Short answer. Yes. Article 2127 provides that a mortgage extends to the amount of the indemnity owing to the owner from the insurers of the mortgaged property. So when your mortgaged building burns down, the fire insurance proceeds stand in place of the building, and the mortgage reaches that payout.
What the law says
the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged
Civil Code, Article 2127 — Extent of the Mortgage. Read the full provision →
The insurance proceeds stand in for the building
When fire destroys a mortgaged building, the lender's security has literally gone up in smoke — unless the law follows the value into whatever replaces it. Article 2127 does exactly that. The mortgage extends to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged. The insurance payout is the money that takes the place of the burned building. So instead of the mortgagee being left with a claim against ashes, the security shifts onto the indemnity the insurer owes for the loss.
This is a form of subrogation
The rule works on a substitution principle. A mortgage attaches to a particular asset for its value; when that asset is converted into money — here, an insurance indemnity — the mortgage attaches to the money in its place. The creditor does not get more than it bargained for, and the debtor is not unjustly enriched by pocketing proceeds for property that still secured an unpaid loan. The proceeds answer to the mortgage to the extent of the secured obligation, all with the declarations, amplifications and limitations established by law.
The same reach covers expropriation and more
The insurance indemnity is one of several substitute values the article gathers in. In the same breath it names the indemnity owing in virtue of expropriation for public use, and it extends the mortgage to natural accessions, improvements, growing fruits, and rents or income not yet received when the obligation becomes due. The unifying idea is that things added to the mortgaged property, and money paid when it is taken or destroyed, generally fall within the mortgage. A fire payout and an expropriation award are treated alike as stand-ins for the property.
What this means for you
If your mortgaged building burns and you receive fire insurance proceeds, do not treat that money as entirely free while the loan is unpaid. The mortgagee's claim can follow the indemnity, and the reach holds whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person. Loan and insurance documents often spell out how proceeds are applied — for instance, toward the outstanding debt or toward rebuilding. Understanding that the law already channels the payout toward the secured obligation helps you anticipate how those proceeds may be handled.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Philippine National Bank vs. Sps. Bernard and Cresencia Marañon, G.R. No. 189316, July 1, 2013 — read the decision on LawPhil →
- Midway Maritime and Technological Foundation, represented by its Chairman/President PhD in Education, Dr. Sabino M. Manglicmot vs. Marissa E. Castro, et al, G.R. No. 189061, August 6, 2014 — read the decision on LawPhil →
- Star Two (SPV-AMC), Inc. vs. Paper City Corporation of the Philippines, G.R. No. 169211, March 6, 2013 — read the decision on LawPhil →
- Bienvenido C. Teoco, et al. vs. Metropolitan Bank and Trust Co, G.R. No. 162333, December 23, 2008 — read the decision on LawPhil →