G.R. No. 217806 - Navarro-Banaria vs. Banaria

Parties and Proceedings
Plaintiffs/Appellees: Ong Guan Can and the Bank of the Philippine Islands.
Defendant/Appellant: Century Insurance Co., Ltd.
On April 19, 1924, the Court of First Instance of Iloilo rendered judgment in favor of plaintiffs, ordering payment of ₱45,000 (the total sum insured) with legal interest from February 28, 1923, plus costs. The defendant appealed.

Insurance Contract and Fire Loss
The insurance policies covered the plaintiff’s house for ₱30,000 and its goods and merchandise for ₱15,000.
Early morning of February 28, 1923, both the house and the insured merchandise were destroyed by fire while the policies were in force.
Clause 14 of the policies provided that the insurer “may at its option reinstate or replace the property damaged or destroyed … instead of paying the amount of the loss or damage,” limited to the cost of reinstatement or the insured sum.

Appellant’s Contentions
Century Insurance Co. invoked clause 14, offering to rebuild the house—albeit smaller and with inferior materials—aligned with the street plan, instead of paying cash.
The appellant argued that rebuilding constituted sufficient indemnity and negated the obligation to pay the insured sum.

Trial Court Findings
The insurer did not give a formal notice of its election to rebuild, as required for alternative obligations under Civil Code article 1133; discussions by witnesses were informal.
The plaintiff refused to consent, noting the proposed house would be smaller and of lower-quality materials.
The trial court held it would be unjust to compel acceptance of an inferior replacement without additional indemnity for the difference, and observed that the insurer never tendered the ₱15,000 insured value for the destroyed merchandise.

Does clause 14 validly create an alternative obligation permitting the insurer to rebuild instead of paying the insured sum?
Did the insurer comply with the requirement to formally notify its election under Civil Code article 1133?
Was the insured’s consent to the proposed reconstruction obtained?
Did the insurer discharge its obligation by tendering the insured value for the destroyed merchandise?