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Insurance- Part III INSURABLE INTEREST

Atty. Reyes

II, in general
Reason for the requirement of II
Insurable Interest in Life Insurance
[REPUBLIC ACT NO. 10607]

SEC. 14. An insurable interest in property may consist in:


(a) An existing interest;

SEC. 10. Every person has an insurable interest in the life and health:

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

(a) Of himself, of his spouse and of his children;

(c) An expectancy, coupled with an existing interest in that out of which the
expectancy arises.

(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.
SEC. 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.
SEC. 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.
D.

Insurable Interest in Property Insurance


[REPUBLIC ACT NO. 10607]

SEC. 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.
SEC. 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.
SEC. 17. The measure of an insurable interest in property is the extent to
which the insured might be damnified by loss or injury thereof.
SEC. 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.
1.

Kinds of II in property
[G.R. NO. 147839 : June 8, 2006]

GAISANO CAGAYAN, INC. Petitioner, v. INSURANCE COMPANY OF


NORTH AMERICA,Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:

A.
B.
C.

SEC. 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.

Page

III. Insurable Interest (II)

Insurance- Part III INSURABLE INTEREST


Atty. Reyes
Before the Court is a Petition for Review on Certiorari of the Decision1 dated
October 11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848
which set aside the Decision dated August 31, 1998 of the Regional Trial
Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the
causes of action for damages of Insurance Company of North America
(respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA
Resolution dated April 11, 2001 which denied petitioner's motion for
reconsideration.

On February 4, 1992, respondent filed a complaint for damages against


petitioner. It alleges that IMC and LSPI filed with respondent their claims
under their respective fire insurance policies with book debt endorsements;
that as of February 25, 1991, the unpaid accounts of petitioner on the sale
and delivery of ready-made clothing materials with IMC was P2,119,205.00
while with LSPI it wasP535,613.00; that respondent paid the claims of IMC
and LSPI and, by virtue thereof, respondent was subrogated to their rights
against petitioner; that respondent made several demands for payment upon
petitioner but these went unheeded.5

The factual background of the case is as follows:


Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue
Jeans. Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products
bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI separately
obtained from respondent fire insurance policies with book debt
endorsements. The insurance policies provide for coverage on "book debts
in connection with ready-made clothing materials which have been sold or
delivered to various customers and dealers of the Insured anywhere in the
Philippines."2 The policies defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of the
loss covered under this Policy."3The policies also provide for the following
conditions:
1. Warranted that the Company shall not be liable for any unpaid account in
respect of the merchandise sold and delivered by the Insured which are
outstanding at the date of loss for a period in excess of six (6) months from
the date of the covering invoice or actual delivery of the merchandise
whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12)
days after the close of every calendar month all amount shown in their books
of accounts as unpaid and thus become receivable item from their
customers and dealers. x x x4

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that
it could not be held liable because the property covered by the insurance
policies were destroyed due to fortuities event or force majeure; that
respondent's right of subrogation has no basis inasmuch as there was no
breach of contract committed by it since the loss was due to fire which it
could not prevent or foresee; that IMC and LSPI never communicated to it
that they insured their properties; that it never consented to paying the claim
of the insured.6
At the pre-trial conference the parties failed to arrive at an amicable
settlement.7 Thus, trial on the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's
complaint.8 It held that the fire was purely accidental; that the cause of the
fire was not attributable to the negligence of the petitioner; that it has not
been established that petitioner is the debtor of IMC and LSPI; that since the
sales invoices state that "it is further agreed that merely for purpose of
securing the payment of purchase price, the above-described merchandise
remains the property of the vendor until the purchase price is fully paid", IMC
and LSPI retained ownership of the delivered goods and must bear the loss.
Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA
rendered its decision setting aside the decision of the RTC. The dispositive
portion of the decision reads:

xxxx

1. the amount of P2,119,205.60 representing the amount paid by the


plaintiff-appellant to the insured Inter Capitol Marketing Corporation, plus
legal interest from the time of demand until fully paid;

WHEREFORE, in view of the foregoing, the appealed decision is


REVERSED and SET ASIDE and a new one is entered ordering defendantappellee Gaisano Cagayan, Inc. to pay:

Page

Petitioner is a customer and dealer of the products of IMC and LSPI. On


February 25, 1991, the Gaisano Superstore Complex in Cagayan de Oro
City, owned by petitioner, was consumed by fire. Included in the items lost or
destroyed in the fire were stocks of ready-made clothing materials sold and
delivered by IMC and LSPI.

Insurance- Part III INSURABLE INTEREST


Atty. Reyes

SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed
statements of the nature, quantity and cost of the thing sold; that loss of the
goods in the fire must be borne by petitioner since the proviso contained in
the sales invoices is an exception under Article 1504 (1) of the Civil Code, to
the general rule that if the thing is lost by a fortuitous event, the risk is borne
by the owner of the thing at the time the loss under the principle of res perit
domino; that petitioner's obligation to IMC and LSPI is not the delivery of the
lost goods but the payment of its unpaid account and as such the obligation
to pay is not extinguished, even if the fire is considered a fortuitous event;
that by subrogation, the insurer has the right to go against petitioner; that,
being a fire insurance with book debt endorsements, what was insured was
the vendor's interest as a creditor.11
reconsideration12

Petitioner filed a motion for


its Resolution dated April 11, 2001.13

but it was denied by the CA in

Hence, the present Petition for Review on Certiorari anchored on the


following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE
IN THE INSTANT CASE WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER
THE SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO
PETITIONER UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS
AUTOMATIC SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN
FAVOR OF RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present
case cannot be deemed to be over credit since an insurance "on credit"
belies not only the nature of fire insurance but the express terms of the
policies; that it was not credit that was insured since respondent paid on the

As to the second error, petitioner avers that despite delivery of the goods,
petitioner-buyer IMC and LSPI assumed the risk of loss when they secured
fire insurance policies over the goods.
Concerning the third ground, petitioner submits that there is no subrogation
in favor of respondent as no valid insurance could be maintained thereon by
IMC and LSPI since all risk had transferred to petitioner upon delivery of the
goods; that petitioner was not privy to the insurance contract or the payment
between respondent and its insured nor was its consent or approval ever
secured; that this lack of privity forecloses any real interest on the part of
respondent in the obligation to pay, limiting its interest to keeping the insured
goods safe from fire.
For its part, respondent counters that while ownership over the ready - made
clothing materials was transferred upon delivery to petitioner, IMC and LSPI
have insurable interest over said goods as creditors who stand to suffer
direct pecuniary loss from its destruction by fire; that petitioner is liable for
loss of the ready-made clothing materials since it failed to overcome the
presumption of liability under Article 126516 of the Civil Code; that the fire
was caused through petitioner's negligence in failing to provide stringent
measures of caution, care and maintenance on its property because electric
wires do not usually short circuit unless there are defects in their installation
or when there is lack of proper maintenance and supervision of the property;
that petitioner is guilty of gross and evident bad faith in refusing to pay
respondent's valid claim and should be liable to respondent for contracted
lawyer's fees, litigation expenses and cost of suit. 17
As a general rule, in petitions for review, the jurisdiction of this Court in
cases brought before it from the CA is limited to reviewing questions of law
which involves no examination of the probative value of the evidence
presented by the litigants or any of them.18 The Supreme Court is not a trier
of facts; it is not its function to analyze or weigh evidence all over
again.19 Accordingly, findings of fact of the appellate court are generally
conclusive on the Supreme Court.20

With costs against the defendant-appellee.

occasion of the loss of the insured goods to fire and not because of the nonpayment by petitioner of any obligation; that, even if the insurance is
deemed as one over credit, there was no loss as the accounts were not yet
due since no prior demands were made by IMC and LSPI against petitioner
for payment of the debt and such demands came from respondent only after
it had already paid IMC and LSPI under the fire insurance policies.15

Page

2. the amount of P535,613.00 representing the amount paid by the plaintiffappellant to the insured Levi Strauss Phil., Inc., plus legal interest from the
time of demand until fully paid.

Insurance- Part III INSURABLE INTEREST


Atty. Reyes
Nevertheless, jurisprudence has recognized several exceptions in which
factual issues may be resolved by this Court, such as: (1) when the findings
are grounded entirely on speculation, surmises or conjectures; (2) when the
inference made is manifestly mistaken, absurd or impossible; (3) when there
is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6)
when in making its findings the CA went beyond the issues of the case, or its
findings are contrary to the admissions of both the appellant and the
appellee; (7) when the findings are contrary to the trial court; (8) when the
findings are conclusions without citation of specific evidence on which they
are based; (9) when the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondent; (10)
when the findings of fact are premised on the supposed absence of
evidence and contradicted by the evidence on record; and (11) when the CA
manifestly overlooked certain relevant facts not disputed by the parties,
which, if properly considered, would justify a different
conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy.
Petitioner claims that the CA erred in construing a fire insurance policy on
book debts as one covering the unpaid accounts of IMC and LSPI since
such insurance applies to loss of the ready-made clothing materials sold and
delivered to petitioner.

Petitioner argues that IMC bears the risk of loss because it expressly
reserved ownership of the goods by stipulating in the sales invoices that "[i]t
is further agreed that merely for purpose of securing the payment of the
purchase price the above described merchandise remains the property of
the vendor until the purchase price thereof is fully paid." 26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil
Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk
until the ownership therein is transferred to the buyer, but when the
ownership therein is transferred to the buyer the goods are at the buyer's
risk whether actual delivery has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee
for the buyer, in pursuance of the contract and the ownership in the goods
has been retained by the seller merely to secure performance by the buyer
of his obligations under the contract, the goods are at the buyer's risk from
the time of such delivery; (Emphasis supplied)cralawlibrary
xxxx

The Court disagrees with petitioner's stand.

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.28
Section 13 of our Insurance Code defines insurable interest as "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." Parenthetically, under Section 14 of the same
Code, an insurable interest in property may consist in: (a) an existing
interest; (b) an inchoate interest founded on existing interest; or (c) an

Indeed, when the terms of the agreement are clear and explicit that they do
not justify an attempt to read into it any alleged intention of the parties, the
terms are to be understood literally just as they appear on the face of the
contract.25 Thus, what were insured against were the accounts of IMC and
LSPI with petitioner which remained unpaid 45 days after the loss through
fire, and not the loss or destruction of the goods delivered.

Thus, when the seller retains ownership only to insure that the buyer will pay
its debt, the risk of loss is borne by the buyer.27 Accordingly, petitioner bears
the risk of loss of the goods delivered.

Page

It is well-settled that when the words of a contract are plain and readily
understood, there is no room for construction.22 In this case, the questioned
insurance policies provide coverage for "book debts in connection with
ready-made clothing materials which have been sold or delivered to various
customers and dealers of the Insured anywhere in the Philippines." 23 ; and
defined book debts as the "unpaid account still appearing in the Book of
Account of the Insured 45 days after the time of the loss covered under this
Policy."24 Nowhere is it provided in the questioned insurance policies that the
subject of the insurance is the goods sold and delivered to the customers
and dealers of the insured.

Insurance- Part III INSURABLE INTEREST


Atty. Reyes

The next question is: Is petitioner liable for the unpaid


accounts?cralawlibrary
Petitioner's argument that it is not liable because the fire is a fortuitous event
under Article 117432 of the Civil Code is misplaced. As held earlier, petitioner
bears the loss under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of
goods by fire but for petitioner's accounts with IMC and LSPI that remained
unpaid 45 days after the fire. Accordingly, petitioner's obligation is for the
payment of money. As correctly stated by the CA, where the obligation
consists in the payment of money, the failure of the debtor to make the
payment even by reason of a fortuitous event shall not relieve him of his
liability.33 The rationale for this is that the rule that an obligor should be held
exempt from liability when the loss occurs thru a fortuitous event only holds
true when the obligation consists in the delivery of a determinate thing and
there is no stipulation holding him liable even in case of fortuitous event. It
does not apply when the obligation is pecuniary in nature.34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic
thing, the loss or destruction of anything of the same kind does not
extinguish the obligation." If the obligation is generic in the sense that the
object thereof is designated merely by its class or genus without any
particular designation or physical segregation from all others of the same
class, the loss or destruction of anything of the same kind even without the
debtor's fault and before he has incurred in delay will not have the effect of

Thus, whether fire is a fortuitous event or petitioner was negligent are


matters immaterial to this case. What is relevant here is whether it has been
established that petitioner has outstanding accounts with IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim.
Exhibits "C" to "C-22"38show that petitioner has an outstanding account with
IMC in the amount of P2,119,205.00. Exhibit "E"39 is the check voucher
evidencing payment to IMC. Exhibit "F"40 is the subrogation receipt executed
by IMC in favor of respondent upon receipt of the insurance proceeds. All
these documents have been properly identified, presented and marked as
exhibits in court. The subrogation receipt, by itself, is sufficient to establish
not only the relationship of respondent as insurer and IMC as the insured,
but also the amount paid to settle the insurance claim. The right of
subrogation accrues simply upon payment by the insurance company of the
insurance claim.41 Respondent's action against petitioner is squarely
sanctioned by Article 2207 of the Civil Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person
who has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its
cause of action. No evidentiary weight can be given to Exhibit "F Levi
Strauss",42 a letter dated April 23, 1991 from petitioner's General Manager,
Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid
account with LSPI. It only confirms the loss of Levi's products in the amount
of P535,613.00 in the fire that razed petitioner's building on February 25,
1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI;
no subrogation receipt was offered in evidence. Thus, there is no evidence
that respondent has been subrogated to any right which LSPI may have
against petitioner. Failure to substantiate the claim of subrogation is fatal to
petitioner's case for recovery of the amount of P535,613.00.

Therefore, an insurable interest in property does not necessarily imply a


property interest in, or a lien upon, or possession of, the subject matter of
the insurance, and neither the title nor a beneficial interest is requisite to the
existence of such an interest, it is sufficient that the insured is so situated
with reference to the property that he would be liable to loss should it be
injured or destroyed by the peril against which it is insured.29 Anyone has an
insurable interest in property who derives a benefit from its existence or
would suffer loss from its destruction.30 Indeed, a vendor or seller retains an
insurable interest in the property sold so long as he has any interest therein,
in other words, so long as he would suffer by its destruction, as where he
has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI
pertain to the unpaid accounts appearing in their Books of Account 45 days
after the time of the loss covered by the policies.

extinguishing the obligation.35 This rule is based on the principle that the
genus of a thing can never perish. Genus nunquan perit. 36 An obligation to
pay money is generic; therefore, it is not excused by fortuitous loss of any
specific property of the debtor.37

Page

expectancy, coupled with an existing interest in that out of which the


expectancy arises.

Insurance- Part III INSURABLE INTEREST


Atty. Reyes
WHEREFORE, the petition is partly GRANTED. The assailed Decision
dated October 11, 2000 and Resolution dated April 11, 2001 of the Court of
Appeals in CA-G.R. CV No. 61848 are AFFIRMED with
the MODIFICATION that the order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.
No pronouncement as to costs. SO ORDERED.
2.

II in case of mortgaged property

SEC. 8. 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.
SEC. 9. 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
obligations on the assignee, making a new contract with him, the acts of the
mortgagor cannot affect the rights of said assignee.
a.
b.

Standard or union mortgage clause


Open mortgage or loss payable clause

DAVIDE, JR., J.:

For our review under Rule 45 of the Rules of Court is the decision 1 of the
Court of Appeals in CA-G.R. SP No. 31916, entitled "Country Bankers
Insurance Corporation versus Armando Geagonia," reversing the decision of
the Insurance Commission in I.C. Case No. 3340 which awarded the claim
of petitioner Armando Geagonia against private respondent Country Bankers
Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the public market of
San Francisco, Agusan del Sur. On 22 December 1989, he obtained from
the private respondent fire insurance policy No. F-14622 2 for P100,000.00.
The period of the policy was from 22 December 1989 to 22 December 1990
and covered the following: "Stock-in-trade consisting principally of dry goods
such as RTW's for men and women wear and other usual to assured's
business."
The petitioner declared in the policy under the subheading entitled COINSURANCE that Mercantile Insurance Co., Inc. was the co-insurer for
P50,000.00. From 1989 to 1990, the petitioner had in his inventory stocks
amounting to P392,130.50, itemized as
follows:nadchanroblesvirtualawlibrary
Zenco Sales, Inc. P55,698.00
F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)
========

[G.R. No. 114427. February 6, 1995.]

P392,130.50

DECISION

"3. The insured shall give notice to the Company of any insurance or
insurances already effected, or which may subsequently be effected,
covering any of the property or properties consisting of stocks in trade,
goods in process and/or inventories only hereby insured, and unless notice
be given and the particulars of such insurance or insurances be stated
therein or endorsed in this policy pursuant to Section 50 of the Insurance
Code, by or on behalf of the Company before the occurrence of any loss or
damage, all benefits under this policy shall be deemed forfeited, provided
however, that this condition shall not apply when the total insurance or

Page

ARMANDO GEAGONIA, Petitioner, v. COURT OF APPEALS and


COUNTRY BANKERS INSURANCE CORPORATION, Respondents.

The policy contained the following condition:nadchanroblesvirtualawlibrary

Insurance- Part III INSURABLE INTEREST


Atty. Reyes
insurances in force at the time of the loss or damage is not more than
P200,000.00."
On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at
the public market of San Francisco, Agusan del Sur. The petitioner's insured
stocks-in-trade were completely destroyed prompting him to file with the
private respondent a claim under the policy. On 28 December 1990, the
private respondent denied the claim because it found that at the time of the
loss the petitioner's stocks-in-trade were likewise covered by fire insurance
policies No. GA-28146 and No. GA-28144, for P100,000.00 each, issued by
the Cebu Branch of the Philippines First Insurance Co., Inc. (hereinafter
PFIC). 3 These policies indicate that the insured was "Messrs. Discount Mart
(Mr. Armando Geagonia, Prop.)" with a mortgage clause
reading:nadchanroblesvirtualawlibrary
"MORTGAGEE: Loss, if any, shall be payable to Messrs.
Cebu Tesing Textiles, Cebu City as their

of the policy.
In its decision of 21 June 1993, 8 the Insurance Commission found that the
petitioner did not violate Condition 3 as he had no knowledge of the
existence of the two fire insurance policies obtained from the PFIC; that it
was Cebu Tesing Textiles which procured the PFIC policies without
informing him or securing his consent; and that Cebu Tesing Textile, as his
creditor, had insurable interest on the stocks. These findings were based on
the petitioner's testimony that he came to know of the PFIC policies only
when he filed his claim with the private respondent and that Cebu Tesing
Textile obtained them and paid for their premiums without informing him
thereof. The Insurance Commission then
decreed:nadchanroblesvirtualawlibrary
"WHEREFORE, judgment is hereby rendered ordering the respondent
company to pay complainant the sum of P100,000.00 with legal interest from
the time the complaint was filed until fully satisfied plus the amount of
P10,000.00 as attorney's fees. With costs. The compulsory counterclaim of
respondent is hereby dismissed."

interest may appear subject to the terms of

The basis of the private respondent's denial was the petitioner's alleged
violation of Condition 3 of the policy.
The petitioner then filed a complaint 5 against the private respondent with
the Insurance Commission (Case No. 3340) for the recovery of P100,000.00
under fire insurance policy No. F-14622 and for attorney's fees and costs of
litigation. He attached as Annex "M" 6 thereof his letter of 18 January 1991
which asked for the reconsideration of the denial. He admitted in the said
letter that at the time he obtained the private respondent's fire insurance
policy he knew that the two policies issued by the PFIC were already in
existence; however, he had no knowledge of the provision in the private
respondent's policy requiring him to inform it of the prior policies; this
requirement was not mentioned to him by the private respondent's agent;
and had it been so mentioned, he would not have withheld such information.
He further asserted that the total of the amounts claimed under the three
policies was below the actual value of his stocks at the time of loss, which
was P1,000,000.00
In its answer, 7 the private respondent specifically denied the allegations in
the complaint and set up as its principal defense the violation of Condition 3

In its decision of 29 December 1993, 11 the Court of Appeals reversed the


decision of the Insurance Commission because it found that the petitioner
knew of the existence of the two other policies issued by the PFIC. It
said:nadchanroblesvirtualawlibrary
"It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144
that the insurance was taken in the name of private respondent [petitioner
herein]. The policy states that 'DISCOUNT MART (MR. ARMANDO
GEAGONIA, PROP)' was assured and that 'TESING TEXTILES' [was] only
the mortgagee of the goods.
In addition, the premiums on both policies were paid for by private
respondent, not by the Tesing Textiles which is alleged to have taken out the
other insurances without the knowledge of private respondent. This is shown
by Premium Invoices nos. 46632 and 46630. (Annexes M and N). In both
invoices, Tesing Textiles is indicated to be only the mortgagee of the goods
insured but the party to which they were issued were the 'DISCOUNT MART
(MR. ARMANDO GEAGONIA).'
It is clear that it was the private respondent [petitioner herein] who took out

P100,000. Phils. First CEB/F-24758" 4

Its motion for the reconsideration of the decision 9 having been denied by
the Insurance Commission in its resolution of 20 August 1993, 10 the private
respondent appealed to the Court of Appeals by way of a petition for review.
The petition was docketed as CA-G.R. SP No. 31916.

Page

this policy. CO-INSURANCE DECLARED:nadchanroblesvirtualawlibrary

Insurance- Part III INSURABLE INTEREST


Atty. Reyes

xxx xxx xxx

'Please be informed that I have no knowledge of the provision requiring me


to inform your office about my prior insurance under FGA-28146 and F-CEB24758. Your representative did not mention about said requirement at the
time he was convincing me to insure with you. If he only did or even inquired
if I had other existing policies covering my establishment, I would have told
him so. You will note that at the time he talked to me until I decided to insure
with your company the two policies aforementioned were already in effect.
Therefore I would have no reason to withhold such information and I would
have no reason to withhold such information and I would have desisted to
part with my hard earned peso to pay the insurance premiums [if] I know I
could not recover anything.
Sir, I am only an ordinary businessman interested in protecting my
investments. The actual value of my stocks damaged by the fire was
estimated by the Police Department to be P1,000,000.00 (Please see xerox
copy of Police Report Annex "A"). My Income Statement as of December 31,
1989 or five months before the fire, shows my merchandise inventory was
already some P595,455,75. . . . These will support my claim that the amount
under the three policies are much below the value of my stocks lost.
xxx xxx xxx

The letter contradicts private respondent's pretension that he did not know
that there were other insurances taken on the stock-in-trade and seriously
puts in question his credibility."
His motion to reconsider the adverse decision having been denied, the
petitioner filed the instant petition. He contends therein that the Court of
Appeals acted with grave abuse of discretion amounting to lack of excess of
jurisdiction:nadchanroblesvirtualawlibrary
"A . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE

B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH


WERE NOT PRESENTED AS EVIDENCE DURING THE HEARING OR
TRIAL; AND
C . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN
AGAINST THE PRIVATE RESPONDENT."
The chief issues that crop up from the first and third grounds are (a) whether
the petitioner had prior knowledge of the two insurance policies issued by
the PFIC when he obtained the fire insurance policy from the private
respondent, thereby, for not disclosing such fact, violating Condition 3 of the
policy, and (b) if he had, whether he is precluded from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the
petitioner's letter of reconsideration of 18 January 1991, is without merit. The
petitioner claims that the said letter was not offered in evidence and thus
should not have been considered in deciding the case. However, as
correctly pointed out by the Court of Appeals, a copy of this letter was
attached to the petitioner's complaint in I.C. Case No. 3340 as Annex "M"
thereof and made an integral part of the complaint. 12 It has attained the
status of a judicial admission and since its due execution and authenticity
was not denied by the other party, the petitioner is bound by it even if it were
not introduced as an independent evidence. 13
As to the first issue, the Insurance Commission found that the petitioner had
no knowledge of the previous two policies. The Court of Appeals disagreed
and found otherwise in view of the explicit admission by the petitioner in his
letter to the private respondent of 18 January 1991, which was quoted in the
challenged decision of the Court of Appeals. These divergent findings of
facts constitute an exception to the general rule that in petitions for review
under Rule 45, only questions of law are involved and findings of fact by the
Court of Appeals are conclusive and binding upon this Court. 14
We agree with the Court of Appeals that the petitioner knew of the prior
policies issued by the PFIC. His letter of 18 January 1991 to the private
respondent conclusively proves this knowledge. His testimony to the
contrary before the Insurance Commissioner and which the latter relied upon
cannot prevail over a written admission made ante litem motam. It was,
indeed, incredible that he did not know about the prior policies since these
policies were not new or original. Policy No. GA-28144 was a renewal of

Indeed private respondent's allegation of lack of knowledge of the previous


insurances is belied by his letter to petitioner [of 18 January 1991. The body
of the letter reads as follows:]

INSURANCE COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH


THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE
DECISION IS ACCORDED RESPECT AND EVEN FINALITY BY THE
COURTS;

Page

the policies on the same property subject of the insurance with petitioner.
Hence, in failing to disclose the existence of these insurances private
respondent violated Condition No. 3 of Fire Policy No. 14622. . . .

Insurance- Part III INSURABLE INTEREST


Atty. Reyes

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. 18 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. 19 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 the amount of the debt, not
exceeding the value of the mortgaged property. 20 Thus, separate
insurances covering different insurable interests may be obtained by the
mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of the
mortgagee, which is the usual practice. The mortgagee may be made the
beneficial payee in several ways. He may become the assignee of the policy
with the consent of the insurer; or the 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. 21
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

On the other hand, a mortgagee may also procure a policy as a contracting


party in accordance with the terms of an agreement by which the mortgagor
is to pay the premiums upon such insurance. 24 It has been noted, however,
that although the mortgagee is himself the insured, as where he applies for a
policy, fully informs the authorized agent of his interest, pays the premiums,
and obtains a policy on the assurance that it insures him, the policy is in fact
in the form used to insure a mortgagor with loss payable clause. 25
The fire insurance policies issued by the PFIC name the petitioner as the
assured and contain a mortgage clause which
reads:nadchanroblesvirtualawlibrary
"Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City
as their interest may appear subject to the terms of the policy."
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses
involved in General Insurance and Surety Corp. vs. Ng Hua 26 or in Pioneer
Insurance & Surety Corp. vs. Yap, 27 which
read:nadchanroblesvirtualawlibrary
"The insured shall give notice to the company of any insurance or
insurances already effected, or which may subsequently be effected
covering any of the property hereby insured, and unless such notice be
given and the particulars of such insurance or insurances be stated in or
endorsed on this Policy by or on behalf of the Company before the
occurrence of any loss or damage, all benefits under this Policy shall be
forfeited."
or in the 1930 case of Santa Ana vs. Commercial Union Assurance Co. 28
which provided "that any outstanding insurance upon the whole or a portion
of the objects thereby assured must be declared by the insured in writing
and he must cause the company to add or insert it in the policy, without
which such policy shall be null and void, and the insured will not be entitled
to indemnity in case of loss," Condition 3 in the private respondent's policy
No. F-14622 does not absolutely declare void any violation thereof. It
expressly provides that the condition "shall not apply when the total
insurance or insurances in force at the time of the loss or damage is not

Condition 3 of the private respondent's Policy No. F-14622 is a condition


which is not proscribed by law. Its incorporation in the policy is allowed by
Section 75 of the Insurance Code 15 which provides that "[a] policy may
declare that a violation of specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision does not avoid the policy."
Such a condition is a provision which invariably appears in fire insurance
policies and is intended to prevent an increase in the moral hazard. It is
commonly known as the additional or "other insurance" clause and has been
upheld as valid and as a warranty that no other insurance exists. Its violation
would thus avoid the policy. 16 However, in order to constitute a violation,
the other insurance must be upon the same subject matter, the same
interest therein, and the same risk. 17

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. 22 This kind of
policy covers only such interest as the mortgagee has at the issuing of the
policy. 23

Page

Policy No. F-24758, while Policy No. GA-28146 had been renewed twice,
the previous policy being F-24792.

Insurance- Part III INSURABLE INTEREST


Atty. Reyes

With these principles in mind, we are of the opinion that Condition 3 of the
subject policy is not totally free from ambiguity and must, perforce, be
meticulously analyzed. Such analysis leads us to conclude that (a) the
prohibition applies only to double insurance, and (b) the nullity of the policy
shall only be to the extent exceeding P200,000.00 of the total policies
obtained.
The first conclusion is supported by the portion of the condition referring to
other insurance "covering any of the property or properties consisting of
stocks in trade, goods in process and/or inventories only hereby insured,"
and the portion regarding the insured's declaration on the subheading COINSURANCE that the co-insurer is Mercantile Insurance Co., Inc. in the sum
of P50,000.00. A double insurance exists where the same person is insured
by several insurers separately in respect of the same subject and interest.
As earlier stated, the insurable interests of a mortgagor and a mortgagee on
the mortgaged property are distinct and separate. Since the two policies of
the PFIC do not cover the same interest as that covered by the policy of the
private respondent, no double insurance exists. The non-disclosure then of
the former policies was not fatal to the petitioner's right to recover on the
private respondent's policy.
Furthermore, by stating within Condition 3 itself that such condition shall not
apply if the total insurance in force at the time of loss does not exceed

WHEREFORE, the instant petition is hereby GRANTED. The decision of the


Court of Appeals in CA-G.R. SP No. 31916 is SET ASIDE and the decision
of the Insurance Commission in Case No. 3340 is REINSTATED.
Costs against private respondent Country Bankers Insurance Corporation.
SO ORDERED.

3.

Separable Insurable Interest of mortgagor and mortgagee

SEC. 53. 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.
SEC. 95. A double insurance exists where the same person is insured by
several insurers separately in respect to the same subject and interest.
4.

When must insurable interest in property exist

SEC. 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.
5.
6.

Insurable Interest of beneficiary in property, life insurance


Effect of change of interest in the thing insured

SEC. 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

10

It is a cardinal rule on insurance that a policy or insurance contract is to be


interpreted liberally in favor of the insured and strictly against the company,
the reason being, undoubtedly, to afford the greatest protection which the
insured was endeavoring to secure when he applied for insurance. It is also
a cardinal principle of law that forfeitures are not favored and that any
construction which would result in the forfeiture of the policy benefits for the
person claiming thereunder, will be avoided, if it is possible to construe the
policy in a manner which would permit recovery, as, for example, by finding
a waiver for such forfeiture. 29 Stated differently, provisions, conditions or
exceptions in policies which tend to work a forfeiture of insurance policies
should be construed most strictly against those for whose benefits they are
inserted, and most favorably toward those against whom they are intended
to operate. 30 The reason for this is that, except for riders which may later
be inserted, the insured sees the contract already in its final form and has
had no voice in the selection or arrangement of the words employed therein.
On the other hand, the language of the contract was carefully chosen and
deliberated upon by experts and legal advisers who had acted exclusively in
the interest of the insurers and the technical language employed therein is
rarely understood by ordinary laymen. 31

P200,000.00, the private respondent was amenable to assume a coinsurer's liability up to a loss not exceeding P200,000.00. What it had in mind
was to discourage over-insurance. Indeed, the rationale behind the
incorporation of "other insurance" clause in fire policies is to prevent overinsurance and thus avert the perpetration of fraud. When a property owner
obtains insurance policies from two or more insurers in a total amount that
exceeds the property's value, the insured may have an inducement to
destroy the property for the purpose of collecting the insurance. The public
as well as the insurer is interested in preventing a situation in which a fire
would be profitable to the insured. 32

Page

more than P200,000.00."

Insurance- Part III INSURABLE INTEREST


Atty. Reyes
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. 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.

SEC. 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.

SEC. 165. A marine insurer is liable for all the expenses attendant upon a
loss which forces the ship into port to be repaired; and where it is stipulated
in the policy that the insured shall labor for the recovery of the property, the
insurer is liable for the expense incurred thereby, such expense, in either
case, being in addition to a total loss, if that afterwards occurs.

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.

[G.R. No. 124520. August 18, 1997.]


SPOUSES NILO CHA and STELLA UY CHA, and UNITED INSURANCE
CO., INC., Petitioners, v. COURT OF APPEALS and CKS
DEVELOPMENT CORPORATION, Respondents.

DECISION

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.
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.
Art. 1306. NCC- The contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy. (1255a)
7.

Assignee in life, property insurance

SEC. 184. A policy of insurance upon life or health may pass by transfer,
will or succession to any person, whether he has an insurable interest or not,
and such person may recover upon it whatever the insured might have
recovered.

PADILLA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court
seeks to set aside a decision of respondent Court of Appeals.
The undisputed facts of the case are as follows:chanrob1es virtual 1aw
library
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a
lease contract with private respondent CKS Development Corporation
(hereinafter CKS), as lessor, on 5 October 1988.cralawnad
2. One of the stipulations of the one (1) year lease contract
states:jgc:chanrobles.com.ph
"18. . . . The LESSEE shall not insure against fire the chattels, merchandise,
textiles, goods and effects placed at any stall or store or space in the leased
premises without first obtaining the written consent and approval of the
LESSOR. If the LESSEE obtain(s) the insurance thereof without the consent
of the LESSOR then the policy is deemed assigned and transferred to the
LESSOR for its own benefit; . . ." 1

11

SEC. 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.

Page

SEC. 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.

Insurance- Part III INSURABLE INTEREST


Atty. Reyes
3. Notwithstanding the above stipulation in the lease contract, the Cha
spouses insured against loss by fire their merchandise inside the leased
premises for Five Hundred Thousand (P500,000.00) with the United
Insurance Co., Inc. (hereinafter United) without the written consent of private
respondent CKS.
4. On the day that the lease contract was to expire, fire broke out inside the
leased premises.

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO


DECLARE THE CONTRACT OF LEASE ENTERED INTO AS A
CONTRACT OF ADHESION AND THEREFORE THE QUESTIONABLE
PROVISION THEREIN TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR OF
PETITIONER.
III

7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a


decision * ordering therein defendant United to pay CKS the amount of
P335,063.11 and defendant Cha spouses to pay P50,000.00 as exemplary
damages, P20,000.00 as attorneys fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328
rendered a decision ** dated 11 January 1996, affirming the trial court
decision, deleting however the awards for exemplary damages and
attorneys fees. A motion for reconsideration by United was denied on 29
March 1996.
In the present petition, the following errors are assigned by petitioners to the
Court of Appeals:chanrob1es virtual 1aw library
I

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO


DECLARE THAT THE STIPULATION IN THE CONTRACT OF LEASE
TRANSFERRING THE PROCEEDS OF THE INSURANCE TO
RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW,
MORALS AND PUBLIC POLICY.

IV

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING


PROCEEDS OF AN INSURANCE POLICY ON THE BASIS OF A
STIPULATION WHICH IS VOID FOR BEING WITHOUT CONSIDERATION
AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF THE
RESPONDENT CORPORATION. 2
The core issue to be resolved in this case is whether or not the aforequoted
paragraph 18 of the lease contract entered into between CKS and the Cha
spouses is valid insofar as it provides that any fire insurance policy obtained
by the lessee (Cha spouses) over their merchandise inside the leased
premises is deemed assigned or transferred to the lessor (CKS) if said policy
is obtained without the prior written consent of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in
a contract cannot be contrary to law, morals, good customs, public order or
public policy. 3
Sec. 18 of the Insurance Code provides:jgc:chanrobles.com.ph
"Sec. 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."cralaw virtua1aw library

II
A non-life insurance policy such as the fire insurance policy taken by

12

6. United refused to pay CKS. Hence, the latter filed a complaint against the
Cha spouses and United.

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING


PROCEEDS OF AN INSURANCE POLICY TO APPELLEE WHICH IS NOT
PRIVY TO THE SAID POLICY IN CONTRAVENTION OF THE INSURANCE
LAW.

Page

5. When CKS learned of the insurance earlier procured by the Cha spouses
(without its consent), it wrote the insurer (United) a demand letter asking that
the proceeds of the insurance contract (between the Cha spouses and
United) be paid directly to CKS, based on its lease contract with the Cha
spouses.

Insurance- Part III INSURABLE INTEREST


Atty. Reyes
petitioner-spouses over their merchandise is primarily a contract of
indemnity. Insurable interest in the property insured must exist at the time
the insurance takes effect and at the time the loss occurs. 4 The basis of
such requirement of insurable interest in property insured is based on sound
public policy: to prevent a person from taking out an insurance policy on
property upon which he has no insurable interest and collecting the
proceeds of said policy in case of loss of the property. In such a case, the
contract of insurance is a mere wager which is void under Section 25 of the
Insurance Code, which provides:jgc:chanrobles.com.ph

SO ORDERED.

"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."cralaw
virtua1aw library
In the present case, it cannot be denied that CKS has no insurable interest
in the goods and merchandise inside the leased premises under the
provisions of Section 17 of the Insurance Code which
provide:jgc:chanrobles.com.ph
"Section 17. The measure of an insurable interest in property is the extent to
which the insured might be damnified by loss of injury thereof."cralaw
virtua1aw library
Therefore, respondent CKS cannot, under the Insurance Code a special
law be validly a beneficiary of the fire insurance policy taken by the
petitioner-spouses over their merchandise. This insurable interest over said
merchandise remains with the insured, the Cha spouses. The automatic
assignment of the policy to CKS under the provision of the lease contract
previously quoted is void for being contrary to law and/or public policy. The
proceeds of the fire insurance policy thus rightfully belong to the spouses
Nilo Cha and Stella Uy-Cha (herein co-petitioners). The insurer (United)
cannot be compelled to pay the proceeds of the fire insurance policy to a
person (CKS) who has no insurable interest in the property insured.

Page

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No.


39328 is SET ASIDE and a new decision is hereby entered, awarding the
proceeds of the fire insurance policy to petitioners Nilo Cha and Stella UyCha.

13

The liability of the Cha spouses to CKS for violating their lease contract in
that the Cha spouses obtained a fire insurance policy over their own
merchandise, without the consent of CKS, is a separate and distinct issue
which we do not resolve in this case.chanroblesvirtuallawlibrary