PRINCIPLES OF INSURANCE 

In the case of Personal Accident, they refer to a

Schedule of Indemnity.
The business of insurance is guided by 6 principles,
2. Penal or forfeiture bonds. Under these types of
namely:
bonds, a default will result in the forfeiture of the
1. Indemnity face amount of the bond. The said amount is not
2. Subrogation necessarily the amount of damages suffered by
3. Contribution the Obligee.
4. Utmost Good 3. Replacement cost insurance. As general rule, the
5. Insurance Interest amount of settlement shall be based on the
6. Proximate Cause  depreciated or sound value of the insured
property. In replacement cost insurance, the
INDEMNITY
amount of settlement is based on the cost to
Discuss the Principle of Indemnity. replace the damaged property.

The purpose of the insurance contract is to restore the

What is deductible?
insured to the same financial condition he was in at the
time of the loss subject to the application of deductible,
Deductible works in two ways, to wit:
depreciation and average clause. The total sum insured
a. It is a bar to a claim, if the amount of loss is below
serves as a cap to the potential liability of the insurer and
deductible.
not the amount the insurer will pay in case of a loss. The
b. It is a deduction to a claim, if the amount of loss is
amount of the indemnity is subject to evaluation by the
above deductible. Simply put, the liability of the insurer
insurer in order to determine the actual extent of loss of
becomes net of deductible.
the insured.

To illustrate, Bentot owns a Ferrari 488 worth

If an insured has received indemnity from the insurance
Php30,000,000 which is insured with Matibay Insurance
company for the injury or loss arising out of the wrong
Co. Based on tariff, the deductible for a Private Car is
or breach of contract complained of, the insurance
0.5% of the car's Fair Market Value or Php2,000,
company shall be subrogated to the rights of the insured
whichever is higher. The deductible is therefore
against the wrongdoer or the person who has violated
Php150,000.
the contract. If the amount paid by the
insurance company does not fully cover the injury or
In case Bentot got involved in a collision accident, and
loss, the insured shall be entitled to recover the
the damage to the Ferrari 488 amounted to Php149,000,
deficiency from the person causing the loss or injury. 
Matibay Insurance Co. has zero liability because the loss
(See New Civil Code of the Philippines, Article 2207)
is below Php150,000.

Enumerate some of the exceptions to this principle.

In case the loss is Php151,000, the liability of Matibay
1. Valued policies like life insurance and insurance Insurance Co. is only Php1,000.
of paintings. Under this type of policy,  the
amount of liability of insurer is pre-determined.

What is depreciation?
It is the decrease in value of a property over time.  suffered by the insured - no more, no less.
In Motor Car Insurance, this refers to the amount
equivalent to a certain percentage (%) (depending on the
age of the vehicle) to be deducted from the proceeds of a
claim under Section III of the Motor Car Policy.
However, depreciation is not applicable in case of total
loss. There is a Schedule of Depreciation in the Motor
Car Policy Forms showing the rates of depreciation.
What is average clause?  It is the legal effect of the payment of claim by the
A clause in a policy requiring that, where assets are
insured for less than their full value, the insured is
required to bear a proportion of any loss. The proportion
is the amount by which the assets are under insured
expressed as a percentage of its indemnity value, at the
time of the loss.
To illustrate, if a property worth Php2,000,000 is insured
for Php1,500,000, the property is 25% under-insured. In
case the damage to the property is Php1,000,000, the
insured shall shoulder Php250,000 as penalty for under-
insuring the property.  
Kardo insured his property against fire for Php
3,000,000.00 with Mabilis Insurance Co. The property was
totally burned and the value of the house was determined to
be Php 2,800,000.00 only.  Receipt was a valid pre-condition before the
How much will be the indemnification of Kardo? It is Php
2,800,000.00 or Php 3,000,000.00?
Mabilis Insurance Co is liable to pay Kardo for Php
2,800,000.00 only since it is the actual loss he suffered
from the fire incident. The total sum insured is only the
maximum limit of liability to assumed by the insurer. It
is not a statement of the amount to be paid in case of a
loss. To pay Php3,000,000 will be in violation of the
principle of indemnity. Under the said principle, the
indemnification shall be limited to the actual loss
SUBROGATION
Subrogation is another principle that closely related with
the principle of indemnity. It seeks to prevent insurer
from profiting from the insurance contract.
Consequently, the amount that the insurer can recover
against the offending party is limited to the amount it has
actually paid to its insured.
insurer. Upon payment of the claim, the insurer assumes
all the legal rights and remedies available to the insured
against any and all parties liable for the loss. 
The cause of the loss or injury must be a risk covered by
the policy to entitle the insurer to subrogation. (Article
2207, New Civil Code)
Discuss the principle of subrogation.
It is the legal effect of the payment of claim by the
insurer. Consequently, -
1. There is no need for a written assignment of
rights in order to enforce   one’s right of
subrogation. However, the Supreme Court stated
that the signing of a Loss and Subrogation
insurer could be compelled to turn over the
whole amount of the insurance to the
insured. (Rizal Surety & Insurance Company vs.
CA, 261 SCRA 69)
2. The insurer can only recover from the offending
party up to the amount it had paid to the insured.
3. The insured can no longer recover from the
offending party what was paid to him by the
insured. However, the insured can still recover
 for the deficiency if the actual damages were
more than what the insurer paid. (Aquino,
Timoteo and Sundiang, Jose, Reviewer on
Commercial Law. 2003 Edition, 52.)
Enumerate cases when there is no right of subrogation?
They are as follows:
1. When the insurer pay the insured for a loss not
covered by the policy.(Sveriges Angfartygs
Assurans Forening vs Qua Chee Gan, 21 SCRA 12
[1959])
2. The insurer by his own act releases the
wrongdoer. (Pan Malayan Insurance Co. vs. Court
of Appeals, 184 SCRA 54 [1990])
3. In case of life insurance.
4. Recovery of loss in excess of the limits provided
by the policy.
CONTRIBUTION
The principle of contribution follows the concept of
indemnity and it applies if there is reinsurance. In case of
a loss, all the co-insurers shall share in the loss in
proportion to their participation in the risk.
Reinsurance is insurance that is purchased by an
insurance company (the "ceding company" or "cedent"
or "cedant" under the arrangement) from one or more
insurance companies (the "reinsurer") directly or
through a broker as a means of risk management,
sometimes in practice including tax mitigation and other
reasons described below. The ceding company and the
reinsurer enter into a reinsurance agreement which
details the conditions upon which the reinsurer would
pay a share of the claims incurred by the ceding
company. The reinsurer is paid a "reinsurance
premium" by the ceding company, which issues
insurance policies to its own policyholders. (Wikipedia)
The maximum retention of an insurer per risk should not
exceed twenty (20) percent of its net worth. (Section 221,
New Insurance Code)
The purpose of this principle is to prevent the insured
from recovering more than the full amount of his loss
where two (2) or more policies exist over the subject
matter of insurance.
Frodo insured his Php 2,000,000.00 property against fire
for Php 2,000,000.00 each with Mabagal and Mabilis
Insurance Company, respectively.  The property was
partially burned and the value of the loss was determined to
be Php 1,200,000.00. 
If you were Frodo’s insurance consultant, what will be your
advice to him?
Frodo may file a claim against either one or both
insurers, provided his aggregate claim will not exceed
Php1,200,000.00. Thus, he can do any of the following:
1. File a claim against either insurer for the full
amount of loss.
2. File two simultaneous claims against the insurers
based on their pro-rata share amounting to Php
600,000.00 each.
He cannot collect Php 1,200,000.00 against each insurer
at the same time since it will violate the principle of
indemnity. The liability of either insurer should not
exceed  its proportionate share in the loss. In order to
determine each insurer’s share in the loss, the
computation shall be as follows:
Mabagal
____________________
Mabagal + Mabilis    multiply by the amount of loss = Mabagal’s share
Php 2,000,000.00        x   Php 1,200,000.00          = Php 600,000.00
Php 4,000,000.00
Distinguish co-insurance from re-insurance. (1994 Bar
Exams)
CO-INSURANCE is the percentage in the value of the
insured property which the insured himself assumes or
undertakes to act as insurer to the extent of the
deficiency in the insurance of the insured property.
In case of loss or damage, the insurer will be liable only
for such proportion of the loss or damage as the amount
of insurance bears to the designated percentage of the
full  value of the property insured.
 
REINSURANCE is where the insurer procures a third
party, called the reinsurer, to insure him against liability
by reason of such original insurance. Basically,
a reinsurance is an  insurance against liability which the
original insurer may incur in favor of the original
insured.
When does double insurance exist? (2005 Bar Exams)
There is double insurance when there is over-insurance
with two or more companies, covering the same
property, the same insurable interest and the same risk.
Double insurance exists where the same person is insured
by several insurers separately in respect of the same
subject matter and interests. (Section 93, Insurance Code
and Geagonia v. Court of Appeals, G.R. No.
114427, February 6, 1995)  Each insurer is bound, as between himself and other
Julie and Alma formed a business partnership. Under
the business name Pino Shop, the partnership engaged in
a sale of construction materials. Julie insured the stocks
in trade of Pino Shop with WGC Insurance Co for
P350th. Subsequently, she again got an insurance contract
with RSI for P1m and then from EIC for P200th. A fire
of unknown origin gutted the store of the partnership.
Julie filed her claims with the three insurance
companies. However, her claims were denied separately for
breach of policy condition which required the insured to
give notice of any insurance effected covering the stocks
in trade. Julie went to court and contended that she
should not be blamed for the omission, alleging that
the insurance agents for WGC, RSI and EIC knew of
the existence of the additional insurance coverages and
that she was not informed about the requirement that
such other or additional insurance should be stated in
the policy. Is the contention of Julie tenable? Explain. May
she recover on her fire insurance policies? Explain. (1993
Bar Exams)
1) No. An insured is required to disclose the other
insurances covering the subject matter of the insurance
being applied for. (New Life Ent vs CA, 207 SCRA 669)
2) No, because she is guilty of violation of a
warranty/condition.
What is the nature of the liability of the several insurers in
double insurance? Explain. (2005 Bar Exams)
insurers, to contribute ratably to the loss in proportion to
the amount for which he is liable under his
contract. (Sec. 94, New Insurance Code) another party, which has the effect of inducing that party
into the contract.
X borrowed from CCC Bank. She mortgaged her house and
lot in favor of the bank. X insured her house. The bank How is materiality determined?
also got the house insured. (A) Is this double insurance?
Explain your answer. Is this legally valid? Explain It is to be determined not by the event, but solely by the
your answer. (2012 Bar Exams)  probable and reasonable influence of the facts upon the
party to whom the communication is due, in forming his
No, there is no double insurance. Double insurance exists estimate of the disadvantages of the proposed contract,
where the same person is insured by several insurers or in making his inquiries. (Section 31, New Insurance
separately with respect to the same subject and Code)
interest. (Sec. 93, Insurance Code). X's basis of insurable
interest is based on ownership of the property while Cite examples of facts/circumstances which are deemed
CCC's Bank's insurable interest is based on the loan.   material.
UTMOST GOOD FAITH

The following facts/circumstances were deemed to be

An insurance contract is one of perfect good faith not for
material which was the basis for denial of claim:
the insured alone, but equally so for the insurer; in fact,
it is more so for the latter, since its dominant bargaining
a.    That the insured is suffering from:
position carries with it a stricter
responsibility. (Fieldmen’s Insurance Co., Inc. vs. Vda. De
1. Incipient pulmonary tuberculosis (Musngi vs.
Songco, 25 SCRA 70 [1968])
West Coast Life Ins. Co, 61 Phil. 864 [1939])
2. Cerebral congestion and Bells Palsy (Argente vs.
It refers to duty of both the insurer and insured to
West Coast Life Ins. Co,51 Phil. 725 [1928])
exercise honesty in dealing with each other. Both parties
3. Cardiovascular disease (St. Ferdinand Memorial
are obligated to declare all facts that are considered
Park, Inc. vs. Great Pacific Life Assurance Corp.,
material to the contract of insurance. The application of
I.C. Case Nov. 20 [1977])
the concept of utmost good is applied and discussed in
4. Acute Bronchitis (Canilang vs. Court of Appeals,
the section dealing concealment and misrepresentation.
42 SCAD 455, 223 SCRA 443 [1993])

Define concealment.
It is the neglect to communicate that which a party
knows and ought to communicate. A concealment
whether intentional or unintentional entitles the injured
party to rescind a contract of insurance. (Section 26-27,
New Insurance Code). However, it will only be a ground
for rescission if it is pertains to a material fact. 
b.    That he has been treated or hospitalized from some
ailment like pneumonia, diabetes or syphilis (De Leon vs.
Crown Life Ins. Co., C.A. L-44842 [1993])
c.    That he was hospitalized for two (2) weeks prior to
his application for insurance. (Sunlife Assurance Co. of
Canada, 64 SCAD 24, 245 SCRA 268 [1995])

Define misrepresentation.

It refers to a false statement of fact made by one party to

Kardo bought a Ford Mustang worth Php2.85M and insured
it with Naloko Insurance Company. He wanted the inception
date to be October 15, 2017 instead of December 5, 2017.
Unknown to Naloko Insurance Company, the car was totally
wrecked on November 30, 2017 or 5 days before the request
for policy issuance. Can Kardo recover against his motor
policy?
Kardo likewise bought a life insurance worth Php10M with
Naisahan Life Insurance Company. The inception date is
December 5, 2017. Unknown to Naisahan Life Insurance
Company, he was diagnosed with cancer 12 months ago. Is
Kardo covered?   within the 2-year incontestability period, the defense of
The answer to both questions is no. Pre-existing
conditions should be disclosed by the insured and failure
to do so is a violation of the principle of utmost good
faith. It could be in the form of either concealment (not
disclosing a material fact) and misrepresentation
(disclosing a material fact that is untrue in order to
induce the insurer to issue the policy). Both are grounds
for denial or rescission of an insurance contract,
including bonds.
 
Marine insurance was secured upon goods on board a ship
which departed from Madagascar to Manila, without any
disclosure to the insurer of the fact that the ship had been
reported at Lloyd’s of London as seen at sea, deep in water
and leaky. This report turned out to be wrong because the
ship was at no time during the voyage leaky or in trouble,
but was lost thru another insured risk. The insurer refuses to
pay the insured, claiming concealment. The insured
counters that the fact not disclosed was erroneous and did
not increase the risk and therefore immaterial. Decide the
dispute with reasons. (1979 Bar Examination)
The insured may not recover under the marine
insurance. While the report was erroneous, it nonetheless
was lost through another risk. This is material because it
could influence the decision of the underwriter in
deciding whether to provide insurance cover or
otherwise.
Atty. Roberto took out a life insurance policy from the Dana
Ins Co (DIC) on 1 Sep 1989. On 31 Aug 1990, Roberto died.
DIC refused to pay his beneficiaries because it discovered
that Robert had misrepresented certain material facts in his
application. The beneficiaries sued on the basis that DIC
can contest the validity of the insurance policy only within 2
years from the date of issue and during the lifetime of the
insured. Decide the case. (1991 Bar Exams)
I would rule in favor of DIC. Since the death happened
misrepresentation is still available to DIC. 
Renato was issued a life insurance policy on January
2, 1990. He concealed the fact that 3 years prior to
the issuance of his life insurance policy, he had been seeing
a doctor about his heart ailment. On March 1, 1992, Renato
died of heart failure. May the heirs file a claim on the
proceeds of the life insurance policy of Renato? (1998 Bar
Exams) 
Yes, because more than 2 years had elapsed when
Renato, the insured, died. After two years, the defenses
of concealment or misrepresentation, no matter how
patent or well founded, is no longer available to the
insurer.
“A” applied for a non-medical life insurance. The insured
did not inform the insurer that one week prior to his
application, he was examined and confined at St. Luke’s
Hospital where he was diagnosed for lung cancer. The
insured soon thereafter died in a plane crash. Is the insurer
liable considering the fact concealed had no bearing with
the cause of death of the insured? Why? (2001 Bar
Examination)
No. The concealed fact is material to the approval and
issuance of the insurance policy. The insured need not
die of the disease he failed to disclose to the insurer.
Simba insured his vessel with Hakuna Matata Insurance
Company effective September 21, 2001. Three days after, it
was discovered that the vessel had sunk a week before the
effectivity of the policy.
Can Simba recover against his marine insurance with
Hakuna Matata Insurance Company?
Yes. Under a marine insurance, past unknown event can
be covered, thus, coverage may be have for a vessel
which had already sunk. The presumption is Simba acted
in good faith when he sought cover for his vessel. The
burden of proving otherwise lies on the part of the
insurer.
An insured, who gains knowledge of a material fact already
after the effectivity of the insurance policy, is not obliged to
divulge it. The reason for this is that the test of concealment
of material fact is determined. (2011 Bar Exams)
(A) at the time of the issuance of the policy.
(B) at any time before the payment of premium.
(C) at the time of the payment of the premium.
(D) at any time before the policy becomes effective.
X insured his life for P20 million. X, plays golf and
regularly exercises everyday, hence is considered in good
health. He did not know, however, that his frequent
headache is really caused by his being hypertensive. In his
application form for a life insurance for himself, he did not
put a check to the question if he is suffering from
hypertension, believing that because of his active lifestyle,
being hypertensive is a remote possibility. While playing
golf one day, X collapsed at the fairway and was declared
dead on arrival at the hospital. His death certificate stated
that X suffered a massive heart attack.
a. Will the beneficiary of X be entitled to the proceeds of the
life insurance under the circumstances, despite the non-
disclosure that he is hypertensive at the time of application? 
b. If X died in an accident instead of a heart attack, would
the fact of X's failure to disclose that he is hypertensive be
considered as material information? (2016 Bar Exams)
a. If depends on when the death happened. If it happened
within the 2 year incontestability period, the insurer can
rescind  the contract because hypertension is a material
fact. If it happened outside the incontestability period,
then the insurer will honor the claim.
b. The answer will remain the same. The insured need
not die of the disease he had failed to disclose to the
insurer. It is sufficient that his non-disclosure misled the
insurer in forming his estimates of the risks of the
proposed insurance policy or in making
inquiries (Henson v. The Philippine American Life
Insurance Co., 56 O.G. No. 48 [1960]).
INSURABLE INTEREST
Define insurable interest. (1965 Bar Examination)
The legal relationship of the insured with the subject
matter of insurance whereby the former stands to benefit
from the preservation of the latter or be prejudiced by
the loss thereof.  Consequently, no contract of insurance
on property shall be enforceable except for the benefit of
some person having insurable interest in the property
insured. (Section 18, New Insurance Code)
Also, the following stipulations shall be void:
1. for the payment of loss whether the person
insured has or has not any interest in the
property insured;
2. that the policy shall be received as proof of such
interest; and
3. every policy executed by way of gaming or
wagering. (Section 25, New Insurance Code)
Notes:
1. The requirement of an insurable interest to
support a contract of insurance is based upon
 considerations of public policy which render services, of which death or illness might delay or
wager policies invalid. A wager policy is prevent the performance; and
obviously contrary to public interest. (De Leon, 3. Of any person upon whose life any estate or
Hector. The Insurance Code of the Philippines interest vested in him depends. (Section 10, New
Annotated. 2002 Edition: 87) Insurance Code).
2. Insurable interest over the thing insured
minimize, if not eliminate, the temptation to  Define insurable interest in life. (1966 Bar Examination)
destroy it in order gain from the proceeds of the An insurable interest in life may be the in the following
policy. forms:
3. A policy issued to a person without insurable
1. Of himself, of his spouse and of his children;
interest in the subject matter is a mere wager
2. Of any person on whom he depends wholly or in
policy having nothing in common with insurance
part for education or support, or in whom he has
except name and form and is void and
a pecuniary interest;
unenforceable on grounds of public policy. (C.J.
3. Of any person under a legal obligation to him for
1110 citing Hamburg-Bremen P. Ins. Co. vs. Lewis,
the payment of money, or respecting property or
4 App. 66)
services, of which death or illness might delay or
4. A carrier or depositary of any kind has an
prevent the performance; and
insurable interest in a thing held by him as such,
4. Of any person upon whose life any estate or
to the extent of his liability but not to exceed the
interest vested in him depends. (Section 10,  New
value thereof. (Section 15, New Insurance Code)
Insurance Code)
 What is the purpose of the law in requiring that the insured
In what cases has corporation an insurable interest in the
must have an insurable interest in the life of the person
lives of its officers? (1965 Bar Examination)
insured?
 
A corporation may have insurable interest in the lives of
The purpose of the law in requiring the existence of
its officers when the death or illness of said officers
insurable interest in the life of the insured is to eliminate
would materially and injuriously affect the corporation.
the temptation to destroy the life of the insured on
 
account of his life insurance.
What does insurable interest in property consist of? Explain
your answer. (1953 and 1967 Bar Examination)
When may there be insurable interest in the life of another.
(1966 Bar Examination)
An insurable interest in property may consist of the
following:
A person may have insurable in the life another in the
following situations:
1. An existing interest. An example of which
includes ownership over a property
1. Of any person on whom he depends wholly or in
2. An inchoate interest founded on an existing
part for education or support, or in whom he has
interest.  Examples of which includes the
a pecuniary interest;
stockholder’s interest in the property of the
2. Of any person under a legal obligation to him for
corporation and partner’s interest in the
the payment of money, or respecting property or
partnership’s property.
 3. An expectancy coupled with an existing interest
in that of which  the expectancy arises. An
example of which a farmer’s interest future crops
to be grown on the land he owned. (Section 14,
New Insurance Code)
Give an example of insurable inchoate right in the property?
(1955 Bar Examination)
The following are examples of insurable inchoate right in
the property:
1. Contractor’s interest in the completed building
for unpaid construction cost;
2. Lessor’s interest in the improvement made by the
lessee;
3. Naked owner’s interest over property which
another person has beneficial title. (Miravite,
Jorge. Bar Review Materials in Commercial Law.
11th Edition, 135)
How is insurable interest measured?
However, in the case of creditor-debtor relationship
where the creditor insures the life of the debtor, the limit
of insurable interest by the creditor is equal to the
amount of debt.
Madugas is the lessee of Makunat Corporation (Makunat).
Under the lease agreement, Madugas cannot insure the
properties stored in the leased property without first
obtaining the consent of Makunat. If consent is not obtained,
the policy is deemed assigned and transferred to the lessor
for its own benefit. Madugas insured the merchandize in the
leased property without obtaining the consent of the lessor.
A fire broke out which destroyed the merchandize stored.
Is the lessor entitled to the proceeds of the policy?
No. Makunat is not entitled to the proceeds of insurance.
It has no insurable interest over the merchandize insured
because it is owned by Madugas. The automatic
assignment of the policy is void for being contrary to law
and public policy. (Spouses Nilo Cha vs. Court of Appeals,
G.R. No. 124520. [August 18, 1997])

It depends on the type of insurance, thus:

(2000)

In Property Insurance, the measure of insurable interest

IS, an elderly bachelor with no known relatives,
in a property is the extent to which the insured may be
obtained life insurance coverage for P250,000.00 from
damnified by loss or injury thereof. (Insurance Code of
Starbrite Insurance Corporation, an entity licensed to
the Philippines, Section 17)
engage in the insurable business under the Insurance Code
of the Philippines (PD1460). He also insured his
In Life Insurance, insurable interest cannot be measured
residential house for twice that amount within the
on account of the fact that the value of one’s life cannot
same corporation. He immediately assigned all his rights to
be estimated or even valued for that matter. According
the insurance proceeds to BX, a friend-companion
to some financial planners, the rule of thumb is
living  with him. Three years later, IS died in a fire that
determining the maximum total sum insured is 5 times of
gutted his insured house two days after he had sold it. There
the annual salary of the insurance applicant. The
is no evidence of suicide or arson or involvement of BX
rationale behind this is that it is assumed that a family of
in these events. BX demanded payment of the
the decedent will take at least five (5) years to adjust to
insurance proceeds from the two policies, the premiums for
the financial loss brought about by the death of
which IS had been faithfully paying during all the time he
breadwinner.
was alive. Starbrite refused payment, contending that BX
had no insurable interest and therefore was not entitled
to receive the proceeds from IS’s insurance coverage on
his life and also on his property. Is Starbrite’s contention
valid? Explain? (2000 Bar Exams)
With respect to the property insurance, Starbrite is
correct. BX, being a mere friend-companion of IS, has no
insurable interest in the residential house of IS. BX is
therefore not entitled to receive the proceeds from IS’s
insurance on his property.   affect the insurer’s liability. Upon the happening of the
With respect to the life insurance, BX is entitled to
receive the proceeds. There is no requirement that BX
should have insurable interest in the life of IS. It  was IS
himself who took the insurance on his own life.
Distinguish insurable interest in property insurance from
insurable interest in life insurance. (2002 Bar
Examinations)
The differences are as follows:
1. As to the existence thereof. In the former, it must
exist both at the inception of the policy and at the
time of the loss, whereas, in the latter, it need not
exist at the time of the loss.
2. As to the extent thereof. In the former, it is limited
by the actual value of interest in the property,
whereas, in the latter, there is no limit, except the
one taken by creditor on the life of the debtor.
 John took out a life insurance on the life of his wife Marsha.
Two months after the decree of annulment of their marriage
became final, she died.
Can John recover under the life insurance?
Yes. At the time he took out the life insurance, he still has
insurable interest over the life of his wife. The
subsequent annulment of their marriage will not effect
his right to recover under the policy.
In life insurance, what is required is that insurable
interest must exist at the inception of the policy but need
not exist when the loss occurs.
What is the legal effect of the change in insurable interest
after the loss?
The change in insurable interest after the loss will not
loss, the liability of the insurer becomes fixed. (Insurance
Code of the Philippines, Section 21.)
The answer would have been different if the change
occurred before the loss. In the case, the claim will be
denied on account of the insured’s lack of insurable
interest.
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. Because at the time of the loss, Benjie was no longer
the owner of the property insured because of his failure to
redeem the property. Insurable interest must be present at the
time of the issuance of the policy and also at the time when
the loss occurs in order to successfully claim against the
policy. Unfortunately, at the time of loss, Benjie no longer
had insurable interest in the property insured.
2) No. While at the time of the loss he had insurable interest
in the building by virtue of ownership, he has no legal
personality to file a claim against the policy. Insurance is a
personal contract. There was no automatic transfer clause in
the policy that would give him such interest in the policy.
What is the legal effect of the death of insured?
The death of the insured will not affect the liability of the
insurer to pay. The interest in the insurance shall
automatically pass on to the insurer’s heirs.
A piece of machinery was shipped to Mr. Pablo on the basis
of C&F, Manila. Mr. Pablo insured the said machinery with
Talaga Merchants Insurance Corp. (TAMIC) for loss or
damage during the voyage. The vessel sank en route to
Manila. Mr. Pablo then filed a claim with TAMIC which was
denied for the reason that prior to delivery, Mr. Pablo had
no insurable interest. Decide the case. (1991 Examination)
The reasoning of the insured is untenable. The purchase
of goods under a perfected contract of sale already vests
equitable interest on the property in favor of the buyer
pending the delivery.
On February 3, 1987, while Jose Palacio was in the hospital
preparatory to a heart surgery, he called his only son, Boy
Palacio, and showed the latter a will naming his son as the
sole heir to all the father’s estate including the family
mansion in Forbes Park. The following day, Boy Palacio
took out a fire insurance on the Forbes Park mansion. One
week later, the father died. After the father’s death, Boy
Palacio moved his wife and his children to the family
mansion which he inherited. On March 30, 1987, a fire
occurred razing the mansion to the ground. Boy Palacio
then proceeded to collect on the fire insurance he took
earlier on the house.
Should the insurance company pay? (1987 Examination)
No. In property insurance, the insured is required to
have insurable interest over the property at the inception
of the policy and at the time of the loss. At the time the
policy was issued, the owner of the mansion is his father
Palacio.
Also, the insurable interest must be an existing.
Unfortunately for Boy Palacio, the fact that he was the
expected sole heir of the property does not give rise to an
existing interest over the mansion prior to the death of
his father Palacio.
JQ, owner of the condominium unit, insured the same
against fire with XYZ Insurance Co., and made the loss
payable to his brother, MLQ. In case of loss by fire of the
said condominium unit, who may recover on the fire
insurance policy? State the reason(s) for your answer. (2001
Bar Examination)
JQ is the one entitled to receive the proceeds of insurance
being the owner thereof. MLQ despite being the
designated as the payee in case loss cannot be entitled to
receive the premium since he has no insurable interest
over the condominium unit.
Is it necessary for the beneficiary to have an insurable
interest in the life of the insured (1949 Bar Examination)?
It depends.
If the policy is secured by the insured on his own life, the
designated beneficiaries need not have an insurable
interest in the life of the insured.
If the policy is secured by a third person on the life of the
insured and said third person designates himself as the
beneficiary, the third person must have insurable
interest on the life of the insured as at the inception of
the policy.
Juan takes an insurance policy on the life of his friend Luis,
becoming himself as the beneficiary. Is the policy valid?
(1946 Bar Examination)
Yes. However, the designation of Juan as beneficiary is
not valid. Juan does not have an insurable interest in the
life of Luis. Mere friendship is not enough to create
insurable interest on the life of another person.
Batman secured a loan from Superman in the amount of Php
1,000,000.00. To guarantee payment of the loan in case
something happens to Batman, Superman bought an
insurance on the life of the Batman equal to the amount of
the latter’s loan. Six (6) months later, Batman died. Prior to
that, Batman was able to pay-off the eighty percent (80%) of
his loan already.
How much can Superman collect from the insurer?
Superman can collect only up to Php 200,000.00. His
insurable interest over Batman’s life was reduced to 20%
on account of the payments made by Batman prior to his
death. Accordingly, the payment by the insurer shall be
reduced in proportion to his reduced insurable interest.
A obtains a fire insurance on his house and as a generous
gesture names his neighbor as his beneficiary. If A’s house
is destroyed by fire, can B successfully claim against the
policy? (1997 Bar Examination)
No. B has no insurable interest over the house of A. In
fire insurance, 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.
Unlike life insurance, fire insurance does not have a
provision for beneficiary designation unlike life
insurance. A could have just assigned his rights under
policy in favor of B after the loss.
Who may insure a mortgaged property?
Both the mortgagor and mortgage may insure the
mortgage property as their interest may appear. It is a
settled that a mortgagor and mortgagee have a separate
and distinct insurable interest in the same mortgaged
property. (Filipino Merchants Insurance Co. vs. Court of
Appeals, G.R. 85144 [November 28, 1989])
Differentiate the interest of a mortgagee and the mortgagor.
Both the mortgagee and the mortgagor have each as
separate and distinct insurable interest in the mortgaged
property. They may procure separate policies with the
same or different insurance companies. (Rodriguez,
Rufus. The Insurance Code of the Philippine Annotated
1999 Edition. 27).
1. The basis of insurable interest of the former is
the loan by the debtor which is supported by its
property, whereas, the latter’s interest is based
upon his ownership over the property.
2. The extent of insurable interest of the former’s
insurable interest is the value of the property
mortgage, whereas, the latter’s extent of
insurable interest is the extent of debt secured.
Glenn secured a loan from Jaypee in the amount of Php
10,000,000.00. As a guarantee for the loan, Glenn
mortgaged his house for worth the same amount to Jaypee.
On the other hand, Jaypee insured Glenn’s house for Php
10,000,000.00 which is equivalent to the value of the latter’s
indebtedness to the former. Six (6) months later, a fire
occurred which burned Glenn’s house to the ground. Prior
to that, Glenn was able to pay-off the fifty (50%) of the loan
already.
How much can Jaypee collect from the insurer?
Jaypee can collect Php 5,000,000.00 from the insurer. His
insurable interest over Glenn’s mortgaged property was
reduced to 50% on account of the payments made by indebtedness. (Rodriguez, Rufus. The Insurance
Glenn during the lifetime of the policy. Accordingly, the Code of the Philippines Annotated 1999 Edition. 30)
payment by the insurer shall be reduced proportionately.
 What are the rules in case the insurance is taken by the
Is it possible for both Jaypee and Glenn insure the same mortgagee?
property without violating the principle of indemnity?
The rules are as follows:
Yes. The basis of insurable interest of the Jaypee is the
1. The mortgagee is entitled to the proceeds of the
loan which is secured by  the mortgagor’s property,
policy in case of a loss to the extent of his credit.
whereas, the Glenn’s interest is based upon his
2. If the proceeds are more than the total amount of
ownership over the property.
this credit, the mortgagor has no right to collect
the balance.
What are rules in case the insurance is taken by the
3. If the proceeds are equal to the amount of the
mortgagor?
credit, the mortgagee can no longer recover the
mortgagor’s indebtedness since the insurer is
The rules are as follows:
subrogated to the mortgagee’s rights.
1. A mortgagor may take an insurance payable 4. If the proceeds are less that the total amount of
either to: (1) himself, or (2) the mortgagee. credit, the mortgagee can still recover from the
2. If the mortgagor takes an insurance for his own mortgagor for deficiency.
benefit, only he can recover from the insurer but 5. Upon payment, the insurer is subrogated to the
the mortgagee has a lien on the proceeds by rights of the mortgagee against the mortgagor to
virtue of the mortgage. the extent of the amount paid. The insurer can
3. Where the mortgagor takes an insurance payable therefore collect the debt of the mortgagor to the
to the mortgagee or where the mortgagor assigns mortgagee. 
the policy taken by him to the mortgagee, the
“A” owns a house valued at Php 50,000.00 which he had
legal effects are: a. The insurance is still deemed
insured against fire for Php 100,000.00. He obtained a loan
to be upon the interest of the mortgagor, 2.  The
from “B” in the amount of Php 100,000.00, and to secure
mortgagor does cease to be a party to the
payment thereof, he executed a deed of mortgage on the
insurance contract, 3. Any act prior to the loss
house, but without assigning the insurance policy to the
which would otherwise render the insurance null
latter. For “A”’s failure to pay the loan on maturity, “B”
and void still renders it null and void although
initiated a foreclosure proceedings and in the ensuing public
the property is in the hands of the mortgagee and
sale, the house was sold by the sheriff to “B” as highest
the proceeds are payable to the mortgagee.
bidder. Immediately upon issuance of the sheriff’s certificate
4. In case of loss, the mortgagee is entitled to the
of sale in his favor, “B” insured the house against fire for
proceeds to the extent of his credit. The
Php 120,000.00 with another insurance company. In order
remaining balance shall accrue in favor of the
to redeem the house, “A” borrowed Php 100,000.00 from
mortgagor.
“C” and, as a security device, he assigned the insurance
5. Upon recovery by the mortgagee to the extent of
policy of Php 100,000.00 to “C”. However, before “A”
his credit, the debt is extinguished and the
could pay “B” his obligation of Php 100,000.00, the house
mortgagor is released from his
was accidentally and totally burned.
Does “A”, “B” or “C” have any insurable interest in the
house, if so, how much? May “A”, “B” or “C” recover
under the policies? If so, how much? (1982 Bar
Examination)
Insofar as “A” is concerned, he has an insurable interest
in the property as the owner thereof. At the time of the
loss, it was still within the redemption period, thus, the
title has yet to be consolidated under the name of the
“B.” However, “A”’s insurable interest over the property
is up to the actual value of house which is Php 50,000.00.
Since he is over-insured, he can seek reimbursement for
the excess premium paid to the insurer.
Insofar as “B” is concerned, he has an inchoate insurable
interest in the property on account of the foreclosure of
the property in his favor. “B”’s insurable interest over
the property amounts to Php 50,000.00 which is the
actual value of house.
Insofar as C is concerned, he cannot recover under the
policy since the assignment was made without the prior
consent of the insurer.
A owns a house worth P500,000. He insured it against fire
for P250,000.00 for the period from January 1, 1977 to
January 1, 1978. At the instance of B, who is a judgment
creditor of A, the said house was levied upon by the sheriff
and sold at a public auction  on March 15, 1997.It was
adjudicated  to B for P150,000 at the auction sale. B
insured the house against fire for P150,000 for the period
from March 16, 1977 to March 16, 1978. The house was
accidentally burned on April 1, 1977.
May A recover under his policy? Give reasons.
May A recover under his policy? Give reasons. (1947 and
1974 Bar Examination)
Yes to both.
Insofar as A is concerned, he can recover since he is the
owner of the property. While his property was already
sold at a public auction, the loss occurred within the one-
year redemption period.
Insofar as B is concerned, he can also recover since he
has an inchoate right over an existing right as the auction
buyer of the property. The extent of his insurable
interest is equal to the amount he paid at the auction.
“X” insured his house for Php 8,000.00 on September 1,
1972. The house is worth Php 20,000.00. On said date “X”
obtained a loan from “Y” and the latter insured the said
house for Php 5,000.00 because the total loan was without
security. On September 10, 1978, “X” sold the house to “Y”
without transferring his policy to “Y.” On September 27,
1972, the house was totally burned by fire of accidental
origin. Can “X” and “Y” recover on their respective
policies? Explain fully. (1972 Bar Examination)
Insofar as “X”’s policy, both “X” and “Y” cannot
recover thereunder.
“X” cannot recover because he is no longer the owner of
the property at the time of the loss, thus, he lacks
insurable interest.
“Y” cannot recover because “X’s” policy was not
endorsed under his name. While he has insurable interest
by virtue of being the new owner thereof, he cannot
claim against the policy of “X” for not being a party
thereto. He has no legal personality to file a claim against
the policy.
Insofar as “Y”’s policy, “Y” cannot recover thereunder. 
PROXIMATE CAUSE
Define proximate cause.
The efficient and dominant cause of the loss in a chain of
continuous event, unbroken by any new independent
cause. Simply put, it is the ultimate cause of the loss.
Under this principle, an insurance contract will respond
to a claim unless the peril covered is the proximate cause
of the loss.
separate lighters, the subject matter did not become two
(2) separate risks. There is no constructive total loss since
only 32.5% of the stones were lost.
What is/are the exceptions to the principle of proximate
cause?

A marine insurance policy on a cargo states that “the Under this principle, an insurance contract will not
insurer shall be liable for losses incident to perils of the respond to a claim unless the peril covered is the
sea.” During the voyage, seawater entered the compartment proximate cause of the loss. The exceptions are as
where the cargo was stored due to the defective drainpipe of follows:
the ship. The insured filed an action on the policy for
recovery of the damages caused to the cargo. May the 1. If the proximate cause of the loss in an excluded
insured recover damages? (1998 Bar Examination) peril under the policy.
2. Loss by willful act or through the connivance of
No. Perils of the sea refer to losses attributable to the the insured.
unusual or extraordinary action of wind or wave or to
Malas bought a standard fire insurance which covers fire
other extraordinary causes connected with navigation.
and lightning only. A few weeks later, there was an
Clearly, the defective drainpipe is not a peril of the sea. It
earthquake which caused fire. The property of Malas was
was incidental to ordinary usage of the ship. The
burned to the ground. Is the claim of Malas payable or not? 
proximate cause of the loss not being a peril of the sea,
the claim should be denied.
While the immediate cause of the loss is fire, the
proximate cause of the loss is earthquake, which is an
An insurance company issued a marine insurance policy
excluded peril.  Section 6 of the standard fire policy
covering a shipment by sea from Mindoro to Batangas of
provides:   
1,000 pieces of Mindoro garden stones “against total loss
only”. The stones were loaded in two lighters, the first with
This insurance does not cover any loss or damage
600 pieces and the second with 400 pieces. Because of the
occasioned by or through or in consequence, directly or
rough seas, damage was caused to the second lighter
indirectly, of any of the following occurrences, namely:-
resulting loss of 325 out of the 400 pieces. The owner of the
(a)   Earthquake, volcanic eruption of other convulsion of
shipment filed claims against the insurance company on the
nature. (emphasis supplied)
ground of constructive total loss as more than three-fourths
(b)   Typhoon, hurricane, tornado, cyclone or other
of the value of the stones had been lost in one of the lighters.
atmospheric disturbance.
(1992 Bar Examination)
(c)   War, invasion, act of foreign enemy, hostilities or
warlike operations (whether war be declared or not), civil
Is the insurance company liable under its policy?
war.
(d)   Mutiny, riot, military or popular rising, insurrection,
No. The insurance company is not liable to pay since its
rebellion, revolution, military or usurped power. 
policy covers “total loss” claims only. The contention of
the insured regarding the existence of a constructive total
Based on the foregoing, the insurer of Malas is not liable
loss is misplaced. While the stones were loaded in two
to pay him.
Dorobo is financially bleeding because sales are
substantially down. Despite efforts from his marketing team,
his stocks remain unsold. Out of desperation, he
intentionally burned his property including the unsold
stocks. Is he entitled to recover against his fire insurance
policy?
7.  If a demand for money or other valuable consideration
was made before the fire in exchange for the resistance of
the offender or for the safety of the person or property of
the victim.
Discussion last meeting

No, because the fire is not accidental in nature. Arson is a

form of willful act of the insured.

However, if arson was committed by a third person and

it can proven that there was no connivance on the part of
Dorobo, then his claim will be compensable. 

Section 21 of the standard fire insurance provides a list

of what constitute prima facie evidence of arson: 

1.  If the fire started simultaneously in more than one part

of the building or establishment.
2.  If substantial amount of flammable substances or
materials are stored within the building not necessary in
the business of the offender nor for household use.
3.  If gasoline, kerosene, petroleum or other flammable or
combustible substances or materials soaked therewith or
containers thereof, of any mechanical, electrical, chemical
or electronic contrivance designed to start a fire, or ashes
or traces of any of the foregoing are found in the ruins or
premises of the burned building or property.
4.  If the building or property is insured for substantially
more than its actual value at the time of the insurance of
the policy.
5.  If during the lifetime of the corresponding fire
insurance policy more than two fires have occurred in the
same or other premises owned or under the control of the
offender and/or insured.
6.  If shortly before the fire, a substantial portion of the
effects insured and stored in a building or property had
been withdrawn from the premises except in the ordinary
course of business.