PRINCIPLES OF INSURANCE 

pre-determined. In the case of Personal

Accident, they refer to a Schedule of
The business of insurance is guided by 6 principles,
Indemnity.
namely:
2. Penal or forfeiture bonds. Under these types
1. Indemnity of bonds, a default will result in the forfeiture
2. Subrogation of the face amount of the bond. The said
3. Contribution amount is not necessarily the amount of
4. Utmost Good damages suffered by the Obligee.
5. Insurance Interest 3. Replacement cost insurance. As general rule,
6. Proximate Cause  the amount of settlement shall be based on the
depreciated or sound value of the insured
INDEMNITY
property. In replacement cost insurance, the
Discuss the Principle of Indemnity. amount of settlement is based on the cost to
replace the damaged property.
The purpose of the insurance contract is to restore the
insured to the same financial condition he was in at
What is deductible?
the time of the loss subject to the application of
deductible, depreciation and average clause. The total
Deductible works in two ways, to wit:
sum insured serves as a cap to the potential liability of
a. It is a bar to a claim, if the amount of loss is below
the insurer and not the amount the insurer will pay in
deductible.
case of a loss. The amount of the indemnity is subject
b. It is a deduction to a claim, if the amount of loss is
to evaluation by the insurer in order to determine the
above deductible. Simply put, the liability of the
actual extent of loss of the insured.
insurer becomes net of deductible.

If an insured has received indemnity from the

To illustrate, Bentot owns a Ferrari 488 worth
insurance company for the injury or loss arising out
Php30,000,000 which is insured with Matibay
of the wrong or breach of contract complained of, the
Insurance Co. Based on tariff, the deductible for a
insurance company shall be subrogated to the rights
Private Car is 0.5% of the car's Fair Market Value or
of the insured against the wrongdoer or the
Php2,000, whichever is higher. The deductible is
person who has violated the contract. If the amount
therefore Php150,000.
paid by the insurance company does not fully cover
the injury or loss, the insured shall be entitled to
In case Bentot got involved in a collision accident, and
recover the deficiency from the person causing
the damage to the Ferrari 488 amounted to
the loss or injury. (See New Civil Code of the
Php149,000, Matibay Insurance Co. has zero liability
Philippines, Article 2207)
because the loss 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 Co. is only Php1,000.
insurance of paintings. Under this type of
policy,  the amount of liability of insurer is
 insurer. It is not a statement of the amount to be paid
What is depreciation? in case of a loss. To pay Php3,000,000 will be in
violation of the principle of indemnity. Under the said
It is the decrease in value of a property over time.  principle, the indemnification shall be limited to the
actual loss suffered by the insured - no more, no less.
In Motor Car Insurance, this refers to the amount
equivalent to a certain percentage (%) (depending on SUBROGATION

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.
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.

What is average clause?  It is the legal effect of the payment of claim by the
insurer. Upon payment of the claim, the insurer
A clause in a policy requiring that, where assets are assumes all the legal rights and remedies available to
insured for less than their full value, the insured is the insured against any and all parties liable for the
required to bear a proportion of any loss. The loss. 
proportion is the amount by which the assets are
under insured expressed as a percentage of its The cause of the loss or injury must be a risk covered
indemnity value, at the time of the loss. by the policy to entitle the insurer to
subrogation. (Article 2207, New Civil Code)
To illustrate, if a property worth Php2,000,000 is
insured for Php1,500,000, the property is 25% under- Discuss the principle of subrogation.
insured. In case the damage to the property is
Php1,000,000, the insured shall shoulder Php250,000 It is the legal effect of the payment of claim by the
as penalty for under-insuring the property.   insurer. Consequently, -

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.  stated that the signing of a Loss and
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
1. There is no need for a written assignment of
rights in order to enforce   one’s right of
subrogation. However, the Supreme Court
Subrogation Receipt was a valid pre-condition
before the 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)  What is the nature of the liability of the several
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.
insurers in double insurance? Explain. (2005 Bar Exams)
Each insurer is bound, as between himself and other
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)
X borrowed from CCC Bank. She mortgaged her house
and lot in favor of the bank. X insured her house. The
bank also got the house insured. (A) Is this double
insurance? Explain your answer. Is this legally valid?
Explain your answer. (2012 Bar Exams)  How is materiality determined?
No, there is no double insurance. Double insurance
exists where the same person is insured by several
insurers separately with respect to the same subject
and interest. (Sec. 93, Insurance Code). X's basis of
insurable interest is based on ownership of the
property while CCC's Bank's insurable interest is
based on the loan.  
UTMOST GOOD FAITH
An insurance contract is one of perfect good faith not
for the insured alone, but equally so for the insurer;
in fact, it is more so for the latter, since its dominant
bargaining position carries with it a stricter
responsibility. (Fieldmen’s Insurance Co., Inc. vs. Vda.
De Songco, 25 SCRA 70 [1968])
It refers to duty of both the insurer and insured to
exercise honesty in dealing with each other. Both
parties are obligated to declare all facts that are
considered material to the contract of insurance. The
application of the concept of utmost good is applied
and discussed in the section dealing concealment and
misrepresentation.
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. 
Define misrepresentation.
It refers to a false statement of fact made by one party
to another party, which has the effect of inducing that
party into the contract.
It is to be determined not by the event, but solely by
the probable and reasonable influence of the facts
upon the party to whom the communication is due, in
forming his estimate of the disadvantages of the
proposed contract, or in making his inquiries. (Section
31, New Insurance Code)
Cite examples of facts/circumstances which are deemed
material.
The following facts/circumstances were deemed to be
material which was the basis for denial of claim:
a.    That the insured is suffering from:
1. Incipient pulmonary tuberculosis (Musngi vs.
West Coast Life Ins. Co, 61 Phil. 864 [1939])
2. Cerebral congestion and Bells Palsy (Argente
vs. West Coast Life Ins. Co,51 Phil. 725 [1928])
3. Cardiovascular disease (St. Ferdinand
Memorial Park, Inc. vs. Great Pacific Life
Assurance Corp., I.C. Case Nov. 20 [1977])
4. Acute Bronchitis (Canilang vs. Court of
Appeals, 42 SCAD 455, 223 SCRA 443 [1993])
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])
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?  
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 within the 2-year incontestability period,
the defense of 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
wager policies invalid. A wager policy is
obviously contrary to public interest. (De
Leon, Hector. The Insurance Code of the
Philippines Annotated. 2002 Edition: 87)
2. Insurable interest over the thing insured
minimize, if not eliminate, the temptation to
destroy it in order gain from the proceeds of
the policy.
3. A policy issued to a person without insurable
interest in the subject matter is a mere wager
policy having nothing in common with
insurance except name and form and is void
and unenforceable on grounds of public
policy. (C.J. 1110 citing Hamburg-Bremen P.
Ins. Co. vs. Lewis, 4 App. 66)
4. A carrier or depositary of any kind has an
insurable interest in a thing held by him as
such, to the extent of his liability but not to
exceed the value thereof. (Section 15, New
Insurance Code)
 What is the purpose of the law in requiring that the
insured must have an insurable interest in the life of the
person insured?
The purpose of the law in requiring the existence of
insurable interest in the life of the insured is to
eliminate the temptation to destroy the life of the
insured on account of his life insurance.
When may there be insurable interest in the life of
another. (1966 Bar Examination)
A person may have insurable in the life another in the
following situations:
1. Of any person on whom he depends wholly or
in part for education or support, or in whom
he has a pecuniary interest;
2. Of any person under a legal obligation to him
for the payment of money, or respecting
property or services, of which death or illness
might delay or prevent the performance; and
3. Of any person upon whose life any estate or
interest vested in him depends. (Section 10,
New Insurance Code).
 Define insurable interest in life. (1966 Bar Examination)
An insurable interest in life may be the in the
following forms:
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, or respecting
property or services, 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. (Section 10, 
New Insurance Code)
In what cases has corporation an insurable interest in the
lives of its officers? (1965 Bar Examination)
 
A corporation may have insurable interest in the lives
of its officers when the death or illness of said officers
would materially and injuriously affect the
corporation.
 
What does insurable interest in property consist of?
Explain your answer. (1953 and 1967 Bar Examination)
An insurable interest in property may consist of the
following:
1. An existing interest. An example of which
includes ownership over a property
2. An inchoate interest founded on an existing
interest.  Examples of which includes the
stockholder’s interest in the property of the
corporation and partner’s interest in the
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?
It depends on the type of insurance, thus:
In Property Insurance, the measure of insurable
interest in a property is the extent to which the
insured may be damnified by loss or injury
thereof. (Insurance Code of the Philippines, Section 17)
In Life Insurance, insurable interest cannot be
measured on account of the fact that the value of
one’s life cannot be estimated or even valued for that
matter. According to some financial planners, the rule
of thumb is determining the maximum total sum
insured is 5 times of the annual salary of the
insurance applicant. The rationale behind this is that
it is assumed that a family of the decedent will take at
least five (5) years to adjust to the financial loss
brought about by the death of breadwinner.
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])
(2000)
IS, an elderly bachelor with no known relatives,
obtained life insurance coverage for P250,000.00 from
Starbrite Insurance Corporation, an entity licensed to
engage in the insurable business under the Insurance
Code of the Philippines (PD1460). He also insured his
residential house for twice that amount within the
same corporation. He immediately assigned all his rights
to the insurance proceeds to BX, a friend-companion
living  with him. Three years later, IS died in a fire that
gutted his insured house two days after he had sold it.
There is no evidence of suicide or arson or involvement
of BX in these events. BX demanded payment of the
insurance proceeds from the two policies, the premiums
for which IS had been faithfully paying during all the
time he 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.   The change in insurable interest after the loss will not
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?
affect the insurer’s liability. Upon the happening of
the 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 Glenn during the lifetime of the
policy. Accordingly, the payment by the insurer shall
be reduced proportionately.
Is it possible for both Jaypee and Glenn insure the same
property without violating the principle of indemnity?
Yes. The basis of insurable interest of the Jaypee is
the loan which is secured by  the mortgagor’s
property, whereas, the Glenn’s interest is based upon
his ownership over the property.
What are rules in case the insurance is taken by the
mortgagor?
The rules are as follows:
1. A mortgagor may take an insurance payable
either to: (1) himself, or (2) the mortgagee.
2. If the mortgagor takes an insurance for his
own benefit, only he can recover from the
insurer but the mortgagee has a lien on the
proceeds by virtue of the mortgage.
3. Where the mortgagor takes an insurance
payable to the mortgagee or where the
mortgagor assigns the policy taken by him to
the mortgagee, the legal effects are: a. The
insurance is still deemed to be upon the
interest of the mortgagor, 2.  The mortgagor
does cease to be a party to the insurance
contract, 3. Any act prior to the loss which
would otherwise render the insurance null and
void still renders it null and void although the
property is in the hands of the mortgagee and
the proceeds are payable to the mortgagee.
4. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit. The
remaining balance shall accrue in favor of the
mortgagor.
5. Upon recovery by the mortgagee to the extent
of his credit, the debt is extinguished and the
mortgagor is released from his
indebtedness. (Rodriguez, Rufus. The Insurance
Code of the Philippines Annotated 1999 Edition.
30)
 What are the rules in case the insurance is taken by the
mortgagee?
The rules are as follows:
 1. The mortgagee is entitled to the proceeds of
the policy in case of a loss to the extent of his
credit.
2. If the proceeds are more than the total
amount of this credit, the mortgagor has no
right to collect the balance.
3. If the proceeds are equal to the amount of the
credit, the mortgagee can no longer recover
the mortgagor’s indebtedness since the insurer
is subrogated to the mortgagee’s rights.
4. If the proceeds are less that the total amount
of credit, the mortgagee can still recover from
the mortgagor for deficiency.
5. Upon payment, the insurer is subrogated to
the rights of the mortgagee against the
mortgagor to the extent of the amount paid.
The insurer can therefore collect the debt of
the mortgagor to the mortgagee.  Insofar as C is concerned, he cannot recover under
“A” owns a house valued at Php 50,000.00 which he had
insured against fire for Php 100,000.00. He obtained a
loan from “B” in the amount of Php 100,000.00, and to
secure payment thereof, he executed a deed of mortgage
on the house, but without assigning the insurance policy
to the latter. For “A”’s failure to pay the loan on
maturity, “B” initiated a foreclosure proceedings and in
the ensuing public sale, the house was sold by the sheriff
to “B” as highest bidder. Immediately upon issuance of
the sheriff’s certificate of sale in his favor, “B” insured
the house against fire for Php 120,000.00 with another
insurance company. In order to redeem the house, “A”
borrowed Php 100,000.00 from “C” and, as a security
device, he assigned the insurance policy of Php
100,000.00 to “C”. However, before “A” could pay “B”
his obligation of Php 100,000.00, the house 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.
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.
A marine insurance policy on a cargo states that “the
insurer shall be liable for losses incident to perils of the
sea.” During the voyage, seawater entered the
compartment where the cargo was stored due to the
defective drainpipe of the ship. The insured filed an
action on the policy for recovery of the damages caused
to the cargo. May the insured recover damages? (1998
Bar Examination)
No. Perils of the sea refer to losses attributable to the
unusual or extraordinary action of wind or wave or to
other extraordinary causes connected with navigation.
Clearly, the defective drainpipe is not a peril of the
sea. It was incidental to ordinary usage of the ship.
The proximate cause of the loss not being a peril of
the sea, the claim should be denied.
An insurance company issued a marine insurance policy
covering a shipment by sea from Mindoro to Batangas of
1,000 pieces of Mindoro garden stones “against total
loss only”. The stones were loaded in two lighters, the
first with 600 pieces and the second with 400 pieces.
Because of the rough seas, damage was caused to the
second lighter resulting loss of 325 out of the 400 pieces.
The owner of the shipment filed claims against the
insurance company on the ground of constructive total
loss as more than three-fourths of the value of the stones
had been lost in one of the lighters. (1992 Bar
Examination)
Is the insurance company liable under its policy?
No. The insurance company is not liable to pay since
its policy covers “total loss” claims only. The
contention of the insured regarding the existence of a
constructive total loss is misplaced. While the stones
were loaded in two separate lighters, the subject power. 
matter did not become two (2) separate risks. There is
no constructive total loss since only 32.5% of the Based on the foregoing, the insurer of Malas is not
stones were lost. liable to pay him.

What is/are the exceptions to the principle of proximate Dorobo is financially bleeding because sales are
cause? substantially down. Despite efforts from his marketing
team, his stocks remain unsold. Out of desperation, he
Under this principle, an insurance contract will not intentionally burned his property including the unsold
respond to a claim unless the peril covered is the stocks. Is he entitled to recover against his fire insurance
proximate cause of the loss. The exceptions are as policy?
follows:
No, because the fire is not accidental in nature. Arson
1. If the proximate cause of the loss in an is a form of willful act of the insured.
excluded peril under the policy.
2. Loss by willful act or through the connivance However, if arson was committed by a third person
of the insured. and it can proven that there was no connivance on the
part of Dorobo, then his claim will be compensable. 
Malas bought a standard fire insurance which covers fire
and lightning only. A few weeks later, there was an
Section 21 of the standard fire insurance provides a
earthquake which caused fire. The property of Malas was
list of what constitute prima facie evidence of arson: 
burned to the ground. Is the claim of Malas payable or
not? 
1.  If the fire started simultaneously in more than one
part of the building or establishment.
While the immediate cause of the loss is fire, the
2.  If substantial amount of flammable substances or
proximate cause of the loss is earthquake, which is an
materials are stored within the building not necessary in
excluded peril.  Section 6 of the standard fire policy
the business of the offender nor for household use.
provides:   
3.  If gasoline, kerosene, petroleum or other flammable
or combustible substances or materials soaked
This insurance does not cover any loss or damage
therewith or containers thereof, of any mechanical,
occasioned by or through or in consequence, directly or
electrical, chemical or electronic contrivance designed
indirectly, of any of the following occurrences, namely:-
to start a fire, or ashes or traces of any of the foregoing
(a)   Earthquake, volcanic eruption of other convulsion
are found in the ruins or premises of the burned
of nature. (emphasis supplied)
building or property.
(b)   Typhoon, hurricane, tornado, cyclone or other
4.  If the building or property is insured for
atmospheric disturbance.
substantially more than its actual value at the time of
(c)   War, invasion, act of foreign enemy, hostilities or
the insurance of the policy.
warlike operations (whether war be declared or not),
5.  If during the lifetime of the corresponding fire
civil war.
insurance policy more than two fires have occurred in
(d)   Mutiny, riot, military or popular rising,
the same or other premises owned or under the control
insurrection, rebellion, revolution, military or usurped
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.
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