SESSION 6: Insurable Interest II

Review: Insurable Interest in Property

Requirement: A person, in order to know the extent of his insurable interest or presence thereof, he must
address the issue of whether he will sustain damage or loss by reason of loss, destruction, or deterioration
of the thing, then he has insurable interest over particular thing.
1. Thing being insured should be susceptible of loss, destruction, or deterioration.
2. Ownership is not a prerequisite in insuring a property. As long as he will suffer loss, destruction,
deterioration of thing.
-The thing being insured should be susceptible of loss, destruction, deterioration of thing.
Section 14: An insurable interest in property may consist in:
A. An Existing interest
-ownership of a property that can be destroyed or damaged, a person can claim that he has interest
over the property.

B. An Inchoate interest founded on an existing interest

-purely inchoate interest is not enough
-Ex. Creditor cannot by the mere fact that he is a creditor insure the property of the debtor. As the
creditor’s claim over property of debtor is inchoate. If after winning a suit against a debtor, a
creditor’s claim is inchoate as he has to wait for a suit to be filed, he should prevail there, before
he can attach the property of the debtor to his own.

-an heir cannot, by the mere fact that he is an heir, insure the properties of his parents. Why?
Because his expectancy to inherit is mere expectancy, mere inchoate—it has not ripened into an
actual right.

-whereas, in a creditor-debtor scenario, and debtor has secured the obligations through a real
estate mortgage, then the creditor’s right or claim over a specific property of debtor is not purely
inchoate. His claim as creditor comes from an existing right which is the right arising from the
real estate mortgage.

C. Expectancy coupled with an existing interest in that out of which the expectancy may arise

 Expectation of profits by a carrier. One of carrier’s right in transportation law, is to

demand payment for fee for the transportation service or contract of carriage. If a person
delivers goods for carriage by the common carrier, the CC accepted the goods for
carriage. Let’s say that the actual transportation has not commenced yet….the goods are
still in the hands of carrier. The actual transportation service is not yet present.

Q: Can the carrier already insure the goods?

A: Yes. The destruction of the goods can result to a loss on the part of the carrier.. Once goods
are handed over to carrier unconditionally, the CC already has the obligationexpected to
observe extra-ordinary diligence. Hence, carrier can insure the goods.
 Q2: Can the carrier insure an expected profit?
A2: Yes. Because the expected profits are not arising from mere expectancy. It is coupled with
existing interest. There is already a contract of transportation entered into by parties.
A mere contingent or expectant interest in any thing, not founded on an actual right to the thing,
nor upon any valid contract for it, is not insurable.
Inchoate right, expectant rights cannot be insured, but they must be anchored in an existing right for them
to be insurable.
Section 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.
Simplify: A person who does not have Ins In cannot insure a property. And a person who does not have II
cannot claim rights over that insurance, even if a person was successfully able to insure a property.. If he
has no II over property—he will not be able to claim from the insurer. Any agreement to the contrary is
void.
-Every contract of insurance(particularly for property) is for the purpose of indemnification. If a person
has no II, there is nothing for him to be damnified. Even if he successfully insures a property, even if at
that time that he took the insurance, valid insurance because he has II but if subsequently, he lost his
II, he will not be able to claim from insurer. Even if there is an agreement that insurer will become liable,
notwithstanding the fact that the insured has no more II, that agreement is void.
-Contracts for gaming or wagering is void, because insured is not entitled to damnification.

-Distinctions between insurable interest in life and in property.

Basis: II in life need not be founded on strict legal basis, II in property should be founded on strict legal
basis
In life As to who must possess interest: A person who insures another life of another party, must have
II. But the beneficiary need not have insurable interest.
In PropertyBoth the insured and beneficiary need to have insurable interest.
-In life, anyone can be named as a beneficiary except those persons who are disqualified from being
beneficiaries as they are disqualified from receiving benefits from each other.
-Even if a person is validly instituted as a beneficiary because he is not among those disqualified under
Art. 739 of NCC (valid designation) It may happen that he can be disqualified from receiving proceeds.
Q1: When is that?
A1: If he is a principal, accomplice or accessory in willfully bringing about the death of another
person. Natural diba? If a person killed the insured, and the murderer is the beneficiary, for obvious
reasons, he cannot receive the proceeds. Here, it is as if there is no beneficiary. The heirs of the insured
will be able to get the proceeds.
Q2: What is the effect of lack of interest? What if there is no insurable interest that is present?
A2: it will all depend on kind of insurance involved and the person who does not have the insurable
interest. If a person takes an insurance covering the life of another, and the one who insures has no
insurable interest in the life of another—then the insurance is void, even if the beneficiary designated has
Insurable interest. It is also the same with respect to insurance over a property. If a person insures a
property of which he has no II, insurance is void, even if beneficiary has II..
On the other hand, if a person who has insurable interest over a property insures the same, and then
designates a person who does not insurable interest to be the beneficiary—the designation of the
beneficiary is unenforceable—the designated benefeicairy cannot claim from insurer, hence, the insured
will be able to claim from the insurer.

Distinctions as to when the interest should be possessed.

In life: only at the time, the contract takes effect, it need not exist thereafter
In property-exist both at the contract takes effect, and at the time of loss although it need not exist in the
meantime.
As to extent of insurable interest:
In life-there is none. There is no ceiling,as value of a life is priceless.
In property-it is the amount for which a person shall be damnified.

CONSEQUENCE OF THE LOSS OF INTEREST:

In property-Insurable interest must exist both at the contract takes effect, and at the time of loss although
it need not exist in the meantime.
In the interim period, it is not required that a person possess continuously the Insurable interest, it may be
that there is lost, but regains interest and at that time the loss takes place, there could still be recovery.
Consequence of the Loss of Interest:
What would be the consequence of the loss of interest concerning property.
Section 20: the loss of Insurable Interest in a property suspends the policy.
-The policy is not avoided, but suspended. Hence, it can be reactivated. It can be revived from its state of
suspension.
Q: How can there be revival of the policy?
A: It can happen once a person regains the insurable interest.
Form our example: a person sold the property, but after, bought back the property. He lost the interest
over property, hence the policy was suspended. But when he bought back the property, he regains his
property—hence the policy was activated.
-You don’t have to notify the insurer in order to lift the policy from its state of suspension. Once interest
is regained, the policy is lifted from a state of suspension.
GR: The policy is suspended once a person loses his insurable interest.
Exceptions:
1. When there is a change of interest in a thing insured after the occurrence of the loss.
It will not affect the right of the insured to claim from the insurer.

Ex. X owns a house. The house is valued at 10 million pesos. He insures the house by 10 million.
The house was partially lost because of fire. Because of the partial destruction of the house, X can
claim form his insurer. Suppose X was able to convince Y, “ I have a house, so artistic…”. Y
went to the house of X, said “kakaiba yung bahay, mukhang sunog”.. X says that its part of the
design or its artistic design. X now sells the artistic to Y. X was able to convince Y and was able
to sell the property. Y is now the owner. After the sale, X claimed for proceeds of insurance with
insurer. Insurer denies liability on the ground that X lost his interest.

Q:is that a valid defense on the part of the insurer?

 A: No. That is not a good defense on part of insurer because the loss of the interest, the change of
the interest happened after the occurrence of the loss. When the loss took place when the property
got destroyed by fire, at that very moment, X’s right has already accrued, hence, the subsequent
change of interest through the sale of property can no longer affect the right of X to claim from
insurer. He can still claim from insurer whatever the amount of claim.

2. Insurance of several distinct things

Ex. A owns 5 town houses. Townhouse 1,2,3,4,5. Townhouse 2 was sold. A sold townhouse no.
2. 1,3,4,5 are still owned by A. All the townhouses 1-5, when A still owner, were insured by A.
The insurance taken by A with this insurer is that there is only 1 policy issued for 5 townhouses.
In that policy, all the townhouses are insured when townhouse no. 2 was sold. Townhouse no.1
and 2 got destroyed by fire—burned. A, the insured, is now claiming from the insurer. Insurer
denies liability using defenses: There is only one policy. A policy of insurance is indivisible, and
since there is a single policy, there was already lost of interest, hence, the policy is suspended. A
cannot claim, and insurer not liable.
Q: is the argument of insurer, correct?
A: Yes, he is correct in so far as townhouse no.2 is concerned. But incorrect with respect to
townhouse no. 1. If several distinct things are insured with only one policy, the loss of
interest in one or some of the several distinct things will not affect the rights as to the others.

-there is a single policy, indivisible. But insurance code says that, If several distinct things are
insured with only one policy, the loss of interest in one or some of the several distinct things will
not affect the rights as to the others. Hence, the loss of interest in townhouse no. 2 did not affect
the claim with respect to townhouse no. 1.

3. Change of interest arising from death of insured.

-follow the rule on succession.
A insured a house. A died. The heir, is X. X inherits the house, also inherits the insurance over
the house. If there is loss, X can recover claims because he steps into the shoes of A from whom
he inherits. X’s authority arising from insurance is because of succession.

4. Transfer of Interest to Partners

-will not result into the suspension of the policy if the partners are jointly insured.

Ex. X, Y, Z partner. They own a building valued at 60 Million. They share in profits and losses
equally. Can X alone insure the building?

A: Yes. To the amount that he will be damnified.. Limited to 20 million. Hence, X alone can
insure the bldg. for 20 million.
Q2: what is X alone insured the building for 60 million. The building got destroyed. Can X claim
the proceeds for the insurance?
A: yes. He can claim for 20 million only—the amount for which he will be damnified.

Q3: X alone insured the building, for 60 million. Subsequently, X sold his interest to his partner
Y. Y now owns 2/3 of the interest over the building, Z owns 1/3, X owns nothing. At that time
the property got destroyed by fire. Can Y claim the proceeds of the insurance?
A3: No. Y cannot. Because the insured is X. Y is not a party to the contract of insurance. A
contract of insurance is personal in nature, hence, Y not being a party, he cannot claim rights over
that policy. When X sold his interest to Y, there is loss of interest on part of X, therefore, the
policy is suspended. Y being not a party cannot claim from the proceeds of the insurance policy.

-Transfer to partners will not result to suspension of the policy. Yes. But that comes with a
condition: transfer to partners will not result to suspension of the policy if and only if they are
jointly insured. In our case, it was X alone who took the insurance. Therefore, the policy was
suspended. We cannot apply the exceptional situation.

Illustration
X, Y, and Z were partners who own a bldg. worth 60 million who took an insurance
covering their building for 60 million. After the taking the insurance, X sold his interest to Y. Y
now becomes 2/3 owner. Z is still 1/3 owner. After the sale by X to Y of his interest, property
gets destroyed by fire.
Q: Can Y and Z recover?
A: Yes. The transfer of interest by X to Y will not affect the policy because it is a transfer of
interest to a partner and they are jointly insured.

Q2. X, Y, and Z were partners who own a bldg. worth 60 million who took an insurance covering
their building for 60 million. They jointly insured the property for 60 million. Policy contains a
provision, “no transfer of interest shall be allowed, and if a transfer of interest is made without the
consent of insured, the policy is avoided”. Despite the stipulation in the policy, X sold his interest
to Y. Y is now 2/3 owner, Z is 1/3 owner. At that moment, property gets destroyed. There is
claim of insurance but insurer denies liability on the ground of violation of non-transferability of
interest. IS insurer liable?

A: yes. Insurer remains to be liable. Notwithstanding any stipulation in the policy regarding
prohibition on transfer of interest, if transfer is in favor of a partner who is jointly insured—the
policy will not be deemed to be suspended, neither will result in avoidance or suspension of
policy—policy remains to be active.

Section 57 of Insurance Code: There is no suspension of the policy notwithstanding a transfer of

interest if the policy is couched in a manner by which the insured is whoever is the owner of the
property.

-The policy can be couched in a manner by which the insured is whoever is it owner. Whoever is
the owner of property, he is the one considered insured—valid stipulation.

 A took an insurance, at the time he was the owner. A sold the house to B. B asserts the
rights of ownership over the house, B also becomes the insured(excpn).
 GR: Property and insurance over property are 2 separate properties the transfer of
property does not involve with it the transfer of the insurance over the property.

EXCPN: Policy provides specifically that it is for the benefit of whoever the owner
thereof.
 o Another exceptional situation: If the policy provides that the transfer of interest
results into the avoidance thereof.
o Once there is a transfer of interest over the thing insured, the policy is avoided. It
departs from the general rule that the policy is merely suspended. Here, the
policy is avoided. Because of that, we cannot restore it back in a state of being
active—it is already dead, we cannot bring back to life something that is dead.
Ex. A takes an insurance over a property that he owns. It says there that “no transfer of
interest over this policy shall be allowed, unless with the consent of the insurer. If a
transfer of interest is effected without consent of insurer, the policy is avoided”. A sold
the property and his interest to B. A wanted to regain back the property, hence, discussed
to B that he wants to repurchase property. B sold back the property. A is again the owner.
Property gets destroyed. Can A recover?
A: A cannot recover. Because of the stipulation in the policy that provides that “the
transfer of interest leads to avoidance”. Regaining of insurable interest will not bring
back the policy that has already been avoided.