University of San Jose – Recoletos

College of Law

Insurance

Special Report on;

Insurable Interest in Health Insurance

Submitted by:
Al-Emir Yusoph J. Balt

Submitted to:
Atty. Ariel Bacatan

October 2018
 Introduction

Before understanding the principles of Insurance Particularly in Health Insurance, let us

have a brief look at what is insurance? In simple terms insurance is meant to protect insured
against uncertain events which may cause disadvantages to him.

What are the basic principles of an insurance? The following are the different
principles: Principle of Insurable Interest, Principle of Utmost Good Faith, Principle of Indemnity,
Principle of Contribution, Principle of Subrogation, and Principle of Proximate Cause. These are
the principles that we need to discuss in order to understand what the essence of each are and
most importantly the importance of having an insurable interest in a health insurance in
accordance with the provisions of the Insurance Code of the Philippines as amended.
 Discussion

Principle of Insurable Interest

This may be defined as any interest which the person insuring will be or deemed to have
in the subject matter of insurance if the event of its loss or destruction that person will be exposed
to risk of losing some pecuniary benefit or advantage.

Every person effecting for insurance must have an insurable interest in the subject matter;
otherwise the insurance contract can’t be enforced. Insurable interest is not mere sentimental
right or interest. It is a right in subject matter or right arising out of a contract in relation to subject
matter. The interest must be pecuniary i.e. capable of estimation in terms of money, anything
which can’t be measured in terms of money like disadvantage, inconvenience or mental distress
can’t be regarded as insurable interest. The interest must be lawful i.e. it should not be illegal or
immoral.

It is the right of the person to insure the subject matter. The time and duration of insurable
interest varies as per the class of insurance. For example in the case of life insurance the assured
must have an insurable interest at the time of taking the policy, in case of fire insurance the
assured must have insurable interest at the time of taking the policy as well as at the time of loss.

Insurable Interest and Health Insurance

Every person is presumed to have insurable interest on his own health without any
limitation. Every person is entitled to recover the sum he/she has insured.

Insurable interest by husband or wife – A wife has an insurable interest in the health of her
husband vice versa a husband has insurable interest in the health of his wife.

Relatives and relationships – The relationship by itself doesn’t create and insurable
interest. When one relation effects an insurance on the health of the other there must be actual
dependence on the person whose life is insured i.e. there must be a reasonable expectation of
benefit from the continued existence of such person healthy and in such case there will be
insurable interest.

The employer has insurable interest in the health status of his employees. There are
statutory responsibilities on the employer to provide health care services to his employees.

The insurable interest is very important at the time of accepting proposal for health
insurance. It guides us who can pay the premium for that particular policy.
Principle of Utmost Good Faith

The duty of Utmost Good Faith (uberrimae fides) is central to the buying and selling of
Insurance. Hence the insurance policies are described as contracts of Uberrimae Fidei. In simple
terms that the insurer and the person who is applying for insurance have a duty to deal honestly
and openly with each other in the negotiations that led up to the formation of insurance contract.
This duty may also continue whilst the contract is in force.

The doctrine of utmost good faith imposes two duties on the parties to the Insurance
contract:

(i) A duty not to misrepresent any matter relating to the insurance i.e. a duty to tell truth:

(ii) A duty to disclose all material facts relating to the contract i.e. a duty not to conceal
anything that is relevant.

Principle of Utmost Good Faith and Health Insurance

Factors relating to the health, habits, personal history, family history, occupation and so
on which form the basis of health insurance contract, are known only to the proposer. If the
proposer does not disclose them, the insurer can’t know them. A medical examination also can’t
bring out all facts and is not fool proof. The blood pressure and diabetes, post illness, injuries and
operations can be suppressed. These are material for the underwriter who assesses risk.
Declaration in the every proposal – particulars are correct- misstatements and suppression –
cancel the policy contract – premiums paid are forfeited. Thus the principle operates through this
declaration.

The duty of disclosure extends up to the date of acceptance. The proposer should bring to
the notice of the insurer, if there are any changes in health, occupation of the proposer, between
the date of proposal and the date of its acceptance. The duty of disclosure ends when the proposal
is accepted.

The insurer or his agents should not make untrue statements regarding the health
insurance product during the selling or the benefits there under. The wrong doings of an agent
and its consequences are big debatable issues; we can arrive at conclusion on such issues based
on previous statutory forum judgement. It is the duty of insurer to disclose all coverage and
exclusion details to insured.
Principle of Indemnity

The rules concerning the amount to which the insured is entitled under their policy when loss
occurs; the central concepts here is the principles of indemnity which in simple terms, requires
that the insured should be fully compensated for their loss, but not over-compensated. The object
of Insurance is to place the insured in the same financial position as he was just before the loss.
This principle prevents the insured from making a profit out of a loss and ensures public interest
at large.

Principle of Indemnity and Health Insurance

Does principle of indemnity apply to health insurance? Yes it applies to health insurance
up to some extent. In case of any person falls sick and hospitalized, the personal inconvenience,
mental distress, pain/suffering can’t be compensated as the same can’t be measurable in terms
of money, moreover these are not insurable interest. Only the pecuniary loss due to
hospitalization is payable to insurer as per the principle of indemnity. Now a days there are
optional critical illness riders available along with some health insurance policies, where the
principle of indemnity is not applicable, as on detection of critical illness and as per policy T&C, if
the case is admissible, the insurer will pay the critical illness sum assured.

Principle of Contribution

An insured whose loss is covered by two or more policies can’t recover more than an
indemnity. However, at common law he can claim against the insurers in any order and for such
proposition of the loss as he thinks fit. In particular, he may choose to claim from one insurer only
and recovers in full from that insurer. Having satisfied the loss, the insurer who pays may then,
and only then, claim a contribution from the other insurer(s). Insurers have always regarded this
as an unsatisfactory state of affairs, because the insurer that is called upon to pay has the full
burden of handling claim and paying the loss, plus thereafter claiming from another insurer, it may
be some time cost and, perhaps, even lead to a dispute with the other office. For this reason,
insurers include contribution condition in all their policies. A contribution condition is a clause that
sets out how the loss is to be met if the insured has another policy which covers it.

Contribution conditions:

 More than two policies of indemnity exist

 Coverage of common interest in all policies
 Coverage of common subject matter in all policies
 Coverage of perils common to all policies, resulted into loss
 Policies contributing are valid on the day of loss
  All the insurance contracts are legally enforceable and liable for loss

Non-compliance of any condition in the policy would not entitle to contribute to the loss.

Principle of Contribution and Health Insurance:

I think this is the least applied principle of insurance in health insurance. The probable
reason is non-disclosure of other health insurance policy by the client. If member is covered under
group health insurance as well as individual health insurance, the member prefers to claim under
group insurance policy only. Moreover at present in the market we don’t have central data center
for insurance policies, where the insurer can cross check to find out whether the member is
covered by other insurance policy. Now there are some new developments happening in this
regard, like linking insurance details with unique member ID issued by the law of the state. I think
this can address this problem up to some extent.

Principle of Subrogation:

Subrogation defined as “the right of one person, having indemnified another under a legal
obligation to do so, to stand in the place of that other and avail himself of all the rights and
remedies of that other, whether already enforced or not.”

In the context of insurance, subrogation refers to the right of an insurer who has
indemnified an insured in respect of a particular loss to recover all or part of the claim payment
by taking over any alternative right to indemnity which the insured possesses. It follows that
subrogation will arise only where the insured has suffered a loss and has another means of
recovering for it, i.e. a claim on their insurance policy and a legal right or claim against some other
person for the same loss.

Principle of Subrogation and Health Insurance

This can be applied in personal injury claims. The vast majority of personal injury claimants
are not aware that when they make a recovery they are usually required to reimburse their health
insurer. Normally clients do not read their health insurance policies in detail.
 The most common examples of personal injury accidents for which the insurer can recover
health care and treatment costs by this principle are:

 slip and falls

 boating, air and rail accidents
 product liability or manufacturing defects
 medical malpractice or professional negligence
 dog bites
 municipal liability
 assaults
 some motor vehicle accidents

Principle of Proximate Cause

The assured can recover the loss only if it is proximately caused by any of the perils insured
against. This is called the rule of “causa proxima”. The rule is causa proxima non remota spectator,
i.e. the proximate or immediate and not the remote cause is to looked to, and if the proximate
cause of the loss is a peril insured against, the assured can recover the amount of the loss from
the insurer.

Principle of Proximate cause and Health Insurance

This doctrine is important in claims aspect across all lines of insurance portfolios. For all
admissible claims the proximate cause of loss always has to be a covered peril. This is most
important in health insurance policies where exclusion of PED and Chronic conditions is applicable.
To have better understanding on this we will go through an example as below,

Mr. XXX was admitted in hospital with abdominal pain last month and was diagnosed with
gall bladder calculi and underwent cholecystectomy. Unluckily subsequently he developed
paralytic ileus ( is a disruption of the normal propulsive ability of the gastrointestinal tract) and
underwent treatment in some other hospital. Mr. XXX admits a gall bladder calculus is a pre -
existing condition which is excluded in the policy. When he discharged from the hospital, he
submitted a claim to his insurance company for medical expenses incurred during his second
hospitalization for paralytic ileus. However the insurance company rejected the claim. Why was
Mr.XXX claim rejected? The second hospitalization was a post abdominal surgery complication of
the excluded medical condition. If the first operation was not taken place, the second
hospitalization would not have been necessary. As the proximate cause of the second
hospitalization was related to the first hospitalization, which was excluded from Mr. XXX health
insurance policy, hence his insurance company was not liable for Mr. XXX claim.
 Jurisprudence

Philippine Health-Care Providers, Inc. V. Estrada

G.R. No. 171052
January 28, 2008

FACTS:

Philippine Health-Care Providers, Inc. (Maxicare) formally appointed Estrada as its General
Agent evidenced by a letter-agreement dated February 16, 1991 granting him a commission
equivalent to:
15 to 18% from individual, family, group accounts
2.5 to 10% on tailored fit plans
10% on standard plans of commissionable amount on corporate accounts
Maxicare had a "franchising system" in dealing with its agents whereby an agent had to first secure
permission from to list a prospective company as client
MERALCO account was included as corporate accounts applied by Estrada
Estrada submitted proposals and made representations to the officers of MERALCO regarding the
MAXICARE Plan but MERALCO directly negotiated with MAXICARE from December 1, 1991 to
November 30, 1992 and was renewed twice for a term of 3 years each
March 24, 1992: Estrada through counsel demanded his commission for the MERALCO account
and 9 other accounts but it was denied by MAXICARE because he was not given a go signal to
intervene in the negotiations for the terms and conditions
RTC: Maxicare liable for breach of contract and ordered it to pay Estrada actual damages in the
amount equivalent to 10% of P20, 169,335 representing her commission for Meralco
CA: Affirms in toto

ISSUE:
W/N Estrada should be paid his commission for the Maxicare Plans subscribed by Meralco

HELD:
YES. Petition is DENIED
Both courts were one in the conclusion that Maxicare successfully landed the Meralco account for
the sale of healthcare plans only by virtue of Estrada’s involvement and participation in the
negotiations
Maxicare’s contention that Estrada may only claim commissions from membership dues which she
has collected and remitted to Maxicare as expressly provided for in the letter-agreement does not
convince us. It is readily apparent that Maxicare is attempting to evade payment of the
commission which rightfully belongs to Estrada as the broker who brought the parties together.
The only reason Estrada was not able to participate in the collection and remittance of premium
dues to Maxicare was because she was prevented from doing so by the acts of Maxicare, its
officers, and employees.
Agent vs. Broker:
Agent receives a commission upon the successful conclusion of a sale
Broker earns his pay merely by bringing the buyer and the seller together, even if no sale is
eventually made
"Procuring cause" in describing a broker’s activity
Cause originating a series of events which, without break in their continuity, result in the
accomplishment
Efforts must have been the foundation on which the negotiations resulting in a sale began
Even a cursory reading of the Complaint and all the pleadings filed thereafter before the RTC, CA,
and this Court, readily show that Estrada does not concede, at any point, that her negotiations
with Meralco failed -Counsel's contention is wrong
Estrada is entitled to 10% of the total amount of premiums paid by Meralco to Maxicare as of May
1996 (including succeeding renewals)
Philippine Health Care Providers, Inc. V. CIR
G.R. No. 167330
September 18, 2009

FACTS:

Philippine Health Care Providers, Inc. is a domestic corporation whose primary purpose is
"[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery
system or a health maintenance organization to take care of the sick and disabled persons enrolled
in the health care plan and to provide for the administrative, legal, and financial responsibilities of
the organization." Individuals enrolled in its health care programs pay an annual membership fee
and are entitled to various preventive, diagnostic and curative medical services provided by its
duly licensed physicians, specialists and other professional technical staff participating in the group
practice health delivery system at a hospital or clinic owned, operated or accredited by it.
January 27, 2000: Commissioner of Internal Revenue (CIR) sent petitioner a formal demand
letter and the corresponding assessment notices demanding the payment of deficiency taxes,
including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,
702,641.18
Petitioner protested the assessment in a letter dated February 23, 2000.
CIR did not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals
(CTA) seeking the cancellation of the deficiency VAT and DST assessments.
CTA: PARTIALLY GRANTED
To pay VAT
DST assessment CANCELLED AND SET ASIDE
CIR: health care agreement was a contract of insurance subject to DST under Section 185
of the 1997 Tax Code
CA: health care agreement was in the nature of a non-life insurance contract subject to
DST
Court Affirmed CA

ISSUE:
W/N the Philippine Health Care Providers, Inc. (HMO) was engaged in the business of
insurance during the pertinent taxable years - NO
W/N the Philippine Health Care Providers, Inc. Enters into an insurance contract - NO

HELD: motion for reconsideration is GRANTED

1. NO
No profit is derived from the making of insurance contracts, agreements or transactions or
that no separate or direct consideration is received therefore, shall not be deemed conclusive to
show that the making thereof does not constitute the doing or transacting of an insurance
business

2. NO
 Basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only
undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of
rates contained in the policy
A participating provider of health care services is one who agrees in writing to render health care
services to or for persons covered by a contract issued by health Service Corporation in return for
which the health service corporation agrees to make payment directly to the participating provider
any indemnification resulting from the payment for services rendered in case of emergency by
non-participating health providers would still be incidental to petitioner’s purpose of providing
and arranging for health care services and does not transform it into an insurer.
As an HMO, it is its obligation to maintain the good health of its members
Its undertaking under its agreements is not to indemnify its members against any loss or damage
arising from a medical condition but, on the contrary, to provide the health and medical services
needed to prevent such loss or damage
Overall, petitioner appears to provide insurance-type benefits to its members (with respect
to its curative medical services), but these are incidental to the principal activity of
providing them medical care. The "insurance-like" aspect of petitioner’s business is
miniscule compared to its noninsurance activities. Therefore, since it substantially provides
health care services rather than insurance services, it cannot be considered as being in the
insurance business.
Principal purpose test
Purpose of determining what "doing an insurance business" means, we have to scrutinize
the operations of the business as a whole and not its mere components
Letter dated September 3, 2000, the Insurance Commissioner confirmed that petitioner is not
engaged in the insurance business. This determination of the commissioner must be accorded
great weight
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event. An insurance contract exists where the following elements
concur: - NOT present
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk and
5. In consideration of the insurer’s promise, the insured pays a premium.
No indemnity
Member can take advantage of the bulk of the benefits anytime even in the absence of
any peril, loss or damage on his or her part.
Assumption of the expense by petitioner is not confined to the happening of a contingency
but includes incidents even in the absence of illness or injury since indemnity of the insured was
not the focal point of the agreement but the extension of medical services to the member at an
affordable cost, it did not partake of the nature of a contract of insurance
HMO, undertakes a business risk when it offers to provide health services. But it is not the
risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk,
is the risk that the cost of insurance claims might be higher than the premiums paid. The amount
of premium is calculated on the basis of assumptions made relative to the insured.
In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a
contract contains all the elements of an insurance contract, if its primary purpose is the rendering
of service, it is not a contract of insurance. The primary purpose of the parties in making the
contract may negate the existence of an insurance contract.
Health care agreements are clearly not within the ambit of Section 185 of the NIRC and there was
never any legislative intent to impose the same on HMOs
Philamcare Health Systems, Inc. V. CA
G.R. No. 125678
March 18, 2002

FACTS:

Ernani Trinos, deceased husband of Julita Trinos, applied for a health care coverage with
Philamcare Health Systems, Inc.
He answered the standard application form: Have you or any of your family members ever
consulted or been treated for high blood pressure, heart trouble, diabetes, cancer, liver
disease, asthma or peptic ulcer? - NO the application was approved for a period of one
year from March 1, 1988 to March 1, 1989. Accordingly, he was issued Health Care
Agreement No. P010194
Under the agreement, respondent’s husband was entitled to avail of hospitalization
benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of "out-
patient benefits" such as annual physical examinations, preventive health care and other out-
patient services.
Upon the termination of the agreement, the same was extended for another year from
March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of
coverage was increased to a maximum sum of P75, 000.00 per disability.
During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila
Medical Center (MMC) for 1 month beginning March 9, 1990.
While her husband was in the hospital, Julina Trinos tried to claim the benefits under the health
care agreement.
Philamcare denied her claim saying that the Health Care Agreement was void
for concealing Ernani’s medical history so she paid the hospitalization expenses of P76, 000.00
herself.
Doctors at the MMC allegedly discovered at the time of Ernani’s confinement that he was
hypertensive, diabetic and asthmatic, contrary to his answer in the application form.
After being discharged from the MMC, he was attended by a physical therapist at home.
Later, he was admitted at the Chinese General Hospital.
Due to financial difficulties, however, he was brought home again.
April 13, 1990 morning: Ernani had fever and was feeling very weak
He was brought to Chinese General Hospital where he died
July 24, 1990: She brought action for damages against Philamcare Health Systems Inc. and its
president, Dr. Benito Reverente
RTC: Philamcare and Dr. Benito Reverent to pay and reimburse P76k plus interest, moral damages,
exemplary damages, attorney's fees and cost of suit
CA: affirmed the decision of RTC but deleted all awards for damages and absolved Philamcare
Philamcare brought an instant petition for review arguing that:
Health care agreement is not an insurance contract; hence the "incontestability clause"
under the Insurance Code does not apply.
grants "living benefits," such as medical check-ups and hospitalization which a member may
immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-
year thereafter
Only medical and hospitalization benefits are given under the agreement without any
indemnification, unlike in an insurance contract where the insured is indemnified for his loss
Since Health Care Agreements are only for a period of one year, as compared to insurance
contracts which last longer; incontestability clause does not apply, as the same requires an
effectivity period of at least two years
Insurance company is governed by the Insurance Commission, but a Health Maintenance
Organization under the authority of the Department of Health

ISSUE:
W/N the health care agreement is a contract of insurance. - YES
W/N the spouse being "not" legal wife can claim - YES

HELD: Petition is DENIED. CA AFFIRMED.

1. YES.
1) A "contract of insurance" is an agreement whereby one undertakes for a consideration
to indemnify another against loss, damage or liability arising from an unknown or contingent
event.
Sec. 3. Any contingent or unknown event, whether past or future, which indemnify a person having
an insurable interest, or create a liability against him, may be insured against, subject to the
provisions of this chapter.

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

Any minor of the age of eighteen years or more, may, notwithstanding such minority, contract for
life, health and accident insurance, with any insurance company duly authorized to do business in
the Philippines, provided the insurance is taken on his own life and the beneficiary appointed is
the minor's estate or the minor's father, mother, husband, wife, child, brother or sister.

The married woman or the minor herein allowed to take out an insurance policy may exercise all
the rights and privileges of an owner under a policy.

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

In the case at bar, the insurable interest of respondent's husband in obtaining the health care
agreement was his own health.
In the nature of non-life insurance, which is primarily a contract of indemnity
Once the member incurs hospital, medical or any other expense arising from sickness, injury or
other stipulated contingent, the health care provider must pay for the same to the extent agreed
upon under the contract.
The answer in response to the question relating to the medical history of the applicant largely
depends on opinion rather than fact, especially coming from respondent's husband who was not
a medical doctor.
Where matters of opinion or judgment are called for, answers made in good faith and without
intent to deceive will not avoid a policy even though they are untrue.
The fraudulent intent on the part of the insured must be established to warrant rescission of the
insurance contract.
Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative
defense and the duty to establish such defense by satisfactory and convincing evidence rests upon
the provider or insurer.

2. YES.
 Sec. 10. Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting
property or service, of which death or illness might delay or prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him depends.

Not the legal wife (deceased was previously married to another woman who was still alive)
Health care agreement is in the nature of a contract of indemnity.
Payment should be made to the party who incurred the expenses