○ Avoid gambling using insurance.
1. Principle of Indemnity ○ Reduce moral hazard.
● When It Must Exist:
● Meaning: Insurance will only pay for the actual loss—no
○ Property Insurance: At the time of loss.
profit from damage or theft.
○ Life Insurance: Only when policy starts.
● Example:
● Purpose:
○ You can insure your car (you’ll lose money if it's
stolen).
○ Prevent the insured from gaining more than the
○ You can insure your spouse, but not a stranger.
loss.
○ Reduce moral hazard (the temptation to cause
or exaggerate a loss).
● Methods to Calculate Actual Cash Value (ACV): 3. Principle of Subrogation
○ Replacement Cost – Depreciation: Cost to ● Meaning: After paying your claim, the insurer can go
replace minus wear and tear. after the third party who caused the damage.
■ Example: A 5-year-old phone worth ● Purpose:
P30,000 new, may be paid at P15,000 ○ Avoid double recovery.
due to depreciation. ○ Make the guilty party pay.
○ Fair Market Value: Price a buyer would pay in ○ Keep insurance premiums lower.
the open market. ● Example:
■ Example: A used laptop sells for ○ Your insurer pays you for car damage caused by
P20,000 online—that’s the payout. another driver, then sues the driver to get the
○ Broad Evidence Rule: Considers all relevant money back.
factors (e.g. income, market trends). ● Notes:
■ Example: Real estate loss valued by ○ Only for amount the insurer paid.
location, structure, and local property ○ You can’t stop the insurer from subrogation.
trends. ○ Doesn’t apply to life or most health insurance.
● Exceptions: ○ Can’t subrogate against the insured
themselves.
○ Valued Policy: Pays full amount regardless of
actual loss.
■ Example: Insured house burns down,
4. Principle of Utmost Good Faith
full face amount paid even if its market
value dropped. ● Meaning: Both insurer and insured must be totally
○ Life Insurance: Pays agreed amount upon honest.
death, not "value" of life. ● Key Doctrines:
○ Replacement Cost Insurance: No deduction ○ Representation: Statements made during
for depreciation. application.
■ Example: Destroyed appliance ■ If false and material, contract can be
replaced at full price of a new one. voided.
■ Example: Lying about your smoking
habits can cancel the life policy.
○ Concealment: Hiding important information.
2. Principle of Insurable Interest
■ Example: Not disclosing a known
● Meaning: You must suffer a financial loss if the insured medical condition.
item/person is lost or harmed. ○ Warranty: Guaranteed true statements (rare).
● Purpose:
■ But most statements are treated as ○ Example: If an agent promises coverage and
representations. you rely on it, insurer can’t deny later.
5. Requirements of an Insurance Contract
For the contract to be legal:
● Offer and Acceptance: Agreement on the terms.
● Consideration: Value exchanged (premium vs.
coverage).
● Competent Parties: Must be legally capable.
● Legal Purpose: Can’t insure illegal things.
● Example: You can't insure smuggled goods; contract
would be invalid.
6. Distinct Legal Characteristics of Insurance Contracts
● Aleatory: Unequal exchange of value.
○ Example: Pay small premium, get large payout if
loss occurs.
● Unilateral: Only insurer makes a legal promise.
○ Example: Insurer must pay claims; insured
doesn’t promise to pay premiums continuously.
● Conditional: Insured must meet conditions to claim.
○ Example: Must report fire promptly.
● Personal: Can’t transfer property policy without insurer’s
permission.
● Contract of Adhesion: “Take-it-or-leave-it” basis.
○ Any unclear terms favor the insured.
7. Law and the Insurance Agent
● Agent: Authorized to act for the insurance company.
● Types of Authority:
○ Express: Clearly given.
○ Implied: Expected from their role.
○ Apparent: When it looks like they have
authority.
● Legal Notes:
○ Insurer is responsible for what the agent knows
or says (within scope).
● Waiver: Giving up a known right.
● Estoppel: Can’t go back on something if another relied
on it.
