If one is in the business of manufacturing shirts, the price of raw materials is a known and fixed quantity before a single shirt comes out of the production line.  There are firm contracts for the supply of cloth, thread, buttons, etc.

In insurance, one gets to know what the costs are only after the claims have come in.  In other words, one gets to know what the cost of raw materials is only after the finished product has gone through the production line.

Pretty scary?  Not really, if one knows and keeps in mind the mathematics involved.  You see, there is this Law of Large Numbers which mathematicians discovered a few centuries ago.

If you toss a coin, you will get either head or tail. But this does not mean that every time you toss the coin twice, you will get head or tail alternatively all the time.  The Law of Large Numbers says that the more you toss the coin, the closer you will get to get a fifty-fifty split of heads and tails. And, if you toss the coin an infinite number of times, then you will get exactly a fifty-fifty split of heads and tails.

The trick is to find out how a set of conditions will probably occur.

A few hundred years ago, when life insurance was just starting in England as a legitimate business activity, some mathematicians decided to find out whether people died at a certain rate.  These precursors of the modern actuary pored through city and municipal records of births and deaths, trudged through cemeteries to read headstones.  They came up with the first mortality table which showed the probability of dying at every age.

With the mortality table (several updated versions are in use today by life insurance companies), the actuary is then able to compute scientifically the premium of a life insurance policy at every age.

But it is not enough to know the probability of, say, a thirty year old man, in good health, with temperate habits and working in a non-hazardous job dying before he reaches thirty-one.  The life insurance company must make the Law of Large Numbers work by insuring as many thirty-year olds as it can. The chances of attaining the numbers in the mortality table, thereby resulting in profitable and stable operations, is far greater if the company insures a hundred thousand thirty-year olds that if it were to insure only a dozen.

Once the insurance company has the volume of business to make the Law of Large Numbers operate, then the cost of raw materials (the amount of claims) become as fixed and stable as that of the shirt manufacturer.  An insurance company that has not attained the volume of business needed to let the Law of Large Numbers operate is not in the insurance business. It is a gambling operation. And sooner or later, that company will fail. It cannot forever be a fugitive of the Law of Large Numbers.

Notice that only a few of the thirty-year olds will die before reaching thirty-one.  The vast majority will go on living and they will all pay their annual premiums. Which brings us to the corollary to the Law of Large Numbers: the claims of the few who suffered loss are paid for by the many who did not suffer loss.  Truly, insurance is a cooperative venture on a massive scale.

The Law of Large Numbers is the bedrock of every line of insurance: fire, motor car, marine, etc. Because of this unforgiving Law, insurance is not for the small-time operator.  It is Big Business.



Let us say Joe decides to smuggle a fleet of Japanese luxury cars into the country. He does not plan to land his contraband cargo at some desolate cove or abandoned airstrip.  No, sir.  That’s old stuff.  He will ship the cars right through the port of Manila.  And this will not be the first time. As in the past, he expects his friends at the Bureau of Customs to come through for him again.

Joe goes to the bank which counts him as a most valued client and opens a letter of credit (LC) as required by the Japanese supplier. The LC is a guarantee by the local bank to the Japanese supplier’s bank (which does not know Joe) that the shipment will be fully paid as soon as Joe submits certain documents. The LC allows Joe to import the cars on credit.

To support the LC application, Joe files with the bank a pro-forma invoice from the Japanese supplier.  The invoice is for an order of machinery parts.  In short order, the LC is approved.  The local bank wires the correspondent bank in Japan and the containerized shipment of luxury cars starts moving under a bill of lading on machinery parts.

Through his insurance broker, Joe buys an All Risks marine insurance policy as required by the bank, from a company that lists him as a most valued client.  Following the terms of the LC, the policy covers machinery parts under the standard warehouse-to-warehouse terms, that is, the shipment is insured from the instant it is lifted from the warehouse floor in Japan and continues uninterruptedly until it unloaded onto the floor of Joe’s warehouse. The sum insured is the amount specified in the LC plus the usual ten percent mark-up.  Joe pays the premium and files the policy with the local bank.

While in mid-ocean, the carrying vessel is battered by a severe typhoon and sinks. The shipment is a total loss. Will the policy pay? Yes. A typhoon is a peril of the sea covered by the policy. The misdescription of the cargo, even assuming it is determined afterwards, is immaterial because, had the insurance company known about the true nature of the shipment, the policy would have been issued anyway and at the same premium

Who gets paid? Depends on who holds title to the shipment at the time of the sinking. If the ship sank after the letter of credit had been fully transacted, that is, the local bank had already remitted the money to the Japanese bank which in turn credited the amount to the supplier’s account, then the check in payment of the claim is issued in Joe’s name.  Joe will then clear his account with the bank.  If before, the check is in the name of the supplier.

But let us say the voyage is uneventful. The ship docks in Manila as scheduled and the shipment is unloaded onto the pier and stored in the container yard.  While the papers are being processed by Customs, the yard catches fire for some unknown reason. Joe’s shipment is a total loss.  Will the policy pay? Yes. While the shipment is on land, fire is one of the perils insured against. Again the misdescription of the cargo is immaterial to the insurance claim.

But let us say nothing untoward happens. The policy continues to cover the shipment while at the container yard for at most sixty days counted from the day the last container was unloaded. After sixty days, the policy expires. If Joe takes delivery of the shipment before the end of sixty days, the policy expires the instant the shipment is unloaded onto the floor at Joe’s warehouse or any other warehouse Joe designates as the final destination.

But let us say that, like some well laid plans, something goes wrong. Signals get crossed and a Customs inspector, who was never in on the deal, orders the container opened. The cat is out of the bag and the shipment is impounded. The press gets hold of the story and plays it on the front pages for days. Joe’s friends at Customs abandon him and the problem is beyond repair. Confiscation follows and the cars eventually wind up with Cabinet members to endow them with some, ahem, prestige.

Is Joe’s loss covered by the policy? No. Loss resulting from confiscation by the government because of Joe’s illegal act of smuggling is not covered. This type of confiscation is not a peril of the sea. Neither is it a peril insured against while the shipment is on land.

There is an epilogue to my tale. When the scandal dies down, the inspector who blew the whistle is quietly exiled, sorry, relocated to some distant port in the south. Since the port has no Customs service, he will spend the next few months contemplating his belly button. Serves him right for doing his duty.



Some people seem to think that insurance companies are only good at collecting premiums but are lousy at paying claims. The annual report of the Insurance Commission shows that claims do get paid.

The insurance companies, life and non-life, pay out over four billion pesos every year (as of 1992).  This figure does not include payments made by SSS, GSIS and Medicare (now Philhealth).

Claims range from a few thousand pesos for a dented fender to a hundred million pesos for the loss of a warehouse full of goods, from a week of hospitalization of a car accident victim to the theft of a brand-new Corolla.

But a claim can get messy that the company and the claimant just cannot agree on the amount to be paid. Before the claimant decides to bring the case to Court, he should try arbitration.

In fact, some policies, like the fire insurance policy, require that the difference in the amount to be paid should first be threshed out by arbitration before the claimant can bring the case to Court.

A single arbitrator can be appointed, but if one cannot be agreed upon, and then the company and the claimant each can appoint an arbitrator. The two arbitrators can then agree on an umpire who will decide on the case.

The arbitration clause in an insurance policy is a throwback to the early, early days of insurance when there were no insurance laws, much less a government regulatory body, when a contract might be drawn up by two gentlemen sharing a keg of ale in a pub and agreeing to keep the lawyers out for as long as possible.

The modern day adjuster assigned to a case is actually an informal arbitrator. He determines whether the claim is covered by the policy or not, and, if so, how much should be paid. In the vast majority of cases, the adjuster is able to arrive at an amount acceptable to both company and claimant. It is when the adjuster cannot make both sides agree that the case is ripe for arbitration.

Normally, when the company has denied the claim, the case can no longer be arbitrated. But, if the company agrees, even a claim that has been turned down may be arbitrated.

Recently, the car theft claim of my client was turned down by the company. To the credit of the company, and probably because my client’s case was strong, the company suggested that the claim be referred to an arbitrator. The company named a well-known insurance executive, newly retired.  My client and I agreed.

The arbitration agreement was drawn up.  It was signed by my client, the company president and the arbitrator. To my mind, the most important item in the agreement was that the arbitrator’s decision was not to be appealed.

The arbitrator went through the files of the case.  He held several hearings, always in the informal setting of an afternoon snack in some well-known eating place or other in Makati. In a few weeks, he decided in favor of my client.

The P300,000 claim was paid. The arbitrator’s fee was split fifty-fifty by the company and my client as agreed. Everybody was happy.

By referring the case to arbitration, we not only speeded up the settlement of the case, but we also avoided adding to the clutter in our overloaded Courts. Better to arbitrate than litigate.



Our condominium building is insured under one policy in the name of the condominium corporation. Lately, the unit across the hallway was sold for twice what I paid for mine a year ago. Shouldn’t I buy a policy on my own to cover the difference?

When you bought your condominium unit, you took ownership of two pieces of property. One is your “unit.” The other is a stake on the building and the land on which it is built.

You own the unit exclusively.  I think the lawyers say you are the owner “in fee simple.”

But, what makes your unit?  Although your Condominium Certificate of Title identifies and describes your unit as “located in the Third Floor of Building VII, Apartment or Unit No. 302,” this specification is subject to the Condominium Act No. 4726.

The Act says that, “unless otherwise expressly provided in the enabling or master deed or the declaration of restrictions,” (and I don’t see how the basic concepts can be changed without turning the condominium into something entirely different, the “boundary of the unit granted are the interior surfaces of the perimeter walls, floors, ceilings, windows and door thereof.”

The key word is “surface.”  Synonymous to area, surface is a unique object.  It has length and width, and nothing else. It has no depth, breadth or thickness.  That is why, surface, or area, is always expressed in square feet or square meters, etc., which is the product arrived at when length is multiplied by width. The perimeter walls, floors, ceilings, windows and doors are beyond the boundary of the unit.  In fact, even the coat of paint, the wallpaper and the layer of floor wax are outside the limits of the unit.

So, your unit consists of and you hold exclusive title to – are you ready? – a cube of air.  A cube of air it may be, but only you and anyone you allow to, can breathe in it.  That, too, is ownership.  If this concept is hard for you to accept, you have a lot of good company that includes lawyers, bankers and real estate brokers and developers.

You can’t insure a cube of air; much less increase any insurance on it.

You also own the building, from the bottom of the foundations up to the top of the roof, and everything fixed in it: elevators, pumps, motors, water tanks, pipes, conduits, etc., etc., and, finally the land on which the building stands.

But, your ownership is not exclusive.  It is in common with all the other unit owners.

The common ownership is actually held by the condominium corporation.  You, in effect, have a share in the corporation in the ratio that the floor area of your unit bears to the total area of all the units.

As a fellow insurance broker puts it quite simply: you are a part owner of the entire building and the land it stands on, and you have been assigned solely to occupy Unit 302.

It is correct that the policy on the building is in the name of the condominium corporation.  But, you cannot take out a policy on your own any more than you can buy a policy covering San Miguel Corporation assets corresponding to your SMC shares.

If the insurance on the building has to be raised, and judging from the current price of units the building is now likely to be under-insured, it should be the condominium corporation that should do it.

The current price is not the basis for insurance, if only because that figure includes the cost of the land.  In a condominium, the basis should be replacement value, what it will cost to put up the building today.

The best way to determine replacement value is to hire the services of an independent appraisal firm. Afterwards, the corporation should ask its insurance broker to place the additional coverage.



The condominium corporation has been with us for about fifty years but it continues to baffle credit managers and in-house lawyers of some banks.

Recently, Roy, a client of my son Jim, wanted to borrow against his condominium unit.  The in-house lawyer and the credit manager of the bank required Roy to submit the original of a fire insurance policy covering the condominium unit.  The policy was to be endorsed to the bank as payee in case of a claim. As had happened several times n the past, Jim had to explain why these requirements could not be complied with.

The condominium, which is Latin for joint dominion or joint ownership, was invented in ancient Rome. It was introduced in the Philippines only in the early 1960’s. Ayala Corporation extensively copied the condominium law of Florida and pushed for its congressional enactment. What is now the Ayala Life Building on Ayala Avenue in Makati was the first condominium in the country. The condominium is one reason for the rapid growth nationwide in real estate development.

When Roy bought his unit in a condominium, he actually paid for a proprietary share in the corporation that owns the building, all the fixed machinery installed in it, and the land on which it stands. He owned the entire property in common with all the other unit owners. This concept of common ownership befuddles even unit owners themselves. Once a friend asked me, “Why should I share in maintaining the elevator? I never use it since my unit is on the ground floor.”  I shot back, “Because you are part owner of the elevator, dummy.”

The law also talks about “common areas,” which throws off a lot of people.

The term is usually taken to mean the areas used by everyone: hallways, staircases, elevators, etc. But, strictly speaking, the entire building and the land are all common areas, commonly owned and used.

Obviously, Roy’s Unit 701 does not hang suspended all by its lonesome self in midair.

By law, the limits of the unit are the inner surfaces of the floor, ceiling, walls, and windows and doors.  The operative word is “surface”. Synonymous to area, surface is that unique two-dimensional object circumscribed by its length and width only. It has no depth or thickness.
This is why surface, or area, is always expressed in square feet, square meters, or whatever, which is what you get when you multiply length by width.

Even the coat of paint, the sheet of wallpaper, and the film of floor wax are not part of Unit 701.  Roy’s unit is nothing but – hold on to your seat – a cube of air.

Clearly, Roy cannot insure a cube of air. Neither can he insure, under a separate policy solely in his name, his proprietary share in the condominium, any more than he can buy insurance covering his proprietary share of a golf club or San Miguel. But, Roy can insure, on his own, all the furnishings and other contents of Unit 701.

The condominium corporation buys, in its name, an insurance policy, call it a master policy, if you like, on the building and the fixed machinery installed in it, against fire, lightning, earthquake, etc. The sum insured is set at replacement value. The premium and other charges are proportionately shared among all unit owners.

The bank’s lien on Roy’s property has to give way to another by-law, which requires that the proceeds of any claim, even resulting from a fire in Unit 701, should be spent to repair the damage. The proceeds cannot be paid to the bank to settle Roy’s loan. Restoring the integrity of the building must come first.

After Jim’s explanation, the bank accepted a certified copy of the policy and the original endorsement annotating the bank’s interest in the policy. A broker’s job is never done.


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