can recover from Mario the amount of P5 M it paid, because it
became subrogated to the rights of Armando.