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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

____________________________

* FIRST DIVISION.

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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
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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.

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.
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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 is1 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

_______________________

1 Rollo, p. 50.

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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 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.
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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 TOTALLY2 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
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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 contrary3
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 property insured must exist at4
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 Article 1409(i), Civil Code.
4 Section 19, Insurance Code.

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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.”

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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.

696

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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])

——o0o——

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