Bonifacio Bros., Inc., et al. vs. Enrique Mora, et al.

A third person not a party to an insurance contract has no right of action against the insurance company for the proceeds of the policy, unless the contracting parties clearly and deliberately conferred a favor upon such person through a stipulation pour autrui. The "loss payable" clause in an insurance policy designating a mortgagee as beneficiary does not extend any benefit to repairmen or materialmen who performed repairs on the insured property.

Enrique Mora owned an Oldsmobile sedan model 1956, which he mortgaged to H.S. Reyes, Inc. with the condition that Mora would insure the automobile with H.S. Reyes, Inc. as beneficiary. The automobile was insured on June 23, 1959 with State Bonding & Insurance Co., Inc. under motor car insurance policy A-0615. The policy contained a "loss payable" clause stipulating that "Loss, if any is payable to H.S. Reyes, Inc.," by virtue of the mortgage in favor of H.S. Reyes, Inc.

Enrique Mora, owner of an Oldsmobile sedan model 1956 bearing plate No. QC-, mortgaged the same to H.S. Reyes, Inc., with the condition that Mora would insure the automobile with H.S. Reyes, Inc. as beneficiary. The automobile was thereafter insured on June 23, 1959 with State Bonding & Insurance Co., Inc., and motor car insurance policy A-0615 was issued to Enrique Mora. The policy provided that the company would indemnify the insured against loss of or damages to the motor vehicle, and that the insured may authorize the repair of the motor vehicle necessitated by damage for which the company may be liable under the policy, provided that the estimated cost of such repair does not exceed the Authorized Repair Limit and a detailed estimate of the cost is forwarded to the company without delay. The policy also contained a clause stating that "Loss, if any is payable to H.S. Reyes, Inc.," by virtue of the fact that the Oldsmobile sedan was mortgaged in favor of H.S. Reyes, Inc.

During the effectivity of the insurance contract, the car met with an accident. The insurance company assigned the accident to the Bayne Adjustment Co. for investigation and appraisal of the damage. Enrique Mora, without the knowledge and consent of H.S. Reyes, Inc., authorized Bonifacio Bros., Inc. to furnish the labor and materials, some of which were supplied by Ayala Auto Parts Co. For the cost of labor and materials, Enrique Mora was billed at P2,102.73 through the H.H. Bayne Adjustment Co. The insurance company, after claiming a franchise in the amount of P100, drew a check in the amount of P2,002.73 as proceeds of the insurance policy, payable to the order of Enrique Mora or H.S. Reyes, Inc., and entrusted the check to the H.H. Bayne Adjustment Co. for disposition and delivery to the proper party. In the meantime, the car was delivered to Enrique Mora without the consent of H.S. Reyes, Inc., and without payment to Bonifacio Bros., Inc. and Ayala Auto Parts Co. of the cost of repairs and materials.

Upon the theory that the insurance proceeds should be paid directly to them, Bonifacio Bros., Inc. and Ayala Auto Parts Co. filed on May 8, 1961 a complaint with the Municipal Court of Manila against Enrique Mora and State Bonding & Insurance Co., Inc. for the collection of the sum of P2,002.73. The insurance company filed its answer with a counterclaim for interpleader, requiring Bonifacio Bros., Inc. and H.S. Reyes, Inc. to interplead in order to determine who has better right to the insurance proceeds in question. Enrique Mora was declared in default for failure to appear at the hearing, and evidence against him was received ex parte. The counsel for Bonifacio Bros., Inc., Ayala Auto Parts Co., and State Bonding & Insurance Co., Inc. submitted a stipulation of facts, on the basis of which the Municipal Court rendered a decision declaring H.S. Reyes, Inc. as having a better right to the disputed amount and ordering State Bonding & Insurance Co., Inc. to pay to H.S. Reyes, Inc. the said sum of P2,002.73.

• Privity of Contract: The appellants argued that the insurance company and Enrique Mora are parties to the repair of the car as well as the towage thereof performed, citing paragraph 4 of the insurance contract which provides that "the insured may authorize the repair of the Motor Vehicle necessitated by damage for which the company may be liable under the policy." They stressed that the H.H. Bayne Adjustment Company's recommendation of payment of the appellants' bill for materials and repairs, for which the latter drew a check for P2,002.73, indicates that Mora and the H.H. Bayne Adjustment Co. acted for and in representation of the insurance company.

• Distinction Between "Loss" and "Damage": The appellants contended that the right of H.S. Reyes, Inc. to the insurance proceeds arises only if there was loss and not where there is mere damage as in the instant case.

• No Privity of Contract: The State Bonding & Insurance Company vehemently opposed the assertion or pretension of the appellants that they are privy to the contract, noting that if it were the intention of the insurance company to make itself liable to the repair shop or materialmen, it could have easily inserted in the contract a stipulation to that effect.

• Privity of Contract: Whether there is privity of contract between the Bonifacio Bros., Inc. and the Ayala Auto Parts Co., on the one hand, and the insurance company, on the other, such that the appellants may recover the insurance proceeds directly from the insurer.

• Loss vs. Damage: Whether the right of H.S. Reyes, Inc. to the insurance proceeds arises only if there was loss and not where there is mere damage.

• Privity of Contract: No. The appellants' alleged cause of action rests exclusively upon the terms of the insurance contract, but the appellants are not mentioned in the contract as parties thereto, nor is there any clause or provision from which an obligation on the part of the insurance company to pay the cost of repairs directly to them can be inferred. Contracts take effect only between the parties thereto, except in specific instances provided by law where the contract contains some stipulation in favor of a third person.

• Loss vs. Damage: No. Any attempt to draw a distinction between "loss" and "damage" is uncalled for, because the word "loss" in insurance law embraces injury or damage. According to section 120 of the Insurance Act, a loss may be either total or partial.

• Privity of Contract: The Court found the appellants' argument "beside the point" because from the undisputed facts and from the pleadings, the appellants' alleged cause of action rests exclusively upon the terms of the insurance contract. The appellants seek to recover the insurance proceeds and rely upon paragraph 4 of the insurance contract document executed by and between the State Bonding & Insurance Company, Inc. and Enrique Mora. The appellants are not mentioned in the contract as parties thereto, nor is there any clause or provision thereof from which an obligation on the part of the insurance company to pay the cost of repairs directly to them can be inferred. The Court emphasized that it is fundamental that contracts take effect only between the parties thereto, except in some specific instances provided by law where the contract contains some stipulation in favor of a third person, known as stipulation pour autrui. Under this doctrine, a third person is allowed to avail himself of a benefit granted to him by the terms of the contract, provided that the contracting parties have clearly and deliberately conferred a favor upon such person. The question of whether a third person has an enforceable interest in a contract must be settled by determining whether the contracting parties intended to tender him such an interest by deliberately inserting terms in their agreement with the avowed purpose of conferring a favor upon such third person. The fairest test to determine whether the interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest is to rely upon the intention of the parties as disclosed by their contract. In the instant case, the insurance contract does not contain any words or clauses to disclose an intent to give any benefit to any repairmen or materialmen in case of repair of the car in question. The "loss payable" clause of the insurance policy stipulates that "Loss, if any, is payable to H.S. Reyes, Inc.," indicating that it was only H.S. Reyes, Inc. which the parties intended to benefit. As regards paragraph 4 of the insurance contract, a perusal thereof shows that instead of establishing privity between the appellants and the insurance company, such stipulation merely establishes the procedure that the insured has to follow in order to be entitled to indemnity for repair. The Court also cited the principle that "a policy of insurance is a distinct and independent contract between the insured and insurer, and third persons have no right either in a court of equity, or in a court of law, to the proceeds of it, unless there be some contract of trust, expressed or implied between the insured and third person." No contract of trust, expressed or implied, exists in this case. The appellants' claim, if at all, is merely equitable in nature and must be made effective through Enrique Mora who entered into a contract with the Bonifacio Bros., Inc. This conclusion is covered by the express provisions of section 50 of the Insurance Act, which provides that "The insurance shall be applied exclusively to the proper interests of the person in whose name it is made unless otherwise specified in the policy."

• Loss vs. Damage: The Court held that any attempt to draw a distinction between "loss" and "damage" is uncalled for, because the word "loss" in insurance law embraces injury or damage. The Court defined "loss" as "the injury or damage sustained by the insured in consequence of the happening of one or more of the accidents or misfortune against which the insurer, in consideration of the premium, has undertaken to indemnify the insured." According to section 120 of the Insurance Act, a loss may be either total or partial.

• Stipulation Pour Autrui — A provision in a contract in favor of a third person not a party to the contract. Under this doctrine, a third person is allowed to avail himself of a benefit granted to him by the terms of the contract, provided that the contracting parties have clearly and deliberately conferred a favor upon such person. The fairest test to determine whether the interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest is to rely upon the intention of the parties as disclosed by their contract. In this case, the Court found no stipulation pour autrui in favor of the repairmen and materialmen because the insurance contract did not contain any words or clauses disclosing an intent to give any benefit to them.

• Privity of Contract — Contracts take effect only between the parties thereto, except in specific instances provided by law where the contract contains some stipulation in favor of a third person. A third person not a party to the contract has no action against the parties thereto and cannot generally demand the enforcement of the same. The Court applied this doctrine to deny the repairmen and materialmen's claim against the insurance company, as they were not parties to the insurance contract and no provision conferred any benefit upon them.

• Loss in Insurance Law — The injury or damage sustained by the insured in consequence of the happening of one or more of the accidents or misfortune against which the insurer, in consideration of the premium, has undertaken to indemnify the insured. The word "loss" in insurance law embraces injury or damage, and according to section 120 of the Insurance Act, a loss may be either total or partial.

• "It is fundamental that contracts take effect only between the parties thereto, except in some specific instances provided by law where the contract contains some stipulation in favor of a third person." — This passage states the foundational principle of privity of contract and introduces the exception of stipulation pour autrui, which is central to the Court's reasoning in denying the appellants' claim.

• "The fairest test to determine whether the interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract." — This passage articulates the controlling test for determining whether a third person has an enforceable interest in a contract, which the Court applied to find that no such interest existed in favor of the repairmen and materialmen.

• "A policy of insurance is a distinct and independent contract between the insured and insurer, and third persons have no right either in a court of equity, or in a court of law, to the proceeds of it, unless there be some contract of trust, expressed or implied between the insured and third person." — This passage establishes the general rule that third persons have no right to insurance proceeds absent a contract of trust, which the Court cited as a cogent reason for not recognizing a right of action by the appellants against the insurance company.

• "The insurance shall be applied exclusively to the proper interests of the person in whose name it is made unless otherwise specified in the policy." — This passage quotes section 50 of the Insurance Act, which the Court applied to conclude that the policy in question, having been framed so that "Loss, if any, is payable to H.S. Reyes, Inc.," unmistakably shows the intention of the parties to benefit only H.S. Reyes, Inc.

• Uy Tam, et al. vs. Leonard, 30 Phil. 471 — Cited as authority for the doctrine of stipulation pour autrui and the rule that the fairest test to determine whether the interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest is to rely upon the intention of the parties as disclosed by their contract.

• Manila Railroad Co. vs. Compañia Transatlantica, 38 Phil. 875 — Cited for the proposition that a third person not a party to the contract has no action against the parties thereto and cannot generally demand the enforcement of the same.

• Lampano vs. Jose, 30 Phil. 537 — Cited for the principle that a policy of insurance is a distinct and independent contract between the insured and insurer, and third persons have no right either in a court of equity or in a court of law to the proceeds of it, unless there be some contract of trust, expressed or implied, between the insured and third person.

• Article 1311, Civil Code of the Philippines — Provides that contracts take effect only between the parties thereto, except in specific instances provided by law where the contract contains some stipulation in favor of a third person. The Court applied this provision to deny the repairmen and materialmen's claim, as they were not parties to the insurance contract and no stipulation pour autrui existed in their favor.

• Section 50, Insurance Act — Provides that "The insurance shall be applied exclusively to the proper interests of the person in whose name it is made unless otherwise specified in the policy." The Court applied this provision to conclude that the policy, having been framed so that "Loss, if any, is payable to H.S. Reyes, Inc.," unmistakably shows the intention of the parties to benefit only H.S. Reyes, Inc.

• Section 120, Insurance Act — Provides that a loss may be either total or partial. The Court cited this provision to reject the appellants' distinction between "loss" and "damage," holding that the word "loss" in insurance law embraces injury or damage.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, and Castro, JJ., concurred.