Chapter 3 Insurable Interest

Section 10. Every person has an insurable

interest in the life and health:
a. Of himself, his spouse and of his
children;
b. Of any person on whom he depends
wholly or in part for education or
support, or in whom he has a
pecuniary interest
c. 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
d. Of any person upon whose life any
estate or interest vested in him
depends
Insurable interest
Any lawful and substantial
economic interest in the safety or
preservation of the subject of the
insurance free from loss, destruction
or pecuniary damage
The person would profit or gain
some advantage by its continued
existence and suffer some loss or
disadvantage by its destruction
Must be a reasonable expectation to
profit or benefit from the continued
life of the insured
Must be founded on the relation of
the parties (pecuniary, contractual,
blood or affinity)
Importance of Insurable Interest:
Without it, the contract is a void
wager
Ensure that the person to benefit
from the insurance does not have a

sinister counter interest to have the

life of the insured come to an end
Purpose of insurance: to compensate
for losses of the insured

Moral Hazard in Life insurance

To allow someone to be compensated
for a loss that does not affect them
financially would create a moral
hazard
No insurable interest = no incentive
to prevent the loss
Lest they could make the loss happen
Insurance is a mechanism for pooling and
distributing a shared risk of economic loss.
Loss and indemnification are key concepts
of insurance.
Prospect of profit from an insured event
would increase moral hazard and would
quickly distort premium calculations.
Any life insurance contract devoid of
insurable interest will be a gamble.
No insurable interest = void ab initio for
being against public policy

General Guidelines for existence of

insurable interest:

Relations by blood or marriage

Business relationships
Creditors

Expectation of benefit need not be based

upon a right that can be enforced in law and
in equity against the person from whom
pecuniary benefit is expected.

A. Himself, Spouse and Children

Own life:
Insurable interest is unlimited
Beneficiary may be assigned,
regardless if the beneficiary has an
insurable interest or not
o Exception: Art. 2012 in
relation to Art. 739 of the
Civil Code
Art. 2012. 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 a donation to him,
according to said article.
Art. 739. 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,
ascendants, by reason of his
office
In the case referred to in No. 1, the
action for the declaration of nullity may
be brought by the spouse of the donor or
done; and the guilt of the donor and
done may be proved by preponderance
of evidence in the same action.

Liability for Suicide:

Insurer only liable if the suicide is
committed after the policy has been
in force for a period of two years

from the date of issue or

reinstatement
Relationship by Blood and Marriage:
With insurable interest:
Husbands and wives
Children (including adopted
children)
Grandparents and grandchildren
Brothers and sisters
Without insurable interest:
Other relatives by marriage
Nieces and nephews
Cousins
Uncles and aunts
Stepchildren and stepparents
Engaged couples
Cohabitees
B. Person on whom one depends wholly
or in part for education or support or in
whom one has a pecuniary interest
Education and Support:
Any person who provides education
and/or support may be insured by the
person benefitting therefrom
Support and education are defined by
the Family Code (Article 194)
Insurable interest on the life with
respect to education is not limited to
relationships mentioned in Art. 195
to 199 of the Family Code
A stranger or a non-related person
may provide support; hence, the
person being supported has insurable
interest in the life of the person
insured (who provides the support)

Persons enumerated in Articles 195197, and 199 of the Family Code are
Article 194. Support comprises
everything indispensable for sustenance,
dwelling, clothing, medical attendance,
education and transportation, in keeping
with the financial capacity of the family.

The education of the person entitled to

be supported referred to in the
preceding paragraph shall include his
schooling or training for some
profession, trade or vocation, even
beyond the age of majority.

Art. 195. Subject to the provisions of the

succeeding articles, the following are
obliged to support each other to the
whole extent set forth in the preceding
article:
(1) The spouses;
(2) Legitimate ascendants and
descendants;
(3) Parents and their legitimate
children and the legitimate and
illegitimate children of the latter;
(4) Parents and their illegitimate
children and the legitimate and
illegitimate children of the latter;
and
(5) Legitimate brothers and
sisters, whether of full or halfblood.
Art. 196. Brothers and sisters not
legitimately related, whether of the full
or half-blood, are likewise bound to
support each other to the full extent set
forth in Article 194, except only when
the need for support of the brother or
sister, being of age, is due to a cause
imputable to the claimant's fault or
negligence.

Art. 197. In case of legitimate ascendants;

descendants, whether legitimate or
illegitimate; and brothers and sisters,
whether legitimately or illegitimately
related, only the separate property of the
person obliged to give support shall be
answerable provided that in case the
obligor has no separate property, the
absolute community or the conjugal
partnership, if financially capable, shall
advance the support, which shall be
deducted from the share of the spouse
obliged upon the liquidation of the absolute
community or of the conjugal partnership.
Art. 199. Whenever two or more persons are
obliged to give support, the liability shall
devolve upon the following persons in the
order herein provided:
(1) The spouse;
(2) The descendants in the nearest
degree;
(3) The ascendants in the nearest
degree; and
(4) The brothers and sisters.
obliged to give support to each other

Amount of Support:
In proportion to the resources or the
means of the giver and to the
necessities of the recipient (Art. 201
Family Code)
Pecuniary Interest or Business
Relationship:
Pecuniary interest must be
recognized by law

 Amount of insurance must not

exceed the value of the interest
There may be an insurable interest in
an otherwise non-insurable interest
relationship by the creation of a
financial dependency or a business
relationship between the parties.
C. Person Under A Legal Obligation

Obligation must be legal

Void or unenforceable contracts are
not covered
Rescissible and voidable contracts
are covered (these contracts are valid
until rescinded or annulled)

Those Obliged to Render Services

Contemplates relationship between
employer and employee
Employers may only take out life
insurance policies on the life of key
employees
Ordinary employees not holding vital
positions cannot be insured by
employers
Those Obliged to Pay Money
Creditors are allowed to take life
insurance on the lives of their
debtors
Amount: limited to the amount of
debt
Effect of the presence of security: the
creditor has no insurable interest on
the life of the debtor because the
latters death will not delay or
prevent the payment of the obligation
If the debtor has already paid the
debt, and after the creditor has taken
out an insurance policy on the life of
the debtor, he (debtor) subsequently
dies, the debtors heirs cannot

recover the proceeds because the

debtor is not a party to the contract.
Neither will the creditor, in this case,
will recover because he has already
been paid.

D. Of Any Person Upon Whose Life Any

Estate or Interest Vested in Him Depends

Insurable interest is present if the

existence of his interest in a property
or an estate depends on the life of
another person

The consent of the person whose life is

being insured is not necessary.
***
Section 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.
Three parties in an insurance contract:
1) Owner of the policy
2) Insured
3) Beneficiary
Owner the one who has the rights
stipulated in the contract
Right to name a beneficiary
Right to participating dividends
Right to surrender the policy
Right to transfer ownership of the
policy
Insured person whose death causes the
insurer to pay the death claim to the
beneficiary

May be the owner of the policy

himself

Beneficiary recipient of the proceeds

when the named insured dies

Types of Beneficiaries:
1. Primary and Contingent
2. Specific and Class
3. Revocable and Irrevocable
Primary and Contingent
Primary entitled to the proceeds of the
policy upon the death of the insured but such
rights expire if the beneficiary dies before
the insured
Contingent (Secondary) entitled to the
proceeds if the primary beneficiary has
predeceased the insured
Specific and Class
Specific identified by name and
relationship
Class group of individuals (ex. children of
the insured)
Revocable and Irrevocable
Revocable
The policy owner reserves the right
to change the beneficiary
Only has an expectation of benefits
Owner of the policy can exercise any
of the policy rights without the
consent of the revocable beneficiary
Irrevocable

Cannot be changed by the policy

owner without the consent of the
beneficiary
Presumption: the designation of beneficiary
is presumed revocable unless otherwise
stated in the policy.

Rights of an Irrevocable Beneficiary:

(RCDO)
Cannot be replaced as beneficiary
without his consent
Can continue paying the premiums
should the insured discontinue the
same
Insured cannot designate additional
beneficiaries without his consent
Insured cannot obtain policy loan or
cash surrender value without his
consent
The designation of a beneficiary, even if
such does not require insurable interest on
the part of the beneficiary, must be done in
good faith.
Disqualified to be Beneficiaries:
Those forbidden to be donees cannot
be beneficiaries (Art. 2012, in
relation to Art. 739 of the Civil
Code)
Reason: a life insurance policy is no
different from a donation in that both
have the same consideration, which
is liberality.
Applicability to Extramarital Relationships:

Policy considerations and dictates of

morality rightly justify the institution

of a barrier between common law

spouses in record to property
relations since such ultimately
encroaches upon the nuptial and filial
rights of the legitimate family. There
is every reason to hold that the bar in
donations between legitimate
spouses and those between
illegitimate ones should be enforced
in life insurance policies since the
same are based on similar
consideration (The Insular Life
Assurance Company, Ltd. v. Ebrado,
1997)
Effect of Predecease of the Beneficiary
before the Insured
Revocable Beneficiary:
Presence of Contingent beneficiary:
the proceeds will go to the named
contingent beneficiaries
Proceeds shall be given to the estate
of the insured if no replacement
beneficiary has been designated
Irrevocable Beneficiary
Policy owner has the right to name a
new beneficiary
If the policy is payable to the
executors, administrators or assigns
of the irrevocable beneficiary, they
will receive the proceeds
***
Section 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.

Act must be Felonious

Requires proof of beneficiarys
intent to kill the victim
Not applicable if the death was
caused through reckless imprudence
or with the presence of a justifying or
exempting circumstance
Quantum of proof to prove intent:
preponderance of evidence
Nearest Relative as Beneficiary
If the beneficiary is disqualified for
willfully causing the death of the
insured, the nearest relative of the
insured will receive the proceeds
***
Section 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.

Must be an interest
o Real or personal
o Or any relation thereto
o Or liability in respect thereof

Contemplated peril might directly

damnify the insured

Purpose of insurable interest:

To prevent the use of insurance as a
means of wagering
Person not having insurable interest
is not allowed to gamble upon the
possibility of its destruction
The proposer of the insurance must
have a relationship with the subject
of the insurance, so that he will
suffer prejudice should it be lost or

damaged, and be benefitted by its

safety

o Purchaser of property before

delivery
o Mortgagee of property
mortgaged
o Mortgagor after foreclosure
but before expiration of the
period of redemption
o Beneficiary under a deed of
trust
o Creditors under a deed of
assignment
o A judgment debtor whose
property has been seized until
the right to redeem has been
lost
o Builders and constructors in
the building pending payment
of construction price
o Purchaser of an option to buy
real estate

***

Section 14. An insurable interest in

property may consist in:
(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 person must be liable to a direct

and immediate loss by its damage or
destruction; it is not enough that he is
liable to damage indirectly and
incidentally, in consequence of the
damage sustained by another

A. Existing interest
May be a legal or an equitable title

Examples of legal title:

o Trustee
o Mortgagor
o Lessor
o Lessee
o Assignee
o Executor
o Administrator
o Trustee
o Receiver

Examples of equitable title:

B. Inchoate interest
Inchoate interest must be founded
on an existing interest

Examples:
o Stockholder in the property
of the corporation of which
he is a 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 or to his
share in the distribution of the
corporate assets upon
dissolution)
The stockholder has
neither legal nor
equitable title to the
assets of the
corporation

o Partner in the firm property

which will support a separate
polity for his benefit
C. An expectancy
Must be coupled with an existing
interest in that out of which such
expectancy arises

Examples:
o Farmer may insure future
crops to be grown on land
owned by him at the time of
issuance of the policy
o Farmer may insure crops
even if the land is not his,
provided that the crops raised
by him belongs to him
o Owner of a business may
insure against a contingency
which may cause loss of
profits resulting from the
cessation or interruption of
his business

One cannot have a lawful, insurable interest

in stolen property, even if he purchased it in
good faith. The bona fide possession of
stolen property does not give rise to the
holder any sort of title whatsoever, such as
would come up to the rule governing an
insurable interest; nor does his bona fide
possession of stolen property constitute such
an exclusive and undisputed claim as would
entitle him to be called the sole and
exclusive owner.
***
Section 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.
Purpose of the provision

Loss of the thing may cause liability

to the carrier or the depository to the
extent of its value
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 insure
himself against the liability which he
may incur upon the destruction of the
chattels
A policy effected by a bailee and
covering by its terms his own
property held in trust, inures, in the
event of loss, equally and
proportionately to the benefit of all
owners of the property insured
***

Section 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.

A mere hope or expectancy to

benefit, which may be frustrated by
the happening of some event, is not
insurable unless it is founded on an
actual right or pursuant to a valid
contract. Otherwise, it is a wagering
contract.

Property of father/son/spouse
A father cannot insure his sons
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.
(Baldwin v. State Insurance Co. 15
NW 300)
Life of parents/children/spouses
Parents, children, and spouses are
under mutual obligation to support
each other; hence, may insure the life
of the other

Property of debtor
A general or unsecured creditor
cannot insure specific property of a
debtor who is alive, even though
destruction of such property would
render worthless any judgment he
might obtain
But an unsecured creditor may insure
the property of a deceased debtor
since all personal liability ceases
with the debt of the debtor
An unsecured creditor who obtains
judgment in his favor and becomes a
judgment creditor, has insurable
interest in the debtors property since
he has a right to levy on such
property as may be necessary to
satisfy the judgment.
One named as beneficiary in a will
has no insurable interest in a
property designated before the
testators death

Mortgagee has an insurable interest

only to the extent of the credit
secured by the mortgage

The lessee has an insurable interest

in the equipment of motor vehicles
leased under Section 17 as it wull be
directly damnified in case of loss,
damage, or destruction of any of the
properties leased (Ong Lim Sing v.
FGB Leasing Finance Corp. 2007)
***

Section 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.

An insurance taken out by a person

on property in which he has no
insurable interest is void.

Where the contract of lease provides

that any fire insurance policy
obtained by the lessee over his leased
premises without the consent of the
lessor is deemed assigned or
transferred to the lessor, 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
insurable interest in the property
insured. (Cha v. Court of Appeals
1997)

Where the insurance is invalidated

on the ground that no insurable
interest exists, the premium is
ordinarily returned to the insured

***
Section 17. The measure of an insurable
interest in property is the extent to which
the insured might be damnified by loss or
injury thereof.

Insurance is a contract of indemnity.

Any contract 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.

Mortgagor has an insurable interest

equal to the value of the mortgaged
property

unless he is in pari delicto with the

insurer.
***
Section 19. An interest in property insured
must exist when the insurance takes effect,
and when the loss occurs, but 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.

In property and liability insurance,

insurable interest must exist at the
time the insurance takes effect and
at the time of loss

Reason: property insurance is a

contract of indemnity; if the insured
has no more interest in the time of
the injury, then he has suffered no
loss

In life insurance, the insurable

interest must exist at the time of the
purchase of the life insurance and
need not exist thereafter or at the
time of loss

Reason: life insurance is an

investment; since the event upon
which the payment is to be made is
certain to happen at some future
time, the insurable interest must be
determined at the time the contract
was entered into.

Extent

Insurable
interest in
life
insurance
Unlimited
(except in
life

Insurable
interest in
property
insurance
Limited to
the actual
value of the

insurance
effected by
a creditor on
the life of a
debtor)
Expectation of Need not
benefit to be
have any
derived
legal basis
Time when
Must exist
insurable
at the time
interest must
of the
exist
effectivity
of the policy
and need not
exist at the
time of the
loss

interest
broken

Must be
based on a
legal right
Must exist
at the time
of the
effectivity
of the policy
and when
the loss
occurs, but
need not
exist in the
meantime

***
Section 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 in interest in the
insurance, suspends the insurance to an
equivalent extent, until the interest in the
thing and the interest in the insurance are
vested in the same person.
Sec. 21. A change in 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.
Sec. 22. A change of interest in one or
more several distinct things, separately
insured by one policy, does not avoid the
insurance as to the others.
Sec. 23. A change on interest, by will or
succession, on the death of the insured,

does not avoid an insurance; and his

interest in the insurance passes to the
person taking his interest in the thing
insured.

merely suspended but is avoided

(Art. 1306 Civil Code)
***

Sec. 24. 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 an insurance even
though it has been agreed that the
insurance shall cease upon an alienation
of the thing insured.
General rule: 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.
Exceptions:
1. In life health and accident insurance
(Sec. 20)
2. A change in the interest of 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 in interest by will or
succession on the death of the
insured (Sec. 23)
5. A transfer of interest by one of
several partners, joint owners or
owners in common, who are jointly
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)
7. When there is an express prohibition
against alienation in the policy, in
case of alienation, the contract is not

Section 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.
Two stipulations 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
Wager policy 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
2. Stipulation that policy shall be
received as proof of insurable
interest
Whether or not an insurable
interest exists does not depend
upon the contract of insurance
A contract of insurance is void for illegality
unless the insured has an insurable interest
in the matter insured. Wager or gaming
policies are disapproves and condemned not
only under statutes declaring them void but
also on the ground of public policy. 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.

***