PERLA COMPANIA DE SEGUROS, INC., PETITIONER, VS. THE COURT OF APPEALS, HERMINIO LIM AND EVELYN LIM, RESPONDENTS.

These are two petitions for review on certiorari, one
filed by Perla Compania de Seguros, Inc. in G.R. No. 96452, and the other by
FCP Credit Corporation in G.R. No. 96493, both seeking to annul and set aside
the decision dated July 30,1990^[1] of
the Court of Appeals in CA-G.R. No. 13037, which reversed the decision of the
Regional Trial Court of Manila, Branch VIII in Civil Case No. 83-19098 for
replevin and damages. The dispositive
portion of the decision of the Court of Appeals reads, as follows:

“WHEREFORE, the decision appealed from is reversed; and appellee
Perla Compania de Seguros, Inc. is ordered to indemnify appellants Herminio and
Evelyn Lim for the loss of their insured vehicle; while said appellants are
ordered to pay appellee FCP Credit Corporation all the unpaid installments that
were due and payable before the date said vehicle was carnapped; and appellee
Perla Compania de Seguros, Inc. is also ordered to pay appellants moral damages
of P12,000.00 for the latter’s mental sufferings, exemplary damages of
P20,000.00 for appellee Perla Compania de Seguros, Inc. ‘s unreasonable refusal
on sham grounds to honor the just insurance claim of appellants by way of
example and correction for public good, and attorney’s fees of P10,000.00 as a
just and equitable reimbursement for the expenses incurred therefor by
appellants, and the costs of suit both in the lower court and in this appeal.”^[2]

The facts as found by the trial court are as follows:

On December 24, 1981, private respondents spouses Herminio and
Evelyn Lim executed a promissory note in
favor of Supercars, Inc. in the sum of P77,940.00, payable in
monthly installments according to the schedule of payment indicated in said
note,^[3]
and secured by a chattel mortgage over a brand new red Ford Laser 1300 5DR Hatchback
1981 model with motor and serial No. SUPJYK-03780, which is registered under
the name of private respondent Herminio Lim^[4] and
insured with the petitioner Perla Compania de Seguros, Inc. (Perla for brevity) for comprehensive coverage under Policy No. PC/41PP-QCB-43383.^[5]

On the same date, Supercars, Inc., with notice to private
respondents spouses, assigned to petitioner FCP Credit Corporation (FCP for
brevity) its rights, title and interest on said promissory note and chattel
mortgage as shown by the Deed of Assignment.^[6]

At around 2:30 P.M. of November 9, 1982, said vehicle was
carnapped while parked at the back of Broadway Centrum along N. Domingo Street,
Quezon City. Private respondent Evelyn
Lim, who was driving said car before it was carnapped, immediately called up
the Anti-Carnapping Unit of the Philippine Constabulary to report said incident
and thereafter, went to the nearest police substation at Araneta, Cubao to make
a police report regarding said incident, as shown by the certification issued
by the Quezon City police.^[7]

On November 10, 1982, private respondent Evelyn Lim reported said
incident to the Land Transportation Commission in Quezon City, as shown by the
letter of her counsel to said office,^[8] in
compliance with the insurance requirement. She also filed a complaint with the Headquarters, Constabulary Highway
Patrol Group.^[9]

On November 11, 1982, private respondent filed a claim for loss
with the petitioner Perla but said claim was denied on November 18, 1982^[10]
on the ground that Evelyn Lim, who was using the vehicle before it was
carnapped, was in possession of an expired driver’s license at the time of the
loss of said vehicle which is in violation of the authorized driver clause of
the insurance policy, which states, to wit:

“AUTHORIZED DRIVER:

Any of the following: (a)
The Insured (b) Any person driving on the Insured’s order, or with his
permission. Provided that the person
driving is permitted, in accordance with the licensing or other laws or
regulations, to drive the Scheduled Vehicle, or has been permitted and is not
disqualified by order of a Court of Law or by reason of any enactment or
regulation in that behalf.”^[11]

On November 17, 1982, private respondents requested from
petitioner FCP for a suspension of payment on the monthly amortization agreed
upon due to the loss of the vehicle and, since the carnapped vehicle was
insured with petitioner Perla, said insurance company should be made to pay the
remaining balance of the promissory note and the chattel mortgage contract.

Perla, however, denied private respondents’ claim. Consequently, petitioner FCP demanded that
private respondents pay the whole balance of the promissory note or to return
the vehicle^[12]
but the latter refused.

On July 25, 1983, petitioner FCP filed a complaint against
private respondents, who in turn filed an amended third party complaint against
petitioner Perla on December 8, 1983. After trial on the merits, the trial court rendered a decision, the
dispositive portion of which reads:

“WHEREFORE, in view of the foregoing, judgment is hereby rendered
as follows:

1. Ordering defendants Herminio Lim and Evelyn
Lim to pay, jointly and severally, plaintiff the sum of P55,055.93 plus
interest thereon at the rate of 24% per annum from July 2, 1983 until fully
paid;

2. Ordering defendants to pay plaintiff
P5,000.00 as and for attorney’s fees; and the costs of suit.

Upon the other hand, likewise, ordering the DISMISSAL of the
Third-Party Complaint filed against Third-Party Defendant.”^[13]

Not satisfied with said decision, private respondents appealed
the same to the Court of Appeals, which reversed said decision.

After petitioners’ separate motions for reconsideration were
denied by the Court of Appeals in its resolution of December 10, 1990,
petitioners filed these separate petitions for review on certiorari.

Petitioner Perla alleged that there was grave abuse of discretion
on the part of the appellate court in holding
that private respondents did not violate the insurance contract because the authorized
driver clause is not applicable to the “Theft” clause of said Contract.

For its part,
petitioner FCP raised the issue of whether or not the loss of the collateral
exempted the debtor from his admitted obligations under the promissory note
particularly the payment of interest, litigation expenses and attorney’s fees.

We find no merit in Perla’s petition.

The comprehensive motor car insurance policy issued by petitioner
Perla undertook to indemnify the private respondents against loss or damage to the
car (a) by accidental collision or overturning, or collision or overturning
consequent upon mechanical breakdown or consequent upon wear and tear; (b) by
fire, external explosion, self-ignition or lightning or burglary, housebreaking
or theft; and (c) by
malicious act.^[14]

Where a car is admittedly, as in this case, unlawfully and
wrongfully taken without the owner’s consent or knowledge, such taking
constitutes theft, and, therefore, it is the “THEFT” clause, and not the
“AUTHORIZED DRIVER” clause, that should apply. As correctly stated by the respondent court in its decision:

“x x x Theft is an entirely different legal concept from that of
accident. Theft is committed by a
person with the intent to gain or, to put it in another way, with the
concurrence of the doer’s will. On the
other hand, accident, although it may proceed or result from negligence, is the
happening of an event without the concurrence of the will of the person by
whose agency it was caused. (Bouvier’s
Law Dictionary, Vol. I, 1914 ed., p. 101).

Clearly, the risk against
accident is distinct from the risk against theft. The ‘authorized driver clause’ in a typical insurance policy is
in contemplation or anticipation of accident in the legal sense in which it
should be understood, and not in contemplation or anticipation of an event such
as theft. The distinction — often
seized upon by insurance companies in resisting claims from their assureds –­
between death occurring as a result of accident and death occurring as a result
of intent may, by analogy, apply to the case at bar. Thus, if the insured vehicle had figured in an accident at the
time she drove it with an expired license, then, appellee Perla Compania could
properly resist appellants’ claim for indemnification for the loss or
destruction of the vehicle resulting from the accident. But in the present case, the loss of the
insured vehicle did not result from an accident where intent was involved; the
loss in the present case was caused by theft, the commission of which was attended
by intent.”^[15]

It is worthy to note that there is no causal connection between
the possession of a valid driver’s license and the loss of a vehicle. To rule otherwise would render car insurance
practically a sham since an insurance company can easily escape liability by
citing restrictions which are not applicable or germane to the claim, thereby
reducing indemnity to a shadow.

We however find the petition of FCP meritorious.

This Court agrees with petitioner FCP that private respondents
are not relieved of their obligation to pay the former the installments due on
the promissory note on account of the loss of the automobile. The chattel mortgage constituted over the
automobile is merely an accessory contract to the promissory note. Being the principal contract, the promissory
note is unaffected by whatever befalls the subject matter of the accessory
contract. Therefore, the unpaid balance
on the promissory note should be paid, and not just the installments due and
payable before the automobile was carnapped, as erronously held by the Court of
Appeals.

However, this does not mean that private respondents are bound to
pay the interest, litigation expenses and attorney’s fees stipulated in the
promissory note. Because of the
peculiar relationship between the three contracts in this case, i, e.,
the promissory note, the chattel mortgage contract and the insurance policy,
this Court is compelled to construe all three contracts as intimately
interrelated to each other, despite the fact that at first glance there is no
relationship whatsoever between the parties thereto.

Under the promissory note, private respondents are obliged to pay
Supercars, Inc. the amount stated
therein in accordance with the schedule provided for. To secure said promissory note, private respondents constituted a
chattel mortgage in favor of Supercars, Inc. over the automobile the former
purchased from the latter. The chattel
mortgage, in turn, required private respondents to insure the automobile and to
make the proceeds thereof payable to Supercars, Inc. The promissory note and chattel mortgage were assigned by
Supercars, Inc. to petitioner FCP, with the knowledge of private respondents. Private respondents were able to secure an
insurance policy from petitioner Perla, and the same was made specifically
payable to petitioner FCP.^[16]

The insurance policy was therefore meant to be an additional
security to the principal contract, that is, to insure that the promissory note
will still be paid in case the automobile is lost through accident or
theft. The Chattel Mortgage Contract
provided that:

“‘THE SAID MORTGAGOR COVENANTS AND AGREES THAT HE/IT WILL CAUSE THE
PROPERTY/IES HEREIN-ABOVE MORTGAGED TO BE INSURED AGAINST LOSS OR DAMAGE BY
ACCIDENT, THEFT AND FIRE FOR A PERIOD OF ONE YEAR FROM DATE HEREOF AND EVERY
YEAR THEREAFTER UNTIL THE MORTGAGE OBLIGATION IS FULLY PAID WITH AN INSURANCE
COMPANY OR COMPANIES ACCEPTABLE TO THE MORT­GAGEE IN AN AMOUNT NOT LESS THAN
THE OUT-STANDING BALANCE OF THE MORTGAGE OBLIGATION; THAT HE/IT WILL MAKE
ALL LOSS, IF ANY, UNDER SUCH POLICY OR POLICIES, PAYABLE TO THE MORT­GAGEE OR
ITS ASSIGNS AS ITS INTERESTS MAY APPEAR AND FORTHWITH DELIVER SUCH POLICY OR
POLICIES TO THE MORTGAGEE. X X X.’”^[17]

It is clear from the abovementioned provision that upon the loss
of the insured vehicle, the insurance company Perla undertakes to pay directly
to the mortgagor or to their assignee, FCP, the outstanding balance of the
mortgage at the time of said loss under the mortgage contract. If the claim on the insurance policy had
been approved by petitioner Perla, it would have paid the proceeds thereof
directly to petitioner FCP, and this would have had the effect of extinguishing private respondents’
obligation to petitioner FCP. Therefore, private respondents were justified in asking petitioner FCP
to demand the unpaid installments from petitioner Perla.

Because petitioner Perla had unreasonably denied their valid
claim, private respondents should not be made to pay the interest, liquidated
damages and attorney‘s fees as stipulated in the promissory
note. As mentioned above, the contract
of indemnity was procured to insure the return of the money loaned from
petitioner FCP, and the unjustified refusal of petitioner Perla to recognize
the valid claim of the private respondents should not in any way prejudice the
latter.

Private respondents can not be said to have unduly enriched
themselves at the expense of petitioner FCP since they will be required to pay
the latter the unpaid balance of its obligation under the promissory note.

In view of the foregoing discussion, We hold that the Court of Appeals did not err in requiring
petitioner Perla to indemnify private respondents for the loss of their insured
vehicle. However, the latter should be
ordered to pay petitioner FCP the amount of P55,055.93, representing the unpaid
installments from December 30, 1982 up to July 1, 1983 as shown in the
statement of account prepared by petitioner FCP,^[18] plus
legal interest from July 2, 1983 until fully paid.

As to the award of moral damages, exemplary damages and
attorney’s fees, private respondents are legally entitled to the same since
petitioner Perla had acted in bad faith by unreasonably refusing to honor the
insurance claim of the private respondents. Besides, awards for moral and exemplary damages, as well as attorney’s
fees are left to the sound discretion of the Court. Such discretion, if well exercised, will not be disturbed on
appeal.^[19]

WHEREFORE, the assailed decision of the Court of Appeals
is hereby MODIFIED to require private respondents to pay petitioner FCP the
amount of P55,055.93, with legal interest from July 2, 1983 until fully paid. The decision appealed from is hereby affirmed as to all other
respects. No pronouncement as to costs.

SO ORDERED.             

Melencio-Herrera, (Chairman), Paras, Padilla, and Regalado, JJ., concur.

^[1] Ponente: Justice Jesus M. Elbinias; Justices Pedro A.
Ramirez and Regina G. Ordoñez-Benitez, concurring.

^[2] Decision of the Court of Appeals, p. 7;
Rollo, p. 63.

^[3]
Exhibit “A”, Exhibit “5”.

^[4]
Exhibit “B”.

^[5] Exhibit “2”, Exhibit
“1-Perla”.

^[6] Exhibit “B”.

^[7] Exhibit “6”, Records, p. 101.

^[8] Exhibit
“7”.

^[9] Exhibit
“8”.

^[10] Exhibit
“2-a-Perla”.

^[11] Exhibit
“1-a Perla de Seguro”; Records, p. 88.

^[12] Exhibits “C” and “D”.

^[13] RTC’s Decision,
pp. 8-9; Records, pp. 34-35.

^[14] Exhibit
“2”.

^[15] Decision
of the Court of Appeals, p. 6; Rollo,
p. 62.

^[16] Exhibit
“2”; Records, p. 88.

^[17] Exhibit “B”; Records, p. 80. Emphasis supplied.

^[18] Exhibit
“D”, Records, p. 84

^[19] Philippine Airline, Inc. vs. Court of
Appeals, 188 SCRA 461 (1990).