690 SUPREME COURT REPORTS ANNOTATED

Cha vs. Court of Appeals

*
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.

Contracts;  Stipulations contained in a contract cannot be contrary to law, morals, good customs,
public order or public policy.—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

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* FIRST DIVISION.

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contracts that the stipulations contained in a contract cannot be contrary to law, morals, good
customs, public order or public policy.

Same; Insurance;  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. 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 petitionerspouses 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. 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.

Same; Same; Leases; The lessor cannot be validly a beneficiary of a fire insurance policy taken by a

lessee over his merchandise, and the provision in the lease contract providing for such automatic
assignment is void for being contrary to law and/or public policy—the insurer cannot be compelled to pay
the proceeds of the policy to a person who has no insurable interest in the property insured.—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.

PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

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692 SUPREME COURT REPORTS ANNOTATED

Cha vs. Court of Appeals

     Jose Angelito B. Bulao for petitioners.

     Jara & Eduardo for private respondent.

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 1
LESSOR then the policy is deemed assigned and transferred to the LESSOR for its own benefit; x x x.”

3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured
against loss by fire the 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.
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

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1 Rollo, p. 50.

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paid directly to CKS, based on its lease contract with the 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
attorney’s 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 attorney’s 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

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** Penned by Judge Roberto M. Lagman.
*** Penned by Justice Conchita Carpio-Morales with Justices Fidel P. Purisima and Fermin A. Martin, Jr., concurring.

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694 SUPREME COURT REPORTS ANNOTATED

Cha vs. Court of Appeals

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 2 BEING TOTALLY DEPENDENT ON THE WILL OF THE
RESPONDENT CORPORATION.

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 contained3 in a contract
cannot be contrary to law, morals, good customs, public order or public policy. 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 property4
insured must exist at the time the insurance takes effect and at the time the loss occurs.  The
basis of such requirement of insurable interest in property insured is based on

_____________________
2 Rollo,p. 18.
3 Article1409(i), Civil Code.
4 Section 19, Insurance Code.

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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 or 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 UyCha (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 the Cha
spouses obtained a fire insur-ance policy over their own merchandise, without the consent of
CKS, is a separate and distinct issue which we do not resolve in this case.
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696 SUPREME COURT REPORTS ANNOTATED

Cha vs. Court of Appeals

WHEREFORE, the decision of the Court of Appeals in CAG.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.

     Bellosillo, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.

Judgment set aside, award of proceeds of fire insurance policy ordered given to petitioners
Nilo Cha and Stella Uy-Cha.

Notes.—In a case arising from a vehicular collision where the driver, the registered
owners, the beneficial owners, and the insurer were sued, a compromise agreement entered
into between the plaintiff and the insurer resulting in the dismissal of the case as against the
insurer does not redound to the benefit of the other defendants. (Imson vs. Court of
Appeals, 239 SCRA 58[1994])
If the insured property is destroyed or damaged through the fault or negligence of a party
other than the assured, then the insurer, upon payment to the assured will be subrogated to
the rights of the assured to recover from the wrongdoer to the extent that the insurer has been
obligated to pay. (Coastwise Lighterage Corporation vs. Court of Appeals,  245 SCRA
796 [1995])

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