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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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VOL. 277, AUGUST 18, 1997 691

Cha vs. Court of Appeals

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 policythe 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 Codea special lawbe 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.


692

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
LESSOR then the policy is deemed assigned
1
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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VOL. 277, AUGUST 18, 1997 693


Cha vs. Court of Appeals

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
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:

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

____________________________

** Penned by Judge Roberto M. Lagman.


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

694
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 BEING TOTALLY
DEPENDENT ON 2
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 contained in a contract cannot be contrary to3
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
property insured must exist at the time the 4
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 Article 1409(i), Civil Code.
4 Section 19, Insurance Code.

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VOL. 277, AUGUST 18, 1997 695


Cha vs. Court of Appeals

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


Codea special lawbe 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.
696

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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697

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