Insurable Interest: Why Landlords Can’t Always Claim Insurance on Tenant Property

G.R. No. 124520, August 18, 1997, SPOUSES NILO CHA AND STELLA UY CHA, AND UNITED INSURANCE CO., INC., PETITIONERS, VS. COURT OF APPEALS AND CKS DEVELOPMENT CORPORATION, RESPONDENTS.

Imagine a fire engulfs a leased property, destroying a tenant’s merchandise. Who gets the insurance payout? The landlord, based on a clause in the lease agreement, or the tenant who actually owned the destroyed goods? This scenario highlights the crucial legal concept of insurable interest. In the case of Spouses Nilo Cha and Stella Uy Cha vs. Court of Appeals and CKS Development Corporation, the Supreme Court clarified that a landlord generally cannot claim insurance proceeds on a tenant’s property, even if the lease agreement attempts to assign the insurance policy to the landlord. This is because the landlord lacks an ‘insurable interest’ in the tenant’s belongings.

Understanding Insurable Interest in the Philippines

Insurable interest is a cornerstone of insurance law. It essentially means that the person taking out an insurance policy must have a financial stake in the insured property or life. This prevents people from gambling on losses they wouldn’t otherwise suffer. Section 18 of the Insurance Code is very clear on this point:

“Sec. 18. 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.”

This requirement is rooted in public policy. Without insurable interest, insurance contracts could become tools for wagering or even incentivizing the destruction of property. Section 25 of the Insurance Code reinforces this principle:

“SECTION 25. 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.”

So, what exactly constitutes insurable interest? Section 17 of the Insurance Code defines it as:

“Section 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by loss of injury thereof.”

In simpler terms, you have an insurable interest in something if you would suffer a financial loss if it were damaged or destroyed.

The Cha vs. CKS Case: A Story of Fire and Insurance

The case of Spouses Cha vs. CKS Development Corporation provides a clear illustration of these principles. Here’s the breakdown:

• The Cha spouses leased a space from CKS Development Corporation.
• The lease contract contained a clause stating that if the Cha spouses insured their merchandise without CKS’s written consent, the insurance policy would be assigned to CKS.
• The Cha spouses, without CKS’s consent, insured their merchandise for P500,000 with United Insurance Co., Inc.
• A fire broke out, destroying the merchandise.
• CKS, upon learning of the insurance, demanded that United pay the proceeds directly to them, citing the lease agreement.
• United refused, and CKS sued both the Cha spouses and United.

The lower court initially ruled in favor of CKS, but the Court of Appeals later reversed part of the decision, removing exemplary damages and attorney’s fees. The case eventually reached the Supreme Court.

The Supreme Court focused on the validity of the lease clause that automatically assigned the insurance policy to CKS. The Court stated that:

“[R]espondent CKS cannot, under the Insurance Code – a special law – be validly a beneficiary of the fire insurance policy taken by the petitioner-spouses over their merchandise. This insurable interest over said merchandise remains with the insured, the Cha spouses.”

The Court emphasized that CKS had no insurable interest in the tenant’s merchandise. The Cha spouses, as the owners of the merchandise, were the ones who would suffer a direct financial loss from its destruction.

The Supreme Court concluded that:

“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. The proceeds of the fire insurance policy thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha…”

Practical Implications for Landlords and Tenants

This case serves as a crucial reminder for both landlords and tenants. Landlords cannot simply claim insurance proceeds on a tenant’s property based on a contractual clause if they lack insurable interest. Tenants should be aware of their rights and ensure they have adequate insurance coverage for their own belongings.

Key Lessons:

• Landlords: Do not assume you can automatically benefit from your tenant’s insurance policy on their property. Focus on insuring the building structure itself.
• Tenants: Always secure your own insurance coverage for your personal belongings and business assets within the leased premises.
• Lease Agreements: Review lease agreements carefully to understand insurance-related clauses. Consult with a legal professional if you have any doubts.

Frequently Asked Questions (FAQs)

Q: What happens if a tenant doesn’t have insurance?

A: If a tenant doesn’t have insurance, they will be responsible for covering their own losses in case of fire, theft, or other covered events. The landlord’s insurance typically covers the building structure, not the tenant’s personal property.

Q: Can a landlord require a tenant to have insurance?

A: Yes, a landlord can require a tenant to obtain insurance as a condition of the lease agreement. However, the landlord cannot automatically claim the proceeds of that insurance unless they have a valid insurable interest.

Q: What is the difference between property insurance and liability insurance?

A: Property insurance covers damage or loss to physical assets, while liability insurance covers legal liabilities if someone is injured on the property.

Q: If a landlord has insurance on the building, does the tenant need their own insurance?

A: Yes, even if the landlord has building insurance, the tenant needs their own insurance to cover their personal belongings and potential liability.

Q: Can a landlord and tenant agree to share insurance proceeds in a specific situation?

A: While parties can contractually agree on many things, any agreement that violates the principle of insurable interest would likely be deemed unenforceable by a court.

ASG Law specializes in insurance law, contract law, and property law. Contact us or email hello@asglawpartners.com to schedule a consultation.