FIRSTDIVISION

[G.R.No.124520.August18,1997]

Spouses NILO CHA and STELLA UY CHA, and UNITED

INSURANCE CO., INC., petitioners, vs. COURT OF
APPEALS and CKS DEVELOPMENT CORPORATION,
respondents.
DECISION
PADILLA,J.:

This petition for review on certiorari under Rule 45 of the Rules of Court
seekstosetasideadecisionofrespondentCourtofAppeals.
Theundisputedfactsofthecaseareasfollows:
1.PetitionerspousesNiloChaandStellaUyCha,aslessees,enteredintoalease
contractwithprivaterespondentCKSDevelopmentCorporation(hereinafterCKS),as
lessor,on5October1988.
2.Oneofthestipulationsoftheone(1)yearleasecontractstates:
18.xxx.TheLESSEEshallnotinsureagainstfirethechattels,merchandise,textiles,
goodsandeffectsplacedatanystallorstoreorspaceintheleasedpremiseswithoutfirst
obtainingthewrittenconsentandapprovaloftheLESSOR.IftheLESSEEobtain(s)the
insurancethereofwithouttheconsentoftheLESSORthenthepolicyisdeemedassigned
andtransferredtotheLESSORforitsownbenefitxxx[1]
3.Notwithstandingtheabovestipulationintheleasecontract,theChaspouses
insuredagainstlossbyfiretheirmerchandiseinsidetheleasedpremisesforFive
HundredThousand(P500,000.00)withtheUnitedInsuranceCo.,Inc.(hereinafter
United)withoutthewrittenconsentofprivaterespondentsCKS.
4.Onthedaythattheleasecontractwastoexpire,firebrokeoutinsidetheleased
premises.
5.WhenCKSlearnedoftheinsuranceearlierprocuredbytheChaspouses(without
itsconsent),itwrotetheinsurer(United)ademandletteraskingthattheproceedsofthe

insurancecontract(betweentheChaspousesandUnited)bepaiddirectlytoCKS,based
onitsleasecontractwithChaspouses.
6.UnitedrefusedtopayCKS.Hence,thelatterfiledacomplaintagainsttheCha
spousesandUnited.
7.On2June1992,theRegionalTrialCourt,Branch6,Manila,renderedadecision*
orderingthereindefendantUnitedtopayCKStheamountofP335,063.11anddefendant
ChaspousestopayP50,000.00asexemplarydamages,P20,000.00asattorneysfees
andcostsofsuit.
8.Onappeal,respondentCourtofAppealsinCAGRCVNo.39328rendereda
decision**dated11January1996,affirmingthetrialcourtdecision,deletinghoweverthe
awardsforexemplarydamagesandattorneysfees.Amotionforreconsiderationby
Unitedwasdeniedon29March1996.
In the present petition, the following errors are assigned by petitioners to
theCourtofAppeals:
I

THEHONORABLECOURTOFAPPEALSERREDINFAILINGTODECLARE
THATTHESTIPULATIONINTHECONTRACTOFLEASETRANSFERRING
THEPROCEEDSOFTHEINSURANCETORESPONDENTISNULLAND
VOIDFORBEINGCONTRARYTOLAW,MORALSANDPUBLICPOLICY
II

THEHONORABLECOURTOFAPPEALSERREDINFAILINGTODECLARE
THECONTRACTOFLEASEENTEREDINTOASACONTRACTOF
ADHESIONANDTHEREFORETHEQUESTIONABLEPROVISIONTHEREIN
TRANSFERRINGTHEPROCEEDSOFTHEINSURANCETORESPONDENT
MUSTBERULEDOUTINFAVOROFPETITIONER
III

THEHONORABLECOURTOFAPPEALSERREDINAWARDING
PROCEEDSOFANINSURANCEPOLICYTOAPPELLEEWHICHISNOT
PRIVYTOTHESAIDPOLICYINCONTRAVENTIONOFTHEINSURANCE
LAW
IV

THEHONORABLECOURTOFAPPEALSERREDINAWARDING
PROCEEDSOFANINSURANCEPOLICYONTHEBASISOFA
STIPULATIONWHICHISVOIDFORBEINGWITHOUTCONSIDERATION

ANDFORBEINGTOTALLYDEPENDENTONTHEWILLOFTHE
RESPONDENTCORPORATION.[2]
Thecoreissuetoberesolvedinthiscaseiswhetherornottheaforequoted
paragraph 18 of the lease contract entered into between CKS and the Cha
spousesisvalidinsofarasitprovidesthatanyfireinsurancepolicyobtainedby
thelessee(Chaspouses)overtheirmerchandiseinsidetheleasedpremisesis
deemed assigned or transferred to the lessor (CKS) if said policy is obtained
withoutthepriorwrittenofthelatter.
Itis,ofcourse,basicinthelawoncontractsthatthestipulationscontained
in a contract cannot be contrary to law, morals, good customs, public order or
publicpolicy.[3]
Sec.18oftheInsuranceCodeprovides:
Sec.18.Nocontractorpolicyofinsuranceonpropertyshallbeenforceable
exceptforthebenefitofsomepersonhavinganinsurableinterestinthe
propertyinsured.
A nonlife 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
takeseffectandatthetimethelossoccurs.[4]Thebasisofsuchrequirementof
insurableinterestinpropertyinsuredisbasedonsoundpublicpolicy:toprevent
apersonfromtakingoutaninsurancepolicyonpropertyuponwhichhehasno
insurableinterestandcollectingtheproceedsofsaidpolicyincaseoflossofthe
property. In such a case, the contract of insurance is a mere wager which is
voidunderSection25oftheInsuranceCode,whichprovides:
SECTION25.EverystipulationinapolicyofInsuranceforthepaymentof
loss,whetherthepersoninsuredhasorhasnotanyinterestintheproperty
insured,orthatthepolicyshallbereceivedasproofofsuchinterest,andevery
policyexecutedbywayofgamingorwagering,isvoid.
Inthepresentcase,itcannotbedeniedthatCKShasnoinsurableinterest
inthegoodsandmerchandiseinsidetheleasedpremisesundertheprovisions
ofSection17oftheInsuranceCodewhichprovide.
Section17.Themeasureofaninsurableinterestinpropertyistheextentto
whichtheinsuredmightbedamnifiedbylossofinjurythereof."
Therefore, respondent CKS cannot, under the Insurance Code a special
lawbevalidlyabeneficiaryofthefireinsurancepolicytakenbythepetitioner
spousesovertheirmerchandise.Thisinsurableinterestoversaidmerchandise
remains with the insured, the Cha spouses. The automatic assignment of the
policytoCKSundertheprovisionoftheleasecontractpreviouslyquotedisvoid
forbeingcontrarytolawand/orpublicpolicy.Theproceedsofthefireinsurance

policythusrightfullybelongtothespousesNiloChaandStellaUyCha(herein
copetitioners).Theinsurer(United)cannotbecompelledtopaytheproceeds
of the fire insurance policy to a person (CKS) who has no insurable interest in
thepropertyinsured.
The liability of the Cha spouses to CKS for violating their lease contract in
thatChaspousesobtainedafireinsurancepolicyovertheirownmerchandise,
without the consent of CKS, is a separate and distinct issue which we do not
resolveinthiscase.
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
proceedsofthefireinsurancepolicytopetitionersNiloChaandStellaUyCha.
SOORDERED.
Bellosillo,Vitug,Kapunan,andHermosisima,Jr.,JJ.,concur.
[1]Rollo,p.50.
*PennedbyJudgeRobertoM.Lagman.
** Penned by Justice Conchita CarpioMorales, with Justices Fidel P. Purisima and Fermin A.

Matin,Jr.,concurring.
[2]Rollo,p.18.
[3]Article1409(i),CivilCode.
[4]Section19,InsuranceCode.