INSURANCE CODE

Republic Act No. 10607:

An Act Strengthening The Insurance Industry,
Further Amending Presidential Decree No. 612,
Otherwise Known As The Insurance Code, As
Amended By Presidential Decree Nos. 1141,
1280, 1455, 1460, 1814 And 1981, And Batas
Pambansa Blg. 874, And For Other Purposes
Principle behind insurance
Insurance is based upon the principle of aiding another from a loss caused
by an unfortunate event.

Laws Governing Insurance

1. RA 10607 further amending Insurance Code (PD 612), as amended).

The Insurance Code primarily governs the different types of insurance
contracts and those engaged in insurance business in the Philippines.
2. Civil Code - The provisions of the Civil Code dealing on insurance are
found in Articles 739 and 2012 (void donations), Article 2011 (applicability of the
Civil Code), Articles 2021-2027 (life annuity contracts), Article 2186
(compulsory motor vehicle liability insurance), and Article 2207 (right of
subrogation).
3. Special laws
a. Revised GSIS Act of 1977 (PD 1146, as amended)
b. Social Security Act of 1954 ( RA 1161, (as amended) c. The
Property Insurance Law ( RA 656, as amended by PD 245)
d. Republic Act No. 4898 (life, disability, and accident insurance
coverage to barangay officials)
e. EO 250; and
f. RA 3591 (PDIC)
 THE CONTRACT OF INSURANCE
CONTRACT OF INSURANCE
An agreement whereby one undertakes for a consideration to
indemnify another against loss, damages or liability arising from an
unknown or contingent event.

A. “Doing an Insurance Business”

Making or proposing to make, as insurer, any insurance contract
Making or proposing to make, as surety, any contract of suretyship as a
vocation
Doing any king of business, including a reinsurance business,
specifically recognized as constituting the doing of an insurance business
with the meaning of this Code
Doing or proposing to do any business in substance equivalent to any
of the foregoing
 REQUISITES OF A VALID INSURANCE CONTRACT
A contract must have consent of the parties, object and cause or
consideration.

The parties who give their consent in this contract are the
insurer and insured.
The object of the contract is the transferring or distributing of the
risk of loss, damage, liability or disability from the insured to the
insurer.
The cause or consideration of the contract is the premium
which the insured pays the insurer.
 CHARACTERISTICS OF INSURANCE CONTRACTS

1. Consensual
· Perfected by the meeting of the minds of the parties
· If an application for insurance has not been either accepted or rejected,
there is no contract as yet

2. Voluntary
· It is not compulsory and the parties may incorporate such terms and
conditions as they may deem convenient which will be binding provided they do
not contravene any provision of law and are not opposed to public policy
 Except if compulsory insurance coverage is required by Law

3. Aleatory
·It depends upon some contingent event
·Each party must take a risk
Insurer - being compelled upon the happening of the contingency, to pay
the entire sum agreed upon
Insured – parting with the amount required as premium without receiving
anything in case the contingency does not happen except what is ordinarily
termed “protection” which is itself is a valuable consideration
4. Executory (insurer) and executed (insured)
· Executory on the part of the insurer in the sense that it is not executed until
payment for a loss
· It is executed as to the insured after payment of the premium
· It is a unilateral contract imposing legal duties only on the insurer who
promises to indemnify in case of loss

5. Conditional
· It is subject to conditions the principal one of which is the happening of the
event insured against
· The contract usually includes many other conditions, such as payment of
premium or performance of some other act, which must be complied with as
precedent to the right of the insured to claim benefit under it

6. A contract of indemnity
The promise of the insurer is to make good only the loss of the insured.
Insured should not collect more than the actual cash value of the loss.
Except:
Life insurance where the liability of insurer is the face value of the policy
and not the earning capacity of the insured at the time of death
Valued Policies where the insurer will pay the value fixed in the policy
regardless of the actual cash value in case of total loss
7. A personal contract
·Each party having in view the credit, character and conduct of another

8. A contract of Adhesion
·Policy is presented to the insured already in its printed form

9. Of highest degree of good faith (uberrimae fides contract)

·The contract of insurance is one of perfect good faith not for the
insured alone but equally so for the insurer. It requires the parties to the
contract to disclose conditions affecting the risk of which he is aware or
material fact which the applicant knows, and those which he ought to
know.
 Elements of an Insurance Contract (I-R-A-P-S)
1. Insurable interest
In general, a person is deemed to have insurable interest in the subject
matter insured where he has a relation or connection with or concerning it
that he will derive pecuniary benefit or advantage from its preservation
and will suffer pecuniary loss or damage from its destruction, termination
or injury by the happening of the event insured against.
2. Risk of Loss or Damage / Designated Peril as Cause
·The happening of the designated events, either unknown or contingent,
past or future, will subject such interest to some loss, whether in the form
of injury, damage, or liability
3. Assumption of Risk
·The insurer assumes the risk to indemnify the insured in case of loss
4. Payment of Premium
·The insurer undertakes to assume the risk of such a loss for a
consideration called the premium to be paid by the insured

5. Risk-Distributing Scheme
·This assumption of risk is part of a general scheme to distribute the
loss among a large number of persons exposed to similar risks
 CLASSES OF INSURANCE CONTRACTS
1. Life - a mutual agreement by which a party agrees to pay a given sum on the
happening of a particular event contingent on the duration of human life, in
consideration of the payment of a smaller sum immediately, or in periodical
payments by the other party

a) Individual life - insurance on human lives and insurance

appertaining thereto or connected therewith.

b) Group Life – a blanket insurance covering a number of individuals

c) Industrial Life – a form of life insurance under which the premiums are
payable either monthly or oftener, if the face amount of insurance provided in
any policy is not more than five hundred times that of the current statutory
minimum daily wage in the City of Manila, and if the words "industrial policy"
are printed upon the policy as part of the descriptive matter.
 Variations in Life Insurance Contracts
a) Whole life plan
· The terms of which the insured is required to pay a certain fixed premium
annually or at more frequent intervals throughout life and the beneficiary is entitled
to receive payment under the policy only after the death of the insured
b) Limited payment plan
· The terms of which the premiums are payable only during a limited period of
years, usually ten, fifteen, or twenty
c) Term plan
· It is an insurance for a fixed or a specific term, such as two, five, or ten years
· If the insured dies within the period specified, the policy is paid to the beneficiary;
if he survives the period, the contract terminates
d) Pure endowment plan
· Insured pays premium for a specified period and should he survive the period, the
insurance company pays him the face value of the policy
· If he should die within the period the insurance company is released from any
liability and unless provided in the contract, need not reimburse any part of the
premiums paid
e) Endowment plan
· The terms of which the insurer binds himself to pay a fixed sum to the insured if
he survives for a specified period (maturity date stated in the policy), or if he dies
within such period, to some other person indicated
· The premium is higher
2. Non-life – includes policies covering risks to which property may be
exposed, as well as those which cover the risk of liability to third persons. It
covers a specified period of time (not more than 1 year) and has a definite
period of coverage.
a) Marine
· Ocean Marine Insurance – insurance against risk connected with
navigation, to which a ship, cargo, freightage, profits or other insurable
interest in movable property, may be exposed during a certain voyage or a
fixed period of time
· Inland Marine Insurance – covers primarily the land or over the land
transportation perils of property shipped by railroads, motor trucks, airplanes,
and other means of transportation. It also covers risks of lake, river, or other
inland waterway transportation and other waterborne perils outside of those
risks that fall definitely within the ocean marine category
b) Fire
Insurance against loss by fire, lightning, windstorm, tornado or
earthquake and other allied risks, when such risks are covered by extension
to fire insurance policies or under separate policies
c) Casualty or Liability Insurance
Insurance covering loss or liability arising from accident or mishap,
excluding certain types of loss which by law or custom are considered as
falling exclusively within the scope of other types of insurance such as fire or
marine
3) Suretyship
A contract of suretyship is an agreement whereby a party called the surety
guarantees the performance by another party called the principal or obligor of
an obligation or undertaking in favor of a third party called the obligee.

4) Compulsory Motor Vehicle Liability Insurance

A specie of compulsory insurance that provides for protection coverage that
will answer for legal liability for losses and damages for bodily injuries or
property damage that may be sustained by another arising from the use and
operation of motor vehicle by its owner

5. Microinsurance
A financial product or service that meets the risk protection needs of the poor
where:
"(a) The amount of contributions, premiums, fees or charges, computed on a
daily basis, does not exceed seven and a half percent (7.5%) of the current
daily minimum wage rate for nonagricultural workers in Metro Manila; and
"(b) The maximum sum of guaranteed benefits is not more than one
thousand (1,000) times of the current daily minimum wage rate for
nonagricultural workers in Metro Manila.
Construing the provisions of the Insurance Code
Since our present IC is based mainly on the Insurance Act, which in turn was
taken verbatim from the law of California (except for Chapter V, which was
taken from the law of NY), the courts should follow in fundamental points, at
least, the construction placed by California Courts on California law (and the
construction placed by the NY Courts on NY law). This is in accordance with
the well settled rule in statutory construction that when a statute has been
adopted from some other state or country, and said statute has previously been
construed by the courts of such state or country, the statute is usually
deemed to have been adopted with the construction so given.

1. Where there is Ambiguity or Doubt •

General rule: contracts of insurance are to be construed liberally in favor
of the insured and strictly against the insurer resolving all ambiguities
against the latter, so as to effect its dominant purpose of indemnity or
payment to the insured, especially were a forfeiture is involved or liability on
the part of the insured

2. Where Terms are Clear •

The court is bound to adhere to the insurance contract as the authentic
expression of the intention of the parties, and it must be construed and
enforced according to the sense and meaning of the terms which the parties
themselves have used.
 RIGHT OF SUBROGATION
Insurance is based on the principle of subrogation (applicable
only
  to property insurance)
Art. 2027, CC: If the plaintiff's property has been insured,
and he 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 aggrieved party shall be
entitled to recover the deficiency from the person causing the
 
loss or injury.
 Subrogation is
essentially a process of substitution, where
the subrogee, in this case, the insurer, steps into the
shoes of the insured. Actions or rights pertaining to the
insured will be transferred to the insurer.
 
For example, you have a car insured under a
comprehensive policy. It was involved in an accident. It
was the fault of the other party. Damage: P70,000.00.
What are your remedies?
 Either you recover from the insurer or
 from the party at fault.

Can you recover from both?

You cannot recover from both. Why not?
Because a contract of insurance is a contract of
indemnity. It is not to be used as an instrument
for profit or gain.
 
 Suppose you decide to recover from the insurer, but the insurer
pays you only P30,000.00. With respect to that amount, there will be
subrogation. It is now the insurer who can recover this amount from
the party at fault.

Subrogation is a normal incident of indemnity insurance. It inures to

the insurer without the need of formal assignment or an express
stipulation in the policy to that effect. The moment the insurer pays
the insured, the insurer becomes a subrogee in equity.
 
May the insured recover from the party at fault?
Art. 2207 of the Civil Code says YES, because the law says, "if the
amount paid by the insurance company does not fully recover the
injury or loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury."
 
Can the insurer's right of subrogation be destroyed?
Yes. The insurer's right of subrogation can be destroyed when the
insured releases the other party at fault from liability. Why? Because
by releasing the other party, the insured destroys or defeats the
insurer's right of subrogation. Hence, the insurer will deny the claim of
the
  insured.
In other words, it is the obligation of the insured to preserve at all
times that right of recovery which belongs to him, but which will
eventually be transferred to the insurer by way of subrogation. That is
a condition in the insurance policy.
 
How else can the right of subrogation be destroyed or defeated?
When the insurer pays the insured even if the cause of the loss was
not the risk or peril insured against.
 CONTRACT OF INSURANCE
REQUISITES OF A CONTRACT OF INSURANCE

1. A subject matter which the insured has an

insurable interest.
2. Event or peril insured against which may
be any future contingent or unknown event,
past or future and a duration for the risk
thereof.
3. A promise to pay or indemnify in a fixed
or ascertainable amount.
4. A consideration known as “premium”.
5. Meeting of the minds of the parties.
 PERFECTION OF AN INSURANCE CONTRACT
 An insurance contract is a consensual contract and
is therefore perfected the moment there is a
meeting of minds with respect to the object and
the cause or consideration.

 What is being followed in insurance contracts is

what is known as the “cognition theory”. Thus, “an
acceptance made by letter shall not bind the person
making the offer except from the time it came to his
knowledge”. (Enriquez vs. Sun Life Assurance Co. of
Canada, 41 Phil. 269)
 PARTIES TO AN INSURANCE CONTRACT
Essential Requisites for a person to be a party in an insurance
contract:
1. Must be COMPETENT to enter (has capacity)
2. Must possess INSURABLE INTEREST
3. Must NOT be a PUBLIC ENEMY
A. Insurer
 party who assumes or accepts the risk of loss and undertakes for a
consideration to indemnify the insured or to pay him a certain sum
on the happening of a specified contingency or event

Who may be an insurer?

A foreign or domestic insurance company may transact business in the
Philippines but must first obtain a certificate of authority for that purpose from
the Insurance Commissioner who has the discretion to refuse to issue such
certificate if it will best promote the interests of the people of this country. (Sec.
187)
An individual may also be an insurer, provided he holds a certificate of
authority from the Insurance Commissioner, and provided further that he is
possessed of the capital assets required of an insurance corporation doing the
same kind of business in the Philippines and invested in the same manner.
(Sec. 184-186)
B. Insured
 The party in whose favor the contract is operative and
who is indemnified against, or is to receive a certain sum
upon the happening of a specified contingency or event.
He is the person whose loss is the occasion for the
payment of the proceeds by the insurer
 Must have capacity to contract
 Must possess an insurable interest in the subject of the
insurance
 Must not be a public enemy.

Public enemy - a nation with whom the Philippines is at

war and it includes every citizen or subject of such
nation. A private corporation may be deemed an enemy
corporation if controlled by enemy aliens.
B is sideswiped by a balut vendor. Because he was previously indicted
for many other crimes including illegal possession of balisongs, he was
declared Metro Manila’s Public Enemy No.1. If A wants to secure
insurance on the life of B, may the insurer refuse on the grounds that B is
a public enemy and therefore may not be insured under Sec. 7 of the IC?
 

In 2010, the Philippine National Police declared Kaddafy Benjelani

"Public Enemy No. 1" because of his terrorist activities in the
country that have resulted in the death of thousands of Filipinos.
A ransom of P15 million was placed on Kaddafy Benjelani's head.

Worried about the future of their family, Kaddafy Benjelani's

estranged wife, Aurelia, secured in December 2010 a life
insurance policy on his life and designated herself as the
beneficiary.
Is the policy valid and binding?
 RULE ON MINORS

M, a minor, enters into a contract of property insurance. The insurance

company issues a policy. There is a loss by fire.

Can the insurance deny the claim on the ground that the insured is a
minor?
May the insurer raise as a defense the minority of the insured, and
therefore consider the contract void?

RULE ON MARRIED WOMEN

Howabout a married woman? Can she enter into a

contractof insurance without the consent of her
husband? (Sec. 3, par. 2, ICP)
 
What are the distinctions between an insurance contract and a wagering
contract?
A contract of insurance is a contract of indemnity and not a wagering, or
gambling contract. It is based on a contingency, it is not a contract of chance and
is not used for profit. The distinctions are the following:
Insurance Contract Gambling contract
Parties seek to distribute loss by Parties contemplate gain through mere
reason of mischance chance or the occurrence of a
contingent event.
Insured avoids misfortune. Gambler courts fortune
Tends to equalize fortune. Tends to increase the inequality of
fortune.
What one insured gains is not at the Essence is whatever one person wins
expense of another insured. The entire from a wager is lost by the other
group of insured provided through the wagering party.
premiums paid, the funds which make
possible the payment of all claims;

Purchase of insurance does not create a As soon as a party makes a wager, he

new and non-existing risk of loss to the creates a risk of loss to himself where
purchaser. In purchasing insurance, the no such risk existed previously.
insurer faces an already existing risk of
economic loss.
C. Beneficiaries
Refer to the persons who are designated in a contract of
insurance as the one who is to receive the benefits which
become payable, according to the terms of the contract,
upon the death of the insured.
Chosen exclusively by insured who may designate
anyone (irrespective of lack of insurable interest) so long
as s/he not disqualified by law.
Proceeds of life insurance policy become the exclusive
property of the beneficiary upon the death of the insured.
Cestui que vie (for whose use/benefit) Person on whose
life the policy was taken.
Must be a risk acceptable to the insurer
Rules in the designation of the beneficiary:
1. Life
a) A person who insures his own life can designate any person as his
beneficiary, whether or not the beneficiary has an insurable interest in the
life of the insured subject to the limitations under Art. 739 and Art. 2012 of
the NCC.
Reason: In essence, a life insurance policy is no different form a civil
donation insofar as the beneficiary is concerned. Both are
founded on the same consideration of liberality. (Insular Life vs.
Ebrado, 80 SCRA 181)

b) A person who insures the life of another person and name himself as the
beneficiary must have an insurable interest in such life. (Sec. 10)

c) As a general rule, the designation of a beneficiary is revocable unless the

insured expressly waived the right to revoke in the policy. (Sec. 11)

d) The interest of a beneficiary in a life insurance policy shall be forfeited

when the beneficiary is the principal accomplice or accessory in willfully bringing
about the death of the insured in which event, the nearest relative of the insured
shall receive the proceeds of said insurance if not otherwise disqualified. (Sec.
12)
Art. 2012 (Civil Code) Any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a life
insurance policy by the person who cannot make any donation to him,
according to said article. (n)
Art. 739. The following donations shall be void:
(1) Those made between persons who were guilty of adultery or
concubinage at the time of the donation;
(2) Those made between persons found guilty of the same criminal
offense, in consideration thereof;
(3) Those made to a public officer or his wife, descedants and
ascendants, by reason of his office.
In the case referred to in No. 1, the action for declaration of nullity may
be brought by the spouse of the donor or donee; and the guilt of the
donor and donee may be proved by preponderance of evidence in the
same action. (n)
 DONATIONS THAT ARE VOID BECAUSE OF MORAL
CONSIDERATIONS/PUBLIC POLICY

1. The first kind—those made between persons who were guilty of

adultery or concubinage at the time of the donation
    

a. The adultery or concubinage need not be proved in a criminal

action. The guilt may be proved by preponderance of evidence.
b. If the donation was made after the adultery or concubinage, then it is
valid except if the consideration thereof is the commission of the act
c. If the perpetrators are merely sweethearts but don’t have any
sexual intercourse with one another, then this prohibition is not
applicable. Remember the elements of adultery and concubinage.
2. The second kind—those made between persons found guilty of the
same criminal offense, in consideration thereof
a. There must be a criminal conviction—mere preponderance of
evidence showing guilt is not sufficient
b. It doesn’t matter whether the donation was made before or after the
commission of the offense
3. The third kind—those made to a public officer or his wife, descendants
and ascendants by reason of his office
     a. Purpose—to prevent bribery
 Problems
Pao and Jane are husband and wife. Jef and Jaja are also
husband and wife. Jef and Jane engaged in adulterous
relations. Jef secured a life insurance policy and named Jane
as beneficiary. When Jef dies, who will get the insurance
proceeds?

Jaja. Jane cannot be named as a beneficiary in a life insurance

policy because she is forbidden by law to receive a donation from
Jef since they were both guilty of adultery.
Pao and Jane are husband and wife. Jef and Jaja are also husband
and wife. Jef has a concubine named Maui Taylor. Jef thereafter
secured a life insurance policy and named Jane as beneficiary.
When Jef dies, who will get the insurance proceeds?

Jane. The law only prohibits the situation wherein a person who is
forbidden from receiving a donation under Art. 739 is named a
beneficiary of a life insurance policy by the person who cannot make
any donation to him, according to said article. Notwithstanding that Jef
is guilty of concubinage, Jane can still be a beneficiary. Since Jane is
not the concubine, Art. 739 will not apply and Jef is not forbidden from
giving a donation to Jane.
Pao and Jane are husband and wife. Jef and Jaja are also husband
and wife. Jane engages in adulterous relations with Van. Jef has a
concubine named Maui Taylor. Jef thereafter secures a life
insurance policy and names Jane as a beneficiary. When Jef dies,
who will get the insurance proceeds?

Jane. The law only prohibits the situation wherein a person who is
forbidden from receiving a donation under Art. 739 is named a
beneficiary of a life insurance policy by the person who cannot make
any donation to him, according to said article. Notwithstanding that both
parties are guilty of adultery and concubinage respectively, they are not
forbidden because Jef is not the one engaged in an adulterous
relationship with Jane, and she is not the concubine of Jef. Art. 739
does not apply.
Pao and Jane are husband and wife. Jef and Jaja are also husband
and wife. Jef and Pao become lovers. Jef thereafter secures a life
insurance policy and names Pao as his beneficiary. When Jef dies
who will get the insurance proceeds?

Pao. Since there is no law prohibiting Jef from donating to Pao,

because both of them are neither guilty of adultery nor concubinage,
then the only solution to this problem is to consider the designation of
the beneficiary as a contract which is valid and binding between the
insurer and the insured.
2. Property

a) The beneficiary of property insurance must have an insurable interest

in such property, which must exist not only at the time the policy takes
effect but also when the loss occurs. (Sec. 13 and 18).
 INSURABLE INTEREST
Definition and Purpose

A person is said to have an insurable interest in the subject matter

insured where he has a relation or connection with, or concern in it that
he will derive pecuniary benefit or advantage from its preservation and
will suffer pecuniary loss or damage from its destruction, termination,
or injury by the happening of the event insured against.

· Essential element of an insurance contract.

· Not legally possible to waive requirement

Developed to meet two objections:

1) That insurance is a wagering contract
2) That insurance creates the temptation of bringing about the
event insured against in order to collect the policy

Why must there be an insurable interest?

It is essential for validity and enforceability of the contract or policy.
A policy issued to a person without interest in the subject matter is a
mere wager policy or contract.
What are the distinctions between an insurance contract and a wagering
contract?
A contract of insurance is a contract of indemnity and not a wagering, or
gambling contract.(Sec. 25) It is based on a contingency, it is not a contract of
chance and is not used for profit. The distinctions are the following:
Insurance Contract Gambling contract
Parties seek to distribute loss by Parties contemplate gain through mere
reason of mischance chance or the occurrence of a
contingent event.
Insured avoids misfortune. Gambler courts fortune
Tends to equalize fortune. Tends to increase the inequality of
fortune.
What one insured gains is not at the Essence is whatever one person wins
expense of another insured. The entire from a wager is lost by the other
group of insured provided through the wagering party.
premiums paid, the funds which make
possible the payment of all claims;

Purchase of insurance does not create a As soon as a party makes a wager, he

new and non-existing risk of loss to the creates a risk of loss to himself where
purchaser. In purchasing insurance, the no such risk existed previously.
insurer faces an already existing risk of
economic loss.
 Problems

A, B, C and D decided to join a bungee jumping competition.

They contributed P1,000 each to a fund available for the use of
any member who is injured in the contest. Is this insurance or
gambling?

This is an insurance contract. Each member contributes to a

common fund, out of which one is reimbursed for the losses that
he may suffer.

Suppose A, B, C, and D agree that the whole amount of 4T

would be given to the one who swings nearest to the ground. Is
this insurance or gambling?

This is now a gambling contract. The parties are now

contemplating a gain based upon uncertain events.
Insurable Interest in Life and Health Insurance

·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;
c. of any person under a legal obligation to him to pay
money or respecting property or services, of which death or
illness might delay or prevent performance; and
d. of any person upon whose life any estate or interest
vested in him depends. (Sec. 10)
Amount:

GENERAL RULE:

There is no limit in the amount the insured can insure his

life.

EXCEPTION:

In a creditor-debtor relationship where the creditor

insures the life of his debtor, the limit of insurable interest is
equal to the amount of the debt.

· If at the time of the death of the debtor the whole debt has
already been paid, the creditor can no longer recover on
the policy because the principle of indemnity applies.
Beneficiary

The beneficiary need not have an insurable interest

over the life of the insured if the insured himself secured
the policy. However, if the life insurance was obtained by
the beneficiary, the latter must have insurable interest over
the life of the insured.
 Problem

A takes an insurance policy on his life and names his friend X as

beneficiary, and another insurance on the life of Y in consideration
of “love and affection” with A as a beneficiary. Which of the two
insurances, if any, is valid and which, if any, is void?

The Insurance taken on A on his life is VALID, because the

beneficiary need not have an insurable interest in the life of the
insured. It must be the one insuring who has an insurable interest in
the life of the person he is insuring, and of course, it goes without
saying that one has an insurable interest in his own life and health.

ON the other hand, the insurance taken by A on the life of Y is

VOID because “love and affection for the insured” on the part of the
person insuring is NOT sufficient ground to qualify as insurable
interest.
 Col. C. Castro v. Insurance Commissioner
GR. 55836, Feb. 16, 1981
Facts:
Castro applied for insurance on the life of his driver. On the basis of such
application, Insular Life issued policy No. 934943 effective July 18, 1979. The
policy applied for and issued was on a 20-yr endowment plan for the sum of
P25T with double indemnity in case of accidental death. Castro paid the first
quarterly premium of P309.95. About 3 months later, on Oct. 16, 1959, the
insured driver was allegedly shot to death by unknown persons. Castro then
filed a claim for the total benefits of 50T under the policy. Insular life denied
the claim on the ground that the policy was VOID. Insular instead refunded
to Castro the premiums he had paid.

Issue: Whether or not Castro has an insurable interest in his driver.

Held: NO.
The requirement of insurable interest to support a contract of insurance is
based upon consideration of public policy which renders wager policies INVALID.
To sustain a contract of this character it must appear that there is a real concern in
the life of the party whose death would be the cause of substantial loss to those
who are named as a beneficiary.
Mere relationship of uncle and nephew, employer and employee is NOT
sufficient to provide an insurable interest on the life of the insured. It must be
shown that the destruction of the life of the insured would cause pecuniary loss to
the complainant. This, Castro failed to prove.
Insurable Interest in Property Insurance
·
Every interest in property whether real or personal, or any
relation thereto, or liability in respect thereof, of such nature
that the contemplated peril might directly damnify the insured
(Sec. 13), which may consist in:

1. an existing interest;
2. any inchoate interest founded on an existing
interest; or
3. an expectancy coupled with an existing interest in
that out of which the expectancy arises. (Sec. 14)
 
When it should exist:
When the insurance takes effect and when the loss occurs,
but need not exist in the meantime.

Amount:
The measure of insurable interest in property is the extent to
which the insured might be damnified by loss or injury thereof.

Beneficiary
The beneficiary must have insurable interest over the thing
insured.
Is it alright if both the mortgagor and the mortgage insure the
same property?
YES. The mortgagor and the mortgagee have each an insurable
interest in the property mortgaged, and this interest is separate and
distinct from the other. Consequently, insurance taken by one in his
own name only and in his favor alone does not inure to the benefit of
the other. And in case both of them take out separate insurance policies
on the same property, or one policy covering their respective interests,
the same is not open to the objection that there is double insurance.

What is the extent of the insurable interest of the mortgagor?

The mortgagor of the property, as owner has an insurable interest to
the extent of the value of the property, even if the mortgage debt is
equal to such value. The reason is that the loss or destruction of the
property insured will NOT extinguish the mortgage debt.
What is the extent of the insurable interest of the mortgagee?

The mortgagee or his assignee has an insurable interest in the

mortgaged property to the extent of the debt secured, such interest
continues until the mortgage debt is extinguished.

Up to what extent can each recover?

The mortgagor cannot recover upon the insurance beyond the full
amount of the loss, and the mortgagee cannot recover in excess of the
credit at the time of the loss.
 STANDARD OR OPEN OR LOSS
UNION MORTGAGE PAYABLE
CLAUSE MORTGAGE
CLAUSE
Subsequent acts of the Acts of the mortgagor
mortgagor cannot affect affect the mortgagee.
the rights of the assignee Reason: Mortgagor does
not cease to be a party to
the contract. (Secs. 8 and
9)
What are the effects of insurance when the mortgagor effects
insurance in his own name and provides that the loss be
payable to the mortgagee?
The contract is deemed to be upon the interest of the
mortgagor, hence he does NOT cease to be a party to the
contract;
Any action of the mortgagor prior to the loss which would
otherwise avoid the insurance affects the mortgagee even if the
property is in the hands of the mortgagee;
Any act which under the contract of insurance is to be
performed by the mortgagor, may be performed by the
mortgagee;
In case of loss, the mortgagee is entitled to the proceeds to the
extent of his credit; and
Upon recovery by the mortgagee to the extent of his credit, the
debt is extinguished.
 PROBLEMS

A is the owner of a house worth 10T which he mortgaged to B

to secure a loan of 5T. What is the insurable interests of each?
Insurable interest of A, mortgagor is P10T, while the
insurable interest of B, mortgagee is P5T.

A insured for 1M her house with the policy providing that the
loss shall be payable to B. The house was mortgaged to B as
security for a loan of P750T. It was totally destroyed by
accidental fire. Who may recover on the policy?
B, the mortgagee may receive the 1M but is entitled only to
the extent of his credit of P750T, and he shall hold as trustee for
A, mortgagor, the excess of P250T.
Supposing before the fire occurred B had already been paid,
who, if at all, will receive the proceeds?

A will receive the proceeds. The reason is that A effected

the insurance in his own name and he did NOT cease to be a
party to the contract although it was provided that the indemnity
be paid to B.

Suppose it was B, mortgagee who insured the house for 1M.

If the loss occurred before B was paid who is entitled to
receive the proceeds?

•But B can only recover P750T, the amount of her credit.

What if the loss occurred after B was paid, can he still
receive the proceeds?

No. Upon payment of the debt, B lost his insurable interest

in the property.

Will A get the proceeds?

No. Because A was never a party to the contract. It is

important to note that it was B, mortgagee who effected the
insurance.
 INSURABLE INTEREST IN INSURABLE INTEREST IN
LIFE PROPERTY
Must exist only at the time the Must exist at the time the policy
policy takes effect and need not takes effect and when the loss
exist at the time of loss occurs
Unlimited except in life insurance Limited to actual value of interest in
effected by creditor on life of debtor. property insured.
The expectation of benefit to be An expectation of a benefit to be
derived from the continued existence derived from the continued existence
of life need not have INSURABLE
any legalINTEREST
of IN
theLIFE
property insured must have a
basis whatever. A reasonable legal basis.
probability is sufficient without more.
The beneficiary need not have an The beneficiary must have
insurable interest over the life of the insurable interest over the thing
insured if the insured himself secured insured.
the policy. However, if the life
insurance was obtained by the
beneficiary, the latter must have
insurable interest over the life of the
insured.
 Problem No. 1
1. A obtains a fire insurance on his house and as a generous
gesture names his neighbor as the beneficiary. If A's house is
destroyed by fire, can B successfully claim against the
policy?

No, B cannot. B has no insurable interest. In property insurance,

the beneficiary must have insurable interest.

2. A obtains insurance over his life and names his neighbor B

the beneficiary because of A‘s secret love for B. If A dies, can B
successfully claim against the policy?

Yes, B can. A insured who takes out life insurance over his own
life can designate anyone as beneficiary, regardless of insurable
interest.
 Problem No. 3
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. Insurable interest, in property insurance, must exist at the
time of loss. 

2. No. Insurable interest may transfer as when, for example,

ownership over the thing insured is transferred by sale.
However, ownership of the policy itself does not transfer,
except when there is an automatic transfer clause.