Noel F. Manankil, et.al. vs.

COA
G.R. No. 217342, October 13, 2020
INTING, J
DOCTRINE: Certainly, whether or not a person designated to receive the insurance proceeds
possesses the requisite insurable interest is a matter that will affect the contract's
enforceability and the beneficiary's suitability to be constituted as such. However, insurable
interest is irrelevant to the manner by which the recipient chooses or is bound to use the
proceeds after the fact.
Verily, the Insurance Code states that the proceeds shall be applied to the designated
recipient's exclusive benefit. However, once the insurer releases the proceeds in full to the
designated recipient, the obligations under a contract of insurance will have been fully
performed and, thus, extinguished. Upon such time, a contract of insurance's terms and the
Insurance Code's provisions may no longer control the manner by which the proceeds are
thereafter used or otherwise disposed of.
FACTS: CDC is a subsidiary corporation established through (EO) 804 in 1993 for the purpose of
becoming BCDA's "operating and implementing arm, x x x to manage the Clark Special Economic
Zone (CSEZ)." Thus, CDC entered into a 25-year Lease Agreement with Amari Duty Free, Inc.
(Amari) to rent out a 1.70-hectare parcel of land located along Dyess Highway, CSEZ, Pampanga
(leased property).
Amari caused the construction of a two-story building (original structure) on the leased
property. The structure was completed on November 13, 1996 and had an estimated cost of
P36,000,000.00.In addition, Amari insured the original structure as required under the Lease
Agreement and designate CDC as the main beneficiary. On December 29, 2005, a fire razed the
original structure, forcing Grand Duty Free to shut down its business operations. GSIS released
the insurance proceeds through a check amounting to P39,246,781.37 and payable to
"CDC-Grand Duty Free Plaza.
CDC, based on the lease contract allege that, as the lessor, they should be the one to construct
the original property in case of damage/loss instead of Grand Duty Fee, the lessee. Due to an
impasse Grand Duty Free intimated the possibility of discontinuing its business in the Clark
Freeport Zone. With this in mind, it proposed the pretermination of the Lease Agreement. CDC
agreed to preterminate the Lease Agreement, as authorized by its Board of Directors (Board)
Based on the parties' 50-50 sharing scheme, CDC and Grand Duty Free will each receive
P19,623,390.68, representing their 50% share in the insurance proceeds.
The Commission on Audit (COA State Auditor IV, issued Notice of Disallowance No. (ND)
2008-10-03 (2008) finding the aforementioned disbursement "contrary to Article VIII, Sections
2 and 3 of the Lease Agreement.” Petitioners appealed but was denied by COA Proper. Hence
they filed a Petition for Certiorari.
ISSUE: Whether or not the 50-50 sharing scheme of insurance proceeds is contrary to insurance
code
RULING: No. the 50-50 disbursement of insurance proceeds is contrary to insurance code,
notwithstanding the fact that CDC is the main beneficiary of the insurance.
Under the Lease Agreement, Grand Duty Free was obligated to: (1) enter into an insurance
contract to secure the original structure against all risks, and (2) designate the CDC as the
beneficiary therein. In turn, Grand Duty Free entered into an insurance contract with the GSIS
and paid all the premiums required under the policy. The Lease Agreement merely required its
designation as beneficiary. However, the CDC was not a party to the insurance contract. The
Lease Agreement further provided that in case of loss of or damage to the leased property, the
CDC shall reconstruct or restore the original structure using the proceeds from the insurance
contract.
When fire gutted the original structure, Grand Duty Free, as the insured, filed a claim upon
the insurance contract. The GSIS, the insurer, remitted the proceeds to the CDC, as the
designated beneficiary under the Lease Agreement. Thereafter, the CDC and Grand Duty Free
preterminated the Lease Agreement and agreed to share in the insurance proceeds, 50-50.
Pursuant to this, the CDC released 50% of the proceeds to Grand Duty Free.
The COA cites that CDC's 50% Release is contrary to law since it violated the Insurance Code,
particularly Sections 53 and 18 thereof; and second, that the expenditure was contrary to the
provisions of the Lease Agreement, particularly Section 2, Article VIII and Section 2, Article VI,
thereof.
Insurance Code does not Apply.
The COA Proper cited the following Insurance Code provisions to support the 50% Release's
disallowance:
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.
Sec. 53. The insurance proceeds shall be applied exclusively to the proper interest of
the person in whose name or for whose benefit it is made unless otherwise
specified in the policy.
Applying the above-cited provisions, the COA Proper ruled that the insurance contract was
executed primarily to protect the CDC's-not Grand Duty Free's-insurable interest in the original
structure. As the designated beneficiary having insurable interest in the property insured, the
insurance proceeds shall be for the CDC's exclusive benefit. Thus, the 50-50 sharing scheme
was contrary to law.
The Court disagrees with the COA Proper's reasoning.
That the disallowed amount in this case refers to a portion of insurance proceeds received from
the GSIS does not ipso facto place the 50% Release within the coverage of the terms of the
insurance contract and, by extension, the Insurance Code.
Certainly, whether or not a person designated to receive the insurance proceeds possesses the
requisite insurable interest is a matter that will affect the contract's enforceability and
the beneficiary's suitability to be constituted as such. However, insurable interest is irrelevant
to the manner by which the recipient chooses or is bound to use the proceeds after the fact.
In the present case, the COA seeks to disallow an amount that pertains not to the insurance
proceeds per se, but to the subsequent disposition thereof.
Verily, the Insurance Code states that the proceeds shall be applied to the designated recipient's
exclusive benefit. However, once the insurer releases the proceeds in full to the designated
recipient, the obligations under a contract of insurance will have been fully performed and,
thus, extinguished. Upon such time, a contract of insurance's terms and the Insurance Code's
provisions may no longer control the manner by which the proceeds are thereafter used or
otherwise disposed of.