Cha vs. Court of Appeals

A contractual stipulation automatically transferring or assigning fire insurance proceeds covering a lessee's merchandise to the lessor is void for being contrary to law and public policy where the lessor has no insurable interest in the merchandise, as insurable interest is measured by the extent to which the insured would be damnified by the loss.

• Petitioner-spouses Nilo Cha and Stella Uy-Cha entered into a one-year lease contract with private respondent CKS Development Corporation (as lessor) on October 5, 1988, for premises where they operated a business.
• Paragraph 18 of the lease contract stipulated that the lessee shall not insure against fire the chattels, merchandise, textiles, goods, and effects placed in the leased premises without first obtaining the written consent and approval of the lessor, and that if the lessee obtained such insurance without the lessor's consent, the policy would be deemed assigned and transferred to the lessor for its own benefit.
• Notwithstanding this stipulation, the Cha spouses procured a fire insurance policy for P500,000.00 covering their merchandise inside the leased premises from petitioner United Insurance Co., Inc. without obtaining the written consent of CKS.
• On the day the lease contract was to expire, a fire broke out inside the leased premises.
• Upon learning of the insurance policy procured by the Cha spouses, CKS wrote to United demanding that the insurance proceeds be paid directly to CKS based on the automatic assignment provision in the lease contract.
• United refused to pay CKS, prompting CKS to file a complaint against the Cha spouses and United to recover the insurance proceeds.

• The stipulation in the lease contract transferring the proceeds of the insurance to respondent CKS is null and void for being contrary to law, morals, and public policy.
• The contract of lease is a contract of adhesion, and therefore the questionable provision therein transferring the proceeds of the insurance to the respondent must be ruled out in favor of the petitioner.
• The Court of Appeals erred in awarding the proceeds of an insurance policy to CKS which is not a party to the said policy, in contravention of the Insurance Law.
• The stipulation is void for being without consideration and for being totally dependent on the will of the respondent corporation.

• Procedural: N/A
• Substantive Issues:
  • Whether the stipulation in the lease contract automatically assigning fire insurance proceeds to the lessor is valid and enforceable.
  • Whether the lessor has an insurable interest in the lessee's merchandise located inside the leased premises.
  • Whether the insurer can be compelled to pay the insurance proceeds to a person who has no insurable interest in the property insured.

• Procedural: N/A
• Substantive:
  • The stipulation in the lease contract is void. Under Section 18 of the Insurance Code, 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.
  • CKS has no insurable interest in the goods and merchandise inside the leased premises under Section 17 of the Insurance Code, which defines insurable interest as the extent to which the insured might be damnified by loss or injury thereof.
  • A fire insurance policy is primarily a contract of indemnity, and insurable interest must exist at the time the insurance takes effect and at the time the loss occurs.
  • The automatic assignment of the policy to CKS under the lease contract provision is void for being contrary to law and public policy, as it would allow a person without insurable interest to collect proceeds on loss of property, effectively constituting a wagering contract prohibited under Section 25 of the Insurance Code.
  • The proceeds of the fire insurance policy rightfully belong to the Cha spouses, and United cannot be compelled to pay CKS which has no insurable interest.
  • The liability of the Cha spouses to CKS for violating the lease contract is a separate and distinct issue not resolved in this case.

• Insurable Interest — Defined under Section 17 of the Insurance Code as the extent to which the insured might be damnified by loss or injury of the property. The Court applied this to determine that a lessor has no insurable interest in merchandise owned by the lessee, as the lessor would not be damnified by the loss of the lessee's goods.
• Contract of Indemnity — A principle applicable to non-life insurance policies such as fire insurance, requiring that the insured must have an insurable interest in the property at the time the policy takes effect and at the time of loss. The Court used this to emphasize that only the owner of the goods (the Cha spouses) could validly claim indemnity for their loss.
• Wagering/Gaming Prohibition — Under Section 25 of the Insurance Code, any policy executed by way of gaming or wagering is void. The Court applied this to explain that allowing CKS to collect proceeds on property in which it had no insurable interest would constitute a wagering contract.

• "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."
• "The measure of an insurable interest in property is the extent to which the insured might be damnified by loss of injury thereof."
• "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."
• "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."

• Article 1409(i), Civil Code — Provides that contracts whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy are inexistent and void from the beginning; cited to support the nullity of the lease stipulation.
• Section 17, Insurance Code — Defines the measure of insurable interest in property as the extent to which the insured might be damnified by loss or injury thereof; cited to establish that CKS had no insurable interest in the merchandise.
• Section 18, Insurance Code — Provides 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; cited as the primary legal basis for invalidating the lease stipulation.
• Section 19, Insurance Code — Cited regarding the requirement that insurable interest must exist at the time the insurance takes effect and at the time the loss occurs.
• Section 25, Insurance Code — Declares void every policy executed by way of gaming or wagering; cited to emphasize the public policy against allowing persons without insurable interest to collect insurance proceeds.