Philippine Air Lines, Inc. vs. Heald Lumber Company

Under Article 2207 of the New Civil Code, when an insured property is damaged by the wrongful act of a third person and the insurer has paid indemnity to the insured, the insurer is subrogated to the insured's rights against the wrongdoer to the extent of the amount paid. The insured is the real party in interest only for the deficiency—the portion of the loss not covered by insurance—and may not sue in its own name for the amount already indemnified, even on a theory of implied trust for the insurer's benefit.

The plaintiff-appellant, Philippine Air Lines, Inc., was the owner of a helicopter that it had insured at its own expense with various insurance companies in London. The helicopter and its two officers were insured for a total of P120,000. The defendant-appellee, Heald Lumber Company, operated a logging area in Mankayan, Mountain Province, where the helicopter crashed after colliding with the defendant's tramway steel cables. The case presented the question of who may properly sue the alleged wrongdoer when the insured has already received partial indemnity from insurers—a matter governed by Article 2207 of the New Civil Code, which the Code Commission noted was deliberately made different from American law on the subject.

Sometime prior to June 4, 1954, the Lepanto Consolidated Mines chartered a helicopter belonging to plaintiff Philippine Air Lines, Inc. to make a flight from its base at Nichols Field Airport to the former's camp at Mankayan, Mountain Province. The helicopter took off on that date with Capt. Gabriel G. Hernandez as pilot and Lt. Rex M. Imperial as first officer, with no other person on board. The helicopter failed to reach its destination because, while on flight within the logging area of defendant Heald Lumber Company, it collided with the defendant's tramway steel cables somewhere in Ampusungan, Mankayan, Mt. Province, resulting in its destruction and the death of both officers.

Plaintiff insured the helicopter for P80,000 and the two officers for P20,000 each with various insurance companies in London, all at plaintiff's expense. As a result of the crash, the insurance companies paid plaintiff a total indemnity of P120,000. Nevertheless, plaintiff sustained additional damages totaling P103,347.82 that were not recovered by insurance.

On March 2, 1956, plaintiff commenced the present action to recover from defendant (a) the sum of P120,000 paid by the insurance companies as indemnity for the loss of the helicopter and the death of the officers, and (b) the sum of P103,347.82 representing consequential and moral damages. With regard to the P120,000 claim, the complaint alleged that plaintiff was asserting the claim "on behalf and for the benefit of said insurers," and the prayer requested that the amount "shall be held by plaintiff in trust for the insurer." As regards the other claim, plaintiff stated that it represented additional damages sustained "upon its own account."

Defendant filed a motion to dismiss, invoking among other grounds that plaintiff had no cause of action for the P120,000 because the insurance companies were the proper parties to sue. Plaintiff opposed, contending that since the loss exceeded the amount of insurance, the right of action against the defendant remained with the insured for the entire loss, with the insured merely holding in trust for the insurers the portion corresponding to the indemnity received. The lower court ruled that the real parties in interest were the insurance companies and ordered plaintiff to either delete the allegation or bring in the insurance companies as parties plaintiff. Plaintiff refused to amend, and the lower court deemed the complaint limited to the additional damages. Plaintiff appealed.

• Real Party in Interest: Plaintiff-appellant argued that since the loss it sustained exceeded the amount of insurance paid, the right of action to recover the entire loss from the wrongdoer remained with the insured, and the action must be brought in its own name as real party in interest, with the insured acting as trustee for the insurers to the extent of the indemnity received.
• Trusteeship Theory: Plaintiff-appellant insisted that despite the subrogation of the insurer to the rights of the insured, the insured could still bring the action in its name because the subrogation vested in it the character of a trustee charged with the duty to pay the insurer so much of the recovery as corresponded to the amount received as partial indemnity.
• Avoidance of Multiplicity of Suits: Plaintiff-appellant contended that adopting a contrary rule would split a cause of action or promote multiplicity of suits, which should be avoided.

• Lack of Cause of Action: Defendant-appellee argued that plaintiff had no cause of action for the P120,000 because the insurance companies, having paid the indemnity, were the real parties in interest who should sue for its recovery.
• Motion to Dismiss: Defendant-appellee moved to dismiss the complaint on the ground that plaintiff sought to recover insurance proceeds already paid to it by various insurance companies, and if anyone should sue for recovery, it would only be the insurance companies.

• Real Party in Interest: Whether the lower court erred in ruling that plaintiff is not the real party in interest with respect to the claim for P120,000 and in ordering that claim deleted from the complaint.

• Real Party in Interest: Yes, the lower court did not err. Under Article 2207 of the New Civil Code, the insurer is subrogated to the rights of the insured against the wrongdoer for the amount of indemnity paid, making the insurer the real party in interest for that portion. The insured may only recover the deficiency from the person causing the loss or injury.

• Real Party in Interest: The Court distinguished the American rule, which allows the insured to sue for the entire loss and hold the insurance proceeds in trust for the insurer, from the Philippine statutory scheme. Article 2207 of the New Civil Code provides that if the plaintiff's property has been insured and he has received indemnity from the insurance company for the injury or loss, the insurance company shall be subrogated to the rights of the insured against the wrongdoer. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party is entitled to recover the deficiency. The Court reasoned that under this provision, the real party in interest with regard to the portion of the indemnity paid is the insurer, not the insured. The payment of indemnity by the insurer does not make the insured a trustee of the former, as in American law, because this matter is statutory and must be governed by Philippine law.

The Court found support in the explanatory note of the Code Commission, which stated that the rule in Article 2207 is different from American law. Under American jurisprudence, the fact that the plaintiff has been indemnified by an insurance company cannot lessen the damages to be paid by the defendant, which gives more damages than those actually suffered by the plaintiff and could result in the defendant paying twice the damages. The proposed article was intended as a better adjustment of the rights of the three parties concerned.

The Court rejected the trusteeship theory, holding that before a person can sue for the benefit of another under a trusteeship, he must be "a trustee of an express trust" under Section 3, Rule 3 of the Rules of Court. An express trust requires creation by direct and positive acts of the parties, by some writing, deed, or will, or by proceedings in court. The provision does not apply to implied trusts, which may be inferred merely from the acts of the parties or from other circumstances.

The Court also rejected the argument regarding multiplicity of suits, noting that under Section 6, Rule 3 of the Rules of Court, both the insurer and the insured may join as plaintiffs to press their claims against the wrongdoer when they arise out of the same transaction or event. The Court cited examples from former Chief Justice Moran illustrating permissible joinder of parties whose claims arise from the same occurrence.

• Subrogation under Article 2207 of the New Civil Code — When an insured's property is damaged by the wrongful act of a third person and the insurer has paid indemnity, the insurer is subrogated to the rights of the insured against the wrongdoer to the extent of the amount paid. The insured is entitled to recover only the deficiency—the portion of the loss not covered by insurance. This rule differs from American law, where the insured may sue for the entire loss and hold the insurance proceeds in trust for the insurer. The Court applied this doctrine to hold that the insurer, not the insured, is the real party in interest for the P120,000 indemnity already paid.

• Real Party in Interest — Under the Rules of Court, every action must be prosecuted in the name of the real party in interest. The Court applied this principle to determine that the insurance companies, having paid the indemnity, were the real parties in interest for the P120,000 claim, and the insured could not sue for that amount in its own name.

• Express Trust Requirement — Before a person can sue for the benefit of another under a trusteeship, he must be "a trustee of an express trust" under Section 3, Rule 3 of the Rules of Court. An express trust must be created by direct and positive acts of the parties, by some writing, deed, or will, or by proceedings in court. The Court applied this doctrine to reject the insured's claim that it could sue as trustee for the insurers, since no express trust existed.

• "Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in said article that the insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision, the real party in interest with regard to the portion of the indemnity paid is the insurer and not the insured." — This passage articulates the Court's core interpretation of Article 2207, establishing that the insurer is the real party in interest for the indemnified portion of the loss.

• "The payment of the indemnity by the insurer to the insured does not make the latter a trustee of the former as in the American law. This matter being statutory, the same must be governed by our own law in this jurisdiction." — This passage rejects the trusteeship theory and emphasizes that Philippine statutory law, not American jurisprudence, governs the subrogation rights of insurers.

• "According to American jurisprudence, the fact that the plaintiff has been indemnified by an insurance company cannot lessen the damages to be paid by the defendant. Such rules give more damages than those actually suffered by the plaintiff, and the defendant, if also sued by the insurance company for imbursement, would have to pay in many cases twice the damages he has caused. The proposed article would seem to be a better adjustment of the rights of the three parties concerned." — This quotation from the Code Commission's report explains the policy rationale behind Article 2207, distinguishing it from American law and justifying the Philippine rule as a better adjustment of the rights of the insured, insurer, and wrongdoer.

• Moran, Comments on the Rules of Court, Vol. I, 1952 Ed., pp. 35, 42-43 — Cited as authoritative commentary on the Rules of Court regarding the express trust requirement under Section 3, Rule 3, and the permissible joinder of parties under Section 6, Rule 3. The Court relied on this commentary to reject the trusteeship theory and to show that multiplicity of suits could be avoided through joinder.

• Article 2207, New Civil Code — Provides that if the plaintiff's property has been insured and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party is entitled to recover the deficiency. The Court applied this provision to hold that the insurer is the real party in interest for the indemnified portion of the loss.
• Section 3, Rule 3, Rules of Court — Requires that a trustee suing for the benefit of another must be a trustee of an express trust. The Court applied this provision to reject the insured's claim that it could sue as trustee for the insurers, since no express trust existed.
• Section 6, Rule 3, Rules of Court — Permits joinder of parties whose claims arise out of the same transaction or event. The Court cited this provision to show that the insurer and insured could join as plaintiffs, avoiding multiplicity of suits.

Paras, C.J., Padilla, Montemayor, Reyes, A., Labrador, Concepcion, Endencia, and Felix, JJ., concurred.