Insurable interest (Insurance Law)

Lawyer, Author, Mentor

1. Concept

Insurable interest – refers to the interest over a life or property entitling one to obtain an insurance policy from an insurer.

As shown hereunder, there is a specific definition of insurable interest for life and health insurance on the one hand and property insurance on the other.

2. Insurable interest in life and health insurance

Every person has an insurable interest in the life and health of:[1]
1) Himself, of his spouse, and of his children;[2]
2) Any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;[3]
3) 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;[4] and
4) Any person upon whose life any estate or interest vested in him depends.[5]
Pineda v. Court of Appeals (September 1993)
A group of six seafarers covered by insurance died after their ship perished at sea. Insular Life paid the beneficiaries their benefits from the individual life insurances. However, the insurance company paid the benefits for the group life insurance to the employer. The beneficiaries/heirs challenged Insular Life’s act of forwarding the benefits of the group life insurance to the employer instead to the former.
HELD: Insular Life was liable. Although the employer may be the titular or named insured, the insurance is actually related to the life and health of the employee. The premium paid is part of the total compensation paid by the services of the employee. Labor is the source of the benefits, which is a form of additional compensation to them.
The coverage terms for group insurance are usually stated in a master agreement or policy that is issued by the insurer to a representative of the group or to an administrator of the insurance program, such as an employer. The employer acts as a functionary in the collection and payment of premiums and in performing related duties. Likewise falling within the ambit of administration of a group policy is the disbursement of insurance payments by the employer to the employees. Most policies, such as the one in this case, require an employee to pay a portion of the premium, which the employer deducts from wages while the remainder is paid by the employer. This is known as a contributory plan as compared to a non-contributory plan where the premiums are solely paid by the employer.”
Best Legal Practices
Employer may take out insurance for employees – The employer has insurable interest on the life of his employees. Hence, the employer is allowed to take out insurance for his employees.

1) Right to change beneficiary

Unless expressly waived on the policy, the insured has the right to change the designated beneficiary on the said policy.[6] The designation is irrevocable if the insured did not change the beneficiary during his lifetime.[7]

2) When beneficiary’s interest in life insurance policy is forfeited

The beneficiary’s interest in life insurance is forfeited when he is the principal, accomplice, or accessory in willfully bringing about the death of the insured.[8]

3. Insurable interest in property insurance

An insurable interest in property insurance consists of “[e]very 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.”[9]

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.[10]

Filipino Merchants Insurance Co. v. Court of Appeals (November 1989)
Choa Tiek Seng obtained a non-life insurance with an “all risk clause” over the shipment of fishmeal. When the goods were unloaded, 105 bags were found in bad order condition. When Seng claimed, it was denied by Filipino Merchants stating that Seng failed to prove that the damage was caused by “some fortuity,” and he had no insurable interest at that time.
HELD: Filipino Merchants was liable. The insured under an “all risks insurance policy” has the initial burden of proving that the cargo was in good condition when the policy attached and that the cargo was damaged when unloaded from the vessel; therafter, the burden then shifts to the insurer to show the exception of the coverage. This Seng was able to do, and Filipino Merchants was unable to do. Regarding the insurable interest, Seng had one based on the perfected contract of sale. This is an existing interest over the goods sufficient to the subject of insurance. A perfected contract of sale is an insurable interest.

a. Carrier or depositary has insurable interest in things held or in possession

To the extent of his liability but not to exceed the value of the thing held, a carrier or depositary of any kind has an insurable interest in the said item in his possession.[11]

b. No insurable interest in mere contingent or expectant interest in a thing

There is no insurable interest in a mere contingent or expectant interest on a thing, which is not founded on an actual right to the thing or upon any valid contract for it.[12]

c. Measure of insurable interest in property is extent of indemnity over loss or injury

The measure of an insurable interest in property is the extent to which the insured might be damnified by the loss or injury thereof.[13]

Gaisano Cagayan, Inc. v. Insurance Co. of North Americ (June 2006)
Intercapitol Marketing Corporation (IMC) and Levi Strauss (Phils.), Inc. (LSPI) obtained a fire insurance policy with book indebtedness over their goods. Despite the goods not having been paid, they were delivered to Gaisano. After the goods were lost through a fire, Insurance Co. paid the benefits and subrogated itself to the rights of IMC & LSPI. As a defense, Gaisano claimed that IMC & LSPI had no insurable interest since the goods had already been delivered and the fire was caused by a fortuitous event.
HELD: Gaisano was liable. Under Sec. 17 of the Insurance Code, the measure of an insurable interest in property is the extent to which the injured might be damnified by the loss or injury thereof.
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full payment of the value of the delivered goods. Unlike the civil law concept of res 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 insured has substantial economic interest in the property.”
Here, LSPI was able to recover since it was damnified by the loss of the goods which were not yet paid. IMC, however, failed to show that the goods were not yet paid.

d. Property insurance enforceable only to person having insurable interest

A contract or policy of insurance on property is only enforceable for the benefit of a person who has an insurable interest in the property insured.[14]

4. When insurable interest required for policy to be enforceable

In life or health insurance, the insurable interest must exist when the insurance takes effect, but the interest does not need to exist thereafter or when the loss occurs. In property insurance, the insurable interest must exist when the insurance takes effect and when the loss occurs, but the interest does not need to exist in the meantime.[15]

a. Change of interest

General Rule: A change of interest in any part of a thing insured not accompanied by a corresponding change of interest in the insurance results in the suspension of the insurance to an equivalent extent until the interest in the thing and in the interest in the insurance are vested in the same person.[16]
Exceptions: This rule on change of interest does not apply to the following:[17]
1) A change of interest in life, accident, and health insurance does not affect the insurance contract;[18]
2) 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;[19]
3) 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;[20]
4) A change of interest, by will or succession, on the death of the insured, does not void an insurance; and his interest in the insurance passes to the person taking his interest in the thing insured;[21] and
5) 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 is to cease upon an alienation of the thing insured.[22]

5. Void stipulations

Void stipulations:
1) Payment of loss whether or not the person has insurable interest in the property insured;
2) Policy received as proof of such interest; or
3) Policy executed by way of gaming or wagering.[23]

[1] Ibid. Section 10.

[2] Ibid. Section 10 (a).

[3] Ibid. Section 10 (b).

[4] Ibid. Section 10 (c).

[5] Ibid. Section 10 (d).

[6] Ibid. Section 11.

[7] Ibid.

[8] INSURANCE CODE, as amended. Section 12. “In such a case, the share forfeited shall pass on to the other beneficiaries, unless otherwise disqualified. In the absence of other beneficiaries, the proceeds shall be paid in accordance with the policy contract. If the policy contract is silent, the proceeds shall be paid to the estate of the insured” (Ibid.).

[9] Ibid. Section 13.

[10] Ibid. Section 14.

[11] Ibid. Section 15.

[12] Ibid. Section 16.

[13] Ibid. Section 17.

[14] Ibid. Section 18.

[15] Ibid. Section 19.

[16] Ibid. Section 20.

[17] Ibid.

[18] Ibid.

[19] Ibid. Section 21.

[20] Ibid. Section 22.

[21] Ibid. Section 23.

[22] Ibid. Section 24.

[23] Ibid. Section 25.

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