4. Insurance Summary 6m2664

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY INSURABLE INTEREST Section 10 Insurable interest in general Insurable interest - Interest which the law requires the owner of an insurance policy to have in the person or thing insured.

1

validity of an insurance contract whatever the subject matter of the policy, whether upon property or life. - A policy issued to a person without interest in the subject matter insured is a mere wager policy or contract and is void for illegality. The insurable interest requirement is held not to apply to industrial life insurance. Requirement, a matter of public policy

(1) Pecuniary in nature. — In general, a person is deemed to have an insurable interest in the subject matter insured -

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

(a) Interest does not necessarily imply a right to the whole or a part of a thing. - To have an interest in the preservation of a thing is to be circumstanced - with respect to it as to have benefit from its existence and prejudice from its destruction. (b) The property of a thing and the interest devisable from it may be very different; - of the first, the price is generally the measure, - but by interest in a thing, every benefit or - advantage arising out of or - depending on such thing may be considered as being comprehended. (2) Exception. — The term has a somewhat broader meaning in connection with life insurance. -

To have an insurable interest in the life of a person, the expectation of benefit from the continued life of that person need not necessarily be of a pecuniary nature.

Necessity of insurable interest to validity of contract The existence of insurable interest is a primary concern in determining the liability of an insurer under a policy of insurance. Insurable interest may be in life and health or in property (1) The existence of insurable interest gives a person the legal right to insure the subject of the policy of insurance. a. In the absence of such interest, the person insuring in effect would be gambling, which is prohibited by law. b. It is a fundamental postulate of all insurance that it must not be a mere bet upon a future event. (2) The rule is that an insurable interest is necessary to the

(1) As a deterrence to the insured — The requirement of an insurable interest to a contract of insurance is based upon considerations of public policy which render wager policies invalid. a. A wager policy is obviously contrary to public interest. It is demoralizing in that: (a) It allows the insured to have an interest in the destruction of the subject matter rather than in its preservation or (b) It affords a temptation or an inducement to the insured, having nothing to lose and everything to gain, to bring to the event upon the happening of which the insurance becomes payable. (2) As a measure of limit of recovery — The legal requirement has been devised with another object in view. a. If and to the extent that any particular insurance contract is a contract to pay indemnity, b. the insurable interest of the insured will be the measure of the upper limit of his provable loss under the contract. The insurance should not provide the insured with the means of making a net profit from the happening of the event insured against. The requirement is enforced and the defense permitted not in the interest of the insurer but of a sound public policy. Two general classes of life policies Insurance upon one’s life In one class are those taken out by the insured upon his own life for the benefit of himself, or of his estate, in case it matures only at his death, or for the benefit of a third person who may be designated as beneficiary. An application for insurance on one's own life does not usually present an insurable interest question.

Insurance upon life of another In the other class belong policies taken out by the insured upon the life of another, When one applies for insurance on the life of another for the former's benefit, he must have an insurable interest in the life of that person.

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY Insurable interest in one's own life Every person has an unlimited insurable interest in his own life whether the insurance is for the benefit of himself or another; and it is not at all necessary that the beneficiary designated in the policy should have any interest in the life of the insured. (1) Insurance taken out by insured on his life for the benefit of another. — The presence of insurable interest is really required only as evidence of the good faith of the parties. -

It is contrary to human experience that a person will insure his own life for the benefit of another for the purpose of speculation, to be tempted to take his own life in order to secure the payment of money to another, or designate as the beneficiary, a person interested in the destruction and not in the continuance of his life.

Consequently, the mere fact that a man on his own motion insures his life for the benefit either of himself or of another is sufficient evidence of good faith to validate the contract. Although there are cases on record where the beneficiary without interest has yielded to the temptation to terminate unlawfully the life insured as if he himself had taken out the policy, the law considers this danger too slight for notice, since the selection of the beneficiary by the insured is in ordinary cases sufficient guaranty of the existence of such good faith and confidence between them as will sufficiently protect the insured. (2) When the insurance regarded a wager policy — An exception to the general rule exists in cases in which the court finds that a wagering policy has been taken out by the insured on his life at the behest of a third person who is named as beneficiary. Evidence of a wagering policy is usually found in such facts as: (a) that the original proposal to take out insurance was that of the beneficiary; (b) that s are paid by the beneficiary; and (c) that the beneficiary has no interest, economic or emotional, in the continued life of the insured. On finding that such a policy is primarily a wager, the court will generally void the policy entirely. A person has an insurable interest in his own life - But if the policy is applied for and owned by someone other than the insured, - the applicant-owner must have an insurable interest in the life of the insured.

2

Similarity between a life insurance policy and a civil donation Civil Donation Donation is an act of liberality whereby a person disposes gratuitously a thing or right in favor of another who accepts it.

Life Insurance Policy No different from a civil donation insofar as the beneficiary is concerned. Both are founded upon the same consideration: liberality

A beneficiary is like a donee, because from the s of die policy which the insured pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance. As a consequence, the proscription in Article 739 (infra.) of the Civil Code should equally operate in life insurance contracts.

Under Article 87 of the Family Code (Exec. Order No. 209.) "Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the marriage shall be void, except moderate gifts which the spouses may give each other on the occasion of any family rejoicing. The prohibition shall apply also to persons living together as husband and wife without a valid marriage/' A life insurance policy taken by a spouse on his (her) life in favor of the other takes effect after the death of the insured. Insurable interest in life of another (1) Insurance for benefit of insured — A person cannot lawfully procure insurance for his own benefit on the life of another in whose life he has no insurable interest. The insurable interest in the life of another must be a pecuniary one (related to money) and it exists whenever the relation between the assured and the insured, - whether by blood, marriage or commercial intercourse, - is such that the assured has a reasonable expectation of deriving benefit from the continuation of the life insured or - of suffering detriment or incurring liability through its termination. - Or to put it more briefly, the policy of the law requires that the assured shall have an interest to preserve the life insured in spite of the insurance, rather than destroy it because of the insurance. (3) Insurance for benefit of a third party. — When the owner of the policy insures the life of another — the cestui que vie — and designates a third party as beneficiary, both the owner and beneficiary must have an insurable interest in the life of the cestui que vie.

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY -

If the insurable interest requirement is satisfied, a life policy is assignable regardless of whether the assignee has an insurable interest in the life of the cestui que vie

3

each other except only when the need for of the brother or sister, being of age, is due to a cause imputable to the claimant's fault or negligence. (2) When pecuniary benefit essential. —

Under our law, in order that one may have an insurable interest in the life of another, it must be one of those mentioned i.e., The interest is pecuniary or founded upon the close relationship between the parties. Hence, the mere fact that two persons are engaged to be married does not give one an insurable interest in the life of the other. EXAMPLE: X takes an insurance on his own life and names his friend Y as beneficiary and another insurance on Y's life with himself (X) as beneficiary. The first insurance is valid because the beneficiary (Y) need not have an insurable interest in the life of the insured. The second insurance is void because X has no insurable interest on the life of Y. Insurable interest in life of person upon whom one depends for education or or in whom he has a pecuniary interest (1) When mere blood relationship sufficient. —the mere relationship of brother or sister, father or child is sufficiently close to give either an insurable interest in the life of the other. -

-

The reasoning upon which the rule is based is that the natural affection in cases of this kind is considered sufficient, o if not more powerful, to protect the life of the insured than any other consideration. The essential thing is this: that the policy shall be obtained in good faith, and not for the purpose of speculating upon the hazard of a life in which the insured has no interest.

Generally, blood or material relationships fit the concept of insurable interest. In any event, the following have an insurable interest in each other's life since under the provisions of Article 195 of our Family Code, they are obliged to each other: (a) The spouses; (b) Legitimate ascendants and descendants; (c) Parents and their legitimate children and the legitimate or illegitimate children of the latter; (d) Parents and their illegitimate children and the legitimate or illegitimate children of the latter; (e) Legitimate brothers and sisters, whether of the full or half-blood. Brothers and sisters not legitimately related, whether of the full or half-blood, are likewise bound to

-

In other cases, mere blood relationship o {e.g., lesser degree of kinship, such as uncle or aunt, and nephew or niece, and cousins) o does not create an insurable interest in the life of another. o Also, mere relationship by affinity (e.g., son-in-law, brother-in-law, stepchildren) ordinarily does not constitute an insurable interest.

Under our law, there must be an expectation of pecuniary benefit in the life of the insured to sustain the insurance, that is, a risk of actual monetary loss from his death. - Hence, "love and affection/' "gratitude," or "friendship," by itself is not sufficient. The expectation, however, need not have legal basis whatever; it is sufficient that it be actual. Thus: (a) The assumption of parental relations when a man sends a girl to school and pays her expenses is sufficient to give her an insurable interest in his life. (b) Upon like principle, a woman who takes a girl from an orphan asylum and gives her a home under circumstances calculated to raise a reasonable expectation of help and care from the girl during the declining years of the benefactress, has an insurable interest in the girl's life, although she is not formally appointed her guardian. (c) It is generally held that a corporation has an insurable interest in the life of an officer on whose services the corporation depends for its prosperity, and whose death will be the cause of a substantial pecuniary loss to it. (d) Similarly, a person may take out a policy on the life of his business partner on the theory that the latter's death may adversely affect the business operations which can, in turn, cause financial losses (e) In the case of employees, insurable interest is dependent upon the value of the employee to the business. One who could be easily replaced would hardly be one in whom the employer could reasonably claim an insurable interest. However, a chemist working on research problems might reasonably be insured, particularly if his experiments had a reasonable expectation of substantial future benefits. A business usually has an interest in other employees occupying key positions, such as the president, executive officers, and department heads who are important to the organization which expects to receive some necessary gain from the continuation of their lives or some financial loss from their death. However, valid insurance may be written when the employee himself applies for the policy and designates the

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY employer as beneficiary. Insurable interest of a person in life of another under a legal obligation to former. (1) Related by contract or commercial relation. — -

-

Any person so related to another, either by contract or commercial relation, that a right possessed by him will be extinguished or impaired by the death or illness of the other may lawfully procure insurance on the other's life. Thus, the employer may insure the life of the employee and vice versa: a corporation, the life of its manager; a partner, the life of his co-partner; a partnership, the life of each partner; and a surety, the life of his principal although the principal has no insurable interest in the life of his surety.

(2) Risk that performance of obligation might be delayed or prevented — In all the instances mentioned, it must appear that the death or illness of the insured person who is under a legal obligation, might delay or prevent its performance. - Accordingly, it has been held that while a partner has an insurable interest in the life of a co-partner who is indebted to him for his proportion of the capital or against whose skill the said partner has advanced money, a partner has no insurable interest in the life of the other if both have no capital invested and neither is indebted to the other. Insurable interest of creditor in life of his debtor (1) Extent of interest. — The creditor has unquestionably an insurable interest in the life of his debtor under Section 10(c). - Thus, a creditor may insure his debtor's life for the purpose of protecting his debt but only to the extent of the amount of the debt and the cost of carrying the insurance on the debtor's life. - It is clear that the creditor will not be fully damnified if the insurance is limited only to the exact amount of the debt. However, the amount of the policy must not be so disproportionate to the amount of the debts and liens thereon plus the cost of the insurance as to justify the conclusion that the policy is merely a wagering or speculative one. - For instance, a policy on the life of another for P300,000.00 to cover a debt of P50,000.00 is a mere wagering policy, and is void (2) Right of debtor in insurance taken by creditor — A creditor who insures the life of his debtor does not act as the agent of the latter (see Sec. 53.), cases to the contrary notwithstanding. -

The contract is one purely between the insurer and the insuring creditor inasmuch as by law, the creditor is given an insurable interest on the life of his debtor. In other words, the insurance does not inure to the benefit of the debtor unless, of course, the contrary is expressly stipulated.

4

(3) Extent of the amount that may be recovered by insuring creditor. — Strictly speaking, an insurance taken by the creditor on the life of his debtor is not purely a contract of life insurance. The principle of indemnity applies in this particular kind of insurance as in the case of property insurance. - It follows that the insuring creditor could only recover such amounts as remain unpaid at the time of the death of the debtor. - If the whole debt has already been paid, then recovery on the policy is no longer permissible. (4) Where insurance taken by debtor for the benefit of creditor. — A distinction should be made between a policy taken by a debtor on his life and made payable to his creditor and one taken by a creditor on the life of his debtor. Where a debtor in good faith insures his life for the benefit of the creditor, full payment of the debt does not invalidate the policy; in such case, the proceeds should go to the estate of the debtor. (5) Where debt becomes legally unenforceable. — According to American cases, the fact that a valid debt becomes subsequently unenforceable, by reason of being barred by the statute of limitations or of the debtor's discharge in insolvency, does not cut off the insurable interest of the creditor although there is no reasonable expectation of the debtor becoming solvent so as to be able to pay his debt. The reason given is that the moral or equitable obligation of the debtor to pay his debt is not destroyed by the discharge which affects only the legal obligation to pay. Under our law, however, it is clear that a creditor may not insure the life of his debtor unless the latter has a legal obligation to him for the payment of money. Insurable interest in life of person upon which an estate or interest depends. Section 10(d) provides that every person has an insurable interest in the life and health of "any person upon whose life any estate or interest vested in him depends." This simply means that one may insure the life of a person where the continuation of the estate or interest vested in him who takes the insurance depends upon the life insured. EXAMPLE: Suppose A receives as legacy, the usufruct of a house. The ownership of which is vested in B. It is provided in the legacy that should B die first, both the usufruct and the ownership of the property will to C. In this case, A has an insurable interest in the life of B for A will suffer pecuniary loss by B's death. Consent of person whose life is insured. Is the consent of the person whose life is insured essential to the validity of the insurance taken by another?

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY (1) Essential to validity of policy. — A leading authority has said: "On clear principle and by the weight of authority, it is believed that all such contracts (without the consent of the insured) are contrary to public policy, and void, x x x The amount of insurance that may be validly procured is not limited strictly to the amount of the pecuniary interest to be protected. A margin must be allowed to cover s and other charges. But this excess of insurance offers a strong temptation to hasten the death of the insured by criminal means. The danger to the public of such insurances is largely obviated when the insured, with knowledge of all the circumstances, has given consent to the contract. His very consent is strong evidence of the good faith of the person procuring the insurance, and thus affords a needed guaranty to society." (2) Not essential to validity of policy. — It seems, however, that under our law (Sec. 10.), the consent of the person insured is not essential to the validity of the policy. So long as it could be proved that the assured has a legal insurable interest at the inception of the policy, the insurance is valid even without such consent. The presence of insurable interest takes the contract out of the class of forbidden wagers. Sec. 11. The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy, (n) Beneficiary defined. (1) In insurance cases, the term beneficiary is ordinarily used in referring to the person who is named or designated in a contract of life, health, or accident insurance as the one who is to receive the benefits which become payable, according to the of the contract, upon the death of the insured, (2) It is also used in insurance law to indicate only those persons, - whether natural or juridical, - who, though not parties to the contract, - are mentioned in it as the intended recipients of the proceeds or - benefits of the insurance if the insured risk occurs, (3) A broader use of the term would include also those who, upon a proper basis of insurable interest, secure insurance for their own benefit upon the lives of others Kinds of beneficiary. Where the beneficiary designated is a person other than the insured, such person may occupy one of three relations to the insured: Insured Himself Third person who Third person paid through mere consideration bounty of insured He may himself The third person The beneficiary be the person named as may be one who who beneficiary may gives no procures the have paid a consideration contract and pays valuable whatsoever for the s consideration for any right that necessary to his selection as may be acquired

maintain it. Such a person is thus an immediate party to the contract and is ordinarily called the assured as where the creditor insures the life of his debtor;

5 such; that is, the insured may have taken the policy for the benefit of a creditor or to secure some other obligation; or

in the policy but is designated as recipient of the proceeds of the policy through mere bounty of the insured, The beneficiary designated may be the estate of the insured or a third party

In the second and third cases: - the beneficiary is not a party to the contract. In all the three cases: the proceeds of the life insurance policy become the exclusive property of the beneficiary upon the death of the insured. - Therefore, where the insured, before dying, was judicially declared insolvent, the proceeds should be paid to the beneficiary and not to the assignee in insolvency. Limitations in the appointment of beneficiary A person may take out a policy of insurance on his own life and make it payable to whomsoever he pleases, irrespective of the beneficiary's lack of insurable interest, provided he acts in good faith and without intent to make the transaction merely a cover for a forbidden wagering contract. (44 C.J.S. 899.) Our Civil Code, however, imposes certain limitations in the appointment of a beneficiary. Article 2012 of the Civil Code provides as follows: "Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him, according to said article, (n)" Article 739 above referred to provides as follows: "The following donations shall be void: (1) Those made between persons who were guilty of adultery or concubinage at the time of the donation; (2) Those made between persons found guilty of the same criminal offense, in consideration thereof; (3) Those made to a public officer or his wife, descendants and ascendants, by reason of his office. In the case referred to in No. 1: the action for declaration of nullity may be brought by the spouse of the donor or donee; - and the guilt of the donor and donee may be proved by preponderance of evidence in the same action, (n)"

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY In order that Article 739 may apply: it is not required that there be a previous conviction for adultery or concubinage. This can be inferred from the clause that "the guilt of the donor and donee may be proved by preponderance of evidence." As already pointed out (under Sec. 10), a life insurance policy, in essence, is no different from a civil donation insofar as the beneficiary is concerned. Both are founded on the same consideration: liberality. A beneficiary is like a donee because from the s of the policy which the insured pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance. As a consequence, the proscription in Article 739 of the Civil Code should equally operate in life insurance contracts. EXAMPLE: M, a married man, takes out an insurance policy on his life and designates B, with whom M is cohabiting at the time, as beneficiary. The designation of B is void since M and B are guilty of concubinage at the time it is made. Hence, in case M dies, his legal heirs and not B will be entitled to the insurance proceeds. But the designation is valid if both M and B are single. The insured in a life insurance may designate any person as beneficiary unless disqualified to be so under the provisions of the Civil Code. In the absence of any beneficiary named in the life insurance policy or where the designated beneficiary is disqualified - the proceeds of the insurance will go to the estate of the deceased insured. Right of insured to change beneficiary in life insurance (1) General rule. — Section 11 abandons the former rule that unless the policy reserves to the insured the right to change the beneficiary, no such right exists and the named beneficiary has vested right in the policy of which he cannot be divested without his consent, - Now, whether or not the policy reserves to the insured the right to change the beneficiary, he has the power to so change the beneficiary without the consent of the latter who acquires no vested right but only an expectancy of receiving the proceeds under the insurance. It follows that the insured retains the right to receive the cash value of the policy, to take out loans against the cash value, to assign the policy, or to surrender it without the consent of the beneficiary. (2) Effect of death of insured. — The right must be exercised specifically in the manner provided in the policy or contract. - But the insured's power to extinguish the beneficiary's interest ceases at his death, - and cannot be exercised by his personal representatives or assignees. - The beneficiary's right then becomes completely fixed.

6

(3) Where right to change is waived. — If the right to change the beneficiary is expressly waived in the policy, then the insured has no power to make such change without the consent of the beneficiary. (a) The beneficiary acquires an absolute and vested interest to all benefits accruing to the policy from the date of its issuance and delivery, including that of obtaining a policy loan to the extent stated in the schedules of values attached to the policy. -

The beneficiary has thus a property right in the policy of which could not be deprived without his consent.

(b) Neither can a new beneficiary be added to the irrevocably designated beneficiary for this would in effect reduce the latter's vested rights. (c) The insured does not even retain the power to destroy the contract by refusing to pay s for the beneficiary can protect his interest by paying the s for the reason that the fulfillment of an obligation may be made by a third person even against the will of the debtor and if he has an interest in the fulfillment of the obligation, even against the will of the creditor Measurement of vested interest of beneficiary in policy The vested right or interest of the beneficiary in a policy should be measured on its full face value and not on its cash surrender value for in case of death of the insured, said beneficiary is paid on the basis of its face value. In case the insured should discontinue paying s, the beneficiary may continue paying it and is entitled to automatic extended term or paid up insurance options, etc. and that said vested right under the policy cannot be divisible at any given time. - An application of loan under the policy and the surrender of the policy by the insured constitute acts of disposition or alienation of property rights of the beneficiary and not merely of management or istration because they involve the incurring or termination of contractual obligations. ILLUSTRATIVE CASE: Insurer required authority from court for surrender of policy designating an unemancipated son as beneficiary. Facts: W was issued by X Co. (insurer) a 20-year endowment plan, with a face value of P5,000.00. She designated her husband H, and their unemancipated minor son S, as her irrevocable beneficiaries. After the denial by X Co. of her policy loan application, W signified her decision to surrender her policy to X Co., which she was also entitled to avail of under one of the provisions of the same policy, and demanded its cash value which then amounted to P520.00. X Co. denied the loan application and the surrender of the policy on the same ground — that the written consent for the minor son must not only be given by his father H, as legal

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY guardian, but it must also be authorized by the court in competent guardianship proceeding. Issue: Is X Co. justified in disapproving the proposed transactions in question? Held: Yes. Under Article 3204 of the Civil Code, "when the property of the child is with more than two thousand pesos, the father or mother shall be considered a guardian of the child's property subject to the duties and obligations of guardians under the Rules of Court." In this case, the full face value of the policy is P5,000.00 and the minor's vested interest therein, as one of the two (2) irrevocable beneficiaries, consists of one-half (1/2) of said amount of P2,500.00. (ibid.) Note: The ruling in this case has been modified by Section 180. Where beneficiary dies before insured (1) View that beneficiary's representative is entitled to insurance proceeds. — It would necessarily follow as a consequence of the vested interest rule, - where the right to change the designated beneficiary is expressly waived in the policy, - that if the beneficiary dies before the insured, his rights so vested should to his representatives, and on the death of the insured, the proceeds of the policy should belong, not to estate of the insured, - but to the representatives of the beneficiary. But this result, however logical in form, does great violence to the purpose of the insured, who must have intended, in the ordinary case, - to provide a fund for the after his death, of those whom he was accustomed to during his lifetime. - He can scarcely have intended to make a provision for the distributees and legatees of the deceased beneficiary, - who may well be persons without claim to his bounty or interest in his life. (Vance, op. cit., p. 710.) (2) View that estate of the insured is entitled to insurance proceeds. — In view of the above considerations, it is believed that where the beneficiary predeceases the insured, - the estate of the insured should be entitled to the proceeds of the insurance especially - where the designation is subject to the express condition to pay the beneficiary if he survives the insured or "if surviving." However, most, but not all, courts hold that the mere fact that such a policy is made payable to the designated beneficiary, "his executors, s, or assigns," is sufficient to negative the implied condition that death of the beneficiary before maturity of the policy terminated all his rights to it. Designation of beneficiary Words used in designating the beneficiaries of a life policy will not be given their technical significance but will be construed

7

broadly in order that the benefit of the insurance shall be received by those intended by the insured as the object of his bounty. - The beneficiary designated may be the insured or his estate, a specifically designated person or persons, or a class or classes of persons. (1) Children. — broad enough to include the following: (a) an adopted child; or (b) an adult child not forming a part of the household of the insured; or (c) after-born children even of a marriage subsequently contracted. The word "children" in an insurance policy ordinarily means a descendant of the first degree and is never intended to include grandchildren. Where the children are named individually, other children cannot share in the insurance proceeds unless the insured subsequently amend his designation to include them. (2) Husband; wife or widow. — The word "wife" in the description of the beneficiary of life insurance is generally regarded as descriptio personae, - and the fact that one who otherwise answers the description does not have the legal status of the wife of the insured does not prevent her from taking as beneficiary, - as when she is designated by name, although the words "his wife" are added, However, if the beneficiary is not named but is designated merely by a status, such as the "husband," "wife," or "widow" of the insured, the legal husband or wife as ascertained at the death of the insured, is entitled to the benefits of such insurance Note that under our law (Arts. 2012 and 739, Civil Code, supra.), any person who is forbidden from receiving any donation such as a common-law spouse, cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him. (3) Husband and children; wife and children. — A policy payable to the wife of the insured and "their children" includes children by another wife, although the prevailing view state that the beneficiaries are limited to children common to both, - But if the designation is made to the insured's "wife and children" or "my wife and children," the insurance is deemed for the benefit of all children of the insured, whether by the named wife or those of another. Under a policy payable to the insured's "husband and children," he and they do not take the insurance by inheritance but upon her death, the insurance money must be divided per capita among the husband and children. The same rule applies to a policy payable to "wife and children."

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY

(4) Family. — The term "family" is sometimes used to indicate the recipient of the proceeds of an insurance policy. In deciding whether a particular person claiming a share of the fund is of the family of the insured, - the court will ascertain whether that person was so regarded by the insured. - If he was so regarded, he will be allowed to participate although in no way related to the insured. (5) Heirs or legal heirs. — When a life policy is made payable to the insured's "heirs" or "legal heirs," these will not ordinarily be construed as indicating merely the heirs at law but rather that class of persons who would take the property of the insured in case he died intestate. - Therefore, it is generally held that the widow of the deceased is entitled to take under a policy payable to his "heirs" or "legal heirs" as well as the children of the deceased (6) Estate or legal representatives of deceased. — The words "estate," "representatives," or "legal representatives," when used in designating beneficiaries,

8

In case the interest of a beneficiary in a life insurance policy is forfeited as provided in Section 12, the nearest relatives, not otherwise disqualified, of the insured shall receive the proceeds of the insurance in accordance with the rules on intestate succession provided in the Civil Code. The nearest relatives of the insured in the order of enumeration are the following: (1) The legitimate children; (2) The father and mother, if living; (3) The grandfather and grandmother, or ascendants nearest in degree, if living; (4) The illegitimate children; (5) The surviving spouse; and (6) The collateral relatives, to wit: (a) brothers and sisters of the full blood; (b) brothers and sisters of the half-blood; and (c) nephews and nieces, (see Arts. 978, 979, 985-987, 988, 995,1003-1006, Civil Code.) (7) In default of the above, the State shall be entitled to receive the insurance proceeds, (see Art. 1011, ibid.) Liability of insurer on death of insured

-

are to be construed in their strict technical sense and the courts will ordinarily assume that they are used to mean executors or s, unless it appears that the insured intended to use these expressions in the sense of heirs or next of kin. Policies payable to the insured's "executors, s or assigns" are clearly assets of the deceased insured's estate while those payable to his "heirs" or "next of kin" are not.

If no beneficiary is designated in the life insurance policy, the proceeds thereof will go to his legal heirs in accordance with law. It has been held, however, that where two women, innocently and in good faith, - contracted marriage with the same man, the insured, and the latter did not designate any beneficiary who would receive the proceeds of his life insurance, each family shall be entitled to one half of the insurance benefits. Sec. 12. The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured; in which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified, Forfeiture of the interest of the beneficiary in a life insurance policy. The word "interest" mentioned in Section 12 means the right of the beneficiary to receive the proceeds of the life insurance policy. It does not mean insurable interest since the beneficiary need not have an insurable interest in the life of the insured.

Check chart ILLUSTRATIVE CASE: The insured, who died while driving his motorcycle, was not allowed to drive a motorcycle in his driver's license. Facts: While the life insurance policy with a face value of P2,000 was in force, D (insured) died as a result of a vehicular accident wherein he was bumped by a car while driving his motorcycle. The policy carried with it a Special Accident Rider providing for an additional benefit of P2,000.00 in case of death by accident. R (insurer) denied payment to D's widow of the Special Accident Rider benefits on the ground that the death of D was an excepted risk as he was then "committing a felony" at the time of the accident as he was not allowed to drive a motorcycle in his driver's license. Issue: Should R be exonerated from paying the Special Accident Rider benefit? Held: No. An act or omission punishable by a special law is strictly not a felony but more of the general term — crime, offense, transgression or infraction of law. Therefore, the act of driving a motorcycle without the license to do so, while in violation of a special law, particularly the Land Transportation and Traffic Code, would not constitute a "felony"; and even if such act is a "felony," the mere fact that the accident occurred while D was committing such felony would not exonerate R from paying the benefit under the Special Accident Rider to avoid liability. It must also be shown that the violation of law was the cause or had causal connection with the accident, (ibid.) Sec. 13. Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest.

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY

9

Insurable interest in property in general Section 13 defines insurable interest in property. The interest may be in the property itself (e.g., ownership), or any relation thereto (e.g., interest of a trustee or a commission agent), or liability in respect thereof (e.g., interest of a carrier or depository of goods). The principle may be stated generally that anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction. (1) Occurrence of loss may be uncertain. — Note that under the law, it is not necessary that the interest is such that the event insured against would necessarily subject the insured to loss. It is sufficient that it might do so, and that pecuniary injury would be the natural consequence.

The rule is different in life insurance (4) Mere factual expectation of loss. — Such expectation not arising from any legal right or duty in connection with the property, does not constitute an insurable interest. Thus, an owner of a gasoline filling station near a hotel has no sufficient insurable interest in the hotel simply because its burning or destruction, though it leaves the filling station physically unharmed, will lessen his income from guests of the hotel. This type of interest called "factual expectation," though usually insufficient in strict indemnity insurance, will suffice in life insurance,

Thus, an insurer of property against fire has an insurable interest therein co-extensive with his liability, (see Sec. 95.)

Sec. 14. An insurable interest in property may consist in:

(2) Title or right to possession not essential — What is more, although a person has no title, legal or equitable, in the property, and neither possession nor right to possession, yet he has an insurable interest if he is so situated with respect to the property that he will suffer loss as the proximate result of its damage or destruction.

(a) An existing interest; (b) An inchoate interest founded on an existing interest; or (c) An expectancy, coupled with an existing interest in that out of which the expectancy arises.

(a) Accordingly, it has been held that where a mortgagor had sold the mortgaged premises to a vendee who assumed the payment of the mortgage debt, and had thus parted with all his interest in the property, the mortgagor yet had an insurable interest in the property because of his personal liability for the debt and his right to be subrogated to the mortgage security in case he should be compelled to make payment. (b) Similarly, a vendor or seller retains an insurable interest on the property sold so long as he has any interest therein. In other words, so long as he has a vendor's lien, i.e., he retains ownership merely to insure that the buyer will pay the price, (see Art. 1504[1], Civil Code.) Unlike die civil law concept of jus perit domino, where ownership is the basis for consideration of who bears the risk of loss, in property insurance, one's interest is not determined by concept of title, but whether the insured has substantial economic interest in the property. (3) Legal expectation of loss or benefit. — Insurable interest in property is not necessarily an interest in property in the sense of title, but a concern in the preservation of the property and such a relation to or connection with it as will necessarily entail a pecuniary loss in case of its injury or destruction. As a general rule, however, the expectation of benefit to be derived from the continued existence of property must have a basis of legal right, although the person insured has no title, either legal or equitable, to the property insured.

Insurable interest in property in particular cases Insurable interest in property need not be an existing interest. It may consist merely of an inchoate interest or an expectancy. (1) An existing interest. —may be a legal title or equitable title. - Undoubtedly, the absolute owner of property has an insurable interest thereon. (a) The following are examples of persons who have insurable interest arising from legal title: trustee, as in the case of the seller of property not yet delivered; - mortgagor of the property mortgaged; - lessor of the property leased; lessee and sublessee may also insure the property leased or subleased; and - assignee of property for the benefit of creditors. Where legal title is held in a representative capacity, as by an executor, , trustee, or receiver, the representative has sufficient insurable interest for the purpose of taking out insurance on the property under his control, but any proceeds from such insurance are to be held for the benefit of those for whose benefit the representative is acting (b) The following have insurable interest arising from equitable title: - purchaser of property before delivery, or before he has performed the conditions of sale; - mortgagee of property mortgaged; mortgagor, after foreclosure but before expiration of the period within which redemption is allowed; the beneficiary under a deed of trust; the creditors under a deed of assignment ;

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY -

a judgment debtor whose property has been seized under execution until the right to redeem or the right to have the sale set aside has been lost (44 C.J.S. 881.); and builders and constructors in the buildings pending the payment of the construction price.

A purchaser of an option to buy real estate has an insurable interest to the extent of the advance payment for the option. Thus, more than one insurable interest may exist over the same property. (2) An inchoate interest. — Such inchoate interest must be founded on an existing interest. (a) A stockholder has an inchoate interest in the property of the corporation of which he is stockholder, which is founded on an existing interest arising from his ownership of shares in the corporation. His insurable interest is limited to the extent of the value of his interest or to his share in the distribution of the corporate assets upon dissolution The stockholder has an interest in the preservation of the corporate property; in its destruction, he sustains a loss in so far as the value of his stock is depreciated in consequence of such destruction, or his dividends are reduced or cut off. Note that a stockholder has neither legal nor equitable title to assets of the corporation. (b) Likewise, a partner has an insurable interest in the firm property which will a separate policy for his benefit. (3) An expectancy. — The expectancy must be coupled with an existing interest in that out of which such expectancy arises. (a) Thus, a farmer may insure future crops if they are to be grown on land owned by him at the time of the issuance of the policy, or although the crops are to be raised by him on the land of another, provided the crops will belong to him when produced. (b) Similarly, an owner of a business can insure against a contingency which may cause loss of profits resulting from the cessation or interruption of his business. (c) Any binding contract giving rights which will be injuriously affected by the destruction of any designated property will also afford an insurable interest in such property even though the insured may have neither interest in the property nor specific lien upon it. So, a workman has an insurable interest in any building he may have contracted to repair, or an artist might insure the structure for the interior decoration of which he had been employed. Sec. 15. A carrier or depository 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.

10

Insurable interest of carrier or depository The reason for this provision is that the loss of the thing may cause liability to the carrier or depository to the extent of its value. A person having a "qualified property" in chattels entitling him to possession and the right of using or dealing with them in accordance with the of the bailment, has such interest in the chattels as may be the subject of a valid contract of insurance. Such bailee may insure merely his interest in the chattels to protect himself against loss of the benefits to which he is entitled, or he may, and does more frequently, insure himself against the liability which he may incur upon the destruction of the chattels. It has been held by our Supreme Court that a policy effected by a bailee and covering by its his own property and property held in trust, inures, in the event of loss, equally and proportionately to the benefit of all the owners of the property insured. (Lopez vs. del Rosario, 44 Phil. 98 [1922].) Under the General Bonded Warehouse Act, a warehouseman, licensed to engage in the business of receiving commodities for storage, is required to insure the same against fire. Sec. 16. A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable. Mere contingent or expectant interest not insurable A mere hope or expectation of benefit which may be frustrated by the happening of some event uncoupled with any present legal right will not a contract of insurance. Thus: (1) Property offather Isonl spouse. — A father cannot insure his son's property nor can a son insure the property that he expects to inherit from his father as his interest is merely an expectancy of inheriting, Similarly, a spouse has no insurable interest in the property of the other. (2) Life of parents/children/spouses. — By statutory provisions, parents and children, and spouses can insure the life of each other, Since under the law, they are under mutual obligation to each other, a life policy is held to be a means of fulfilling that obligation or a means of saving the party entitled to from being the subject of public charity. (3) Property of debtor — Nor can a general or unsecured creditor insure specific property of his debtor who is alive, even though destruction of such property would render worthless any judgment he might obtain. (a) But an unsecured creditor may insure the property of a deceased debtor since all personal liability ceases with the

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY death of the debtor. The proceedings to subject the estate to the payment of the debt of the deceased debtor are in rem. (b) Also, an unsecured creditor who obtains a judgment in his favor becomes a judgment creditor and has been held to have insurable interest in the debtor's property as he has a right to levy on such property as may be necessary to satisfy the judgment. However, to recover under the insurance, he must show that the debtor has no other property out of which the judgment may be satisfied.

11

P400,000.00 for Y who made an advance payment of P80,000.00, the balance to be paid upon delivery of the house on a certain date when Y would return from abroad and occupy the house. As X finished the construction at a much earlier date, he insured the house against fire for P400,000.00. The house was burned down before its delivery to Y. What is the extent of the insurable interest of X?

(c) Of course, an unsecured creditor has an insurable interest in the life of his debtor to the extent of the amount of the debt. (Sec. 10[c].) (4) Property of testator still alive. — One named as beneficiary in a will has no insurable interest in a property designated before the testator's death, however reasonable his expectation of benefit to be derived from the continued existence of the property. His expectation has no legal basis since the will has no legal effect before the death of the testator. The will can be revoked at any time before the death of the testator unless he has expressly waived this right in the policy (Sec. 11.) in which case the beneficiary will have insurable interest. Sec. 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof. Measure of insurable interest in property As already shown, a contract of insurance is one of indemnity.

It is P400,000.00 although he already received from Y P80,000.00 as advance payment because X has to replace the house destroyed with another worth P400,000.00, as per contract, not P320,000.00. (3) The financing lease contract stipulates that the equipment and motor vehicles leased shall be insured at the cost and expense of the lessee against loss, damage or destruction from fire, theft, accident, or other insurable risk for the full term of the lease. The lessee has an insurable interest in the equipment and motor vehicles leased under Section 17 as it will be directly damnified in case of loss, damage, or destruction of any of the properties leased. Sec. 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some person having an insurable interest in the property insured, (a) Effect of absence of insurable interest in property insured (1) Principle of indemnity applicable. — This principle is at the basis of all contracts of property insurance.

Any contract of property insurance that gives to the insured more than indemnity against his actual loss that may be suffered by the happening of the event insured against is in the nature of a wagering policy contrary to public policy and void.

-

Thus, a mortgagor has an insurable interest equal to the value of the mortgaged property and a mortgagee, only to the extent of the credit secured by the mortgage, (see Sec. 8.) The purpose of property insurance is to indemnify a person against actual loss, and not to wager on the happening of the event.

-

EXAMPLES: (1) X insured his property valued at P100,000.00, for P120,000.00. X suffered a total loss. The amount of the insurance (P120,000.00) is not the amount payable in the event of a loss but rather represents the maximum limit of recovery of the insured, (see Sec. 60.)

-

Under the indemnity rule, the insurer would be liable only to pay P100,000.00. If X receives P80,000.00 from the party that caused the loss, the liability of the insurer is reduced in the same amount. Anything that reduces or diminishes the loss reduces the amount which the insurer is bound to pay.

-

-

-

Accordingly, an insurance taken out by a person on property in which he has no insurable interest is void. It has been held that fire insurance taken on property belonging to another is void, although the insurer had full knowledge of the fact of ownership and even if the insured subsequently acquired insurable interest. (Sec. 19.) In a case, the contract of lease provides that any fire insurance policy obtained by the lessee over his merchandise inside the leased premises without the consent of the lessor is deemed assigned or transferred to the lessor. It held that such automatic assignment is void for being contrary to law and public policy, hence, the insurer cannot be compelled to pay the proceeds of the policy to the lessor who has no interest in the property insured

Where the insurance is invalidated on the ground that no insurable interest exists, the is ordinarily returned to the insured unless he is in pari delicto with the insurer, - is consistent with the principle of indemnity to pay the insured a benefit in an amount equal to or less than the loss but the principle is violated if he is paid a benefit more or greater than the loss.

(2) Under a building contract, X constructed a house for In life insurance taken by a person on his own life, it is not

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY necessary for the beneficiary to have an insurable interest in the life insured, (2) Doctrine of waiver or estoppel not applicable. — This doctrine cannot be invoked since the public has an interest in the matter independent of the consent or concurrence of the parties. - But where the real intention of the insured was to insure his goods for P15,000.00 but through the error or mistake of the insurer, the policy issued for P15,000.00 was for the building in which the goods were stored which building the insured never owned or had any insurable interest, it was held in case of loss of the goods, the insured can recover. This is a case where the insured's lack of insurable interest in property insured is not sufficient to avoid an insurance. Measure of indemnity in insurance contracts. (1) Contracts of marine or fire insurance. — They are contracts of indemnity. - This means that the real purpose of the contract is, in case of loss, - to place the insured in the same situation in which he was before the loss subject to the and conditions of the policy. - The amount of indemnity may be determined after the loss (see Sec. 60.) or is previously fixed in the contract, Pursuant to the general rule regarding indemnity, the amount of insurance fixed in th? policy of a marine or fire insurance is not the exact measure of indemnity to which the insured is entitled, but the maximum indemnity which he might obtain. The insured cannot recover in excess of his actual loss. (a) In valued policies (Sec. 61.), however, the valuation of the thing insured is conclusive between the parties thereto in the adjustment of loss, if the insured has some interest at risk, and there is no fraud on his part (see Sees. 156, 171.), although it might be proved that the actual value of the thing is less. (b) Similarly, the principle of indemnity cannot be invoked by the insurer who agreed to repair or replace the thing insured with a new one even though the cost of the undertaking may exceed the original amount of the insurance, (see Sec. 172.) (2) Liability insurance contracts. — They are considered contracts of indemnity against liability and not against loss, In this type of insurance, the insurer's promise is to pay the proceeds of the policy on behalf of the insured to a third person to whom the insured is liable. If the insured suffers no loss because his liability to the third person, for some reason, cannot be enforced, the insurer has no obligation to pay the proceeds, (3) Life insurance contracts. - They are not contracts of indemnity. The amount fixed payable at the death of the insured is not considered as the true value of the thing insured because

12

the life of a person is priceless, but is simply the measure of indemnity which the insurer has bound himself to pay the insured. The contract of insurance may be to pay, on the happening of the event insured against, a certain or ascertainable sum of money, irrespective of whether or not the insured has suffered loss or of the amount of such loss if he has suffered any. The amount for which a person is insured is governed by the amount of that he contracted to pay. (4) Personal accident insurance contracts. — Like life policies, they are not contracts of indemnity. Life and limb are not susceptible to exact or uniform valuation. Hence, the principle of indemnity is not applicable. However, if a person effects a personal accident insurance on the life of another person, the amount recoverable is the loss sustained by the person who effected the policy. In theory, therefore, such a personal accident insurance becomes a contract of indemnity, but it is often impossible exactly to assess the injury suffered, and a policy with fixed benefits may be issued. (5) Health insurance contracts. — Like life insurance contracts, health insurance contracts that provide a specific periodic income to disabled persons are not contracts of indemnity. But those that cover medical expenses are contracts of indemnity. In these contracts, only medical expenses incurred by the insured are paid. (6) Health care agreement. — Such an agreement with a health maintenance organization (HMO) is in the nature of a non-life insurance which is primarily a contract of indemnity. Once a member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract. - Being in the nature of a contract of indemnity, payment should be made to the party who incurred the expenses. - Hence, the fact that the one who paid all the hospital and medical expenses was not the legal wife of the deceased member considering that at the time of their marriage, the deceased was previously married to another woman who was still alive, is of no moment. She is entitled to reimbursement. Sec. 19. An interest in property insured must exist when the insurance takes effect, and when the loss occurs, but need not exist in the meantime; and interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs, (a) Time when insurable interest must exist The general rule stated in this section is applicable only to insurance on property and not to life insurance except that on the life of the debtor. (1) When insurance takes effect and loss occurs. — Insurable

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY interest in property must exist at two distinct times: on the date of execution of the contract of insurance; and on the date of the occurrence of the risk insured against, otherwise, the policy is void. Thus, if a fire occurs after the sale or alienation of the property, the former owner cannot recover on the policy. (2) When insurance takes effect. — In life insurance, the insurable interest requirement is satisfied if the interest exists at the time the policy is procured, even if it has ceased to exist at the time of the insured's death. Thus, if a debtor whose life was insured by a creditor (see Sec. 10[c].) subsequently pays the debt, remains in force provided, of course, the former creditor continues to pay the s. Most of the situations in which insurable interest may later disappear involve business relationships. Under the law, health, accident and disability insurance is deemed included in the "life" and "non-life" insurance. (Sec. 187, par. 8.) (3) When liability attaches. — In liability insurance, questions of insurable interest are not particularly important. It necessarily exists when the liability of the insured to a third party attaches, (4) Need not exist during intervening period. — The obvious purpose of the provision is to prevent the issue of wagering policies, (see Sec. 14[b], [c].) But the interest insured "need not exist in the meantime." (Sec. 19.) It is well-settled that in the absence of special provision in the policy to the contrary, the alienation of insured property will not defeat a recovery if the insured has subsequently reacquired the property and possesses an insurable interest at the time of loss.

13

(3) D issued a promissory note in favor of C to secure a loan of P100,000.00 payable within one (1) year. To add further protection, C insured D's life for the amount of the note for the year it was to run. D died on the 10th month after paying the note at the end of the ninth month. Can C recover on the insurance? No. The principle of indemnity applies in this case as in property insurance. Neither can the estate of D recover since the contract was purely between C and the insurer, unless, of course, the contrary was stipulated. But if the insurance was taken by D on his life for the benefit of C, the payment of the debt did not invalidate the policy which would remain in force for the full year for which the was paid. In this case, the proceeds of the insurance would be paid to the estate of D. (4) X corporation insures the life of Y, its President, for P100,000.00 with X as beneficiary. Thereafter, Y sells his stockholdings and severes connections with X which continues to pay the annual s. During the currency of the policy, Y dies. Is X entitled to recover the insurance proceeds? Yes, under Section 19.

EXAMPLES: (1) D insured his house on May 15, 2002 for a period of one year. Without asg the policy, he sold the house to B on July 10, 2002.

Existence of insurable interest when risk attaches. It must be noted, however, that notwithstanding the great volume of authority to the contrary, it seems that the existence of an insurable interest at the inception of the contract, unless made so by statute, is not at all necessary to its validity. It is sufficient that insurable interest exists at the time the risk attaches.

If the house was accidentally burned on September 15,2002, D cannot recover because his insurable interest was no longer existing when the loss occurred. However, if on September 11, 2002, D reacquired the house from B, D may recover on the policy because insurable interest need not exist during the intervening period from July 10, 2002 when he sold the house, to September 10, 2002.

EXAMPLE: D, contemplating the purchase of B's house, may take out a policy of insurance under which the risk is to attach upon D's purchase and acquisition of interest in the house. In this case, the requirement of good faith and a real interest at the time of the loss is amply sufficient to satisfy the demand of public policy.

(2) Suppose in the same example, C is an unsecured creditor of D for the amount of P100,000.00 and he insured D's house on September 12, 2002 for the same amount. The house burned accidentally on September 15, 2002.

Insurable interest in life and property distinguished. (1) As to extent of insurable interest. — Insurable interest in life (save in life insurance effected by creditor on life of debtor) is unlimited; in property, insurable interest is limited to the actual value of the interest thereon, (see Sec. 17.)

Has C the right to collect the proceeds of the insurance? No, because being a general creditor without any lien on D's house, C had no insurable interest when he insured it. (see Sec. 16.) But, suppose D sold the house to C before September 15, 2002 when the loss occurred. Not even then. C did not have insurable interest in the house when the insurance took effect. (Sec. 19.)

(2) As to time when insurable interest must exist. — In life insurance (save that effected by creditor on life of debtor), it is enough that insurable interest exists at the time the policy takes effect and need not exist at the time of the loss (see Sec. 181.); in property insurance, it is necessary that insurable interest "must exist when the insurance takes effect and when the loss occurs, but need not exist in the meantime." (Sec. 19.)

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY (3) As to expectation of benefit to be derived. — In life insurance, the expectation of benefit to be derived from the continued existence of life need not have any legal basis whatever. A reasonable probability is sufficient without more. Thus, a person is under no legal obligation to a friend or a cousin. Yet one who is dependent on another for has an insurable interest in the latter's life, even though there is no legal right to if there is reasonable ground for believing that the will be continued. In property insurance, an expectation of benefit, to be derived from the continued existence of the property insured, however likely and morally certain of realization it may be, will not afford a sufficient insurable interest unless that expectation has a basis of legal right. If such legal basis exists, an expected benefit, however remote, constitutes an insurable interest. Thus, an expectant heir cannot insure the property he expects to inherit. But a stockholder may insure the property of the corporation although he has no legal interest whatsoever in such property. His expectation of benefit to be derived from the continued existence of such property, however, is based upon his legal right as stockholder to demand participation in the profits of the corporation, or in its assets upon dissolution, (see Sec. 14[b].) Sec. 20. Except in the cases specified in the next four sections, and in the cases of life, accident, and health insurance, a change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the insurance, suspends the insurance to an equivalent extent, until the interests in the thing and the interest in the insurance are vested in the same person. Effect, in general, of change of interest. Generally speaking, the mere transfer of a thing insured does not transfer the policy but suspends it until the same person becomes the owner of both the policy and the thing insured. (Sec. 58.) This rule is embodied in Section 20 and is in accordance with Section 19 that an insured must have an insurable interest in the property insured at the time of loss. Thus, a purchaser of insured property who does not take the precaution to obtain a transfer of the policy of insurance, cannot, in case of loss, recover upon such contract, as the transfer has the effect of suspending the insurance until the purchaser becomes the owner of the policy as well as the property insured. In such case, nobody can recover on the policy. The purchaser cannot recover because he has no contract with the insurer. The seller (insured) cannot also recover because having sold the property, he has no more insurable interest in the same. (San Miguel Brewery vs. Law Union & Rock Ins. Co., 40 Phil. 674 [1920].) Note that the contract is not rendered void but is merely

14

suspended by a change of interest. Object of rule against alienation. The object of the provision against alienation or change of interest or title is ordinarily to provide against changes which might supply a motive to destroy the property, or might lessen the interest of the insured in protecting and guarding it. Change of interest covered by law. The change of interest referred to in Sections 20, 21, 22, 23, and 24 means absolute transfer of the property insured such as the conveyance of the property by means of an absolute deed of sale. Consequently, the interest in the property insured does not by mere execution of a pledge or mortgage. Thus, it has been held that in a chattel mortgage, there is no alienation within the meaning of the insurance law until the mortgagee acquires a right to take possession of the property by default of the mortgagor under the of the mortgage. Exceptions to general rule. The rule that change of interest suspends the insurance is subject to exceptions, to wit: (1) In life, health, and accident insurance (Sec. 20.); (2) A change of interest in the thing insured after the occurrence of an injury which results in a loss (Sec. 21.); (3) A change of interest in one or more of several things, separately insured by one policy (Sec. 22.); (4) A change of interest by will or succession on the death of the insured (Sec. 23.); (5) A transfer of interest by one of several partners, t owners, or owners in common, who are tly insured, to the others (Sec. 24.); (6) When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured (Sec. 57.); and (7) When there is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but is avoided. (Art. 1306, Civil Code; see Sec. 24.) Sec. 21. A change of interest in a thing insured, after the occurrence of an injury which results in a loss, does not affect the right of the insured to indemnity for the loss. Change of interest in a thing insured after loss. After a loss has happened, the liability of the insurer becomes fixed. The insured has a right to assign his claim against the insurer as freely as any other money claim. This right is absolute and cannot be delimited by agreement, (see Sees. 83, 173.) The insured has also the absolute right to transfer the thing insured after the occurrence of the loss. Such change of interest does not affect his right to indemnity for the loss. (Sec. 21.) Section 20 refers to change of interest in the thing insured before loss has occurred. Sec. 22. A change of interest in one or more of several distinct things, separately insured by one policy, does not avoid the insurance as to the others.

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY

Change of interest where several things separately insured by one policy In connection with the above section, it is important to make a distinction between a divisible contract and an indivisible contract, (see Art. 1420, Civil Code.) (1) Effect dependent on divisibility of contract. — In the former, the cause or consideration is made up of several parts while in the latter, it is entire and single. If the things are "separately insured in one policy" the contract is divisible and the violation of a condition which avoids the policy with respect to one or more of the things does not affect the others. On the other hand, if the things are insured under one policy for a gross sum and for an entire , the contract is indivisible so that a change of interest in one or more of the things will also avoid the insurance as to the others. EXAMPLE: Suppose D is the owner of a car and a jeep. He insured the car for P500,000.00 and the jeep for P200,000.00 under a single policy for which he paid a total of P15,000.00. Under Section 22, the sale of the jeep will not affect the insurance of the car. But if the car and the jeep were not separately valued in the policy and D paid P15,000.00 as the for the insurance of both the car and the jeep, the sale of the jeep without the insurer's consent affects also the insurance on the car. Hence, if, after the sale of the jeep, the car was lost or destroyed, C cannot recover on the insurance of the car. (2) Divisibility of contract, a question of intention. — Whether a contract is entire or severable is a question of intention to be determined by the language employed by the parties. Where only one was paid for the entire shipment of goods, the insurance contract is indivisible and the fact that the goods (which are not separately valued) are loaded on two different vessels does not make the contract several and divisible as to the items insured. It has been held that where the amount of the insurance agreed upon was merely apportioned among the various items insured to limit the extent of the risk of the insurer as regards each item, the contract of insurance is still indivisible. Sec. 23. A change of interest, by will or succession, on the death of the insured, does not avoid an insurance; and his interest in the insurance es to the person taking his interest in the thing insured.

15

rights to the succession are transmitted from the moment of the death of the decedent. (Art. 777, Civil Code.) EXAMPLE: D insures his house. Thereafter, he dies. H inherits the property by will or by operation of law. The change of interest in the house by the death of D does not affect the insurance because it is likewise transferred to H who may collect on the policy should the house be burned later on even before he could transfer the insurance policy under his name. Sec. 24. A transfer of interest by one of several partners, t owners, or owners in common, who are tly insured, to the others, does not avoid an insurance, even though it has been agreed that the insurance shall cease upon an alienation of the thing insured. Transfer of interest by one of the several partners, etc. tly insured. (1) Effect where transfer is to the others. — A transfer of interest in the insured property by a partner, t owner, or owner in common, to the others who are tly insured, will not avoid the insurance. The rule is the same even if there is a stipulation that the insurance shall cease upon an alienation of the thing insured. (2) Reason for the rule. — The underlying principle is that each partner (or owner, or owner in common) is interested in the whole property and the hazard is not increased because the purchasing partner has acquired a greater interest in the property by a transfer of his co-partners' share. In other words, the transfer does not affect the risk because no new party is brought into contractual relationship with the insurer. (3) Exception to the rule. — But a policy will be avoided by a sale of an interest in partnership property by the partner to one of his co-partners, without the consent of the insurer and before the loss occurs, where the policy contains the condition "that in case of any sale, transfer, or change of title of any property insured by this company, or of any undivided interest therein, such insurance will be void and cease." (4) Effect where transfer is to strangers. — It is alienation or transfer to a stranger or third person that will avoid the policy. A sale by a partner of his interest to a stranger ends the contract of insurance as to him but does not affect the insurance as to the others. EXAMPLE: A policy of fire insurance was issued to partnership X under its firm name. The policy makes no provision for changes in the personnel of the firm.

Change of interest by death of insured.

Will the subsequent withdrawal of a partner or ission of a new partner affect the validity of the policy?

Under Section 23, the insurance on property es automatically, on the death of the insured, to the heir, legatee or devisee who acquired interest in the thing insured. The

No. Under Section 26, the insurance continues despite the changes in the firm's hip. The policy was taken in the name of the partnership X which has a juridical

MIRANDA, CLARISSE ANN INSURANCE DELEON SUMMARY personality separate and distinct from that of each of its , Sec. 25. Every stipulation in a policy of insurance for the payment of loss whether the person insured has or has not any interest in the property insured, or that the policy shall be received as proof of such interest, and every policy executed by way of gaming or wagering, is void, (a)

d.

There are two stipulations in an insurance policy which are declared void under this section. (1) Stipulation for the payment of loss whether the person insured has or has not any interest in the subject matter of the insurance. — A policy issued to a person without interest in the subject matter of the contract is a mere wager policy or contract and is void. A wager policy has been defined as a pretended insurance where the insured has no interest in the thing insured and can sustain no loss by the happening of the misfortunes insured against. The policy of the law does not it of such insurance, however willing the parties may be to enter it. The doctrine of waiver has obviously nothing to do with it. The company or its agents cannot, by waiver, invest the insured with interest he does not own. The law, however, makes an exception in the cases mentioned in Section 181 regarding life insurance. (2) Stipulation that the policy shall be received as proof of insurable interest. — Whether or not insurable interest exists does not depend upon the contract of insurance or the stipulations therein. The insurer can always show lack of insurable interest after the issuance of a policy of insurance, (see Sec. 83.) The defense of absence of insurable interest is available only to the insurer being the only party to the insurance contract who has a legitimate interest in raising the defense. It may be raised by and for the benefit of the insurer alone. Wagering or gaming policies void. A contract of insurance is void for illegality unless the insured has an insurable interest in the subject matter insured. (1) A mere bet upon a future event. — a. It is a fundamental postulate of all insurance that it must not be a mere bet upon a future event. b. Wager or gaming policies are disapproved and condemned not only under statutes declaring them void, but also independently of statute, on the ground of public policy. c. They are regarded as detrimental to society. Such policies have a tendency to create a desire for the event,

and furnish strong temptation to the party interested to bring about if possible the event insured against,

(2) Non-existence of loss from occurrence of event. — Wagers suffer no loss from the occurrence of the contingent event. -

Stipulations prohibited in an insurance policy

16

On the contrary, they actually profit from it. The insurable interest requirement intends to deter the insured from the temptation to bring about by unnatural means the results of the contingent event.