FIRST DIVISION

[G.R. No. 14300. January 19, 1920.]

SAN MIGUEL BREWERY, ETC., plaintiff-appellee, vs. LAW UNION AND
ROCK INSURANCE CO. (LTD.) ET AL., defendants-appellees. HENRY
HARDING, defendant-appellant.
Crossfield & O'Brien for appellant Harding.
Lawrence & Ross for appellee Law Union etc. Ins. Co.
Sanz & Luzuriaga for appellee "Filipinas, Compañia de Seguros."
No appearance for the other appellee.
SYLLABUS
1. INSURANCE; INSURABLE INTEREST; EXTENT OF RECOVERY BY
MORTGAGEE. — A brewery company, as mortgagee of real property, procured a
policy of insurance to be written thereon payable to itself, in case of loss. The
insurer was notified that the brewery was merely a mortgagee, but no information
was asked or given as to the personality of the owner. Held: That the brewery
company had an insurable interest but could recover on the policy only to the
extent of the credit secured by the mortgage.
2. ID.; SALE OF INSURED PROPERTY; SUSPENSION OF INSURANCE. — A
purchaser of insured property who does not take the precaution to obtain a transfer
of the policy of insurance cannot, in case of loss, recover upon such contract, as the
transfer of the property has the effect of suspending the insurance until the
purchaser becomes owner of the policy as well as of the property insured.
3. ID.; MISTAKE OF PARTIES IN EXPRESSION OF INTENTION;
REFORMATION. — If during the negotiations leading up to the writing of a
policy of insurance the contracting parties agree that the insurance shall be so
written as to protect not only the interest of the applicant for the policy, as
mortgagee, but also the residuary interest of the owner, and the policy is, by
inadvertence, ignorance, or mistake, so written as to protect only the interest of the
applicant, the court has the power to reform the contract and give effect to it in the
sense in which the parties intended to be bound.
4. ID.; ID.; ID.; CERTAINTY OF PROOF REQUIRED. — In order to justify the
reformation of a contract of insurance on the ground of failure of the contract to
express the intention of the contracting parties, the proof must be of the most
satisfactory character, and it must be made clearly to appear that the minds of the
contracting parties did actually meet in agreement and that there was some mutual
mistake in the expression of their purpose.
DECISION
STREET, J p:
This action was begun on October 8, 1917, in the Court of First Instance of the city
of Manila by the plaintiff, the San Miguel Brewery, for the purpose of recovering
upon two policies of insurance underwritten respectively by the Law Union and
Rock Insurance Company (Ltd.), and the "Filipinas" Compañia de Seguros, for the
sum of P7,500 each, insuring certain property which has been destroyed by fire.
The plaintiff, the San Miguel Brewery, is named as the party assured in the two
policies referred to, but it is alleged in the complaint that said company was in
reality interested in the property which was the subject of insurance in the
character of a mortgage creditor only, and that the owner of said property upon the
date the policies were issued was one D. P. Dunn who was later succeeded as
owner by one Henry Harding. Accordingly said Harding was made a defendant, as
a person interested in the subject of the litigation.
The prayer of the complaint is that judgment be entered in favor of the plaintiff
against the two companies named for the sum of P15,000, with interest and costs,
and further that upon satisfaction of the balance of P4,505.30 due to the plaintiff
upon the mortgage debt, and upon the cancellation of the mortgage, the plaintiff be
absolved from liability to the defendants or any of them. The peculiar form of the
latter part of the prayer is evidently due to the design of the plaintiff to lay a
foundation for Harding to recover the difference between the plaintiff's credit and
the amount for which the property was insured. Accordingly, as was to be
expected, Harding answered, admitting the material allegations of the complaint
and claiming for himself the right to recover the difference between the plaintiff's
mortgage credit and the face value of the policies. The two insurance companies
also answered, admitting in effect their liability to the San Miguel Brewery to the
extent of its mortgage credit, but denying liability to Harding on the ground that
under the contracts of insurance the liability of the insurance companies was
limited to the insurable interest of the plaintiff therein. Soon after the action was
begun the insurance companies effected a settlement with the San Miguel Brewery
by paying the full amount of the credit claimed by it, with the result that the
litigation as between the original plaintiff and the two insurance companies came
to an end, leaving the action to be prosecuted to final judgment by the defendant
Harding with respect to the balance claimed to be due to him upon the policies.
Upon hearing the evidence the trial judge came to the conclusion that Harding had
no right of action whatever against the companies and absolved them from liability
without special finding as to costs. From this decision the said Henry Harding has
appealed.
The two insurance companies who are named as defendants do not dispute their
liability to the San Miguel Brewery, to the extent already stated, and the only
question here under discussion is that of the liability of the insurance companies to
Harding. It is therefore necessary to take account of such facts only as bear upon
this aspect of the case.
In this connection it appears that on January 12, 1916, D. P. Dunn, then the owner
of the property to which the insurance relates, mortgaged the same to the San
Miguel Brewery to secure a debt of P10.000. In the contract of mortgage Dunn
agreed to keep the property insured at his expense to the full amount of its value in
companies to be selected by the Brewery Company and authorized the latter in
case of loss to receive the proceeds of the insurance and to retain such part as
might be necessary to cover the mortgage debt. At the same time, in order more
conveniently to accomplish the end in view, Dunn authorized and requested the
Brewery Company to effect said insurance itself. Accordingly on the same date
Antonio Brias, general manager of the Brewery, made a verbal application to the
Law Union and Rock Insurance Company for insurance to the extent of P15,000
upon said property. In reply to a question of the company's agent as to whether the
Brewery was the owner of the property, he stated that the company was interested
only as a mortgagee. No information was asked as to who was the owner of the
property, and no information upon this point was given.
It seems that the insurance company to whom this application was directed did not
want to carry more than one-half the risk. It therefore issued its own policy for
P7,500 and procured a policy in a like amount to be issued by the "Filipinas"
Compañia de Seguros. Both policies were issued in the name of the San Miguel
Brewery as the assured, and contained no reference to any other interest in the
property. Both policies contain the usual clause requiring assignments to be
approved and noted on the policy. The premiums were paid by the Brewery and
charged to Dunn. A year later the policies were renewed, without change, the
renewal premiums being paid by the Brewery, supposedly for the account of the
owner. In the month of March of the year 1917 Dunn sold the insured property to
the defendant Henry Harding, but no assignment of the insurance, or of the
insurance policies, was at any time made to him.
We agree with the trial court that no cause of action in Henry Harding against the
insurance companies is shown. He is not a party to the contracts of insurance and
cannot directly maintain an action thereon. (Uy Tam and Uy Yet vs. Leonard, 30
Phil. Rep., 471.) His claim is merely of an equitable and subsidiary nature and
must be made effective, if at all, through the San Miguel Brewery in whose name
the contracts are written. Now the Brewery, as mortgagee of the insured property,
undoubtedly had an insurable interest therein; but it could not, in any event,
recover upon these policies an amount in excess of its mortgage credit. In this
connection it will be remembered that Antonio Brias, upon making application for
the insurance, informed the company with which the insurance was placed that the
Brewery was interested only as a mortgagee. It would, therefore, be impossible for
the Brewery to recover anything beyond the amount secured by its mortgage on the
insured property.
This conclusion is not only deducible from the principles governing the operation
and effect of insurance contracts in general but the point is clearly covered by the
express provisions of sections 16 and 50 of the Insurance Act (Act No. 2427). In
the first of the sections cited, it is declared that "the measure of an insurable
interest in property is the extent to which the insured might be damnified by loss or
injury thereof" (sec. 16); while in the other it is stated that "the insurance shall be
applied exclusively to the proper interest of the person in whose name it is made
unless otherwise specified in the policy" (sec. 50).
These provisions would have been fatal to any attempt at recovery even by D. P.
Dunn, if the ownership of the property had continued in him up to the time of the
loss; and as regards Hardings an additional insuperable obstacle is found in the fact
that the ownership of the property had been changed, prior to the loss, without any
corresponding change having been effected in the policy of insurance. In section
19 of the Insurance Act we find it stated that "a change of interest in any part of a
thing insured unaccompanied by a corresponding change of interest in the
insurance, suspends the insurance to an equivalent extent, until the interest in the
thing and the interest in the insurance are vested in the same person." Again in
section 55 it is declared that "the mere transfer of a thing insured does not transfer
the policy, but suspends it until the same person becomes the owner of both the
policy and the thing insured."
Undoubtedly these policies of insurance might have been so framed as to have
been "payable to the San Miguel Brewery, mortgagee, as its interest may appear,
remainder to whomsoever, during the continuance of the risk, may become the
owner of the interest insured." (Sec. 54, Act No. 2427.) Such a clause would have
proved an intention to insure the entire interest in the property, not merely the
insurable interest of the San Miguel Brewery, and would have shown exactly to
whom the money, in case of loss, should be paid. But the policies are not so
written.
It is easy to collect from the facts stated in the decision of the trial judge, no less
than from the testimony of Brias, the manager of the San Miguel Brewery, that, as
the insurance was written up, the obligation of the insurance companies was
different from that contemplated by Dunn, at whose request the insurance was
written, and Brias. In the contract of mortgage Dunn had agreed, at his own
expense, to insure the mortgaged property for its full value and to indorse the
policies in such manner as to authorize the Brewery Company to receive the
proceeds in case of loss and to retain such part thereof as might be necessary to
satisfy the remainder then due upon the mortgage debt. Instead, however, of
effecting the insurance himself Dunn authorized and requested the Brewery
Company to procure insurance on the property in the amount of P15,000 at Dunn's
expense. The Brewery Company undertook to carry this mandate into effect, and it
of course became its duty to procure insurance of the character contemplated, that
is, to have the policies so written as to protect not only the insurable interest of the
Brewery, but also the owner. Brias seems to have supposed that the policies as
written had this effect, but in this he was mistaken. It was certainly a hardship on
the owner to be required to pay the premiums upon P15,000 of insurance when he
was receiving no benefit whatever except in protection to the extent of his
indebtedness to the Brewery. The blame for the situation thus created rests,
however, with the Brewery rather than with the insurance companies, and there is
nothing in the record to indicate that the insurance companies were requested to
write insurance upon the insurable interest of the owner or intended to make
themselves liable to that extent.
If during the negotiations which resulted in the writing of this insurance, it had
been agreed between the contracting parties that the insurance should be so written
as to protect not only the interest of the mortgagee but also the residuary interest of
the owner, and the policies had been, by inadvertence, ignorance, or mistake
written in the form in which they were issued, a court would have the power to
reform the contracts and give effect to them in the sense in which the parties
intended to be bound. But in order to justify this, it must be made clearly to appear
that the minds of the contracting parties did actually meet in agreement and that
they labored under some mutual error or mistake in respect to the expression of
their purpose. Thus, in Bailey vs. American Central Insurance Co. (13 Fed., 250), it
appeared that a mortgagee desiring to insure his own insurable interest only,
correctly stated his interest, and asked that the same be insured. The insurance
company agreed to accept the risk, but the policy was issued in the name of the
owner, because of the mistaken belief of the company's agent that the law required
it to be so drawn. It was held that a court of equity had the power, at the suit of the
mortgagee, to reform the instrument and give judgment in his favor for the loss
thereunder, although it had been agreed by both parties that the policy should be
written exactly as it was. Said the court: "If the applicant correctly states his
interest and distinctly asks for an insurance thereon, and the agent of the insurer
agrees to comply with his request, and assumes to decide upon the form of the
policy to be written for that purpose, and by mistake of law adopts the wrong form,
a court of equity will reform the instrument so as to make it insurance upon the
interest named." (See also Fink vs. Queens Insurance Co., 24 Fed., 318; Esch vs.
Home Insurance Co., 78 Iowa, 334; 16 Am. St. Rep., 443 ; Woodbury Savings etc.,
Co., vs. Charter Oack Insurance Co., 31 Conn., 517; Balen vs. Hanover Fire
Insurance Co., 67 Mich., 179.)
Similarly, in cases where the mortgagee is by mistake described as owner, the
court may grant reformation and permit a recovery by the mortgagee in his
character as such. (Dalton vs. Milwaukee etc. Insurance Co., 126 Iowa, 377; Spare
vs. Home Mutual Insurance Co., 17 Fed., 568.) In Thompson vs. Phenix Insurance
Co. (136 U. S., 287, 34 L. ed., 408), it appeared that one Kearney made application
to an insurance company for insurance on certain property in his hands as receiver
and it was understood between him and the company's agent that, in case of loss,
the proceeds of the policy should accrue to him and his successors as receiver and
to others whom it might concern. However, the policy, as issued, was so worded as
to be payable only to him as receiver. In an action brought on the policy by a
successor of Kearney, it was alleged that the making of the contract in this form
was due to inadvertence, accident, and mistake upon the part of both Kearney and
the company.
Said the court:
"If by inadvertence, accident, or mistake the terms of the contract were not fully set
forth in the policy, the plaintiff is entitled to have it reformed."
In another case the same court said:
"We have before us a contract from which, by mistake, material stipulations have
been omitted, whereby the true intent and meaning of the parties are not fully or
accurately expressed. There was a definite concluded agreement as to insurance,
which, in point of time, preceded the preparation and delivery of the policy, and
this is demonstrated by legal and exact evidence, which removes all doubt as to the
sense and undertaking of the parties. In the agreement there has been a mutual
mistake, caused chiefly by that contracting party who now seeks to limit the
insurance to an interest in the property less than that agreed to be insured. The
written agreement did not effect that which the parties intended. That a court of
equity can afford relief in such a case, is, we think, well settled by the authorities."
(Smell vs. Atlantic, etc., Ins. Co., 98 U. S., 85, 89; 25 L. ed., 52.)
But to justify the reformation of a contract, the proof must be of the most
satisfactory character, and it must clearly appear that the contract failed to express
the real agreement between the parties. (Philippine Sugar Estates Development
Company vs. Government of the Philippine Islands, 62 L. ed., 1177, reversing
Government of Philippine Islands vs. Philippine Sugar Estates Development Co.,
30
In the case now before us the proof is entirely insufficient to authorize the
application of the doctrine stated in the foregoing cases, for it is by no means clear
from the testimony of Brias — and none other was offered —that the parties
intended for the policy to cover the risk of the owner in addition to that of the
mortgagee. It results that the defendant Harding is not entitled to relief in any
aspect of the case.
The judgment is therefore affirmed, with costs against the appellant. So ordered.
Arellano, C. J., Johnson, Araullo, Malcolm and Avanceña, JJ., concur.