San Miguel Brewery v.

Law Union Rock Insurance Company, 40 PHIL 674

Facts:

> On Jan. 12, 1918, Dunn mortgaged a parcel of land to SMB to secure a debt of 10T. > Mortgage contract stated that Dunn was to have the property insured at his own expense, authorizing SMB to choose the insurers and to receive the proceeds thereof and retain so much of the proceeds as would cover the mortgage debt. > Dunn likewise authorized SMB to take out the insurance policy for him. > Brias, SMBs general manager, approached Law Union for insurance to the extent of 15T upon the property. In the application, Brias stated that SMBs interest in the property was merely that of a mortgagee. > Law Union, not wanting to issue a policy for the entire amount, issued one for P7,500 and procured another policy of equal amount from Filipinas Cia de Seguros. Both policies were issued in the name of SMB only and contained no reference to any other interests in the propty. Both policies required assignments to be approved and noted on the policy. > Premiums were paid by SMB and charged to Dunn. A year later, the policies were renewed. > In 1917, Dunn sold the property to Harding, but no assignment of the policies was made to the latter. > Property was destroyed by fire. SMB filed an action in court to recover on the policies. Harding was made a defendant because by virtue of the sale, he became the owner of the property, although the policies were issued in SMBs name. > SMB sought to recover the proceeds to the extent of its mortgage credit with the balance to go to Harding. > Insurance Companies contended that they were not liable to Harding because their liability under the policies was limited to the insurable interests of SMB only. > SMB eventually reached a settlement with the insurance companies and was paid the balance of its mortgage credit. Harding was left to fend for himself. Trial court ruled against Harding. Hence the appeal.

Issue:

Whether or not the insurance companies are liable to Harding for the balance of the proceeds of the 2 policies.

Held:

NOPE. Under the Insurance Act, the measure of insurable interest in the property is the extent to which the insured might be daminified by the loss or injury thereof. Also it is provided in the IA that the insurance shall be applied exclusively to the proper interest of the person in whose name it is made. Undoubtedly, SMB as the mortgagee of the property, had an insurable interest therein; but it could NOT, an any event, recover upon the two policies an amount in excess of its mortgage credit.

By virtue of the Insurance Act, neither Dunn nor Harding could have recovered from the two policies. With respect to Harding, when he acquired the property, no change or assignment of the policies had been undertaken. The policies might have been worded differently so as to protect the owner, but this was not done.

If the wording had been: Payable to SMB, mortgagee, as its interests may appear, remainder to whomsoever, during the continuance of the risk, may become owner of the interest insured, it would have proved an intention to insure the entire interest in the property, NOT merely SMBs and would have shown to whom the money, in case of loss, should be paid. Unfortunately, this was not what was stated in the policies.

If during the negotiation for the policies, the parties had agreed that even the owners interest would be covered by the policies, and the policies had inadvertently been written in the form in which they were eventually issued, the lower court would have been able to order that the contract be reformed to give effect to them in the sense that the parties intended to be bound. However, there is no clear and satisfactory proof that the policies failed to reflect the real agreement between the parties that would justify the reformation of these two contracts.

SAN MIGUEL BREWERY, ETC., plaintiff-appellee, vs. LAW UNION AND ROCK INSURANCE CO., (LTD.) ET AL., defendants-appellees. HENRY HARDING, defendant-appellant., G.R. No. L-14300, January 19, 1920.

Crossfield and O'Brien for appellant Harding. Lawrence and Ross for appellee Law Union etc. Ins. Co.

Sanz and Luzuriaga for appellee "Filipinas, Compaia de Seguros." No appearance for the other appellee. STREET, J.: 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 Law Union and Rock Insurance Company (Ltd.), and the "Filipinas" Compania 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 judgement 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" Compania 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 not 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 show. 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 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 Harding, an additional insuperable obstacle is found in the fact that the ownership of the property had been charged, 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 Sane 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 mortgage 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 mortgage, to reform the instrument and give judgment in his favor for the loss thereunder, although it had been 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 Oak Insurance Co., 31 Conn., 517; Balen vs. Hanover Fire Insurance Co., 67 Mich., 179.) Similarly, in cases where the mortgage is by mistake described as owner, the court may grant reformation and permit a recovery by the mortgage 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. Phoenix Insurance Co. (136 U.S., 287; 34 L. 3d., 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 Island vs. Philippine Sugar Estates Development Co., 30 Phil. Rep., 27.) In the case now before us the proof is entirely insufficient to authorize the application of the doctrine state in the foregoing cases, for it is by 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 Avancea, JJ., concur.

G.R. No. L-2294

May 25, 1951

FILIPINAS COMPAIA DE SEGUROS, petitioner, vs. CHRISTERN, HUENEFELD and CO., INC., respondent. Ramirez and Ortigas for petitioner. Ewald Huenefeld for respondent. PARAS, C.J.:

On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after payment of corresponding premium, obtained from the petitioner ,Filipinas Cia. de Seguros, fire policy No. 29333 in the sum of P1000,000, covering merchandise contained in a building located at No. 711 Roman Street, Binondo Manila. On February 27, 1942, or during the Japanese military occupation, the building and insured merchandise were burned. In due time the respondent submitted to the petitioner its claim under the policy. The salvage goods were sold at public auction and, after deducting their value, the total loss suffered by the respondent was fixed at P92,650. The petitioner refused to pay the claim on the ground that the policy in favor of the respondent had ceased to be in force on the date the United States declared war against Germany, the respondent Corporation (though organized under and by virtue of the laws of the Philippines) being controlled by the German subjects and the petitioner being a company under American jurisdiction when said policy was issued on October 1, 1941. The petitioner, however, in pursuance of the order of the Director of Bureau of Financing, Philippine Executive Commission, dated April 9, 1943, paid to the respondent the sum of P92,650 on April 19, 1943. The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the purpose of recovering from the respondent the sum of P92,650 above mentioned. The theory of the petitioner is that the insured merchandise were burned up after the policy issued in 1941 in favor of the respondent corporation has ceased to be effective because of the outbreak of the war between the United States and Germany on December 10, 1941, and that the payment made by the petitioner to the respondent corporation during the Japanese military occupation was under pressure. After trial, the Court of First Instance of Manila dismissed the action without pronouncement as to costs. Upon appeal to the Court of Appeals, the judgment of the Court of First Instance of Manila was affirmed, with costs. The case is now before us on appeal by certiorari from the decision of the Court of Appeals. The Court of Appeals overruled the contention of the petitioner that the respondent corporation became an enemy when the United States declared war against Germany, relying on English and American cases which held that a corporation is a citizen of the country or state by and under the laws of which it was created or organized. It rejected the theory that nationality of private corporation is determine by the character or citizenship of its controlling stockholders. There is no question that majority of the stockholders of the respondent corporation were German subjects. This being so, we have to rule that said respondent became an enemy corporation upon the outbreak of the war between the United States and Germany. The English and American cases relied upon by the Court of Appeals have lost their force in view of the latest decision of the Supreme Court of the United States in Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92 Law. Ed. Advance Opinions, No. 4, pp. 148-153, in which the controls test has been adopted. In "Enemy Corporation" by Martin Domke, a paper presented to the Second International Conference of the Legal Profession held at the Hague (Netherlands) in August. 1948 the following enlightening passages appear: Since World War I, the determination of enemy nationality of corporations has been discussion in many countries, belligerent and neutral. A corporation was subject to enemy legislation when it was controlled by enemies, namely managed under the influence of individuals or corporations, themselves considered as enemies. It was the English courts which first the Daimler case applied this new concept of "piercing the corporate veil," which was adopted by the peace of Treaties of 1919 and the Mixed Arbitral established after the First World War. The United States of America did not adopt the control test during the First World War. Courts refused to recognized the concept whereby American-registered corporations could be considered as enemies and thus subject to domestic legislation and administrative measures regarding enemy property.

World War II revived the problem again. It was known that German and other enemy interests were cloaked by domestic corporation structure. It was not only by legal ownership of shares that a material influence could be exercised on the management of the corporation but also by long term loans and other factual situations. For that reason, legislation on enemy property enacted in various countries during World War II adopted by statutory provisions to the control test and determined, to various degrees, the incidents of control. Court decisions were rendered on the basis of such newly enacted statutory provisions in determining enemy character of domestic corporation. The United States did not, in the amendments of the Trading with the Enemy Act during the last war, include as did other legislations the applications of the control test and again, as in World War I, courts refused to apply this concept whereby the enemy character of an American or neutral-registered corporation is determined by the enemy nationality of the controlling stockholders. Measures of blocking foreign funds, the so called freezing regulations, and other administrative practice in the treatment of foreign-owned property in the United States allowed to large degree the determination of enemy interest in domestic corporations and thus the application of the control test. Court decisions sanctioned such administrative practice enacted under the First War Powers Act of 1941, and more recently, on December 8, 1947, the Supreme Court of the United States definitely approved of the control theory. In Clark vs. Uebersee Finanz Korporation, A. G., dealing with a Swiss corporation allegedly controlled by German interest, the Court: "The property of all foreign interest was placed within the reach of the vesting power (of the Alien Property Custodian) not to appropriate friendly or neutral assets but to reach enemy interest which masqueraded under those innocent fronts. . . . The power of seizure and vesting was extended to all property of any foreign country or national so that no innocent appearing device could become a Trojan horse." It becomes unnecessary, therefore, to dwell at length on the authorities cited in support of the appealed decision. However, we may add that, in Haw Pia vs. China Banking Corporation,* 45 Off Gaz., (Supp. 9) 299, we already held that China Banking Corporation came within the meaning of the word "enemy" as used in the Trading with the Enemy Acts of civilized countries not only because it was incorporated under the laws of an enemy country but because it was controlled by enemies. The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone except a public enemy may be insured." It stands to reason that an insurance policy ceases to be allowable as soon as an insured becomes a public enemy. Effect of war, generally. All intercourse between citizens of belligerent powers which is inconsistent with a state of war is prohibited by the law of nations. Such prohibition includes all negotiations, commerce, or trading with the enemy; all acts which will increase, or tend to increase, its income or resources; all acts of voluntary submission to it; or receiving its protection; also all acts concerning the transmission of money or goods; and all contracts relating thereto are thereby nullified. It further prohibits insurance upon trade with or by the enemy, upon the life or lives of aliens engaged in service with the enemy; this for the reason that the subjects of one country cannot be permitted to lend their assistance to protect by insurance the commerce or property of belligerent, alien subjects, or to do anything detrimental too their country's interest. The purpose of war is to cripple the power and exhaust the resources of the enemy, and it is inconsistent that one country should destroy its enemy's property and repay in insurance the value of what has been so destroyed, or that it should in such manner increase the resources of the

enemy, or render it aid, and the commencement of war determines, for like reasons, all trading intercourse with the enemy, which prior thereto may have been lawful. All individuals therefore, who compose the belligerent powers, exist, as to each other, in a state of utter exclusion, and are public enemies. (6 Couch, Cyc. of Ins. Law, pp. 5352-5353.) In the case of an ordinary fire policy, which grants insurance only from year, or for some other specified term it is plain that when the parties become alien enemies, the contractual tie is broken and the contractual rights of the parties, so far as not vested. lost. (Vance, the Law on Insurance, Sec. 44, p. 112.) The respondent having become an enemy corporation on December 10, 1941, the insurance policy issued in its favor on October 1, 1941, by the petitioner (a Philippine corporation) had ceased to be valid and enforcible, and since the insured goods were burned after December 10, 1941, and during the war, the respondent was not entitled to any indemnity under said policy from the petitioner. However, elementary rules of justice (in the absence of specific provision in the Insurance Law) require that the premium paid by the respondent for the period covered by its policy from December 11, 1941, should be returned by the petitioner. The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of whether the policy in question became null and void upon the declaration of war between the United States and Germany on December 10, 1941, and its judgment in favor of the respondent corporation was predicated on its conclusion that the policy did not cease to be in force. The Court of Appeals necessarily assumed that, even if the payment by the petitioner to the respondent was involuntary, its action is not tenable in view of the ruling on the validity of the policy. As a matter of fact, the Court of Appeals held that "any intimidation resorted to by the appellee was not unjust but the exercise of its lawful right to claim for and received the payment of the insurance policy," and that the ruling of the Bureau of Financing to the effect that "the appellee was entitled to payment from the appellant was, well founded." Factually, there can be no doubt that the Director of the Bureau of Financing, in ordering the petitioner to pay the claim of the respondent, merely obeyed the instruction of the Japanese Military Administration, as may be seen from the following: "In view of the findings and conclusion of this office contained in its decision on Administrative Case dated February 9, 1943 copy of which was sent to your office and the concurrence therein of the Financial Department of the Japanese Military Administration, and following the instruction of said authority, you are hereby ordered to pay the claim of Messrs. Christern, Huenefeld & Co., Inc. The payment of said claim, however, should be made by means of crossed check." (Emphasis supplied.) It results that the petitioner is entitled to recover what paid to the respondent under the circumstances on this case. However, the petitioner will be entitled to recover only the equivalent, in actual Philippines currency of P92,650 paid on April 19, 1943, in accordance with the rate fixed in the Ballantyne scale. Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to pay to the petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in Philippine currency, that should be returned by the petitioner for the unexpired term of the policy in question, beginning December 11, 1941. Without costs. So ordered. Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo, JJ., concur.