III.

Insurable Interest
A. Concept of insurable interest in general

Any contingent or unknown event, whether past or future, which may damnify a person having
an insurable interest, or create a liability against him, may be insured

B. Reason for the requirement of insurable interest

C. Insurable interest in life insurance

D. Insurable interest in property insurance

1. Insurable interest in case of mortgaged property

a. standard or union mortgage clause

b. open or loss payable clause

2. Effect of change of interest in the thing insured (Art. 1306, NCC)

Spouses Cha vs. CA, (August 18, 1997)

FACTS:

Spouses Nilo Cha and Stella Uy-Cha and CKS Development Corporation entered a 1 year
lease contract with a stipulation not to 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.  But it insured against loss by fire their
merchandise inside the leased premises for P500,000 with the United Insurance Co., Inc.
without the written consent of CKS

On the day the lease contract was to expire, fire broke out inside the leased premises and CKS
learning that the spouses procured an insurance wrote to United to have the proceeds be paid
directly to them. But United refused so CKS filed against Spouses Cha and United.

RTC: United to pay CKS the amount of P335,063.11 and Spouses Cha to pay P50,000 as
exemplary damages, P20,000 as attorney’s fees and costs of suit
CA: deleted exemplary damages and attorney’s fees

ISSUE: W/N the CKS has insurable interest because the spouses Cha violated the stipulation

HELD: NO. CA set aside. Awarding the proceeds to spouses Cha.

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.  

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.

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

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

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.  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.
Geagonia vs. CA, February 6, 1995
Facts:
 
Geagonia, owner of a store, obtained from Country Bankers fire insurance policy for
P100,000.00. The 1 year policy and covered the stock trading of dry goods. The policy noted the
requirement that

"3. The insured shall give notice to the Company of any insurance or insurances already
effected, or which may subsequently be effected, covering any of the property or
properties consisting of stocks in trade, goods in process and/or inventories only hereby
insured, and unless notice be given and the particulars of such insurance or insurances
be stated therein or endorsed in this policy pursuant to Section 50 of the Insurance
Code, by or on behalf of the Company before the occurrence of any loss or damage, all
benefits under this policy shall be deemed forfeited, provided however, that this
condition shall not apply when the total insurance or insurances in force at the time of
the loss or damage is not more than P200,000.00."

The petitioners’ stocks were destroyed by fire. He then filed a claim which was subsequently
denied because the petitioner’s stocks were covered by two other fire insurance policies for
Php 200,000 issued by PFIC. The basis of the private respondent's denial was the petitioner's
alleged violation of Condition 3 of the policy. Geagonia then filed a complaint against the
private respondent in the Insurance Commission for the recovery of P100,000.00 under fire
insurance policy and damages. He claimed that he knew the existence of the other two
policies. But, he said that he had no knowledge of the provision in the private respondent's
policy requiring him to inform it of the prior policies and this requirement was not mentioned
to him by the private respondent's agent.

The Insurance Commission found that the petitioner did not violate Condition 3 as he had no
knowledge of the existence of the two fire insurance policies obtained from the PFIC; that it
was Cebu Tesing Textiles w/c procured the PFIC policies w/o informing him or securing his
consent; and that Cebu Tesing Textile, as his creditor, had insurable interest on the stocks.

The Insurance Commission then ordered the respondent company to pay complainant the sum
of P100,000.00 with interest and attorney’s fees.

CA reversed the decision of the Insurance Commission because it found that the petitioner
knew of the existence of the two other policies issued by the PFIC.
 
Issues:
1. WON the petitioner had not disclosed the two insurance policies when he obtained the
fire insurance and thereby violated Condition 3 of the policy. -- YES
2. WON he is prohibited from recovering - NO
 
Held: Yes. No. Petition Granted
 
Ratio:
 
1. the petitioner knew of the prior policies issued by the PFIC. His letter of 18 January 1991 to
the private respondent conclusively proves this knowledge. His testimony to the contrary
before the Insurance Commissioner and which the latter relied upon cannot prevail over a
written admission made ante litem motam. It was, indeed, incredible that he did not know
about the prior policies since these policies were not new or original.
 
2.

As to a mortgaged property, the mortgagor and the mortgagee have each an independent
insurable interest therein and both interests may be covered by one policy, or each may take
out a separate policy covering his interest, either at the same or at separate times.18 The
mortgagor's insurable interest covers the full value of the mortgaged property, even though the
mortgage debt is equivalent to the full value of the property.19 The mortgagee's insurable
interest is to the extent of the debt, since the property is relied upon as security thereof, and in
insuring he is not insuring the property but his interest or lien thereon. His insurable interest is
prima facie the value mortgaged and extends only to the amount of the debt, not exceeding the
value of the mortgaged property.20 Thus, separate insurances covering different insurable
interests may be obtained by the mortgagor and the mortgagee.

A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the
usual practice. The mortgagee may be made the beneficial payee in several ways. He may
become the assignee of the policy with the consent of the insurer; or the mere pledgee without
such consent; or the original policy may contain a mortgage clause; or a rider making the policy
payable to the mortgagee "as his interest may appear" may be attached; or a "standard
mortgage clause," containing a collateral independent contract between the mortgagee and
insurer, may be attached; or the policy, though by its terms payable absolutely to the
mortgagor, may have been procured by a mortgagor under a contract duty to insure for the
mortgagee's benefit, in which case the mortgagee acquires an equitable lien upon the proceeds

In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as
his interest may appear, the mortgagee is only a beneficiary under the contract, and recognized
as such by the insurer but not made a party to the contract itself. Hence, any act of the
mortgagor which defeats his right will also defeat the right of the mortgagee.22 This kind of
policy covers only such interest as the mortgagee has at the issuing of the policy.

On the other hand, a mortgagee may also procure a policy as a contracting party in accordance
with the terms of an agreement by which the mortgagor is to pay the premiums upon such
insurance.24 It has been noted, however, that although the mortgagee is himself the insured,
as where he applies for a policy, fully informs the authorized agent of his interest, pays the
premiums, and obtains a policy on the assurance that it insures him, the policy is in fact in the
form used to insure a mortgagor with loss payable clause.25

The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a
mortgage clause which reads: "Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu
City as their interest may appear subject to the terms of this policy."

This is clearly a simple loss payable clause, not a standard mortgage clause

NO DOUBLE INSURANCE
A double insurance exists where the same person is insured by several insurers separately in
respect of the same subject and interest. As earlier stated, the insurable interests of a
mortgagor and a mortgagee on the mortgaged property are distinct and separate. Since the
two policies of the PFIC do not cover the same interest as that covered by the policy of the
private respondent, no double insurance exists. The non-disclosure then of the former policies
was not fatal to the petitioner's right to recover on the private respondent's policy.

2/
Stated differently, provisions, conditions or exceptions in policies which tend to work a
forfeiture of insurance policies should be construed most strictly against those for whose
benefits they are inserted, and most favorably toward those against whom they are intended to
operate.

With these principles in mind, Condition 3 of the subject policy is not totally free from
ambiguity and must be meticulously analyzed. Such analysis leads us to conclude that (a) the
prohibition applies only to double insurance, and (b) the nullity of the policy shall only be to
the extent exceeding P200,000.00 of the total policies obtained.

Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total
insurance in force at the time of loss does not exceed P200,000.00, the private respondent was
amenable to assume a co-insurer's liability up to a loss not exceeding P200,000.00. What it had
in mind was to discourage over-insurance. Indeed, the rationale behind the incorporation of
"other insurance" clause in fire policies is to prevent over-insurance and thus avert the
perpetration of fraud. When a property owner obtains insurance policies from two or more
insurers in a total amount that exceeds the property's value, the insured may have an
inducement to destroy the property for the purpose of collecting the insurance. The public as
well as the insurer is interested in preventing a situation in which a fire would be profitable to
the insured.
RCBC vs. CA

Doctrine: It is settled that a mortgagor and a mortgagee have separate and distinct insurable
interests in the same mortgaged property, such that each one of them may insure the same
property for his own sole benefit.

Facts: Respondent Goyu & Sons, Inc. (GOYU) applied for credit facilities and accommodations
with RCBC at its Binondo Branch, and was initially granted 30M php, which RCBC’s executive
committee later increased to P50M, then to P90M, and finally to P117M. As security, GOYU
executed two real estate mortgages and two chattel mortgages in favor of RCBC.

Under each of these four mortgage contracts, GOYU committed itself to insure the
mortgaged property with an insurance company approved by RCBC, and subsequently, to
endorse and deliver the insurance policies to RCBC. GOYU obtained 10 insurance policies
from Malayan Insurance Company, Inc. (MICO).

In 1992, GOYU’s factory buildings in Valenzuela were gutted by fire. GOYU submitted its claim
for indemnity, which MICO denied on the ground that the insurance policies were either
attached pursuant to writs of attachments/garnishments issued by various courts or that
the insurance proceeds were also claimed by other creditors of GOYU alleging better
rights to the proceeds than the insured.

GOYU filed a complaint for specific performance and damages. RCBC also filed with MICO its
formal claim over the proceeds of the insurance policies, which MICO denied for the same
reasons.

RTC, confirming that there were other creditors, ordered that the proceeds of the ten insurance
policies be deposited with the said court minus the P14,938,080.23 (aggregate amount obtained
by other creditors through their respective writs of attachments). From this judgment, all parties
interposed their respective appeals. GOYU, MICO and RCBC all appealed. CA partly granted
GOYU’s appeal, but sustained RTC’s decision as to MICO and RCBC. Hence this appeal by
RCBC and MICO.
.
Issue: WON RCBC, as mortgagee, has any right over the insurance policies taken by GOYU,
the mortgagor, in case of the occurrence of loss? - YES

Ruling: It is settled that a mortgagor and a mortgagee have separate and distinct insurable
interests in the same mortgaged property, such that each one of them may insure the same
property for his own sole benefit. There is no question that GOYU could insure the
mortgaged property for its own exclusive benefit. In the present case, although it appears
that GOYU obtained the subject insurance policies naming itself as the sole payee, the
intentions of the parties as shown by their contemporaneous acts, must be given due
consideration in order to better serve the interest of justice and equity. 

The mortgage contracts between GOYU and RCBC expressly stipulate that GOYU shall insure
the mortgaged property with any of the insurance companies acceptable to RCBC, and endorse
these insurance policies in favor of, and deliver them, to RCBC. The endorsements were held to
be defective by CA and RTC because it lacked the signature of any officer of GOYU. But the
Court is in a quandary how MICO’s underwriter, Alchester Insurance Agency, Inc., could arrive
at the idea of endorsing any specific insurance policy in favor of any particular beneficiary or
payee other than the insured had not such named payee or beneficiary been specifically
disclosed by the insured itself. GOYU voluntarily disclosed to Alchester that the properties were
mortgaged to GOYU. On equitable principles, particularly on the ground of estoppel, the Court is
constrained to rule in favor of mortgagee RCBC. (In short, separate dapat insurable interest
nila but GOYU’s acts show that there was intent to make RCBC as beneficiary).

RCBC, in good faith, relied upon the endorsement documents sent to it as this was only
pursuant to the stipulation in the mortgage contracts. Moreover, GOYU failed to seasonably
repudiate the authority of the person or persons who prepared such endorsements. GOYU
continued to enjoy the benefits of the credit facilities extended to it by RCBC. 

GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the
proceeds of insurance shall exclusively apply to the interest of the person in whose name or for
whose benefit it is made. The peculiarity of the circumstances obtaining in the instant case
presents a justification to take exception to the strict application of said provision, it having been
sufficiently established that it was the intention of the parties to designate RCBC as the party for
whose benefit the insurance policies were taken out. 

The court notes that out of the 10 insurance policies subject of this case, only 8 of them appear
to have been subject of the endorsements. These 8 policies can not be attached by GOYU’s
other creditors being exclusively payable to RCBC by reason of the endorsement.

4. Cagayan, Inc. vs. Insurance Company of North America, G.R. No. 147839

Facts: Insurance Company of North America is the insurer of Intercapitol Marketing Corporation
or IMC (the maker of Wrangler Blue Jeans) and Levi Straus & Co (LSPI). IMC and LSPI
separately obtained from respondent fire insurance policies for coverage on “book debts in
connection with ready-made clothing materials which have been sold or delivered to various
customers and dealers of the Insured anywhere in the Philippines. As provided in the policies,
book debts is  defined as  the unpaid account of the insured due to loss.
 
Herein petitioner Gaisano Superstore   is a customer of IMC and LSPI and on feb 1991, said
mall was consumed by fire and Included in the items lost or destroyed in the fire were stocks of
ready-made clothing materials sold and delivered by IMC and LSPI. Due to the fire, herein
insurer company paid IMC and LSPI their claims under their respective fire insurance policies
with book debt endorsement for the unpaid account of petition on the sale and delivery of ready-
made clothing materials. Petitioner: petitioner contends however that it could not be held liable
because the property covered by the insurance policies were destroyed due to fortuities event; 
that IMC and LSPI never communicated to it that they
insured their properties; that it never consented to paying the claim of the insured.
 
RTC ruled in favor of Insurance Co. of South America ruling that the fire is a fortuitous event
and that the merchandise remains the property of the vendor until the purchase price is fully
paid. Hence IMC and LSPI retained the ownership of the merchandize and must bear the loss.
 
Upon appeal. CA set aside the decision of the RTC ruling that  if the thing is lost by a fortuitous
event, the risk is borne by the owner of the thing at the time the loss under the principle of res
perit domino (under Art 1504(1) of the Civil Code) and that  petitioner’s obligation to IMC and
LSPI is not the delivery of the lost goods but the payment of its unpaid account and as such the
obligation to pay is not extinguished, even if the fire is considered a fortuitous event.
 
 
ISSUE:
1. WON the insurance is deemed to be over "credit"
2. WON the Pretitioner Gaisano is liable for the unpaid accounts
 
 
HELD:
1. YES.
 
The court held that when the words of a contract are plain and readily understood, there is no
room for construction. In this case, the questioned insurance policies provide coverage for “book
debts in connection with ready-made clothing materials which have been sold or delivered to
various  customers and dealers of the Insured anywhere in the Philippines;”and defined book
debts as the “unpaid account still appearing in the Book of Account of the Insured 45 days after
the time of the loss covered under this Policy.” Nowhere is it provided in the questioned
insurance policies that the subject of the insurance is the goods sold and delivered to the
customers and dealers of the insured.Thus, what were insured against were the accounts of
IMC and LSPI with petitioner which remained unpaid 45 days after the loss through fire, and not
the loss or destruction of the goods delivered.
 
Respondent's position is correct that while ownership over the ready-made clothing materials
was transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said
goods as creditors who stand to suffer direct pecuniary loss from its destruction by fire; that
petitioner is liable for loss of the ready-made clothing materials since it failed to overcome the
presumption of liability under Article 1265 of the Civil Code; that the firewas caused through
petitioner’s negligence in failing to provide stringent measures of caution, care and maintenance
on its property because electric wires do not usually short circuit unless there are defects in their
installation or when there is lack of proper maintenance and supervision of the property.
 
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
 
"ART. 1504. Unless otherwise agreed, the goods remain at the seller’s risk until the ownership
therein is transferred to the buyer, but when the ownership therein is transferred to the buyer 
the goods are at the buyer’s risk whether actual delivery has been made or not, except that:
 (1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in the goods has been retained by the seller
merely to secure performance by the buyer of his obligations under the contract, the goods are
at the buyer’s risk from the time of such delivery;"
 
 
Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of
loss is borne by the Buyer goods delivered. Accordingly, petitioner bears the risk of loss of the
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest
until full payment of the value of the delivered goods. Unlike the civil law concept of res perit
domino, where ownership is the basis for consideration of who bears the risk of loss, in property
insurance, one’s interest is not determined by concept of title, but whether insured has
substantial economic interest in the property. An Insurable interest in property does not
necessarily imply a property interest in, or a lien upon, or  possession of, the subject matter of
the insurance, and neither the title nor a beneficial interest is requisite to the existence of such
an interest, it is sufficient that the insured is so situated with reference to the property that he
would be liable to loss should it be injured or destroyed by the peril against which it is insured.
Indeed, a vendor or seller retains an insurable interest in the property sold so long as he has
any interest therein.

2. YES.
Petitioner’s argument that it is not liable because the fire is a fortuitous event under Article 1174
of the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of
the Civil Code.
 
Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but
for petitioner’s accounts with IMC and LSPI that remained unpaid 45 days after the fire.
Accordingly, petitioner’s obligation is for the payment of money. As correctly stated by the CA,
where the obligation consists in the payment of money, the failure of the debtor to make the
payment even by reason of the peril against which it is insured. Anyone has an insurable
interest in property who derives a benefit from as where he has a vendor’s lien. The interest of
IMC and LSPI pertain to the unpaid accounts appearing in. their Books of Account 45 days after
the time of the loss covered by the policies. In this case, the insurable fortuitous event shall not
relieve him of his liability. The rationale for this is that the rule that an obligor should be held
exempt from liability when the loss occurs thru a  fortuitous event only holds true when the
obligation consists in the delivery of a determinate thing and there is no stipulation holding him
liable even in case of fortuitous event. And under 1263 of the Civil Code, in an obligation to
deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish
the obligation.” If the obligation is generic in the sense that the object thereof is designated
merely by its class or genus without any particular designation or physical segregation from all
others of the same class, the loss or destruction of anything of the same kind even without the
debtor’s fault and before he has incurred in delay will not have the effect of extinguishing the
obligation.
 
Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this
case. What is relevant here is whether it has been established that petitioner has outstanding
accounts with IMC and LSPI.