Sps. Nilo Cha v. CA

FIRST DIVISION
[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.
Jose Angelito B. Bulao for petitioners.

Jara & Eduardo for private respondent.
SYNOPSIS
Spouses Nilo Cha and Stella Uy-Cha entered into a lease contract with private
respondent CKS Development Corporation as lessor. One of the stipulations in the
lease contract was a prohibition on taking fire insurance by the lessee without the
approval of the lessor. In case the lessee shall obtain insurance without the consent of
the lessor then the policy shall be deemed assigned and transferred to the lessor.
Notwithstanding this stipulation, the spouses Cha insured against loss by fire their
merchandise inside the leased premises. On the day the lease contract was to expire,
fire broke out inside the leased premises. CKS Development learned of the insurance
procured without its consent by the Cha spouses. CKS Development, therefore,
claimed the proceeds of the insurance from the insurer, but was refused by the latter.
CKS Development filed a complaint against the Cha spouses and the insurer and won
its case. On appeal, the Court of Appeals affirmed the decision of the trial court
ordering the insurer to pay the proceeds of the insurance directly; to CKS
Development Corporation. Hence, this petition for review on certiorari. TEHIaD
The decision of the Court of Appeals was set aside and a new decision was
entered awarding the proceeds of the fire insurance policy to herein petitioners Nilo
Cha and Stella Uy-Cha. The Supreme Court ruled that CKS Development Corporation
could not, under the Insurance Code, be validly a beneficiary of the fire insurance
policy taken by the petitioners over their merchandise. The insurable interest over said
merchandise remains with the insured. The automatic assignment of the policy to CKS
Copyright 1994-2016 CD Technologies Asia, Inc. Jurisprudence 1901 to 2016 Third Release 1
under the provision of the lease contract previously quoted is void for being contrary
to law and/or public policy. The insurer cannot be compelled to pay the proceeds of
the fire insurance policy to a person who has no insurable interest in the property
insured.
SYLLABUS
1. COMMERCIAL LAW; INSURANCE CODE; INSURABLE

INTEREST; LESSOR HAS NO INSURABLE INTEREST IN GOODS AND
MERCHANDISE INSIDE THE LEASED PREMISES UNDER THE PROVISIONS
OF SECTION 17 OF THE INSURANCE CODE; CASE AT BAR. 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. 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 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. . . . 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.
2. ID.; ID.; AUTOMATIC ASSIGNMENT OF THE INSURANCE

POLICY TO THE LESSOR UNDER THE PROVISION OF THE LEASE
CONTRACT IS VOID FOR BEING CONTRARY TO LAW AND/OR PUBLIC
POLICY. 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. CTEaDc
DECISION
PADILLA, J : p
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. LexLib
2. One of the stipulations of the one (1) year lease contract states:
"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(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 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 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 *(2) 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 **(3) 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:
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(4)
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(5)
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(6) 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
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. cdasia
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.
Bellosillo, Vitug, Kapunan and Hermosisima, Jr., JJ ., concur.
Footnotes
1. Rollo, p. 50.
* Penned by Judge Roberto M. Lagman.
** Penned by Justice Conchita Carpio-Morales with Justice Fidel P. Purisima and
Fermin A. Matin, Jr., concurring.
2. Rollo, p. 18.
3. Article 1409(i), Civil Code.
4. Section 19, Insurance Code.
Endnotes
1 (Popup - Popup)
1. Rollo, p. 50.
2 (Popup - Popup)
* Penned by Judge Roberto M. Lagman.
3 (Popup - Popup)
** Penned by Justice Conchita Carpio-Morales with Justice Fidel P. Purisima and
Fermin A. Matin, Jr., concurring.
4 (Popup - Popup)
2. Rollo, p. 18.
5 (Popup - Popup)
3. Article 1409(i), Civil Code.
6 (Popup - Popup)
4. Section 19, Insurance Code.

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FIRST DIVISION

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

SPOUSES NILO CHA and STELLA UY CHA, and UNITED

Jose Angelito B. Bulao for petitioners.

1. COMMERCIAL LAW; INSURANCE CODE; INSURABLE

2. ID.; ID.; AUTOMATIC ASSIGNMENT OF THE INSURANCE

The undisputed facts of the case are as follows:

1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a

3. Notwithstanding the above stipulation in the lease contract, the Cha

8. On appeal, respondent Court of Appeals in CA GR CV No. 39328

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING

Sec. 18 of the Insurance Code provides:

"Sec. 18. No contract or policy of insurance on property shall be

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

"Section 25. Every stipulation in a policy of Insurance for the payment

"Section 17. The measure of an insurable interest in property is the

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

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

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