G.R. No. 124520 - Spouses Cha vs. Court of Appeals

Case Summary (G.R. No. 124520)

Factual Background

Spouses Nilo Cha and Stella Uy-Cha entered into a one-year lease with CKS Development Corporation on 5 October 1988. The lease contained clause 18 providing that the lessee shall not insure chattels, merchandise, textiles, goods and effects in the leased premises without the lessor's prior written consent and that, if the lessee obtained such insurance without consent, the policy would be deemed assigned and transferred to the lessor for its own benefit. Notwithstanding that stipulation, the Cha spouses procured a fire insurance policy covering their merchandise for P500,000.00 from United Insurance Co., Inc. without obtaining CKS Development Corporation's written consent. On the day the lease was to expire a fire occurred inside the leased premises.

Demand and Commencement of Litigation

Upon learning of the policy, CKS Development Corporation wrote United Insurance Co., Inc. and demanded that the insurer pay the proceeds directly to CKS pursuant to the lease clause purporting to assign the policy. United Insurance Co., Inc. refused to pay CKS. CKS Development Corporation then filed suit against the Cha spouses and United Insurance Co., Inc. to recover the insurance proceeds.

Trial Court Proceedings and Court of Appeals Decision

The Regional Trial Court, Branch 6, Manila, on 2 June 1992, rendered judgment ordering United Insurance Co., Inc. to pay CKS Development Corporation P335,063.11 and ordering the Cha spouses to pay P50,000.00 as exemplary damages, P20,000.00 as attorneys' fees, and costs of suit. On appeal, the Court of Appeals in CA-G.R. CV No. 39328 affirmed the trial court's decision but deleted the awards of exemplary damages and attorneys' fees; its decision was rendered 11 January 1996 and its denial of a motion for reconsideration was entered 29 March 1996.

Issues Presented on Review

In their Rule 45 petition, petitioners assigned errors contending, in substance, that: (1) the lease provision purporting to transfer insurance proceeds to CKS Development Corporation was null and void as contrary to law, morals, and public policy; (2) the lease was a contract of adhesion and the assignment provision should be construed against CKS; (3) the Court of Appeals erred in awarding proceeds to a party not privy to the insurance policy in contravention of the Insurance Code; and (4) the assignment provision was void for lack of consideration and for being entirely dependent on the will of CKS Development Corporation.

Parties' Contentions

The petitioners maintained that the clause in the lease effecting an automatic assignment of any fire insurance procured by the lessee without the lessor's consent was unenforceable because CKS Development Corporation had no insurable interest in the lessees' merchandise and thus could not be a valid beneficiary under the Insurance Code. CKS Development Corporation relied upon the express lease provision to claim entitlement to the insurance proceeds. United Insurance Co., Inc. refused to pay CKS, leading to the insurer's appeal and the present petition.

Ruling of the Supreme Court (Disposition)

The Supreme Court granted the petition, set aside the decision of the Court of Appeals, and entered judgment awarding the proceeds of the fire insurance policy to Spouses Nilo Cha and Stella Uy-Cha. The Court held that the lease clause purporting to effect an automatic assignment of the policy to CKS Development Corporation was void insofar as it attempted to confer on CKS the right to the proceeds without an insurable interest.

Legal Basis and Reasoning

The Court recognized that non-life insurance such as the fire policy in this case is primarily a contract of indemnity and reiterated that an insurable interest must exist at the time the insurance takes effect and at the time of loss. The Court cited Sec. 18, Insurance Code, which requires that 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, and Sec. 25, Insurance Code, which voids policies executed by way of gaming or wagering. The Court further invoked Sec. 17, Insurance Code, for the measure of insurable interest and Article 1409(i), Civil Code, for the proposition that contractual stipulations contravening law or public policy are void. Because CKS Development Corporation had no insurable interest in the Cha spouses' goods, CKS could not be a valid beneficiary under the policy and the purported automatic assignment in the lease was contrary to law and public policy. Consequently, United Insurance Co., Inc. could not be compelled t

Case Syllabus (G.R. No. 124520)

Parties and Procedural Posture

Spouses Nilo Cha and Stella Uy-Cha and United Insurance Co., Inc. filed a petition for review under Rule 45, Rules of Court from a decision of the Court of Appeals.
CKS Development Corporation instituted an action in the Regional Trial Court, Branch 6, Manila against the Cha spouses and United claiming entitlement to fire insurance proceeds under a lease stipulation.
The RTC rendered judgment ordering United to pay CKS P335,063.11 and awarding exemplary damages, attorneys' fees, and costs against the Cha spouses.
The Court of Appeals affirmed the RTC decision but deleted awards for exemplary damages and attorneys' fees, and denied United's motion for reconsideration.
The petitioners sought reversal of the Court of Appeals' decision before the Supreme Court by raising constitutional and statutory objections to the lease stipulation.

Key Factual Allegations

Spouses Nilo Cha and Stella Uy-Cha entered into a one-year lease with CKS on 5 October 1988.
The lease contained a clause prohibiting the lessee from insuring chattels in the leased premises without the lessor's written consent and providing that any policy obtained without consent would be deemed assigned to the lessor.
The Cha spouses procured a fire insurance policy covering their merchandise for Five Hundred Thousand Pesos (P500,000.00) with United without CKS's written consent.
Fire occurred on the day the lease was to expire, damaging the insured merchandise.
CKS demanded that United pay the insurance proceeds to CKS pursuant to the lease stipulation, but United refused, prompting litigation.

Contract Clause

Paragraph 18 of the lease provided that the lessee shall not insure property in the leased premises without the lessor's written consent.
Paragraph 18 further provided that any policy obtained without the lessor's consent shall be deemed assigned and transferred to the lessor for the lessor's benefit.
The clause operated as an automatic assignment of any fire insurance procured by the lessee without prior written consent of the lessor.

Statutory Framework

Section 18, Insurance Code requires that no insurance on property shall be enforceable except for the benefit of a person having an insurable interest in the property insured.
Section 25, Insurance Code renders void every stipulation in an insurance policy for payment of loss where the person insured has no interest in the property or where the policy is executed by way of gaming or wagering.
Section 17, Insurance Code defines the measure of insurable interest as the extent to which the insured might be damnified by loss or injury to the property.
Article 1409(i), Civil Code provides the general rule that stipulations in a contract cannot be contrary to law, morals, good customs, public order, or public policy.

Issues Presented

Whether paragraph 18 of th