June 27, 1973
FACTS:
Artex Development Co. obtained a policy from Wellington Insurance Co. for the insurance of its buildings, stocks, and machinery against loss or damage by fire or lighting (in the sum of P24,346,509, and an additional sum of P883,034), and the use and occupancy of these properties against business interruption (in the sum ofp 5,200,000).
Due to Wellington Insurance’s lack of capital, it had to secure reinsurance coverage with Alexander and Alexander Inc. to cover the over P24M fire insurance coverage policy it issued to Artex.
Subsequently, the properties of Artex had caught fire. The total property loss was P10,106,554.40 while its total business interruption loss was P3,000,000.
Wellington was able to pay P6,481,870.07 of the property loss and P1,864,134.08 of the business interruption loss, leaving a balance of P3,624,683.43 and P1,748,460.00 respectively.
Due to the Wellington’s failure to pay its balance, Artex filed a case before the CFI. Wellington raised the defense that it had obtained reinsurance from other companies to cover its liability, hence the insured’s cause of action is against the reinsurance company and not against them.
The lower court ruled in favor or Artex, ordering Wellington to pay the balance. Hence, the instant petition.
ISSUE:
Whether Artex has a cause of action against the reinsurer. - NO.
HELD:
A third party not privy to a contract that contains no stipulations pour autrui (stipulation in favor of third party not a party to the contract) in its favor may not sue for enforcement of the contract. Unless there is a specific grant in, or assignment of, reinsurance contract in favor of the insured or a manifest intention of the contracting parties to the reinsurance contract to grant such benefit or favor to the insured, the insured, not being privy to the reinsurance contract, has no cause of action against the reinsurer.
In this case, there was no clause in the reinsurance contract that can be considered as a stipulation pour autrui in favor of Artex, and whereby Artex is deemed to have agreed to look solely to the reinsurance for indemnity in case of loss. Hence, under Section 91 of the Insurance Act (now section 100), Artex, being the original insured, has no interest in the contract of insurance between Wellington, the insurer, and Alexander and Alexander, the reinsurer.
This rule is consistent with Article 1311 of the Civil Code, where it is stated that “Contracts take effect only between the parties, their assigns, and heirs”. A stipulation pour autrui is an exception that can only be availed when the contracting parties clearly and deliberately conferred the favor upon the third party.