B. Insurable Interest

B. Insurable Interest

R.A. No. 10607, Sections 10-25

Insurable interest (or what may be insured) is that interest which a person is deemed to have in the subject matter insured, where he has a relation or connection with or concern in it, such that the person will:

• Derive pecuniary benefit or advantage from the preservation of the subject matter insured; and
• Suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against [Lalican v. Insular Life Assurance Company Limited, G.R. No. 183526, 25 August 2009]¹.

An insurable interest is one of the most basic and essential requirements in an insurance contract. The existence of an insurable interest gives a person the legal right to insure the subject matter of the policy of insurance [Lalican v. Insular Life Assurance Company Limited]. It may not be waived by stipulation. Absence of insurable interest renders the insurance contract void [Sec. 25]².

General Rule: Insurable interest must be capable of pecuniary estimation because the purpose of insurance is to indemnify. It would be difficult to measure if the benefit derived or the loss incurred is not capable of pecuniary estimation.

Exception: The insurable interest need not always be pecuniary in nature (e.g. in insuring the life of a person, the purpose is not to indemnify but to act as an investment or savings instrument) [Lucena v. Craufurd, 2Bos & PNR 269]³.

Ratio: It is a deterrence to the insured

A policy issued to a person without insurable interest is a mere wager policy or contract and is void for illegality [De Leon].

Evidence that life insurance is regarded as a wager policy:

• The original proposal to take out insurance was that of the beneficiary;
• The premiums are paid by the beneficiary;
• The beneficiary has no interest, economic or emotional, in the continued life of the insured [De Leon].

The insurable interest is the measure of the upper limit of his provable loss under the contract. Insurance should not provide the insured means of making a net profit from the happening of the event insured against [De Leon].

When insurable interest should exist

For Life Insurance: Insurable interest over life/health must exist at the time of the inception of the contract but may be lost after [Sec. 19]⁵.

For Property Insurance: Insurable interest must exist at the time of the inception of the contract and at the occurrence of the loss. But it need not exist during the intervening period or from the time between when the policy takes effect, and the loss occurs. 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 [Sec. 19].

Change of interest may involve any part of the thing insured

General Rule: A change of interest in the thing insured does not transfer the policy but suspends the insurance to an equivalent extent until the interest in the thing and the interest in the insurance policy are vested in the same person. Thus, the contract is not rendered void but is merely suspended [Sec. 20]⁶.

Exception:

• Life, health, and accident insurance.
• A change of interest in the thing insured after the occurrence of an injury which results in a loss does not affect the policy [Sec. 21]⁷.
• A change in the interest in one or more of several things, separately insured by one policy, such as a conveyance of one or more things, does not affect the policy with respect to the others not so conveyed [Sec. 22]⁸.
• A change of interest by will or succession on the death of the insured. His interest passes to his heir or legal representative who may continue the insurance policy on the property by continuing paying premiums [Sec. 23]⁹.
• A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others does not avoid the insurance, even though it has been agreed that the insurance shall cease upon alienation of the thing insured [Sec. 24]¹⁰.
• Automatic transfers of interest in cases in which the policy is so framed that it will inure to the benefit of whosoever may become the owner of the interest insured during the circumstance of the risk [Sec. 57]¹¹.

Where a policy is framed to benefit whoever becomes the owner of the insured interest during the continuance of the risk, that owner may claim the benefit of the policy despite the change of interest [Sec. 57].

In case of an express prohibition against alienation in the policy [Art. 1306, NCC]¹², alienation will not merely suspend the contract but avoid it entirely.

1. In Life/Health

Every person has an insurable interest in the life and health:

• Of himself, of his spouse and of his children;
• Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;

General Rule: Section 10 expressly recognizes insurable interest in one's own life and health and those of one's spouse and children.

For other relatives, a blood relationship alone does not suffice; a basis under another clause of Section 10, such as dependence for education or support or a pecuniary interest, must exist.

Ratio: One would naturally protect the life of his family member regardless of whether there is monetary consideration. Good faith is presumed.

Exception: Relationships with lesser degree of kinship (e.g., aunt, niece, nephew, cousin). A basis under another clause of Section 10 is essential. Relationships by affinity (inlaws) and gratitude and affection are not deemed sufficient. There must be a statutory basis for insurable interest.

• 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
• Of any person upon whose life any estate or interest vested in him depends [Sec. 10]¹³.

A person is not allowed to take out insurance upon the life of a stranger [Carale].

There is no insurable interest in the life of an illegitimate spouse. A creditor may take out insurance on the life of his debtor if the debtor's death or illness might delay or prevent payment of the debt, whether or not the debt is secured [Carale].

The Insurance Code does not expressly provide the type of spouse, whether illegitimate or legitimate. However, it can be presumed that the provision refers to legitimate spouses, based on Art. 195 of the Family Code¹⁴ on support, as well as Art. 739, NCC¹⁵ on prohibited donations.

On the insurable interest of children: the law does not make any qualifications on the status of the child. This is in accord with Art. 195 of the Family Code.

Measure of Indemnity

General Rule: The measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy.

Exception: Unless the interest of the person insured is susceptible of exact pecuniary measurement, the measure of indemnity under life or health insurance is the sum fixed in the policy.¹⁶

a. In Life Insurance

Life insurance policies may be divided into two general classes:

• Insurance upon one’s life
• Insurance upon the life of another

i. Interest in One’s Own Life

The cestui que vie is the insured himself. The insured can designate anyone to be the beneficiary of the policy.

Example: In life insurance, the cestui que vie is the person whose life is insured. The policyholder might be different from the insured person. For example, if you take out a life insurance policy on your own life, you are both the policyholder and the cestui que vie. However, if you take out a policy on someone else's life (e.g., your spouse or child), that person is the cestui que vie.

Each person has unlimited interest in his own life, whether the insurance is for the benefit of himself or another [40 CJS 909].

The beneficiary designated need not have any interest in the life of the insured when the latter takes out policy on his own life [De Leon].

ii. Interest in Life of Another

The insurable interest in the life of another:

• May arise from the relationships expressly listed in Insurance Code Section 10, including one's spouse or child, without requiring a pecuniary interest; for other persons, it must rest on another ground under Section 10, such as dependence for support or a pecuniary interest;
• Exists whenever the relation between the assured and the insured is such that the assured has a reasonable expectation of deriving benefit from the continuation of the life insured or of suffering detriment through its termination [De Leon].

General Rule: When the owner of the policy insures the life of another, and designates a third party as beneficiary, the owner must have an insurable interest in the life of the cestui que vie. The designated beneficiary need not independently have an insurable interest, subject to the prohibition on wagering arrangements and the disqualifications under Civil Code Article 2012 (Insurance Code, Sec. 10; Civil Code, Art. 2012).

Exception: An assignee of the insurance contract is not required to have insurable interest in the life of the insured, since insurable interest over life should exist only during the inception of the contract.

Note: An assignment of the insurance contract is different from a change in the designated beneficiary.

But if a person obtains a policy on the life of another and names himself as the beneficiary, he must have insurable interest therein [De Leon].

iii. Beneficiary

A beneficiary is the person named or designated in a contract of life, health, or accident insurance as the person who is to receive the proceeds or benefits which become payable, if the insured risk occurs.

General Rule: A person may designate a beneficiary, 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 [De Leon]

Exception: Any person who is forbidden from receiving any donation under Art. 739, NCC¹⁷ cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him [Art. 2012, NCC¹⁸].

Art. 739, NCC. The following donations are void:

• Those made between persons who were guilty of adultery or concubinage at the time of the donation;
• Those made between persons found guilty of the same criminal offense, in consideration thereof;
• Those made to a public officer or his wife, descendants and ascendants, by reason of his office. (…)

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iv. Changing the Beneficiary

General Rule: The insured shall have the right to change the beneficiary he designated in the policy [Sec. 11]¹⁹.

Exception: If the insured expressly waived his right to change the beneficiary, this makes the latter an irrevocable beneficiary. But despite the waiver, he can still change the beneficiary, provided he obtained the beneficiary’s consent [Sec. 11]

SLAYER RULE

Under the Slayer Statute, when the beneficiary is the principal, accomplice or accessory in willfully bringing about the death of the insured, the interest of beneficiary in life insurance policy is forfeited [Sec. 12]²⁰.

v. Transfer of Policy

The life insurance policy can be transferred whether the transferee has insurable interest or not. Notice of the transfer to the insurer is not required for the validity of the same [Secs. 184- 185]²¹.

There is no right of subrogation in life insurance, because it is not a contract of indemnity.

b. In Health Insurance

General Rule: Interest in the life or health of a person must exist at the inception of the insurance contract but need not exist thereafter or when the loss occurs [Sec. 19]²².

Exception:

• In the case of a creditor’s insurance taken on the life of the debtor, insurable interest must exist when the insurance takes effect; payment of the debt does not, by itself, invalidate the policy, but the creditor’s recovery is limited by the debt;
• In the case of a company’s insurance taken on the life of an employee, insurable interest must exist when the insurance takes effect; the employee’s later departure does not, by itself, invalidate the policy

2. In Property

The following are considered as insurable interest, provided that they are of such nature that a contemplated peril might directly damnify the insured:

• Every interest in real or personal property; or (e.g. Ownership)
• Any relation thereto; or (e.g. Interest of a trustee or a commission agent)
• Any liability in respect thereof [Sec. 13]²³ (e.g. Interest of a carrier or depository of goods)

A person has an insurable interest in property when he sustains such relation with respect to it that he has a reasonable expectation of:

• Benefit to be derived from its continued existence; or
• Loss or liability from its destruction [Carale; Gaisano Cagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, 8 June 2006]²⁴.

An insurable interest in property may consist in:

• An existing interest [Sec. 14]²⁵;

Existing interest in property may be a legal title or equitable title [De Leon].

Examples of those having existing interest are:

• Owners as regards their properties,
• A buyer in a perfected contract of sale,
• A carrier or depository [Sec. 15]²⁶
• A warehouseman [General Bonded Warehouse Act²⁷],
• Trustees in the case of the seller of property not yet delivered,
• Mortgagors over the property mortgaged, and lessor, lessee and sublessee over the property leased [De Leon].
• An inchoate interest founded on an existing interest [Sec. 14]; or

Inchoate interest in property exists but is incomplete or unripe until the happening of an event [De Leon].

Examples of inchoate interests are:

• The interest of stockholders with respect to dividends in case of profits and shares in the assets, and
• The interest of a partner in the properties belonging to the partnership [De Leon].
• An expectancy, coupled with an existing interest in that out of which the expectancy arises [Sec. 14].
• For example, a farmer who planted crops has insurable interest over his harvest which can be expected [De Leon].

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 [Sec. 16]²⁸. A son has no insurable interest over the property of his father because such is just a mere expectancy and has no legal basis before he inherits such property [Carale].

a. Time of Existence

General Rule: Interest in property insured must exist both at inception and at time of loss, but not in the intervening period [Sec. 19]²⁹.

This means that the insurable interest in the property must exist both at the inception of the contract and at the time of the loss [Carale].

Exceptions:

• A change in interest over the thing insured after the loss contemplated. The insured may sell the remains without prejudice to his right to recover [Sec. 21]³⁰;
• A change of interest in one or more several distinct things, separately insured by one policy. This does not avoid the insurance as to the others [Sec. 22]³¹.
• A change in interest by will or succession upon the death of the insured [Sec. 23]³²;
• A transfer of interest by one of several partners, joint owners, or owners in common who are jointly insured. The acquiring co-owner has the same interest; his interest merely increases upon acquiring other co-owners interest [Sec. 24]³³.

Note: A transfer of interest by one of several jointly insured partners, joint owners, or owners in common to the others does not avoid the insurance [Sec. 24]. A transfer to a stranger does not necessarily avoid the policy: a change of interest in the thing insured unaccompanied by a corresponding change in interest in the insurance generally suspends the insurance to an equivalent extent until both interests vest in the same person [Sec. 20].

Mere transfer of the property does not transfer the policy but suspends it until the same person becomes the owner of both the policy and the thing insured [Sec. 20]³⁴.

Insurable Interest

Insurable interest is the interest which the law requires the owner of an insurance policy to have in the person or thing insured [Carale].

Insurable interest in property rests on a potential economic loss; insurable interest in life or health includes the relationships and interests specified in Section 10 of the Insurance Code. For property insurance, insurable interest requires exposure to loss from the contemplated peril. For life or health insurance, insurable interest is determined under the relationships and interests listed in Section 10 of the Insurance Code.

In terms of the event insured against, it is the relation between the insured and the person or property insured, such that the occurrence of the risk will cause substantial loss or harm of some kind to the insured [Carale].

Under the Code, the following are void:

• Stipulation in a policy for the payment of loss whether the person insured has or has not any interest in the property insured;
• Stipulation that the policy shall be received as proof of such interest;
• Policy executed by way of gaming or wagering [Sec. 25]³⁵.

Note: Insurable interest is required in industrial life insurance.

Insurable interest is required for industrial life insurance policies. Industrial life insurance is a type of life insurance that provides low levels of coverage often to lower-income workers.

b. Measure of Indemnity

Being a contract of indemnity, the measure of insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof [Sec. 17]³⁶.

The insured cannot recover a greater value than that of his actual loss because it would be a wagering policy contrary to public policy and void.

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 [Sec. 15]³⁷.

c. Interest in Property and Life Distinguished