Ong Guan Can and The Bank of the Philippine Islands vs. The Century Insurance Co., Ltd.

If valid, a fire insurer’s contractual option to reinstate or replace damaged property instead of paying the loss is an alternative obligation; the insurer must formally notify the insured of its election, and that election takes legal effect only upon the insured’s consent or, if impugned, upon a competent court’s declaration. The insurer cannot, without such election and consent, compel the insured to accept a smaller, lower-quality rebuilding without additional indemnity for the difference.

Ong Guan Can and The Bank of the Philippine Islands were the plaintiffs-appellees, while The Century Insurance Co., Ltd. was the defendant-appellant. A building of the plaintiff was insured against fire by the defendant in the sum of P30,000, and the goods and merchandise contained therein were insured in the sum of P15,000. The house and merchandise insured were burnt early in the morning of February 28, 1923, while the policies issued by the defendant in favor of the plaintiff were in force.

The appellant contended that under clause 14 of the conditions of the policies, it may rebuild the house burnt, and although the house may be smaller, yet it would be sufficient indemnity to the insured for the actual loss suffered by him. The appellant insisted that the judgment must be modified and that it be permitted to rebuild the house burnt, subject to the alignment of the street where the building was erected, and that it be relieved from the payment of the sum in which said building was insured. Clause 14 provided that the company may at its option reinstate or replace the property damaged or destroyed, or any part thereof, instead of paying the amount of the loss or damages, or may join with any other company or insurers in so doing, but the company shall not be bound to reinstate exactly or completely, but only as circumstances permit and in reasonable sufficient manner, and in no case shall the company be bound to expend more in reinstatement than it would have cost to reinstate such property as it was at the time of the occurrence of such loss or damage, nor more than the sum insured by the company thereon.

The record showed that the appellant company did not give a formal notice of its election to rebuild. While the witnesses Cedrun and Cacho spoke of the proposed reconstruction of the house destroyed, the plaintiff did not give his assent to the proposition, for the reason that the new house would be smaller and of materials of lower kind than those employed in the construction of the house destroyed. The trial judge found that it would be an imposition inequitable, as well as unjust, to compel the plaintiff to accept the rebuilding of a smaller house than the one burnt, with a lower kind of materials than those of said house, without offering him an additional indemnity for the difference in size between the two houses, which circumstances were taken into account when the insurance applied for by the plaintiff was accepted by the defendant. The trial judge also noted that no tender was made of the insured value of the merchandise contained in the house destroyed, which amounted to P15,000.

• Right to Rebuild Under Clause 14: The Century Insurance Co., Ltd. (defendant-appellant) contended that under clause 14 of the conditions of the policies, it may rebuild the burnt house, and although the house may be smaller, the rebuilding would be sufficient indemnity to the insured for the actual loss suffered.
• Modification of Judgment: It insisted that the judgment must be modified and that it be permitted to rebuild the house burnt, subject to the alignment of the street where the building was erected, and that it be relieved from the payment of the sum in which said building was insured.

• Effect of Clause 14: Whether clause 14 of the fire insurance policies, allowing the insurer to reinstate or replace damaged property instead of paying the loss, created an alternative obligation requiring notice and consent under Article 1133 of the Civil Code.
• Propriety of Election to Rebuild: Whether the insurer’s alleged election to rebuild the burnt house, without formal notice and without the insured’s assent, was proper and sufficient to relieve it from paying the insured value.
• Affirmance of Judgment: Whether the judgment ordering payment of P45,000 with legal interest from February 28, 1923, and costs should be affirmed.

• Effect of Clause 14: Yes. If valid, clause 14 makes the insurer’s obligation alternative; the debtor must notify the creditor of its election under Article 1133 of the Civil Code, and the election takes effect only upon consent or judicial declaration if impugned.
• Propriety of Election to Rebuild: No. No formal notice was given; the insured did not assent because the proposed house would be smaller and of lower materials, and the P15,000 merchandise value was not tendered.
• Affirmance of Judgment: Yes. The judgment was affirmed with costs against the appellant.

• Effect of Clause 14: The Court reasoned that if clause 14 is valid, its effect is to make the obligation of the insurance company an alternative one: it may either pay the insured value of the house or rebuild it. In alternative obligations, the debtor—here, the insurance company—must notify the creditor of its election, stating which of the two prestations it is disposed to fulfill, in accordance with Article 1133 of the Civil Code. The purpose of the notice is to give the creditor an opportunity to express consent or to impugn the election. Only after such notice shall the election take legal effect when consented to by the creditor or, if impugned by the latter, when declared proper by a competent court.
• Propriety of Election to Rebuild: The record showed that the appellant company did not give a formal notice of its election to rebuild. Although witnesses Cedrun and Cacho spoke of the proposed reconstruction, the plaintiff did not assent because the new house would be smaller and of lower-kind materials than the destroyed house. The trial judge found it inequitable and unjust to compel the plaintiff to accept a smaller house with lower materials without additional indemnity for the difference in size, circumstances that were taken into account when the insurance was accepted. The Court added that no tender was made of the insured value of the merchandise contained in the destroyed house, amounting to P15,000. Thus, the alleged election to rebuild instead of paying the insurance value was improper.
• Affirmance of Judgment: The Court found nothing in the record to justify reversal of the trial judge’s finding that the election alleged by the appellant to rebuild the burnt house instead of paying the value of the insurance was improper. The judgment appealed from was in accordance with the merits of the case and the law and was affirmed with costs against the appellant.

• Alternative Obligations and Election — An obligation is alternative when the debtor may choose between two prestations. Under Article 1133 of the Civil Code, the debtor must notify the creditor of the election, stating which prestation will be fulfilled. The election does not become legally effective until the creditor consents or, if the creditor impugns it, until a competent court declares it proper. The Court applied this doctrine to a fire insurance policy clause allowing the insurer to rebuild instead of paying the loss.
• Insurer’s Option to Reinstate or Replace — A clause in a fire insurance policy granting the insurer the option to reinstate or replace damaged property instead of paying the loss creates an alternative obligation. The insurer cannot unilaterally compel the insured to accept a rebuilding that is smaller and of lower quality than the property destroyed without offering additional indemnity for the difference. The insurer must also account for other insured items, such as merchandise, whose value was not tendered.
• Sufficiency of Rebuilding as Indemnity — Where the insurer elects to rebuild, the rebuilding must be a reasonable and sufficient indemnity. A smaller house built with lower-kind materials, without additional compensation for the difference in size and quality, is not a sufficient indemnity and cannot be imposed on the insured.

• "If this clause of the policies is valid, its effect is to make the obligation of the insurance company an alternative one, that is to say, that it may either pay the insured value of house, or rebuild it." — This passage states the ratio decidendi on the effect of the policy clause: the insurer’s option to rebuild or pay is an alternative obligation.
• "It must be noted that in alternative obligations, the debtor, the insurance company in this case, must notify the creditor of his election, stating which of the two prestations he is disposed to fulfill, in accordance with article 1133 of the Civil Code." — This passage establishes the notice requirement for the insurer’s election under Article 1133.
• "The object of this notice is to give the creditor, that is, the plaintiff in the instant case, opportunity to express his consent, or to impugn the election made by the debtor, and only after said notice shall the election take legal effect when consented by the creditor, or if impugned by the latter, when declared proper by a competent court." — This passage explains the purpose of notice and when the election becomes legally effective.
• "It would be an imposition unequitable, as well as unjust, to compel the plaintiff to accept the rebuilding of a smaller house than the one burnt, with a lower kind of materials than those of said house, without offering him an additional indemnity for the difference in size between the two house, which circumstances were taken into account when the insurance applied for by the plaintiff was accepted by the defendant." — This passage, adopted from the trial judge, explains why the proposed rebuilding was not sufficient indemnity.

• Article 1133, Civil Code — In alternative obligations, the debtor must notify the creditor of his election, stating which prestation he is disposed to fulfill. The Court applied this provision to require the insurer to notify the insured of its election to rebuild; absent such notice and the insured’s consent or judicial approval, the election could not take legal effect.

Johnson, Street, Malcolm, Avanceña, Ostrand, Johns and Romualdez, JJ., concur.