NOTES IN INSURANCE LAW

Culled primarily from the lectures of Atty. Amado E. Tayag

The present insurance law is RA 10607 enacted in 2013 signed by Pres. Noynoy Aquino. It
replaced the former PDs of President Marcos which governed our Insurance laws

From where did we adopt our Insurance laws?

• Some are from California laws except those chapters pertaining to agency and agents
patterned after the laws of New York
• A lot of doctrines are interpreted based on the laws of California

Elements of insurance contract: (Art. 1318, NCC)

1. Consideration: The premiums paid
2. Subject matters:
• Life
• Property
• Risk of being held liable to third persons or Casualty Insurance: A very good
example is the motor vehicle liability insurance
o In this type of insurance, the insurer or insurance company pays the
victim
o While the insured is the driver of the vehicle, the insurance company
would pay the victim of the driver of the vehicle
o It is a compulsory insurance, not voluntary. It is mandatory because it
is required by law, the motor vehicle liability law implemented by the
LTFRB.
o The reason is because of public safety and interest so that there is
automatic payment to the victims. No need for courts.
o Another example is the Government Service Insurance System and the
SSS Law which makes it compulsory. These laws are special laws
governing insurance contracts
3. Consent

What is the distinctive element present in an insurance contract/policy?

• That the insured possesses the insurable interest susceptible of pecuniary estimation

What is insurable interest?

When can it be said that a person has an insurable interest over a particular subject
matter?
• When the person has ownership over the property; or
• When the person will be damnified by the loss of such property.
• When the person would derive benefit from its continued preservation and would
suffer injury from its damage or destruction. (Lalican v. CA)

In insurable interests in property, what title must you possess over the property?
• Legal or equitable title, not both, may suffice
• In property, there may be two or more insurable interests.

Daverick Pacumio
UST Faculty of Civil Law
What laws govern insurance contracts?
• Generally, the Insurance Code and other special laws govern insurance contracts
• Suppletorily, the civil code provisions apply if the insurance code is silent (Art. 2011).
Examples are:
o Art. 2207 of the Civil Code provides for the right of subrogation but note that
this is only applicable to insurance on property

Characteristic of insurance contract

1. Voluntary: No compulsion. The parties may incorporate such terms and conditions
as they may deem convenient. This, however, is merely a general rule
• An exception to this rule is the aforementioned motor vehicle liability law
where the law requires motor vehicle registrants to secure insurance or
compulsory third party liability insurance (CTPL)
2. Consensual: There must be meeting of the minds before an insurance contract is
perfected (Art. 1319).
• An insurance contract is a contract. Being a contract, you apply the pertinent
provisions of the civil code pertaining to contracts in general
• Note that in the second paragraph of Art. 1319, we follow the Cognition
Theory whereby if the acceptance of the party, if sent via letter, the same is
not enough as it must be communicated and received by the addressee
• So, in case acceptance by the insurance company of an application is sent by
letter to the applicant and the applicant, while the letter is in transit, dies,
there is no perfected insurance contract
3. Uberrimae (utmost) Fidae (good faith) (singular: Uberrima Fidas): A contract of
insurance is a contract of utmost good faith. This is because the courts are ready to
apply the doctrine of estoppel as against the insurer when he seeks to take advantage
of some condition of forfeiture in order to escape payment under the policy.
4. Aleatory: Art. 2010 of the NCC provides that a contract is aleatory when one of the
parties or both reciprocally bind themselves to give or to do something in
consideration of what the other shall give or do upon the happening of an event
which is uncertain, or which is to occur at an indeterminate time.
• It is also aleatory in the sense that what the insured will pay in premiums is
not equal to what he will receive in case of loss.
5. Unilateral: Upon the payment of the premium, there is only one party who has the
obligation, that is, the insurer’s obligation to pay for the proceeds of the insurance
in case of loss.
6. Personal: The contract is entered into with due consideration of the circumstances
of the parties.
7. Executory and Conditional: The contract is executory to the insurer and subject
to the condition that the event insured against actually happens.

Why is an insurance contract called a contract of adhesion?

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A: It is because insurance contracts are normally drafted or made by one party, the insurer,
and the other party, the insured, is left to either accept or reject it.

Is this contrary to the voluntariness of a contract of insurance?

A: No. The other party is free to either reject or accept the insurance contract.

Would this characteristic of being a contract of adhesion have an impact on the

interpretation of insurance contracts?
A: Yes. In case of ambiguity, contracts of adhesion are strictly construed against the maker
thereof. However, if there is no ambiguity, the letter of the contract shall be strictly
followed.

What is/are the basis of these rules?

A: Statutory law, i.e., Art. 1377 of the Civil Code which provides that, “The interpretation of
obscure words or stipulations in a contract shall not favor the party who caused the
obscurity.” Aside from the Civil Code, another basis is the Insurance Code. Last, the
Supreme Court via jurisprudence.

Cases involving ambiguous provisions in insurance contracts:

Del Rosario v. Equitable Insurance

• In this case, while drowning was covered by the Insurance Policy, there was no
specific amount mentioned in the policy for such.
• The interpretation of obscure stipulations in a contract should not favor the party
who caused the obscurity which, in the case at bar, is the insurance company. The
'terms in an insurance policy, which are ambiguous, equivocal or uncertain . . . are
to be construed strictly against, the insurer, and liberally in favor of the insured so
as to effect the dominant purpose of indemnity or payment to the insured, especially
where a forfeiture is involved.’

Malayan Insurance v. CA
• If a marine insurance company desires to limit or restrict the operation of the
general provisions of its contract by special proviso, exception, or exemption, it
should express such limitation in clear and unmistakable language. Obviously, the
deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1
of Section 1 of the Institute War Clauses (Cargo) gave rise to ambiguity. If the risk of
arrest occasioned by ordinary judicial process was expressly indicated as an
exception in the subject 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. 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.

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 • An insurance contract should be so interpreted as to carry out the purpose for which
the parties entered into the contract which is, to insure against risks of loss or
damage to the goods. Where restrictive provisions are open to two interpretations,
that which is most favorable to the insured is adopted.

Verendia v. CA
• Considering the foregoing discussion pointing to the fact that Verendia used a false
lease contract to support his claim, the terms of the policy should be strictly
construed against the insured. Verendia failed to live by the terms of the policy,
specifically Section 13 thereof which states that all benefits under the policy shall be
forfeited "if the claim be in any respect fraudulent, or if any false declaration be
made or used in support thereof, or if any fraudulent means or devises are used by
the Insured or anyone acting in his behalf to obtain any benefit under the policy".

Alpha Insurance v. Castor

• The insurance policy states that Alpha Insurance shall indemnify the Insured against
loss by theft. In the exceptions thereto, the insurance policy states that Alpha
Insurance is not liable for any malicious damage caused by the insured, any member
of his family, or by a person in the insured’s service. Contract of insurance, like other
contracts, are to be construed according to the sense and meaning of the terms
which the parties themselves have used. If such terms are clear and unambiguous,
they must be taken and understood in their ordinary and popular sense.

Fortune Care v. Amorin

• The phraseology used in medical or hospital service contracts, such as the one at
bar, must be liberally construed in favor of the subscriber, and if doubtful or
reasonably susceptible of two interpretations the construction conferring coverage
is to be adopted, and exclusionary clauses of doubtful import should be strictly
construed against the provider.

Cases involving literal interpretation of insurance contracts in the absence of

ambiguity:

New Life v. CA
• While it is a cardinal principle of insurance law that a policy or contract of insurance
is to be construed liberally in favor of the insured and strictly against the insurer
company, yet contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties themselves have
used. If such terms are clear and unambiguous, they must be taken and understood
in their plain, ordinary and popular sense.
• In this case, New Life admits that the insurance policies issued by private
respondents did not state or endorse thereon the other insurance coverage obtained
or subsequently effected on the same stocks in trade for the loss of which
compensation is claimed by New Life. The terms of the contract are clear and
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 unambiguous. The insured is specifically required to disclose to the insurer any
other insurance and its particulars which he may have effected on the same subject
matter.
• Condition no. 3 in this case avoids instances of over-insurance.
• The public, as well as the insurer, is interested in preventing the situation in
which a fire would be profitable to the insured.

Fortune Insurance v. CA
• The insurance policy entered into by the parties is a theft or robbery insurance policy
which is a form of casualty insurance. In these types of insurance, "the
opportunity to defraud the insurer — the moral hazard — is so great that
insurers have found it necessary to fill up their policies with countless
restrictions, many designed to reduce this hazard. Seldom does the insurer
assume the risk of all losses due to the hazards insured against." Persons
frequently excluded under such provisions are those in the insured's service and
employment. The purpose of the exception is to guard against liability should the
theft be committed by one having unrestricted access to the property."
• Even granting for the sake of argument that these contracts were not "labor- only"
contracts, and PRC Management Systems and Unicorn Security Services were truly
independent contractors, Magalong and Atiga were, in respect of the transfer of
Producer's money from its Pasay City branch to its head offce in Makati, its
"authorized representatives" who served as such with its teller Maribeth Alampay.
Howsoever viewed, Producers entrusted the three with the specific duty to safely
transfer the money to its head office, with Alampay to be responsible for its custody
in transit; Magalong to drive the armored vehicle which would carry the money; and
Atiga to provide the needed security for the money, the vehicle, and his two other
companions. In short, for these particular tasks, the three acted as agents of
Producers. A "representative" is defined as one who represents or stands in the place
of another; one who represents others or another in a special capacity, as an agent,
and is interchangeable with "agent." Thus, Fortune is exempt.
• Physical hazard: The opportunity to defraud is not great. The hazard may pertain
to the condition of the thing. In moral hazard, the opportunity to defraud the
insurer is greater because a person may be entrusted or may have unlimited access
to the property/ies insured. In moral hazard, the psyche of the insured is affected
because the insured may refuse to give due care to his/her insured property since
he/she knows he/she might profit from the same.

NPC v. Philamgen
• The surety bond of Philamgen had not yet expired. The breach of contract in this
case, that is, the abandonment of the unfinished work of the transmission line of
the petitioner by the contractor Far Eastern Electric, Inc. was within the effective
date of the contract and the surety bond. Such abandonment gave rise to the
continuing liability of the bond as provided for in the contract which is deemed

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 incorporated in the surety bond executed for its completion. To rule therefore that
private respondent was not properly notified would be gross error.
• The surety bond must be read in its entirety and together with the contract between
NPC and the contractors. The provisions must be construed together to arrive at
their true meaning. Certain stipulations cannot be segregated and then made to
control.

Some notes from Atty. Tayag:

• The parties to an insurance contract may include riders/clauses. A rider is an
attached document wherein the parties may exclude, include, modify, or change in
any way a policy in the contract. So, an insurance contract is not strictly a contract
of adhesion.
• In Del Rosario, the provision covering death by drowning in the insurance policy
was a mere rider. The issue arose only because there was no amount specified in
case the insured dies by drowning in which case, the SC applied the rule on
ambiguous provisions in an insurance contract.
• Arts. 1370-1379 of the Civil Code apply in the interpretation of insurance contracts.
Note the application of Art. 1377 as discussed above.
• Contra proferentem: a rule in contract law which states that any clause considered
to be ambiguous should be interpreted against the interests of the party that
requested that the clause is included. This is embodied in Art. 1377 of the Civil Code.
• Whenever there is an ambiguity, it is resolved in favor of the insured if only to carry
out the purpose of the insurance contract in the first place, which is to indemnify
the insured against loss (Malayan Insurance v. CA). Note also that Art. 1373 of the
Civil Code states that, “If some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most adequate to
render it effectual.”

As a Consensual Contract

Great Pacific Life v. CA

• A contract of insurance, like other contracts, must be assented to by both parties
either in person or by their agents. The contract, to be binding from the date of the
application, must have been a completed contract, one that leaves nothing to be
done, nothing to be completed, nothing to be passed upon, or determined, before it
shall take effect. There can be no contract of insurance unless the minds of the
parties have met in agreement. In this case, there was no meeting of the minds. In
the absence of a meeting of the minds between petitioner Pacific Life and Ngo Hing
over the 20-year endowment life insurance in the amount of P50,000.00 in favor of
the latter's one-year old daughter, and with the non-compliance of the abovequoted
conditions stated in the disputed binding deposit receipt, there could have been no
insurance contract duly perfected between them.
• When private respondent supplied the required essential data for the insurance
application form, he was fully aware that his one-year old daughter is typically a
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 mongoloid child. Such a congenital physical defect could never be ensconced nor
disguised. Nonetheless, private respondent, in apparent bad faith, withheld the fact
material to the risk to be assumed by the insurance company. As an insurance agent
of Pacific Life, he ought to know, as he surely must have known, his duty and
responsibility to supply such a material fact. Had he divulged said significant fact in
the insurance application form, Pacific Life would have verified the same and would
have had no choice but to disapprove the application outright.
• The contract of insurance is one of perfect good faith, not for the insured alone but
equally so for the insurer. Concealment is a neglect to communicate that which a
party knows and ought to communicate.

Notes from Atty. Tayag:

• One of the characteristics of insurance contract is that it is consensual in nature.
• Note that under Art. 1319 of the Civil Code, a counter-offer is another offer which
must be accepted by the acceptor.
• The insured is normally the one who makes the offer. The insurer is the one who
accepts, which is done by the delivery of the insurance policy, where the Cognition
Theory under the second paragraph of Art. 1319 of the Civil Code applies and comes
into play.
• A binding receipt in a life insurance company does not insure outright because the
application is still subject to the approval of the insurer. The term “binding” is a
misnomer.
• In fact, in this case the binding receipt even contained three (3) provisions one of
which is that the application must be accepted and approved.

As a Contract of Indemnity
• Applies only to property insurance and not life insurance because in the latter, the
amount to be paid by the insurer can never be equal to the value of the life that is
being insured.
• Sec. 186, Insurance Code: Unless the interest of a person insured is susceptible
of exact pecuniary measurement, the measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the policy.
• What is referred to in the emphasized exception in Sec. 186?
o Life insurance policy obtained by the creditor insuring the life of his debtor.

Mayer Steel Pipe v. CA

• The CA erred in applying Sec. 3(6) of the Carriage of Goods by Sea Act because under
this provision, only the carrier’s liability is extinguished if no suit is filed within one
year after delivery of the goods or the date when they should have been delivered.
But the liability of the insurer is not extinguished because the insurer’s liability is
based not on the contract of carriage but on the contract of insurance. Moreover, in
the cited case of Filipino Merchants, it was the insurer which filed a claim against
the carrier for reimbursement of the amount it paid to the shipper. In the case at

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 bar, it was the shipper which filed a claim against the insurer. The basis of the
shipper's claim is the "all risks" insurance policies issued by private respondents to
petitioner Mayer.
• An insurance contract is a contract whereby one party, for a consideration known
as the premium, agrees to indemnify another for loss or damage which he may suffer
from a specified peril. An "all risks" insurance policy covers all kinds of loss other
than those due to willful and fraudulent act of the insured. Thus, when private
respondents issued the "all risks" policies to petitioner Mayer, they bound
themselves to indemnify the latter in case of loss or damage to the goods insured.
Such obligation prescribes in ten years, in accordance with Article 1144 of the New
Civil Code.
Notes from Atty. Tayag:
• Always take note of the governing contract and the governing law between the
parties involved
• Prime example is this case. With regard to the relationship between the
shipper/consignee and the carrier, the governing contract is the bill of lading, and
the governing law is the Carriage of Goods by Sea Act (COGSA)
• With regard to the shipper/consignee and the insurer, the governing contract is the
marine insurance policy and the governing law is the Insurance Code, supplemented
by the Civil Code
• In cases like this, you have to determine who the party sued is. If the party sued is
the carrier, even if the insurer is the one filing the case, then the prescriptive period
is the one governed by COGSA, i.e., one (1) year from the time of delivery of the
goods.
• If the party sued is the insurer, then you look at the governing contract, i.e., the
insurance policy contract and, if there are no provisions on prescription therein,
apply the provisions of the Civil Code, specifically, Art. 1144.

Paramount Insurance v. Japzon

• There is merit in petitioner's contention that its liability is limited only to
P50,000.00 as expressed in Insurance Policy No. CV-3466 issued on February 23,
1978. The said insurance policy clearly and categorically placed the petitioner's
liability for all damages arising out of death or bodily injury sustained by one person
as a result of any one accident at P50,000.00. Said amount complied with the
minimum fixed by law then prevailing, Section 377 of Presidential Decree No. 6123
(which was retained by P.D. No. 1460, the Insurance Code of 1978), which provided
that the liability of land transportation vehicle operators for bodily injuries
sustained by a passenger arising out of the use of their vehicles shall not be less than
P12,000.00. Since the petitioner's liability under the insurance contract is neither
less than P12,000.00 nor contrary to law, morals, good customs, public order or
public policy, said stipulation must be upheld as effective and binding between the
parties. Therefore, the terms of the contract constitute the measure of the insurer's
liability.

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Philamgen v. CA
• Art. 2207 of the Civil Code provides that, “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.” In Pan Malayan Insurance Co. v. CA, the SC held that
payment by the assurer to the assured operates as an equitable assignment to the
assurer of all the remedies which the assured may have against the third party whose
negligence or wrongful act caused the loss. The doctrine of subrogation has its roots
in equity. It is designed to promote and to accomplish justice and is the mode which
equity adopts to compel the ultimate payment of a debt by one who in justice, equity
and good conscience ought to pay. Therefore, the payment made by Philamgen to
Coca-Cola Bottlers Philippines, Inc., gave the former the right to bring an action as
subrogee against Felman. Having failed to rebut the presumption of fault, the
liability of Felman for the loss of the 7,500 cases of 1-liter Coca-Cola softdrink bottles
is inevitable.

Fireman’s Fund v. Jamila

• Subrogation is founded on principles of justice and equity, and its operation is
governed by principles of equity. It rests on the principle that substantial justice
should be attained regardless of form, that is, its basis is the doing of complete,
essential, and perfect justice between all the parties without regard to form.
Subrogation is a normal incident of indemnity insurance. Upon payment of the loss,
the insurer is entitled to be subrogated pro tanto to any right of action which the
insured may have against the third person whose negligence or wrongful act caused
the loss. Fireman’s Fund’s action against Jamila is squarely sanctioned by Art. 2207
of the Civil Code. As the insurer, Fireman’s Fund is entitled to go after the person or
entity that violated its contractual commitment to answer for the loss insured
against.

Pan Malayan v. CA
• Art. 2207 provides that if the insured property is destroyed or damaged through the
fault or negligence of a party other than the assured, then the insurer, upon payment
to the assured, will be subrogated to the rights of the assured to recover from the
wrongdoer to the extent that the insurer has been obligated to pay.

Aboitiz Shipping v. ICNA

• Art. 1735 of the Civil Code states that where the goods are lost, destroyed, or
deteriorated, common carriers, like Aboitiz, are presumed to have been at fault or
to have acted negligently, unless they prove that they exercised extraordinary
diligence. The bill of lading issued by petitioner on 31 July 1993 contains the notation
"grounded outside warehouse", suggesting that from July 26 to 31, the goods were
kept outside the warehouse. And since evidence showed that rain fell over Manila

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 during the same period, we can conclude that this was when the shipment sustained
water damage.

Malayan Insurance v. Alberto

• Payment by the insurer to the insured operates as an equitable assignment to the
insurer of all the remedies that the insured may have against the third party whose
negligence or wrongful act caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity of contract. It accrues simply
upon payment by the insurance company of the insurance claim. The doctrine of
subrogation has its roots in equity. It is designed to promote and to accomplish
justice; and is the mode that equity adopts to compel the ultimate payment of a debt
by one who, in justice, equity, and good conscience, ought to pay. Thus, it is but
rightful for Malayan Insurance to be subrogated to the rights of the assured.

Additional notes from Atty. Tayag:

Sec. 3. Any contingent or unknown event, whether past or future, which may
damnify a person having an insurable interest, or create a liability against him, may
be insured against, subject to the provisions of this chapter.
• Contingent event: May or may not happen or something that is certain to happen
but the time when it would occur is yet uncertain (Example: Life insurance – death
is certain but the time of death is uncertain)
• This section also contemplates third-party liability (Example: Compulsory Third-
Party Liability contracts)

Sec. 4. The preceding section does not authorize an insurance for or against the
drawing of any lottery, or for or against any chance or ticket in a lottery drawing a
prize.
• For public policy considerations.

Right of Subrogation
• An equitable principle – has its roots in equity.
• Applies only in property insurance (see Art. 2207 which refers only to property)
because the life of a person is incapable of pecuniary estimation.
• Moreover, it applies only in property insurance because the subrogee is essentially
an assignee who steps into the shoes of the insured and assumes the rights
appertaining to the insured.
• This is why one of the exceptions to the right of subrogation is where the insured,
by his own acts, absolves the wrongdoer.

Reasons behind the right of subrogation:

1. To prevent unjust enrichment; and
2. So that the wrongdoer could not be allowed to escape liability

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Exceptions to the right of subrogation:
1. If the assured, by his own act, releases the wrongdoer from liability;
2. Where the insurer pays the assured the value of the lost goods without notifying the
carrier who has in good faith settled the assured’s claim for loss; and
3. Where the insurer pays the assured for a loss which is not a risk covered by the
policy, thereby effecting “voluntary payment.”1

Filipinas Compaña de Seguros v. Christern Huenefeld

• The English and American cases relied upon by the CA are no longer controlling,
because the latest ruling of the US Supreme Court in Clark v. Uebersee adopts the
control test, i.e., the nationality of a corporation is determined by the citizenship of
its controlling stockholders. Since the majority of respondents’ stockholders are
Germans, it is deemed a German corporation. The Philippine Insurance Law (Act
No. 2427, as amended), in section 8, provides that "anyone except a public enemy
may be insured." It stands to reason that an insurance policy ceases to be allowable
as soon as an insured becomes a public enemy.
• The respondent having become an enemy corporation on 10 December 1941, the
insurance policy issued in its favor on 01 October 1941, by the petitioner (a Philippine
corporation) had ceased to be valid and enforceable, and since the insured goods
were burned after 10 December 1941, and during the war, the respondent was not
entitled to any indemnity under said policy from the petitioner.

People v. Yip Wai Ming

• It needs not much emphasis to say that an application form does not prove that
insurance was secured. Anybody can get an application form for insurance, fill it up
at home before filing it with the insurance company. In fact, the very first sentence
of the form states that it merely "forms the basis of a contract between you and NZI
Life." There was no contract yet. There is no proof that the insurance company
approved the proposal, no proof that any premium payments were made, and no
proof from the record of exhibits as to the date it was accomplished. It appearing
that no insurance was issued to Lam Po Chun with accused-appellant as the
beneficiary, the motive capitalized upon by the trial court vanishes. Thus, the
picture changes to one of the alleged perpetrator killing his fiancee under cold-
blooded circumstances for nothing.

Philamlife v. Pineda
• Under the Insurance Law, the beneficiary designated in a life insurance contract
cannot be changed without the consent of the beneficiary because he has a vested
interest in the policy. In this case, the Beneficiary Designation Indorsement in the
policy states that the designation of the beneficiaries is irrevocable, and that “no
right or privilege under the Policy may be exercised, or agreement made with the
Company to any change in or amendment to the policy, without the consent of the

1
Pan Malayan v. CA, supra.

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 said beneficiary/ies.” Thus, it is only with the consent of all beneficiaries that any
change or amendment in the policy concerning the irrevocable beneficiaries may be
legally and validly effected.

Heirs of Maramag v. Maramag (Alexa, play Kabet by Gagong Rapper)

• Art. 2011 of the Civil Code provides that insurance contracts shall be governed by
special laws, i.e., the Insurance Code, Sec. 53 of which provides that, “The insurance
proceeds shall be applied exclusively to the proper interest of the person in whose
name or for whose benefit it is made unless otherwise specified in the policy.” Thus,
the only persons entitled to claim the insurance proceeds are either the insured or
the beneficiary. The exception is where the insurance contract was intended to
benefit third persons who are not parties to the same in the form of favorable
stipulations or indemnity, i.e., a stipulation pour autrui.2
• Nevertheless, there is no prohibition against illegitimate children receiving the
insurance proceeds wherein the concubine was the original beneficiary
• Even if you are the legitimate family, you are still considered a third party if you are
not named as a beneficiary thereon. It is only in cases where the insured has not
designated any beneficiary, or when the designated beneficiary is disqualified by law
to receive the proceeds, that the insurance policy proceeds shall redound to the
benefit of the estate of the insured. Here, there remained beneficiaries who are not
disqualified, i.e., the children of the concubine. There is no provision disqualifying
illegitimate children from being named as beneficiaries of the insurance.

Insular Life v. Ebrado (Alexa, play Ako ang Nagwagi by Didith Reyes)
• While it is unfortunate that the Insurance Laws of the country do not contain
specific provisions grossly resolutory of the prime question at hand, Art. 2011 of the
Civil Code provides that “the contract of insurance is governed by special laws.
Matters not expressly provided for in such special laws shall be regulated by this
code.” Moreover, Art. 2012 of the Civil Code even 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 a donation to him.” In
essence, a life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned.
• Here, as stipulated by the parties themselves, Carponia, being a concubine of
Buenaventura, is disqualified to become a beneficiary. Criminal conviction is not
needed for the disqualification to arise. The guilt of the party may be proved “in the
same action” for declaration of nullity of donation.

Filipino Merchants v. CA
• An "all risks policy" should be read literally as meaning all risks whatsoever and
covering all losses by an accidental cause of any kind. The terms "accident" and
"accidental", as used in insurance contracts, have not acquired any technical

2
An exception to the relativity of contracts.

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 meaning. Thus, the terms have been taken to mean that which happens by chance
or fortuitously, without intention and design, and which is unexpected, unusual and
unforeseen. The insured under an "all risks insurance policy" has the initial burden
of proving that the cargo was in good condition when the policy attached and that
the cargo was damaged when unloaded from the vessel; thereafter, the burden then
shifts to the insurer to show the exception to the coverage.
• An “all risk” policy affords more protection to the insured than a “perils” policy,
where only specified risks or perils are covered. An “all risk” policy provides
protection and indemnity over losses whose cause are undetermined, subject only
to certain specified exceptions. In Filipino Merchants, the exception is when the loss
or damage is caused by delay or the inherent vice or nature of the subject matter of
the insurance.
• In an “all risk” policy, it is the insurance policy who has the burden of proof to prove
that the loss was due to an instance covered by the specified exceptions. In other
words, the insurance company must prove that the cause of the loss is due to any of
the causes excluded or excepted from the policy.
• Insurable interest in property under Sec. 13 of the Insurance Code may consist in (a)
an existing interest; (b) an inchoate interest founded on an existing interest; or (c)
an expectancy, coupled with an existing interest in that out of which the expectancy
arises. Herein private respondent, as vendee/consignee of the goods in transit has
such existing interest therein as may be the subject of a valid contract of insurance.
His interest over the goods is based on the perfected contract of sale. The perfected
contract of sale between him and the shipper of the goods operates to vest in him
an equitable title even before delivery or before he performed the conditions of the
sale.
• Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract
of sale, the seller is authorized or required to send the goods to the buyer, delivery
of the goods to a carrier, whether named by the buyer or not, for, the purpose of
transmission to the buyer is deemed to be a delivery of the goods to the buyer, the
exceptions to said rule not obtaining in the present case. thus, the delivery of the
goods on board the carrying vessels partake of the nature of actual delivery since
from that time, foreign buyers assumed the risks of loss of the goods and paid the
insurance premium covering them.

Sps. Cha v. CA
• CKS has no insurable interest in the goods and merchandise inside the leased
premises under Sec. 17 of the Insurance Code which provides that the measure of
insurable interest in property is the extent to which the insured might be damnified
by loss or injury thereof. Respondent CKS cannot, under the Insurance Code — a
special law — be validly a beneficiary of the fire insurance policy taken by the
petitioner-spouses over their merchandise. This insurable interest over said
merchandise remains with the insured, Sps. Cha. The automatic assignment of the
policy to CKS under the provision of the lease contract previously quoted is void for

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 being contrary to law and/or public policy. The proceeds of the fire insurance policy
thus rightfully belong to Sps. Cha.
• Sec. 18 of the Insurance Code provides that no contract or policy of insurance on
property shall be enforceable except for the benefit of some person having an
insurable interest in the property insured. A non-life insurance policy such as the
fire insurance policy taken by petitioner-spouses over their merchandise is primarily
a contract of indemnity. Insurable interest in the property insured must exist at the
time the insurance takes effect and at the time the loss occurs. The basis of such
requirement of insurable interest in property insured is based on sound public
policy: to prevent a person from taking out an insurance policy on property upon
which he has no insurable interest and collecting the proceeds of said policy in case
of loss of the property. In such a case, the contract of insurance is a mere wager
which is void under Section 25 of the Insurance Code.
• Sec. 25 of the Insurance Code: No amount of stipulation would remove or dispense
with the very important element, which is insurable interest.
• The SC also cited Art. 1409 (1) of the Civil Code, which states that a contract whose
cause or purpose is contrary to law, morals, or public policy is void. The stipulation
in the lease contract in this case removing the insurable interest is ontrary to law,
morals, and public policy.

Notes from Atty. Tayag

Insurable Interest: That interest which a person is deemed to have interest in the subject
matter insured, where he has a relation or connection with or concern in it, such that the
person will derive pecuniary benefit or advantage from the preservation of the subject
matter and will suffer pecuniary loss or damage from its destruction, termination, or injury
by the happening of the event insured against (Lalican v. Insular Life).
• Note in Sps. Cha where the SC held that waiver of insurable interest even in
contractual stipulations is void for being contrary to law and/or public policy. The
stipulation inserted in the lease contract of Sps. Cha is one contrary to law and public
policy because it states that in case Sps. Cha obtains fire insurance without the
written consent of CKS, the proceeds of such insurance shall be payable to CKS. CKS
has no insurable interest, whether legal or equitable, over the goods entirely owned
by lessee Sps. Cha.

Kind of title in order for a person to insure property:

1. Legal title; or
2. Equitable title.

Sec. 13, Insurance Code: Any interest on property, whether real or personal, or
liability in respect thereof, of such a nature that a contemplated peril might directly
damnify an insured, is an insurable interest.

Sec. 14, Insurance Code: What insurable interest in property may consist in:
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 a. Existing interest – Either a legal interest or an equitable or beneficial interest.

Examples: Lessor (Legal Title) and Lessee (Equitable/Beneficial Title); Trustor

(Legal Title) and Trustee (Beneficial Title); Mortgagor (Legal Title) and Mortgagee
(Equitable/Beneficial Title).

Mortgagee Clause or Loss Payable Clause:3 Clause which provides that the loss,
if any, shall be payable to the mortgagee. For example: Fire insurance. The owner of
the property who mortgaged his property obtained a fire insurance policy over his
property. Under the law, the mortgagee also has an independent insurable interest
over the same property. There is no double insurance here because there is no
similarity or identity of interest over the property insured, which is an element of
double insurance.
Q: Is this a violation of Sec. 18 of the Insurance Code because of the lack of insurable
interest of the mortgagee who benefits from the loss, if any?
A: NO. The mortgagee has an equitable/beneficial interest.

b. Inchoate interest – Must be founded on an existing interest, otherwise, the loss of

the property will not directly damnify the insured.

Example: A shareholder has inchoate interest on the properties of the corporation.

A shareholder has an inchoate interest founded an existing interest, i.e., the shares
of stock which he owns and holds. Thus, a shareholder can take out an insurance on
the properties of the corporation. Note that in this case, the legal or equitable title
belongs to the corporation since a corporation may own property in its own name
based on the doctrine of separate corporate personality, distinct from the
personality of the shareholders comprising such corporation.
o Why does a shareholder have only inchoate interest? The properties of
the corporation redound to the benefit of the shareholders upon the
dissolution of the corporation, subject to prior payment of all corporate debts
and obligations. Thus, it is possible that after payment of corporate debts and
obligations, there would no longer be any property which the shareholders
may acquire.
o Why does the law allow the shareholder to insure these properties? It
is because it is founded on existing interest. What is this existing interest
in this case? The shareholdings of the stockholder.

c. Expectancy interest – Expectancy must likewise be coupled with an existing

interest. Mere expectant interest must be founded upon an actual right to the thing
or a valid contract.

3
Sec. 8, Insurance Code.

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 Example: Interests over the profits that are to be earned by a business; Interest over
future crops of farmers

Q: May the creditor automatically insure the property of his debtor?

A: It depends. If the creditor is unsecured, he may not insure the property of his
debtor. If the creditor is secured for example by a mortgage, then the creditor may
insure the property mortgaged.
XPN: When the unsecured creditor becomes a judgement creditor.

Note: A mere expectancy is not automatically insurable unless it is founded on an

actual right to the thing, or upon any valid contract.
o Any valid contract: Real Estate Mortgage

Inchoate and expectancy interest are almost the same because they pertain to
interest that arises in the future.
Inchoate Interest Expectancy Interest
Interest by a stockholder owned by and Expected interest a creditor will have
registered in a corporation over the property of his debtor, e.g., a
Real Estate Mortgage

Insurable Interest in Property Insurable Interest in Life Insurance

Insurance
Extent: Limited up to the value of the Extent: Unlimited except if secured by
property the creditor
Time when it must exist: At the time Time when it must exist: At the time
of perfection of the contract and at the of perfection of the insurance contract
time of the loss
Need for legal basis: Expectation ofNeed for legal basis: Expectation of
benefit must have legal basis benefit need not have legal basis or
need not be based on legally
enforceable obligation
Beneficiary’s interest: Beneficiary Beneficiary’s interest: Insurable
must have insurable interest interest is not necessary if the insured
took out the policy on his own life and
designated another. Beneficiary must
have insurable interest if one took out
an insurance on the life of another

Insurable Interest
• Important requirement: No amount of estoppel or waiver may dispense with the
insurable interest.

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 • A kind of interest a person may have such that the continued existence of a person
or property will continue to benefit him and, on the other hand, its destruction will
damnify him.
• Sps. Cha v. CA: In property insurance, the person in whose name and for whose
benefit the proceeds will be given must have insurable interest over the property
insured. Sec. 18 – no insurance contract on property is enforceable except in favor of
a person who has insurable interest over the property insured.
• Heirs of Maramag v. Maramag: Sec. 53 - The insurance proceeds shall be applied
exclusively to the proper interest of the person in whose name or for whose benefit
it is made unless otherwise specified in the policy.
o This is the basis used by the SC in giving the benefits or proceeds to Loreto
Maramag’s illegitimate children.
o Kung sino yung designated sa beneficiary-designation portion, that must be
respected subject to the statutory limitation of Art. 739, NCC.
o Sec. 53 is applied without qualification to life insurance.
o 2 general scenarios in a life insurance policy: A person insuring his own
self, and a person insuring the life of another. In the first, insurable interest
is undoubtedly complied with because the person insuring has insurable
interest over his own life. In the second, the person applying for insurance
must have an insurable interest over the life of another person.
o When insurance proceeds payable to the estate of the insured: It is only in
cases where the insured has not designated any beneficiary, or when the
designated beneficiary is disqualified by law to receive the proceeds, that the
insurance policy proceeds shall redound to the benefit of the estate of the
insured.

Life Insurance
• 2 general scenarios in a life insurance policy: A person insuring his own self, and
a person insuring the life of another. In the first, insurable interest is undoubtedly
complied with because the person insuring has insurable interest over his own life.
In the second, the person applying for insurance must have an insurable interest
over the life of another person.
• Note: When it is the creditor insuring life of debtor, the rules on property insurance
apply. Note, further: the amount the creditor gets when loss occurs is limited to the
standing balance of the debtor’s obligation.
• For example, Juan granted 1 Million loan to Pedro and insured the life of Pedro in
the amount of 1 Million. During the effectivity of the policy, on the 6th month, Pedro
died. Upon Pedro’s death, he was able to pay ½. How much may Juan recover? Only
the remaining balance of the loan at the time Pedro died, i.e. ½ or 500,000.

Property Insurance
• Person designated as a beneficiary must also have an insurable interest over the
property insured. This cannot be dispensed with by stipulation or waiver (Sps. Cha
v. CA).
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• When must this insurable interest exist?
o Sec. 19 – Insurable interest in property must exist both: (a) at the time when
the insurance takes effect; and (b) the time when the loss occurs but need
not exist in the meantime. When these requirements do not concur, the
beneficiary will not get the proceeds.
o With respect to life insurance, however, the insurable interest must exist at
the time the insurance takes effect, but need not exist at the time loss, i.e.,
death occurs.
o What happens in case of change of interest over the property insured? Sec.
20 – Suspends the insurance to an equivalent extent until the insurable
interest over the property insured is vested in one and the same person. Read
this with Sec. 58 of the law, viz: A mere transfer of the thing insured does not
transfer the policy but suspends it until the interest in the thing insured is
vested in one and the same person.
o Scenario: Original owner of the house sold his house to another person
without transferring the fire insurance policy. Thereafter, a fire gutted the
house. Who gets the benefit?
A: Neither the original owner nor the buyer of the house. Under Sec. 58, a
mere transfer of the thing insured does not transfer the policy but merely
suspends its effectivity. Moreover, there was no compliance with Sec. 19
because the original owner who procured the policy no longer had insurable
interest at the time the loss occurred, and the buyer did not have insurable
interest over the property when the insurance policy procured because it was
the original owner who procured the same.
o Scenario: Same set of facts above, but during the effectivity of the fire
insurance policy, a fire gutted the insured house which resulted the partial
destruction of the house of the original owner. A few weeks after, he sold the
undestroyed and unburnt portion of the house to another. Who is entitled to
the proceeds?
A: The original owner. At the time of the loss, he is still the owner of the
house and the insured property. Under Sec. 21, transfer or change of interest
or ownership occurring after the loss does not affect the right of the original
insured for indemnity over the loss. So, qualify palagi. Kung nauna ibenta
bago masunog, neither could collect. Kung nauna masunog before ibenta,
you apply Sec. 21.
o Another reason under American jurisprudence is that upon the happening of
the loss, the right to receive the proceeds is vested and absolute.
o Sec. 22 – Whenever there are two or more things separately insured by the
same policy, a change of interest in one will not affect the policy as to the
others. Operative words: Separately insured.
o Scenario: 2 vehicles insured by motor vehicle insurance covered by 1 policy.
Vehicle 1 was sold to another person. Will the policy over vehicle 2 be
adversely affected?

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 A: It depends. Both vehicles must be separately insured. For example, if the
premiums are separately computed and payable.
o Sec. 24 – 2 or more joint owners must be jointly insured in one policy, and
that the change of interest must be only with respect to one of them, i.e., sila
sila lang din pinaglipatan ng interest over the property insured.
o Sec. 23 – Change of interest by will or succession.
o Scenario: Juan, a senior citizen, obtained a fire insurance policy over his
house. He died. Thereafter, a fire gutted his house. May his son, Juan, Jr.
obtain the proceeds?
A: Juan, Jr. may invoke the exception provided in Sec. 23 since the change of
interest over the insured house took effect after the death of his father. Art.
777 of the NCC provides that the right to inheritance is transmitted from the
moment of death. It is immaterial that the title over the insured property is
not yet transferred in favor of Juan, Jr.

Coverage: Sections 1-25 of the Insurance Code + cases.

-oOo-

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