G.R. No. 96452 & 96493, May 7, 1992
PERLA COMPANIA DE SEGUROS, INC. and FCP CREDIT CORPORATION, petitioners, vs. THE COURT OF APPEALS, HERMINIO LIM and EVELYN LIM, respondents.

FACTS

On December 24, 1981, spouses Herminio and Evelyn Lim executed a promissory note in favor of Supercars, Inc. for P77,940.00, payable in monthly installments. To secure the note, they executed a chattel mortgage over a brand new Ford Laser. The chattel mortgage contract required them to insure the vehicle against loss or damage by accident, theft, and fire, with the proceeds payable to the mortgagee. Supercars, Inc. assigned its rights under the note and mortgage to FCP Credit Corporation (FCP). The Lims insured the vehicle with Perla Compania de Seguros, Inc. (Perla) under a comprehensive motor car insurance policy, which was made payable to FCP. On November 9, 1982, the vehicle was carnapped. Evelyn Lim immediately reported the theft to the authorities and to the Land Transportation Commission. On November 11, 1982, the Lims filed a claim with Perla. Perla denied the claim on November 18, 1982, on the ground that Evelyn Lim, who was driving the vehicle before it was stolen, was in possession of an expired driver’s license, which allegedly violated the “Authorized Driver” clause of the insurance policy. The Lims then requested FCP to suspend payments, arguing Perla should pay the balance. After Perla’s denial, FCP demanded payment from the Lims or the return of the vehicle. When the Lims refused, FCP filed a complaint for replevin and damages. The Lims filed a third-party complaint against Perla. The Regional Trial Court ruled in favor of FCP, ordering the Lims to pay the unpaid balance plus interest and attorney’s fees, and dismissed the third-party complaint against Perla. The Court of Appeals reversed this decision, ordering Perla to indemnify the Lims for the loss, ordering the Lims to pay FCP only the unpaid installments due before the carnapping, and awarding moral damages, exemplary damages, and attorney’s fees against Perla. Both Perla and FCP filed separate petitions for review.

ISSUE

1. Whether the “Authorized Driver” clause in the insurance policy applies to a loss caused by theft, thereby allowing Perla to validly deny the claim.
2. Whether the loss of the mortgaged vehicle relieves the Lims from their obligation to pay the promissory note in full, including interest and attorney’s fees.

RULING

1. No. The “Authorized Driver” clause does not apply to a loss caused by theft. The Supreme Court agreed with the Court of Appeals that theft is a distinct risk from accident. Theft involves intent and is committed with the concurrence of the doer’s will, whereas accident, even if arising from negligence, happens without the willful intent of the person causing it. The “Authorized Driver” clause contemplates accidents, not theft. There is no causal connection between possessing an expired driver’s license and the vehicle being stolen. Applying the clause to a theft claim would render car insurance practically illusory.
2. No, the loss does not relieve the Lims from paying the principal obligation, but they are not liable for the stipulated interest, liquidated damages, and attorney’s fees. The promissory note is the principal contract, and the chattel mortgage is merely an accessory contract. The loss of the mortgaged vehicle does not extinguish the debt under the promissory note. Therefore, the Lims are liable to pay FCP the unpaid balance of the principal obligation. However, the contracts (promissory note, chattel mortgage, and insurance policy) are intimately interrelated. The insurance was procured precisely as an additional security for the loan, to ensure payment in case of loss. Since Perla unreasonably and in bad faith denied the valid claim, the Lims should not be prejudiced by having to pay the additional charges (interest, liquidated damages, attorney’s fees) stipulated in the promissory note. The Court modified the Court of Appeals’ decision, ordering the Lims to pay FCP the amount of P55,055.93 (representing unpaid installments from December 30, 1982, to July 1, 1983) with legal interest from July 2, 1983, until fully paid. The awards of moral damages, exemplary damages, and attorney’s fees against Perla were affirmed due to its bad faith in unreasonably refusing the claim.