[G.R. No. 154514.

July 28, 2005]

WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND
SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING
ASSOCIATION (BERMUDA) LTD., respondents.

DECISION

QUISUMBING, J.:

This petition for review assails the Decision[1] dated July 30, 2002 of the Court of Appeals in
CA-G.R. SP No. 60144, affirming the Decision[2] dated May 3, 2000 of the Insurance Commission
in I.C. Adm. Case No. RD-277. Both decisions held that there was no violation of the Insurance
Code and the respondents do not need license as insurer and insurance agent/broker.

The facts are undisputed.

White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage
for its vessels from The Steamship Mutual Underwriting Association (Bermuda) Limited
(Steamship Mutual) through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently,
White Gold was issued a Certificate of Entry and Acceptance. [3] Pioneer also issued receipts
evidencing payments for the coverage. When White Gold failed to fully pay its accounts,
Steamship Mutual refused to renew the coverage.

Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to
recover the latters unpaid balance. White Gold on the other hand, filed a complaint before the
Insurance Commission claiming that Steamship Mutual violated Sections 186 [4] and 187[5] of the
Insurance Code, while Pioneer violated Sections 299, [6] 300[7] and 301[8] in relation to Sections
302 and 303, thereof.

The Insurance Commission dismissed the complaint. It said that there was no need for
Steamship Mutual to secure a license because it was not engaged in the insurance business. It
explained that Steamship Mutual was a Protection and Indemnity Club (P & I Club). Likewise,
Pioneer need not obtain another license as insurance agent and/or a broker for Steamship Mutual
because Steamship Mutual was not engaged in the insurance business. Moreover, Pioneer was
already licensed, hence, a separate license solely as agent/broker of Steamship Mutual was
already superfluous.

The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the
appellate court distinguished between P & I Clubs vis--vis conventional insurance. The appellate
court also held that Pioneer merely acted as a collection agent of Steamship Mutual.

In this petition, petitioner assigns the following errors allegedly committed by the appellate
court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING
BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS
THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE
TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE
THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A
LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN
NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.[9]

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the
insurance business in the Philippines? (2) Does Pioneer need a license as an insurance
agent/broker for Steamship Mutual?

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not
have a license to do business in the Philippines although Pioneer is its resident agent. This
relationship is reflected in the certifications issued by the Insurance Commission.

Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business.
To buttress its assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v.
Court of Appeals[10] as an association composed of shipowners in general who band together for
the specific purpose of providing insurance cover on a mutual basis against liabilities incidental to
shipowning that the members incur in favor of third parties. It stresses that as a P & I Club,
Steamship Mutuals primary purpose is to solicit and provide protection and indemnity coverage
and for this purpose, it has engaged the services of Pioneer to act as its agent.

Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the
insurance business in the Philippines. It is merely an association of vessel owners who have come
together to provide mutual protection against liabilities incidental to shipowning. [11] Respondents
aver Hyopsung is inapplicable in this case because the issue in Hyopsung was the jurisdiction of
the court over Hyopsung.

Is Steamship Mutual engaged in the insurance business?

Section 2(2) of the Insurance Code enumerates what constitutes doing an insurance business
or transacting an insurance business. These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as
merely incidental to any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this Code.
...
 The same provision also provides, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions, or that no separate or direct consideration is
received therefor, shall not preclude the existence of an insurance business.[12]

The test to determine if a contract is an insurance contract or not, depends on the nature of
the promise, the act required to be performed, and the exact nature of the agreement in the light
of the occurrence, contingency, or circumstances under which the performance becomes requisite.
It is not by what it is called.[13]

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a

consideration to indemnify another against loss, damage or liability arising from an unknown or
contingent event.[14]

In particular, a marine insurance undertakes to indemnify the assured against marine losses,
such as the losses incident to a marine adventure. [15] Section 99[16] of the Insurance Code
enumerates the coverage of marine insurance.

Relatedly, a mutual insurance company is a cooperative enterprise where the members are
both the insurer and insured. In it, the members all contribute, by a system of premiums or
assessments, to the creation of a fund from which all losses and liabilities are paid, and where the
profits are divided among themselves, in proportion to their interest. [17] Additionally, mutual
insurance associations, or clubs, provide three types of coverage, namely, protection and
indemnity, war risks, and defense costs.[18]

A P & I Club is a form of insurance against third party liability, where the third party is
anyone other than the P & I Club and the members. [19] By definition then, Steamship Mutual as a
P & I Club is a mutual insurance association engaged in the marine insurance business.

The records reveal Steamship Mutual is doing business in the country albeit without the
requisite certificate of authority mandated by Section 187 [20] of the Insurance Code. It maintains
a resident agent in the Philippines to solicit insurance and to collect payments in its behalf. We
note that Steamship Mutual even renewed its P & I Club cover until it was cancelled due to non-
payment of the calls. Thus, to continue doing business here, Steamship Mutual or through its
agent Pioneer, must secure a license from the Insurance Commission.

Since a contract of insurance involves public interest, regulation by the State is necessary.
Thus, no insurer or insurance company is allowed to engage in the insurance business without a
license or a certificate of authority from the Insurance Commission.[21]

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?

Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of

registration[22] issued by the Insurance Commission. It has been licensed to do or transact
insurance business by virtue of the certificate of authority [23] issued by the same agency.
However, a Certification from the Commission states that Pioneer does not have a separate
license to be an agent/broker of Steamship Mutual.[24]

Although Pioneer is already licensed as an insurance company, it needs a separate license to

act as insurance agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation or
procurement of applications for insurance, or receive for services in obtaining insurance, any
commission or other compensation from any insurance company doing business in the Philippines
or any agent thereof, without first procuring a license so to act from the Commissioner, which
must be renewed annually on the first day of January, or within six months thereafter. . .

Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of its
directors and officers. Regrettably, we are not the forum for these issues.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the
Court of Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby
REVERSED AND SET ASIDE. The Steamship Mutual Underwriting Association (Bermuda) Ltd., and
Pioneer Insurance and Surety Corporation are ORDERED to obtain licenses and to secure proper
authorizations to do business as insurer and insurance agent, respectively. The petitioners prayer
for the revocation of Pioneers Certificate of Authority and removal of its directors and officers, is
DENIED. Costs against respondents.

SO ORDERED.
RAFAEL (REX) VERENDIA, petitioner,
vs.
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE PHILIPPINES, respondents.
G.R. No. 76399 January 22, 1993
FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,
vs.
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.
B.L. Padilla for petitioner.
Sabino Padilla, Jr. for Fidelity & Surety, Co.

MELO, J.:
The two consolidated cases involved herein stemmed from the issuance by Fidelity and Surety
Insurance Company of the Philippines (Fidelity for short) of its Fire Insurance Policy No. F-18876
effective between June 23, 1980 and June 23, 1981 covering Rafael (Rex) Verendia's residential
building located at Tulip Drive, Beverly Hills, Antipolo, Rizal in the amount of P385,000.00.
Designated as beneficiary was the Monte de Piedad & Savings Bank. Verendia also insured the
same building with two other companies, namely, The Country Bankers Insurance for P56,000.00
under Policy No. PDB-80-1913 expiring on May 12, 1981, and The Development Insurance for
P400,000.00 under Policy No. F-48867 expiring on June 30, 198l.
While the three fire insurance policies were in force, the insured property was completely destroyed
by fire on the early morning of December 28, 1980. Fidelity was accordingly informed of the loss
and despite demands, refused payment under its policy, thus prompting Verendia to file a
complaint with the then Court of First Instance of Quezon City, praying for payment of P385,000.00,
legal interest thereon, plus attorney's fees and litigation expenses. The complaint was later
amended to include Monte de Piedad as an "unwilling defendant" (P. 16, Record).
Answering the complaint, Fidelity, among other things, averred that the policy was avoided by
reason of over-insurance; that Verendia maliciously represented that the building at the time of the
fire was leased under a contract executed on June 25, 1980 to a certain Roberto Garcia, when
actually it was a Marcelo Garcia who was the lessee.
On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz, ruling in favor of
Fidelity. In sustaining the defenses set up by Fidelity, the trial court ruled that Paragraph 3 of the
policy was also violated by Verendia in that the insured failed to inform Fidelity of his other
insurance coverages with Country Bankers Insurance and Development Insurance.
Verendia appealed to the then Intermediate Appellate Court and in a decision promulgated on
March 31, 1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa, Bartolome, and Ejercito (P), JJ.), the
appellate court reversed for the following reasons: (a) there was no misrepresentation concerning
the lease for the contract was signed by Marcelo Garcia in the name of Roberto Garcia; and (b)
Paragraph 3 of the policy contract requiring Verendia to give notice to Fidelity of other contracts of
insurance was waived by Fidelity as shown by its conduct in attempting to settle the claim of
Verendia (pp. 32-33, Rollo of G.R. No. 76399).
Fidelity received a copy of the appellate court's decision on April 4, 1986, but instead of directly
filing a motion for reconsideration within 15 days therefrom, Fidelity filed on April 21, 1986, a
motion for extension of 3 days within which to file a motion for reconsideration. The motion for
extension was not filed on April 19, 1986 which was the 15th day after receipt of the decision
because said 15th day was a Saturday and of course, the following day was a Sunday (p.
14., Rollo of G.R. No. 75605). The motion for extension was granted by the appellate court on April
30, 1986 (p. 15. ibid.), but Fidelity had in the meantime filed its motion for reconsideration on April
24, 1986 (p. 16, ibid.).
Verendia filed a motion to expunge from the record Fidelity's motion for reconsideration on the
ground that the motion for extension was filed out of time because the 15th day from receipt of the
decision which fell on a Saturday was ignored by Fidelity, for indeed, so Verendia contended, the
Intermediate Appellate Court has personnel receiving pleadings even on Saturdays.
The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion for
reconsideration was similarly brushed aside on July 22, 1986 (p. 30, ibid .), the petition herein
docketed as G.R. No. 75605 was initiated. Subsequently, or more specifically on October 21, 1986,
the appellate court denied Fidelity's motion for reconsideration and account thereof. Fidelity filed
on March 31, 1986, the petition for review on certiorari now docketed as G.R. No. 76399. The two
petitions, inter-related as they are, were consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.
Before we can even begin to look into the merits of the main case which is the petition for review
oncertiorari, we must first determine whether the decision of the appellate court may still be
reviewed, or whether the same is beyond further judicial scrutiny. Stated otherwise, before anything
else, inquiry must be made into the issue of whether Fidelity could have legally asked for an
extension of the 15-day reglementary period for appealing or for moving for reconsideration.
As early as 1944, this Court through Justice Ozaeta already pronounced the doctrine that the
pendency of a motion for extension of time to perfect an appeal does not suspend the running of
the period sought to be extended (Garcia vs. Buenaventura 74 Phil. 611 [1944]). To the same effect
were the rulings in Gibbs vs. CFI of Manila (80 Phil. 160 [1948]) Bello vs. Fernando (4 SCRA 138
[1962]), and Joe vs. King(20 SCRA 1120 [1967]).
The above cases notwithstanding and because the Rules of Court do not expressly prohibit the
filing of a motion for extension of time to file a motion for reconsideration in regard to a final order
or judgment, magistrates, including those in the Court of Appeals, held sharply divided opinions on
whether the period for appealing which also includes the period for moving to reconsider may be
extended. The matter was not definitely settled until this Court issued its Resolution in Habaluyas
Enterprises, Inc. vs. Japson (142 SCRA [1986]), declaring that beginning one month from the
promulgation of the resolution on May 30, 1986
. . . the rule shall be strictly enforced that no motion for extension of time to file a
motion for new trial or reconsideration shall be filed . . . (at p. 212.)
In the instant case, the motion for extension was filed and granted before June 30, 1986, although,
of course, Verendia's motion to expunge the motion for reconsideration was not finally disposed
until July 22, 1986, or after the dictum in Habaluyas had taken effect. Seemingly, therefore, the filing
of the motion for extension came before its formal proscription under Habaluyas, for which reason
we now turn our attention to G.R. No. 76399.
Reduced to bare essentials, the issues Fidelity raises therein are: (a) whether or not the contract of
lease submitted by Verendia to support his claim on the fire insurance policy constitutes a false
declaration which would forfeit his benefits under Section 13 of the policy and (b) whether or not, in
submitting the subrogation receipt in evidence, Fidelity had in effect agreed to settle Verendia's
claim in the amount stated in said receipt. 1
Verging on the factual, the issue of the veracity or falsity of the lease contract could have been
better resolved by the appellate court for, in a petition for review on certiorari under Rule 45, the
jurisdiction of this Court is limited to the review of errors of law. The appellate court's findings of
fact are, therefore, conclusive upon this Court except in the following cases: (1) when the
conclusion is a finding grounded entirely on speculation, surmises, or conjectures; (2) when the
inference made is manifestly absurd, mistaken, or impossible; (3) when there is grave abuse of
discretion in the appreciation of facts; (4) when the judgment is premised on a misapprehension of
facts; (5) when the findings of fact are conflicting; and (6) when the Court of Appeals in making its
findings went beyond the issues of the case and the same are contrary to the admissions of both
appellant and appellee (Ronquillo v. Court of Appeals, 195 SCRA 433 [1991]). In view of the
conflicting findings of the trial court and the appellate court on important issues in these
consolidated cases and it appearing that the appellate court judgment is based on a
misapprehension of facts, this Court shall review the evidence on record.
The contract of lease upon which Verendia relies to support his claim for insurance benefits, was
entered into between him and one Robert Garcia, married to Helen Cawinian, on June 25, 1980 (Exh.
"1"), a couple of days after the effectivity of the insurance policy. When the rented residential
building was razed to the ground on December 28, 1980, it appears that Robert Garcia (or Roberto
Garcia) was still within the premises. However, according to the investigation report prepared by
Pat. Eleuterio M. Buenviaje of the Antipolo police, the building appeared to have "no occupant" and
that Mr. Roberto Garcia was "renting on the otherside (sic) portion of said compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that Marcelo
Garcia, whom he considered as the real lessee, was occupying the building when it was burned
(TSN, July 27, 1982, p.10).
Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an adjuster was able to
locate him. Robert Garcia then executed an affidavit before the National Intelligence and Security
Authority (NISA) to the effect that he was not the lessee of Verendia's house and that his signature
on the contract of lease was a complete forgery. Thus, on the strength of these facts, the adjuster
submitted a report dated December 4, 1981 recommending the denial of Verendia's claim (Exh. "2").
Ironically, during the trial, Verendia admitted that it was not Robert Garcia who signed the lease
contract. According to Verendia, it was signed by Marcelo Garcia, cousin of Robert, who had been
paying the rentals all the while. Verendia, however, failed to explain why Marcelo had to sign his
cousin's name when he in fact was paying for the rent and why he (Verendia) himself, the lessor,
allowed such a ruse. Fidelity's conclusions on these proven facts appear, therefore, to have
sufficient bases; Verendia concocted the lease contract to deflect responsibility for the fire towards
an alleged "lessee", inflated the value of the property by the alleged monthly rental of P6,500 when
in fact, the Provincial Assessor of Rizal had assessed the property's fair market value to be only
P40,300.00, insured the same property with two other insurance companies for a total coverage of
around P900,000, and created a dead-end for the adjuster by the disappearance of Robert Garcia.
Basically a contract of indemnity, an insurance contract is the law between the parties (Pacific
Banking Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its terms and conditions constitute
the measure of the insurer's liability and compliance therewith is a condition precedent to the
insured's right to recovery from the insurer (Oriental Assurance Corporation vs. Court of Appeals,
200 SCRA 459 [1991], citing Perla Compania de Seguros, Inc. vs. Court of Appeals, 185 SCRA 741
[1991]). As it is also a contract of adhesion, an insurance contract should be liberally construed in
favor of the insured and strictly against the insurer company which usually prepares it (Western
Guaranty Corporation vs. Court of Appeals, 187 SCRA 652 [1980]).
Considering, however, the foregoing discussion pointing to the fact that Verendia used a false lease
contract to support his claim under Fire Insurance Policy No. F-18876, the terms of the policy
should be strictly construed against the insured. Verendia failed to live by the terms of the policy,
specifically Section 13 thereof which is expressed in terms that are clear and unambiguous, that all
benefits under the policy shall be forfeited "If the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, or if any fraudulent means or devises are used by
the Insured or anyone acting in his behalf to obtain any benefit under the policy". Verendia, having
presented a false declaration to support his claim for benefits in the form of a fraudulent lease
contract, he forfeited all benefits therein by virtue of Section 13 of the policy in the absence of proof
that Fidelity waived such provision (Pacific Banking Corporation vs. Court of Appeals, supra).
Worse yet, by presenting a false lease contract, Verendia, reprehensibly disregarded the principle
that insurance contracts are uberrimae fidae and demand the most abundant good faith (Velasco
vs. Apostol, 173 SCRA 228 [1989]).
There is also no reason to conclude that by submitting the subrogation receipt as evidence in
court, Fidelity bound itself to a "mutual agreement" to settle Verendia's claims in consideration of
the amount of P142,685.77. While the said receipt appears to have been a filled-up form of Fidelity,
no representative of Fidelity had signed it. It is even incomplete as the blank spaces for a witness
and his address are not filled up. More significantly, the same receipt states that Verendia had
received the aforesaid amount. However, that Verendia had not received the amount stated therein,
is proven by the fact that Verendia himself filed the complaint for the full amount of P385,000.00
stated in the policy. It might be that there had been efforts to settle Verendia's claims, but surely,
the subrogation receipt by itself does not prove that a settlement had been arrived at and enforced.
Thus, to interpret Fidelity's presentation of the subrogation receipt in evidence as indicative of its
accession to its "terms" is not only wanting in rational basis but would be substituting the will of
the Court for that of the parties.
WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No. 76399 is
GRANTED and the decision of the then Intermediate Appellate Court under review is REVERSED
and SET ASIDE and that of the trial court is hereby REINSTATED and UPHELD.
SO ORDERED.
RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF
APPEALS and TRANSWORLD KNITTING MILLS, INC., respondents.
DECISION
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of
Court seeking to annul and set aside the July 15, 1993 Decision [1] and
October 22, 1993 Resolution[2] of the Court of Appeals[3] in CA-G.R. CV
NO. 28779, which modified the Ruling[4] of the Regional Trial Court of
Pasig, Branch 161, in Civil Case No. 46106.
The antecedent facts that matter are as follows:
On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance)
issued Fire Insurance Policy No. 45727 in favor of Transworld Knitting
Mills, Inc. (Transworld), initially for One Million (P1,000,000.00) Pesos and
eventually increased to One Million Five Hundred Thousand
(P1,500,000.00) Pesos, covering the period from August 14, 1980 to
March 13, 1981.
Pertinent portions of subject policy on the buildings insured, and location
thereof, read:
 "On stocks of finished and/or unfinished products, raw materials and
supplies of every kind and description, the properties of the Insureds
and/or held by them in trust, on commission or on joint account with
others and/or for which they (sic) responsible in case of loss whilst
contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate (sic)
within own Compound at MAGDALO STREET, BARRIO UGONG,
PASIG, METRO MANILA, PHILIPPINES, BLOCK NO. 601.
xxx...............xxx...............xxx
Said building of four-span lofty one storey in height with mezzanine
portions is constructed of reinforced concrete and hollow blocks
and/or concrete under galvanized iron roof and occupied as hosiery
mills, garment and lingerie factory, transistor-stereo assembly plant,
offices, warehouse and caretaker's quarters.
'Bounds in front partly by one-storey concrete building under
galvanized iron roof occupied as canteen and guardhouse, partly by
building of two and partly one storey constructed of concrete below,
timber above undergalvanized iron roof occupied as garage and
quarters and partly by open space and/or tracking/ packing, beyond
which is the aforementioned Magdalo Street; on its right and left by
driveway, thence open spaces, and at the rear by open spaces.'" [5]
The same pieces of property insured with the petitioner were also insured
with New India Assurance Company, Ltd., (New India).
On January 12, 1981, fire broke out in the compound of Transworld, razing
the middle portion of its four-span building and partly gutting the left and
right sections thereof. A two-storey building (behind said four-span
building) where fun and amusement machines and spare parts were
stored, was also destroyed by the fire.
Transworld filed its insurance claims with Rizal Surety & Insurance
Company and New India Assurance Company but to no avail.
On May 26, 1982, private respondent brought against the said insurance
companies an action for collection of sum of money and damages,
docketed as Civil Case No. 46106 before Branch 161 of the then Court of
First Instance of Rizal; praying for judgment ordering Rizal Insurance and
New India to pay the amount of P2,747, 867.00 plus legal
interest,P400,000.00 as attorney's fees, exemplary damages, expenses of
litigation of P50,000.00 and costs of suit.[6]
Petitioner Rizal Insurance countered that its fire insurance policy sued
upon covered only the contents of the four-span building, which was partly
burned, and not the damage caused by the fire on the two-storey annex
building.[7]
On January 4, 1990, the trial court rendered its decision; disposing as
follows:
"ACCORDINGLY, judgment is hereby rendered as follows:
(1)Dismissing the case as against The New India Assurance Co.,
Ltd.;
(2) Ordering defendant Rizal Surety And Insurance Company to pay
Transwrold (sic) Knitting Mills, Inc. the amount of P826, 500.00
representing the actual value of the losses suffered by it; and
(3) Cost against defendant Rizal Surety and Insurance Company.
SO ORDERED."[8]
Both the petitioner, Rizal Insurance Company, and private respondent,
Transworld Knitting Mills, Inc., went to the Court of Appeals, which came
out with its decision of July 15, 1993 under attack, the decretal portion of
which reads:
"WHEREFORE, and upon all the foregoing, the decision of the court
below is MODIFIED in that defendant New India Assurance
Company has and is hereby required to pay plaintiff-appellant the
amount of P1,818,604.19 while the other Rizal Surety has to pay the
plaintiff-appellant P470,328.67, based on the actual losses sustained
by plaintiff Transworld in the fire, totalling P2,790,376.00 as against
the amounts of fire insurance coverages respectively extended by
New India in the amount of P5,800,000.00 and Rizal Surety and
Insurance Company in the amount of P1,500,000.00.
No costs.
SO ORDERED."[9]
On August 20, 1993, from the aforesaid judgment of the Court of Appeals
New India appealed to this Court theorizing inter alia that the private
respondent could not be compensated for the loss of the fun and
amusement machines and spare parts stored at the two-storey building
because it (Transworld) had no insurable interest in said goods or items.
On February 2, 1994, the Court denied the appeal with finality in G.R. No.
L-111118 (New India Assurance Company Ltd. vs. Court of Appeals).
Petitioner Rizal Insurance and private respondent Transworld, interposed
a Motion for Reconsideration before the Court of Appeals, and on October
22, 1993, the Court of Appeals reconsidered its decision of July 15, 1993,
as regards the imposition of interest, ruling thus:
"WHEREFORE, the Decision of July 15, 1993 is amended but only
insofar as the imposition of legal interest is concerned, that, on the
assessment against New India Assurance Company on the amount
of P1,818,604.19 and that against Rizal Surety & Insurance
Company on the amount of P470,328.67, from May 26, 1982 when
the complaint was filed until payment is made. The rest of the said
decision is retained in all other respects.
SO ORDERED."[10]
Undaunted, petitioner Rizal Surety & Insurance Company found its way to
this Court via the present Petition, contending that:
I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE
ANNEX BUILDING WHERE THE BULK OF THE BURNED
PROPERTIES WERE STORED, WAS INCLUDED IN THE
COVERAGE OF THE INSURANCE POLICY ISSUED BY RIZAL
SURETY TO TRANSWORLD.
II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B)
ERRED IN NOT CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-
RIZAL SURETY), TAKEN IMMEDIATELY AFTER THE FIRE, WHICH
CLEARLY SHOW THAT THE PREMISES OCCUPIED BY
TRANSWORLD, WHERE THE INSURED PROPERTIES WERE
LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.
III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT
TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH AND WITH
MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL ACTION,
AND IN NOT ORDERING TRANSWORLD TO PAY TO RIZAL
SURETY MORAL AND PUNITIVE DAMAGES (ART. 2205, CIVIL
CODE), PLUS ATTORNEY'S FEES AND EXPENSES OF
LITIGATION (ART. 2208 PARS. 4 and 11, CIVIL CODE).[11]
The Petition is not impressed with merit.
It is petitioner's submission that the fire insurance policy litigated upon
protected only the contents of the main building (four-span), [12] and did not
include those stored in the two-storey annex building. On the other hand,
the private respondent theorized that the so called "annex" was not an
annex but was actually an integral part of the four-span building [13]and
therefore, the goods and items stored therein were covered by the same
fire insurance policy.
Resolution of the issues posited here hinges on the proper interpretation
of the stipulation in subject fire insurance policy regarding its coverage,
which reads:
"xxx contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate (sic)
within own Compound xxx"
Therefrom, it can be gleaned unerringly that the fire insurance policy in
question did not limit its coverage to what were stored in the four-span
building. As opined by the trial court of origin, two requirements must
concur in order that the said fun and amusement machines and spare
parts would be deemed protected by the fire insurance policy under
scrutiny, to wit:
"First, said properties must be contained and/or stored in the areas
occupied by Transworld and second, said areas must form part of
the building described in the policy xxx"[14]
'Said building of four-span lofty one storey in height with
mezzanine portions is constructed of reinforced concrete
and hollow blocks and/or concrete under galvanized iron
roof and occupied as hosiery mills, garment and lingerie
factory, transistor-stereo assembly plant, offices, ware
house and caretaker's quarter.'
The Court is mindful of the well-entrenched doctrine that factual findings
by the Court of Appeals are conclusive on the parties and not reviewable
by this Court, and the same carry even more weight when the Court of
Appeals has affirmed the findings of fact arrived at by the lower court. [15]
In the case under consideration, both the trial court and the Court of
Appeals found that the so called "annex " was not an annex building but
an integral and inseparable part of the four-span building described in the
policy and consequently, the machines and spare parts stored therein
were covered by the fire insurance in dispute. The letter-report of the
Manila Adjusters and Surveyor's Company, which petitioner itself cited and
invoked, describes the "annex" building as follows:
"Two-storey building constructed of partly timber and partly concrete
hollow blocks under g.i. roof which is adjoining and
intercommunicating with the repair of the first right span of the lofty
storey building and thence by property fence wall." [16]
Verily, the two-storey building involved, a permanent structure which
adjoins and intercommunicates with the "first right span of the lofty storey
building",[17] formed part thereof, and meets the requisites for
compensability under the fire insurance policy sued upon.
So also, considering that the two-storey building aforementioned was
already existing when subject fire insurance policy contract was entered
into on January 12, 1981, having been constructed sometime in 1978,
[18] petitioner should have specifically excluded the said two-storey building

from the coverage of the fire insurance if minded to exclude the same but
if did not, and instead, went on to provide that such fire insurance policy
covers the products, raw materials and supplies stored within the premises
of respondent Transworld which was an integral part of the four-span
building occupied by Transworld, knowing fully well the existence of such
building adjoining and intercommunicating with the right section of the
four-span building.
After a careful study, the Court does not find any basis for disturbing what
the lower courts found and arrived at.
Indeed, the stipulation as to the coverage of the fire insurance policy under
controversy has created a doubt regarding the portions of the building
insured thereby. Article 1377 of the New Civil Code provides:
"Art.1377. The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity"
Conformably, it stands to reason that the doubt should be resolved against
the petitioner, Rizal Surety Insurance Company, whose lawyer or
managers drafted the fire insurance policy contract under scrutiny. Citing
the aforecited provision of law in point, the Court in Landicho vs.
Government Service Insurance System,[19] ruled:
"This is particularly true as regards insurance policies, in respect of
which it is settled that the 'terms in an insurance policy, which are
ambiguous, equivocal, or uncertain x x x are to be construed strictly
and most strongly against the insurer, and liberally in favor of the
insured so as to effect the dominant purpose of indemnity or
payment to the insured, especially where forfeiture is involved' (29
Am. Jur., 181), and the reason for this is that the 'insured usually
has no voice in the selection or arrangement of the words employed
and that the language of the contract is selected with great care and
deliberation by experts and legal advisers employed by, and acting
exclusively in the interest of, the insurance company.' (44 C.J.S., p.
1174).""[20]
Equally relevant is the following disquisition of the Court in Fieldmen's
Insurance Company, Inc. vs. Vda. De Songco,[21] to wit:
"'This rigid application of the rule on ambiguities has become
necessary in view of current business practices. The courts cannot
 ignore that nowadays monopolies, cartels and concentration of
capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared
'agreements' that the weaker party may not change one whit, his
participation in the 'agreement' being reduced to the alternative to
'take it or leave it' labelled since Raymond Saleilles 'contracts by
adherence' (contrats [sic] d'adhesion), in contrast to these entered
into by parties bargaining on an equal footing, such contracts (of
which policies of insurance and international bills of lading are prime
example) obviously call for greater strictness and vigilance on the
part of courts of justice with a view to protecting the weaker party
from abuses and imposition, and prevent their becoming traps for
the unwary (New Civil Code, Article 24; Sent. of Supreme Court of
Spain, 13 Dec. 1934, 27 February 1942.)'" [22]
The issue of whether or not Transworld has an insurable interest in the fun
and amusement machines and spare parts, which entitles it to be
indemnified for the loss thereof, had been settled in G.R. No. L-111118,
entitled New India Assurance Company, Ltd., vs. Court of Appeals, where
the appeal of New India from the decision of the Court of Appeals under
review, was denied with finality by this Court on February 2, 1994.
The rule on conclusiveness of judgment, which obtains under the
premises, precludes the relitigation of a particular fact or issue in another
action between the same parties based on a different claim or cause of
action. "xxx the judgment in the prior action operates as estoppel only as
to those matters in issue or points controverted, upon the determination of
which the finding or judgment was rendered. In fine, the previous judgment
is conclusive in the second case, only as those matters actually and
directly controverted and determined and not as to matters merely
involved therein."[23]
Applying the abovecited pronouncement, the Court, in Smith Bell and
Company (Phils.), Inc. vs. Court of Appeals,[24] held that the issue of
negligence of the shipping line, which issue had already been passed
upon in a case filed by one of the insurers, is conclusive and can no longer
be relitigated in a similar case filed by another insurer against the same
shipping line on the basis of the same factual circumstances. Ratiocinating
further, the Court opined:
"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai
Maru') had been negligent, or so negligent as to have proximately
caused the collision between them, was an issue that was actually,
directly and expressly raised, controverted and litigated in C.A.-G.R.
 No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision and
held the 'Don Carlos' to have been negligent rather than the 'Yotai
Maru' and, as already noted, that Decision was affirmed by this
Court in G.R. No. L-48839 in a Resolution dated 6 December 1987.
The Reyes Decision thus became final and executory approximately
two (2) years before the Sison Decision, which is assailed in the
case at bar, was promulgated. Applying the rule of conclusiveness of
judgment, the question of which vessel had been negligent in the
collision between the two (2) vessels, had long been settled by this
Court and could no longer be relitigated in C.A.-G.R. No. 61206-R.
Private respondent Go Thong was certainly bound by the ruling or
judgment of Reyes, L.B., J. and that of this Court. The Court of
Appeals fell into clear and reversible error when it disregarded the
Decision of this Court affirming the Reyes Decision." [25]
The controversy at bar is on all fours with the aforecited case. Considering
that private respondent's insurable interest in, and compensability for the
loss of subject fun and amusement machines and spare parts, had been
adjudicated, settled and sustained by the Court of Appeals in CA-G.R. CV
NO. 28779, and by this Court in G.R. No. L-111118, in a Resolution, dated
February 2, 1994, the same can no longer be relitigated and passed upon
in the present case. Ineluctably, the petitioner, Rizal Surety Insurance
Company, is bound by the ruling of the Court of Appeals and of this Court
that the private respondent has an insurable interest in the aforesaid fun
and amusement machines and spare parts; and should be indemnified for
the loss of the same.
So also, the Court of Appeals correctly adjudged petitioner liable for the
amount of P470,328.67, it being the total loss and damage suffered by
Transworld for which petitioner Rizal Insurance is liable. [26]
All things studiedly considered and viewed in proper perspective, the
Court is of the irresistible conclusion, and so finds, that the Court of
Appeals erred not in holding the petitioner, Rizal Surety Insurance
Company, liable for the destruction and loss of the insured buildings and
articles of the private respondent.
WHEREFORE, the Decision, dated July 15, 1993, and the Resolution,
dated October 22, 1993, of the Court of Appeals in CA-G.R. CV NO.
28779 are AFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.
RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
Jose A. Espiritu for appellant.
Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:
This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer to
recover from the defendant life insurance company the sum of pesos 6,000 paid by the deceased for a life
annuity. The trial court gave judgment for the defendant. Plaintiff appeals.
The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the Sun Life
Assurance Company of Canada through its office in Manila for a life annuity. Two days later he paid the
sum of P6,000 to the manager of the company's Manila office and was given a receipt reading as follows:
MANILA, I. F., 26 de septiembre, 1917.

PROVISIONAL RECEIPT Pesos 6,000

Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta
Vitalicia solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen medico y aprobacion
de la Oficina Central de la Compaia.

The application was immediately forwarded to the head office of the company at Montreal, Canada. On
November 26, 1917, the head office gave notice of acceptance by cable to Manila. (Whether on the same
day the cable was received notice was sent by the Manila office of Herrer that the application had been
accepted, is a disputed point, which will be discussed later.) On December 4, 1917, the policy was issued
at Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote to the Manila office of the company
stating that Herrer desired to withdraw his application. The following day the local office replied to Mr.
Torres, stating that the policy had been issued, and called attention to the notification of November 26,
1917. This letter was received by Mr. Torres on the morning of December 21, 1917. Mr. Herrer died on
December 20, 1917.
As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of
acceptance of his application. To resolve this question, we propose to go directly to the evidence of record.
The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the trial
testified that he prepared the letter introduced in evidence as Exhibit 3, of date November 26, 1917, and
handed it to the local manager, Mr. E. E. White, for signature. The witness admitted on cross-examination
that after preparing the letter and giving it to he manager, he new nothing of what became of it. The local
manager, Mr. White, testified to having received the cablegram accepting the application of Mr. Herrer from
the home office on November 26, 1917. He said that on the same day he signed a letter notifying Mr.
Herrer of this acceptance. The witness further said that letters, after being signed, were sent to the chief
clerk and placed on the mailing desk for transmission. The witness could not tell if the letter had every
actually been placed in the mails. Mr. Tuason, who was the chief clerk, on November 26, 1917, was not
called as a witness. For the defense, attorney Manuel Torres testified to having prepared the will of Joaquin
Ma. Herrer, that on this occasion, Mr. Herrer mentioned his application for a life annuity, and that he said
that the only document relating to the transaction in his possession was the provisional receipt. Rafael
Enriquez, the administrator of the estate, testified that he had gone through the effects of the deceased and
had found no letter of notification from the insurance company to Mr. Herrer.
Our deduction from the evidence on this issue must be that the letter of November 26, 1917, notifying Mr.
Herrer that his application had been accepted, was prepared and signed in the local office of the insurance
company, was placed in the ordinary channels for transmission, but as far as we know, was never actually
mailed and thus was never received by the applicant.
Not forgetting our conclusion of fact, it next becomes necessary to determine the law which should be
applied to the facts. In order to reach our legal goal, the obvious signposts along the way must be noticed.
Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the Code
of Commerce and the Civil Code. In the Code of the Commerce, there formerly existed Title VIII of Book III
and Section III of Title III of Book III, which dealt with insurance contracts. In the Civil Code there formerly
existed and presumably still exist, Chapters II and IV, entitled insurance contracts and life annuities,
respectively, of Title XII of Book IV. On the after July 1, 1915, there was, however, in force the Insurance
Act. No. 2427. Chapter IV of this Act concerns life and health insurance. The Act expressly repealed Title
VIII of Book II and Section III of Title III of Book III of the code of Commerce. The law of insurance is
consequently now found in the Insurance Act and the Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be
followed in order that there may be a contract of insurance. On the other hand, the Civil Code, in article
1802, not only describes a contact of life annuity markedly similar to the one we are considering, but in two
other articles, gives strong clues as to the proper disposition of the case. For instance, article 16 of the Civil
Code provides that "In matters which are governed by special laws, any deficiency of the latter shall be
supplied by the provisions of this Code." On the supposition, therefore, which is incontestable, that the
special law on the subject of insurance is deficient in enunciating the principles governing acceptance, the
subject-matter of the Civil code, if there be any, would be controlling. In the Civil Code is found article 1262
providing that "Consent is shown by the concurrence of offer and acceptance with respect to the thing and
the consideration which are to constitute the contract. An acceptance made by letter shall not bind the
person making the offer except from the time it came to his knowledge. The contract, in such case, is
presumed to have been entered into at the place where the offer was made." This latter article is in
opposition to the provisions of article 54 of the Code of Commerce.
If no mistake has been made in announcing the successive steps by which we reach a conclusion, then the
only duty remaining is for the court to apply the law as it is found. The legislature in its wisdom having
enacted a new law on insurance, and expressly repealed the provisions in the Code of Commerce on the
same subject, and having thus left a void in the commercial law, it would seem logical to make use of the
only pertinent provision of law found in the Civil code, closely related to the chapter concerning life
annuities.
The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only from the
date it came to his knowledge, may not be the best expression of modern commercial usage. Still it must
be admitted that its enforcement avoids uncertainty and tends to security. Not only this, but in order that the
principle may not be taken too lightly, let it be noticed that it is identical with the principles announced by a
considerable number of respectable courts in the United States. The courts who take this view have
expressly held that an acceptance of an offer of insurance not actually or constructively communicated to
the proposer does not make a contract. Only the mailing of acceptance, it has been said, completes the
contract of insurance, as the locus poenitentiae is ended when the acceptance has passed beyond the
control of the party. (I Joyce, The Law of Insurance, pp. 235, 244.)
In resume, therefore, the law applicable to the case is found to be the second paragraph of article 1262 of
the Civil Code providing that an acceptance made by letter shall not bind the person making the offer
except from the time it came to his knowledge. The pertinent fact is, that according to the provisional
receipt, three things had to be accomplished by the insurance company before there was a contract: (1)
There had to be a medical examination of the applicant; (2) there had to be approval of the application by
the head office of the company; and (3) this approval had in some way to be communicated by the
company to the applicant. The further admitted facts are that the head office in Montreal did accept the
application, did cable the Manila office to that effect, did actually issue the policy and did, through its agent
in Manila, actually write the letter of notification and place it in the usual channels for transmission to the
addressee. The fact as to the letter of notification thus fails to concur with the essential elements of the
general rule pertaining to the mailing and delivery of mail matter as announced by the American courts,
namely, when a letter or other mail matter is addressed and mailed with postage prepaid there is a
rebuttable presumption of fact that it was received by the addressee as soon as it could have been
transmitted to him in the ordinary course of the mails. But if any one of these elemental facts fails to
appear, it is fatal to the presumption. For instance, a letter will not be presumed to have been received by
the addressee unless it is shown that it was deposited in the post-office, properly addressed and stamped.
(See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq., notes.)
We hold that the contract for a life annuity in the case at bar was not perfected because it has not been
proved satisfactorily that the acceptance of the application ever came to the knowledge of the applicant. lawph!l.net

Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000 with
legal interest from November 20, 1918, until paid, without special finding as to costs in either instance. So
ordered.
Mapa, C.J., Araullo, Avancea and Villamor, JJ., concur.

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

Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO.,
INC., petitioners, vs. COURT OF APPEALS and CKS DEVELOPMENT
CORPORATION, respondents.

DECISION
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:

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.
2. One of the stipulations of the one (1) year lease contract states:
18. x x x. 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; x x x[1]
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 respondents CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased
premises.
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 Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha
spouses and United.
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:
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
II

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

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
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 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:

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.

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

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:
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.

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.
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."

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.
 The liability of the Cha spouses to CKS for violating their lease contract in
that 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.

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 Uy-Cha.

SO ORDERED.