Insurable Interest

In Life and Health

Section 10.

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

(a) Of himself, of 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;

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.

Classes of insurable interests

Insurable interest may be:

insurable interest in the insured's own life, or
insurable interest in the life of another person.

Where the insurance is on the life of another, the owner of the insurance policy is different from the "subject" of the insurance–the person whose life is insured.
The owner may, in turn, be the beneficiary or the beneficiary may be another person.
With respect to insurable interest in the life of another person, the same may be based on:

relationship by blood

spouse, children

no insurable interest over the life of his parents or his brothers and sisters

business relationship or
other pecuniary interest.

obliged to support:

spouses;
legitimate ascendants and descendants;
parents and their legitimate children and the legitimate and illegitimate children of the latter;
parents and their illegitimate children and the legitimate and illegitimate children of the latter; and
legitimate brothers and sisters, whether of full or half-blood

reasonable certainty that the continuation of the life will be of direct, material advantage to the insured
reasonable expectation of financial benefit from the continuation of the life of the insured
reasonable expectation of expenses upon the death of the insured

Consent of the Insured

The presence of insurable interest (e.g., financial or familial ties) ensures the policy is not a mere wager.

Exceptions:

Parents can insure a minor child without the child's consent.
Spouses can insure each other without express consent.

Insurers often issue policies without the insured's knowledge, especially in cases where the risk of harm is minimal due to clear pecuniary interest (e.g., business partners).
Real insurable interest reduces the likelihood of misuse or harm.
Consent is not indispensable as long as:

There is a clear insurable interest.
The policy amount is reasonable and limited to actual pecuniary interest (to avoid misuse or gambling motivations).

Beneficiary

If a person procures insurance on his own life, who may be his beneficiary?
A person can take insurance on his own life and designate anyone as beneficiary except those disqualified to receive donation under Article 739 of the Civil Code.

persons in illicit relations – adultery or concubinage (no need for conviction);
persons found guilty of adultery or concubinage;
public officer or his wife, descendants, or ascendants

Rationale:

Life insurance policy is no different from donation insofar as the beneficiary is concerned. Both are founded on liberality.
A beneficiary is like a donee because from the premiums of the policy which the insured pays out of liberality, the beneficiary will receive the proceeds of the insurance.
As a consequence, the proscription in Article 739 of the Civil Code should equally operate in life insurance contracts.

The beneficiary in this case can be anyone, such as a distant relative or a friend, who need not have any insurable interest in the life of the insured.

Lawful spouse and legitimate children of the insured cannot complain of denial of their legitime

The lawful spouse and legitimate children cannot complain of denial of their legitime because the proceeds of the life insurance policy do not form part of the estate of the insured.
Neither can they claim the insurance proceeds because they are not privy to the contract.
Moreover, under Section 53 of the Insurance Code, the insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy.
The only persons entitled to claim the insurance proceeds are either:

the insured, if still alive;
or the beneficiary, if the insured is already deceased, upon the maturation of the policy.

No insurable interest on the life of his parents

By express exclusion under par. (a), a person has no insurable interest on the life of his parents and other ascendants unless he depends upon them for education and/or support. (par. b.)
The rationale for their exclusion in par. (a) is that the parents are logically expected to predecease their children.

Insurable interest on the life and health of their illegitimate children

Parents can take insurance on the life of their children, whether legitimate or illegitimate, because the law makes no distinction as to the kind of children and there being no statutory prohibition against it.

Insurance on the life of another person and designate himself as the beneficiary

A person can take an insurance on the life of another person and designate himself as the beneficiary provided that he has pecuniary interest in the person he is insuring.
In other words, the insured must be any of the persons under Section 10 (b to d).

The beneficiary of a life insurance need not have any insurable interest in the life of the insured.

The beneficiary of a life insurance need not have any insurable interest in the life of the insured.
Any person can take insurance on his own life and designate anyone as his beneficiary except those disqualified to be donees under Article 739 of the Civil Code.

A homosexual took an insurance policy on the life of his boyfriend

There is no insurable interest on the life of his boyfriend.
Friendship alone is not the insurable interest contemplated in life insurance.
Insurable interest in the life of others (other than one's own life, spouses, or children) is merely to the extent of the pecuniary interest in that life.
However, there is an insurable interest in the life of the other if a person depended wholly or in part for support. The fact that one is a transgender is irrelevant. It is the reliance for support which establishes insurable interest.

Examples 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.

A mortgagee may insure the life of the mortgagor up to the extent of the mortgage debt to the mortgagee.
A seller may insure the life of the buyer if the latter has the obligation to deliver a specified property under a contract to sell. The seller's insurable interest is the contracted value of the property for delivery.
A law firm may procure a keyman insurance policy on its Managing Partner.
An employer corporation has an insurable interest on its manager where the death of the manager will be detrimental to the corporation's operations.

In the case of insurable interest on any person under a legal obligation for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance, the insurable interest is limited up to the extent of the liability.
It is in effect a security for the payment of obligation and the obligee who took the policy cannot recover more that what is owed to him.
With such limitations, it is believed that it is unreasonable to require the creditor to secure the consent of the debtor before securing the policy for his own protection, with the creditor paying the premium.
Of course, in practice, consent is usually present because the creditor who intends to secure a policy will make it a condition in the loan or any pertinent agreement that the debtor gives his or her consent.
In the alternative, the creditor will require the debtor to secure an insurance policy and either assign the same to the creditor or to make the creditor the beneficiary thereof.

Any person upon whose life any estate or interest vested in him depends.

The usufructuary may insure the life of the owner of the naked title if his right to the usufruct will be extinguished upon death of the latter.
Examples:

A person who will become the owner of a property as soon as another attains a certain age, may, (by) means of insurance, assure an indemnity for loss to be suffered by him in case that person dies before attaining such age;
A may insure the life of B in order to compensate himself for the loss which he will suffer through the latter's death if A receives as a legacy the usufruct of a property that ownership of which is vested in B, on the condition that at the death of the latter, the legacy is extinguished, the ownership and usufruct of the property passing to C.

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.

Notwithstanding the foregoing,

in the event the insured does not change the beneficiary during his lifetime,

the designation shall be deemed irrevocable.

Change of Beneficiary.

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.
Notwithstanding the foregoing, in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable.

Effects of the irrevocable designation of the beneficiary in a life insurance policy.

In case of irrevocable designation, the beneficiary has acquired a vested right on the life insurance policy including its incident such as the policy loan and cash surrender value.
As such, any act on the part of the insured which may impair the interest of the irrevocably designated beneficiary is null and void.
Thus:

The beneficiary cannot be changed
No additional beneficiary can be designated and
The insured cannot take a cash surrender value on the policy unless the beneficiary consents to any of the foregoing acts.

Cash surrender value is the amount of money a life insurance policyholder receives if they terminate their policy before it matures or they die.

Effects of the revocable designation of the beneficiary

The insured:

may change the beneficiary during his lifetime
add a beneficiary or
exclude a beneficiary in case of joint designation of beneficiaries.

The same rule applies in case the policy is silent on the nature of the designation, for in such case, the designation is deemed to be revocable.

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 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.

The proceeds of the life insurance policy are payable as follows:

In case a beneficiary is unlawfully designated, the proceeds shall be payable to the estate of the insured (not only to the lawful spouse of the insured although she has a share in the estate of the insured).

It is because the policy remains valid.
Only the designation is void.

In case of joint designation of beneficiaries, the share of the unlawfully designated beneficiary shall form additional part of the share of the lawfully designated beneficiary.

Thus, the share of the common law spouse shall be forfeited in favor of the designated illegitimate children.

In case of joint designation of lawfully designated beneficiaries, proceeds shall be divided based on terms of policy.

If the policy is silent, the proceeds shall be divided equally between or among the beneficiaries.

In case a beneficiary is lawfully designated and the insured dies ahead of the beneficiary, the proceeds are payable to the beneficiary unless he is the principal, accessory or accomplice in willfully bringing about the death of the insured.
In such a case, interest of the beneficiary shall be forfeited and 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.
Note that the insurer is still liable.

In case the beneficiary predeceases the insured, make a distinction between irrevocable and revocable beneficiary.

If irrevocable, the proceeds shall inure to the benefit of the legal representatives of the beneficiary.
If revocable, the proceeds shall inure to the estate of the insured.
If the policy is silent as to whether designation is irrevocable or revocable, the proceeds shall inure to the estate of the insured because the designation is revocable unless otherwise specified in the policy.

The beneficiary's interest in a life insurance endowment policy will only accrue if the insured dies before the end of the endowment period. If the insured survives, the proceeds are payable to him.

In Property

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.

Test

Based on Section 13 of the Insurance Code, the presence of insurable interest in property can be determined by asking if the insured has 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 said insured.
Any title to, or interest in property, legal or equitable, will support a contract of property insurance. Even where the insured has no title, the contract will be upheld if his interest in or his relation to, the property is such that he will, or may be benefited pecuniary loss from its destruction or injury.
The test in determining insurable interest in property is whether one will derive pecuniary benefit or advantage from its preservation, or will suffer pecuniary loss or damage from its destruction, termination, injury by the happening of the event insured against.

Section 14.

An insurable interest in property may consist in:

(a) An existing interest;

(b) An inchoate interest founded on an existing interest; or

Insurable interest in property consists of

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

Designation as Beneficiary

The act of designating his brother as beneficiary is not similar to assignment of his right to the policy which will result in loss of insurable interest.
The brother cannot recover on the fire insurance policy despite his designation as beneficiary, for lack of insurable interest on the property.
For the beneficiary to recover on the fire or property insurance policy, it is required that he must have insurable interest in the property insured.

Separate insurable interests on the same property.

Example:

A’s insurable interest is his legal and/or equitable interest over the property as an owner.
B’s insurable interest is the preservation of the property which may become the basis of liability in case of loss or damage thereto.

Existing interest

Existing interest includes the interest of an owner.
However, title or ownership is not essential.
Thus, the following persons have insurable interest over the property even if they are not the owners thereof:

lessee
depositary
usufructuary
borrower in commodatum

Consistently, a possessor who is holding the property without consideration with the consent of the owner has insurable interest in the property that he is occupying.
One has 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.
In sale of goods, an unpaid seller retains insurable interest over the goods even if ownership had already been transferred to the vendee upon delivery.

An unpaid seller has a vendor's lien and therefore he will be damnified by the loss of the goods even after delivery.
On the other hand, the vendee or buyer has insurable interest over the goods even while the goods are still in transit.
The consignee of the goods in transit under an invoice containing the terms under "C & F Manila," has insurable interest in said goods. As vendee/consignee of the goods, he has such existing interest therein as may be the subject of a valid insurance contract. His interest over the goods is based on the perfected contract of sale. The perfected contract of sale between him and the seller/shipper of the goods operates to vest in him an equitable title even before delivery or before he performed the conditions of the sale. The contract of shipment, whether under "F.O.B.," "C.I.F," or "C & F” is immaterial in the determination of whether the vendee has insurable interest or not in the goods in transit. The perfected contract of sale even without delivery vests the vendee an equitable title, an existing interest over the goods sufficient to be the subject of insurance.

Insurable interest in property exists in any of the following cases because the person is so situated that he will suffer because of the loss due to a peril insured against:

When the insured possesses a legal title to the property insured, whether vested or contingent, defeasible or indefeasible;
When he has equitable title of whatever character and in whatever manner acquired;
When he possesses a qualified property or possessory right in the subject of the insurance;
When he has mere possession or right of possession;
When he has neither possession of the property nor any other legal interest in it but stands in such relation with respect to it that he may suffer from its destruction, loss of a legal right dependent upon its continued existence.

Example:

A person who stands in such relation with respect to it that he may suffer from its destruction is a building contractor who insured the building that he constructed.

Examples of existing interest

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.
Both the mortgagor and mortgagee may insure the mortgaged property against fire. The mortgagor may insure it up to the extent of the value while the mortgagee up to the extent of the mortgage debt.
A depositor may insure his deposits in excess of the PDIC insurance coverage.

Inchoate interest

Inchoate interest must be founded on an existing interest, otherwise, the loss of the property will not directly damnify the insured.

Example:

A shareholder has inchoate interest on the properties of the corporation. His inchoate interest over the properties of the corporation is founded on his existing interest in the corporation as a shareholder.
The interest of a purchaser of a property in a judicial sale subject to redemption.

Examples of inchoate interest founded on existing interest.

A stockholder may insure corporate property to the extent of and in proportion to the value of his shares in the corporation.

A stockholder has inchoate right to the corporate assets which will ripen into full ownership upon dissolution and liquidation of the corporation.

A property under contract to sell.

The buyer may insure the property to the extent of the amount of payment he has made or the entire value of the property depending on how the stipulation in the agreement will damnify him in case of loss of such property.
The seller may also insure the property to the extent of the unpaid purchase price or even the full value if there is stipulation that he is liable to return the payment in case of non-delivery.

The judgment creditor, after levy of the judgment debtor's property, may insure it because the debtor may not exercise his right of redemption.

He has inchoate interest because he may acquire ownership of the levied property in case of failure of the debtor to redeem.
The judgment creditor and the judgment debtor both have insurable interest on the property which can be separately covered by fire insurance.
In case of loss before expiration of the redemption period, the owner and the judgment creditor may recover on their separate insurance.
If the loss occurs after expiration of the redemption period, only the judgment creditor may claim on the insurance.

A general creditor, however, has no insurable interest on the debtor's property.

This is because prior to the levy, the general creditor's interest on the debtor's property is a mere contingent or expectant interest not founded on an actual right to the thing, nor upon any valid contract for it.

Expectancy

Expectancy must likewise be coupled with an existing interest.

For instance, the interest of an heir over the properties of his successor who is still alive is a mere expectancy that is not coupled with an existing interest.
Hence, the heir does not have insurable interest over the properties of his successor-in-interest.

It may be true that one cannot have insurable interest in property that does not exist nor is it correct to say that the possibility that property may come into existence in the future gives a present insurable interest therein.
But the mere fact that property has no present existence affords no reason why a bona fide contract should not be made for its protection when it shall be subsequently acquired or come into being. Such expectant insurance may be said to be subject to a suspensory condition, and attaches to any specific property only upon its emerging into the realm of existent things.

Examples of expectancy coupled with existing interest out of which the expectancy arises

Growing crops.
Expected freightage of the common carrier.
Profits of a partnership for a partner.
Expected commissions of agents.

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.

Insurable interest of bailee

In a contract of carriage, the carrier may be damnified by the loss of the goods because he may be obligated to pay the shipper any damage to the property.
Similarly, a depositary is obligated to take care of the thing deposited and he can be made liable if the thing deposited is damaged.
Thus, both the carrier and the depositary have insurable interest over the property subject to the provisions of Section 15 of the Insurance Code.

Included in insurance policies taken by depositaries are the so-called bailee policies that are involved in transportation of goods.

It was observed that "any bailee or person in custody of property and responsible for it may take insurance in his own name and may recover not only a sum equal to his own interest in the property by reason of any lien for advances or charges, but the full amount named in the policy up to the value of the property.

However, under Section 15, the amount that can be recovered is limited to amount that is equivalent to the extent of liability of the carrier or depositary; the value of the property is fixed as the upper limit of the amount that can be recovered by the bailee or carrier and not necessarily the amount that can be recovered.
Lopez v. Del Rosario:

A policy effected by bailee and covering by its terms his own property and property held in trust; inures, in the event of a loss, equally and proportionately to the benefit of all the owners of the property insured.
Even if one secured insurance covering his own goods and goods stored with him, and even if the owner of the stored goods did not request or know of the insurance, and did not ratify it before the payment of the loss, yet it has been held by a reputable court that the warehouseman is liable to the owner of such stored goods for his share.
It should be noted however that the Supreme Court observed in this case that by giving a natural expression to the terms of the warehouse receipts, it could be concluded that the warehouseman acted as the agent of the owners-depositor.
The agency can be deduced from the warehouse receipts, the insurance policies, and the circumstances surrounding the transaction. Thus, the situation in Lopez v. Del Rosario is not one of those contemplated under Section 15 of the Insurance Code because insurance under this provision is an insured to be taken by the carrier or the depositary in their own behalf.

Insurable interest of the mortgagor and mortgagee

Both the mortgagor and the mortgagee have insurable interest over the mortgaged property.

The mortgagor is the owner of the mortgaged property, hence, he has an existing interest that may be the subject of an insurance.
Section 8 governs situations when the mortgagor takes an insurance on the basis of his own insurable interest:

Unless the policy otherwise provides, where a mortgagor of property effects insurance in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the original contract, and any act of his, prior to the loss, which would otherwise avoid the insurance, will have the same effect, although the property is in the hands of the mortgagee, but any act which, under the contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee therein named, with the same effect as if it had been performed by the mortgagor.

As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein and both interests may be covered by one policy, or each may take out a separate policy covering his interest, either at the same or at separate times.

The mortgagor's insurable interest covers the full value of the mortgaged property, even though the mortgage debt is equivalent to the full value of the property.
The mortgagee's insurable interest is to the extent of the debt, since the property is relied upon as security thereof, and in insuring, he is not insuring the property but his interest or lien thereon. His insurable interest is prima facie the value mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged property.

Thus, separate insurances covering different insurable interests may be obtained by the mortgagor and the mortgagee.
The usual practice and contractual stipulation is for mortgagor to take out insurance for the benefit of the mortgagee.

The mortgagee may be made the beneficial payee in several ways including the following:

He may become the assignee of the policy with the consent of the insurer; or
A mere pledgee without such consent, or the original policy may contain a mortgage clause: or
A rider making the policy payable to the mortgagee "as his interest may appear" may be attached; or
A "standard mortgage clause," containing a collateral independent contract between the mortgagee and insurer, may be attached; or
The policy, though by its terms payable absolutely to the mortgagor, may have been procured by a mortgagor under a contract duty to insure for the mortgagee's benefit, in which case the mortgagee acquires an equitable lien upon the proceeds; or
The policy may provide for a loss payable clause in favor of the mortgagee.

In the policy obtained by the mortgagor with "loss payable clause" in favor of the mortgagee as his interest may appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a party to the contract itself.

Hence, any act of the mortgagor which defeats his right will also defeat the right of the mortgagee.
This kind of policy covers only such interest as the mortgagee has at the issuance of the policy.
The typical "loss payable clause" is also known as the "open mortgage clause."

A "loss payable clause" should be distinguished from a "union mortgage clause" where there is a transfer of an insurance from the mortgagor to the mortgagee with the assent of insurer.

The applicable statute is Section 9 of the Insurance Code which provides:

If an insurer assents to the transfer of an insurance from a mortgagor to a mortgagee, and, at the time of his assent, imposes further obligation on the assignee, making a new contract with him, the act of the mortgagor cannot affect the rights of said assignee.

The different variations of "loss payable clauses" were explained by Prof. Vance in this wise:

In the first class are those that merely designate the mortgagee as payee to the extent of his interest, of such sum as may become payable under the provisions and conditions of the policy. Under such clause, the mortgagee is made merely a beneficiary under the contract, recognized as such by the insurer, but not made a party to the contract itself.

Any default on the part of the mortgagor, which by the terms of the policy defeat his rights, will also defeat all rights of the mortgagee under the contract, even though the latter may not have been in any fault.

In the second class are those clauses, known in their more usual forms, as "standard" or "union" mortgage clauses, which create collateral independent contracts between the insurer and mortgagee, and provide that the rights of the mortgagee shall not be defeated by the acts or defaults of the mortgagor.

Under clauses of this class, we have the general rule that the mortgagee's rights remain unaffected by any default or breach of condition by the mortgagor to which the mortgagee is not a party."

Section 16.

A mere contingent or expectant interest in any thing,

not founded on an actual right to the thing,

nor upon any valid contract for it, is not insurable.

A son does not have insurable interest on the property of his father

His interest in such property is a mere expectancy not founded on actual right.
In property insurance, insurable interest must exist both at the time of the taking of the insurance and at the time of the loss.
The insurable interest must be an existing interest.
The fact alone that the son was the potential sole heir of his father's estate does not give him any existing interest prior to the death of the decedent.

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.

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.

Section 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.

Existence of interest in property and life or health

For Property Insurance:

Insurance takes effect

The insured must have a financial interest in the property when the policy begins.

Time of loss

This interest must still exist when the loss occurs.

Interim period

It is not necessary to maintain this interest continuously between these two points.

For Life or Health Insurance:

Insurance takes effect

The insured must have an insurable interest in the life or health of the person being insured at the policy's inception.

Subsequent periods

This interest does not need to persist after the policy begins or at the time of the loss.

Distinguish insurable interest in property insurance from insurable interest in life insurance.

Amount of insurance

In property insurance, the actual value of the interest therein is the limit of the insurance that can validly be placed thereon.

Limited up to the value or the property.

In life insurance, there is no limit to the amount of insurance that may be taken upon life except in case of a creditor securing the life of the debtor in which case the insurance should be limited to the amount of the debt.

Unlimited except if secured by creditor.

Existence of insurable interest

In property insurance, an interest insured must exist when the insurance takes effect and when the loss occurs but need not exist in the meantime.
In life insurance, it is enough that insurable interest exists at the time when the contract is made but it need not exist at the time of loss.

Insurable interest of beneficiary

The beneficiary in property insurance must have insurable interest over the property insured and such insurable interest must be covered by the insurance policy.
In life insurance, if the insured procured insurance on his own life, he can designate anyone as beneficiary (except those disqualified to receive donation) even though the latter has no insurable interest in the life of the insured.

Need for legal basis

Property:

Expectation of benefit must have legal basis.

Life:

Expectation of benefit need not have legal basis or need not be based on legally enforceable obligation.

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 of 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.

Property Insurance

In property insurance, insurable interest in the subject property must exist when the insurance takes effect and when the loss occurs. It need not exist continuously from the time the insurance takes effect until the time of the loss; the law provides that it need not exist in the meantime. In other words, the insured can recover even if he lost his insurable interest after the perfection of the insurance contract so long as he recovers the same before the loss occurs.

Example:

Mr. A is the owner of a car which he insured with X Company. After the issuance of the policy, Mr. A sold and delivered the car to Mr. B. Later, Mr. A re-acquired the car from Mr. B. It was after the re-acquisition that the car was destroyed. In this case, Mr. A can recover even if there is a period between the time of the taking of the insurance and the time of the loss that Mr. A had no insurable interest over the car. The insurance is deemed suspended during the intervening period in accordance with Section 20 of the Insurance Code.
Thus, in the given example, the insurance is suspended when Mr. B became the owner and possessor of the car. The insurance is automatically reinstated when Mr. A re-acquires the property.

SEC. 58.

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.

The policy may contain a provision that renders the policy void upon the transfer of the property without the consent of the insurer.

If the policy contains no provision against alienation, the transfer of the entire interest in the property covered will not render the contract void, but simply inoperative during the period of suspension, and subject to a revival upon the interest again vested in the person named in the policy as insured.
The fact that a transfer or sale of the property insured is merely voidable will not aid the insured where it has not been set aside prior to the loss.

Transfer or change of interest in the property with the consent of the insurer will not suspend the policy. In fact, the policy itself may be written in such a way that consent is given in advance by the insurer and the policy will inure to the benefit of anyone to whom the property is transferred. Section 57 of the Insurance Code provides:

SEC. 57.

A policy may be 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.

Effect of a change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the 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 interest in the thing and the interest in the insurance are vested in the same person.
Example:

"N" owns a condominium unit presently insured with Holy Insurance Co. for P10 million. "N" later sells the condominium unit to "O." Somehow "O" fails to obtain the transfer of the insurance policy to his name from "N." Subsequently, fire of unknown origin destroys completely the condominium unit.
Who may collect the insurance proceeds?
Neither N nor O may collect. As to N, an interest in property insured must exist when the insurance takes effect and when the loss occurs. Although N had insurable interest when the insurance takes effect, yet he had no more interest when the loss happened.

The change of interest contemplated is absolute transfer of the insured's entire interest in the property insured to one not previously interested or insured.
Thus, the insured retains insurable interest in the property insured in the following cases:

Execution of mortgage by the insured since interest in the property did not pass to the mortgagee by the mere execution of the mortgage;
Lease of the insured property;
If the insured is a judgment debtor whose property was sold on execution until the right to redeem has expired; and
If the insured is the mortgagor whose property has been foreclosed until expiration of the redemption period.

Exceptions

In life, health, and accident insurance.

Because for these types of insurance, it is enough that insurable interest exists at the time of the issuance of the policy.

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.

This is because the right is already vested and the benefit has accrued.

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.

This is because there is no change of interest and in insurance with respect to the remaining properties.
Thus, if the insured obtains insurance for two separate houses but covered by one policy and then sold one but both were destroyed by fire.
The insured can claim on the insurance with respect to the unsold property.

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

This is because the ownership is effectively transferred to the heirs.

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.

This is because the transfer is not made in favor of any third party.

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.

This is because this situation allows for change of interest in the property but without corresponding loss of insurance coverage.
Thus if a fire insurance policy provides that the loss was payable to the mortgagee, as its interest may appear, the remainder to whomsoever during the continuance of the risk may become owner of the interest insured, the buyer may recover because it was so framed for the benefit of whomsoever during the continuance of the risk may become the owner of the interest insured.

Section 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.

Section 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.

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

Section 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.

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.

If the insured has no insurable interest over the life or property he insures, the insurance contract is considered unenforceable.
If it can be established that the contract is really a wager, the same can be considered void for being against public policy.

§5. INSURABLE INTEREST OF BENEFICIARY IN PROPERTY INSURANCE.

The beneficiary must have insurable interest in the property that is the object of the insurance. The contract will be considered a wagering contract if the beneficiary is allowed to recover even if he has no insurable interest in the subject property.

§5.01. INSURABLE INTEREST OF BENEFICIARY IN LIFE INSURANCE.

If the insured takes out insurance on his own life, he can designate anybody, whether or not the beneficiary has insurable interest over his (insured) life. However, if the insured takes out insurance on the life of another designating himself or herself as beneficiary, insurable interest on the part of the insured is necessary. Insurable interest on the part of the beneficiary is likewise necessary if one takes out insurance on the life of another and designates a third person as the beneficiary.

§6. ASSIGNEE IN LIFE INSURANCE.

A life insurance policy can be transferred even without the consent of or notice to the insurer. By express provision of Section 184 of the Insurance Code, it is not necessary that the transferee has insurable interest.

a. Since a policy of insurance upon life or health may pass by transfer, will, or succession to any person, whether he has insurable interest or not, the transferee may recover whatever the insured may have recovered under the policy.

§6.01. ASSIGNEE IN PROPERTY INSURANCE.

With respect to property insurance, it is necessary that the transferee has insurable interest over the thing insured. This is consistent with Section 18 of the Insurance Code, which provides that "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."

The requirement of insurable interest can likewise be inferred from Section 58, which provides that 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.

Accordingly, a clause in an agreement providing for an automatic assignment of the policy is void if the assignee does not have any insurable interest over the insured property. For example, a provision in a contract of lease that provides that any fire insurance policy obtained by the lessee over the merchandise inside the leased premises is deemed assigned or transferred to the lessor is void for being contrary to law and public policy.

b. If the transfer of the property insurance policy is made after the loss, insurable interest on the part of the beneficiary is no longer necessary. In fact, the policy cannot prohibit the transfer of the policy after the loss has occurred. The Insurance Code provides:

SEC. 85.

An agreement not to transfer the claim of the insured against the insurer after the loss has happened is void if made before the loss except as otherwise provided in the case of life insurance.

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Commercial Laws 2: Insurance Code - Insurable Interest