Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-1669

xxx

August 31, 1950

PAZ LOPEZ DE CONSTANTINO, plaintiff-appellant,

vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-1670

advance during the lifetime and good health of the Insured of the annual
premium of One Hundred fifty-eight and 4/100 pesos Philippine
currency1 and of the payment of a like amount upon each twenty-seventh
day of September hereafter during the term of Twenty years or until the
prior death of the Insured. (Emphasis supplied.)

August 31, 1950

AGUSTINA PERALTA, plaintiff-appellant,

vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
Mariano Lozada for appellant Constantino.
Cachero and Madarang for appellant Peralta.
Dewitt, Perkins and Ponce Enrile for appellee.
Ramirez and Ortigas and Padilla, Carlos and Fernando as amici curiae.
BENGZON, J.:
These two cases, appealed from the Court of First Instance of Manila, call for
decision of the question whether the beneficiary in a life insurance policy may
recover the amount thereof although the insured died after repeatedly failing to pay
the stipulated premiums, such failure having been caused by the last war in the
Pacific.
The facts are these:
First case. In consideration of the sum of P176.04 as annual premium duly paid to it,
the Asia Life Insurance Company (a foreign corporation incorporated under the laws
of Delaware, U.S.A.), issued on September 27, 1941, its Policy No. 93912 for P3,000,
whereby it insured the life of Arcadio Constantino for a term of twenty years. The
first premium covered the period up to September 26, 1942. The plaintiff Paz Lopez
de Constantino was regularly appointed beneficiary. The policy contained these
stipulations, among others:
This POLICY OF INSURANCE is issued in consideration of the written and
printed application here for a copy of which is attached hereto and is
hereby made a part hereof made a part hereof, and of the payment in

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All premium payments are due in advance and any unpunctuality in making
any such payment shall cause this policy to lapse unless and except as kept
in force by the Grace Period condition or under Option 4 below. (Grace of 31
days.)
After that first payment, no further premiums were paid. The insured died on
September 22, 1944.
It is admitted that the defendant, being an American corporation , had to close its
branch office in Manila by reason of the Japanese occupation, i.e. from January 2,
1942, until the year 1945.
Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued
its Policy No. 78145 (Joint Life 20-Year Endowment Participating with Accident
Indemnity), covering the lives of the spouses Tomas Ruiz and Agustina Peralta, for
the sum of P3,000. The annual premium stipulated in the policy was regularly paid
from August 1, 1938, up to and including September 30, 1941. Effective August 1,
1941, the mode of payment of premiums was changed from annual to quarterly, so
that quarterly premiums were paid, the last having been delivered on November 18,
1941, said payment covering the period up to January 31, 1942. No further
payments were handed to the insurer. Upon the Japanese occupation, the insured
and the insurer became separated by the lines of war, and it was impossible and
illegal for them to deal with each other. Because the insured had borrowed on the
policy an mount of P234.00 in January, 1941, the cash surrender value of the policy
was sufficient to maintain the policy in force only up to September 7, 1942. Tomas
Ruiz died on February 16, 1945. The plaintiff Agustina Peralta is his beneficiary. Her
demand for payment met with defendant's refusal, grounded on non-payment of the
premiums.
The policy provides in part:
This POLICY OF INSURANCE is issued in consideration of the written and
printed application herefor, a copy of which is attached hereto and is
hereby made apart hereof, and of the payment in advance during the life
time and good health of the Insured of the annual premium of Two hundred
and 43/100 pesos Philippine currency and of the payment of a like amount
upon each first day of August hereafter during the term of Twenty years or
until the prior death of either of the Insured. (Emphasis supplied.)

xxx

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All premium payments are due in advance and any unpunctuality in making
any such payment shall cause this policy to lapse unless and except as kept
in force by the Grace Period condition or under Option 4 below. (Grace of
days.) . . .
Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of
the policies minus all sums due for premiums in arrears. They allege that nonpayment of the premiums was caused by the closing of defendant's offices in Manila
during the Japanese occupation and the impossible circumstances created by war.
Defendant on the other hand asserts that the policies had lapsed for non-payment of
premiums, in accordance with the contract of the parties and the law applicable to
the situation.
The lower court absolved the defendant. Hence this appeal.
The controversial point has never been decided in this jurisdiction. Fortunately, this
court has had the benefit of extensive and exhaustive memoranda including those
of amici curiae. The matter has received careful consideration, inasmuch as it affects
the interest of thousands of policy-holders and the obligations of many insurance
companies operating in this country.
Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as
amended, and the Civil Code.2Act No. 2427 was largely copied from the Civil Code of
California.3 And this court has heretofore announced its intention to supplement the
statutory laws with general principles prevailing on the subject in the United State. 4
In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts of
insurance are contracts of indemnity upon the terms and conditions specified in the
policy. The parties have a right to impose such reasonable conditions at the time of
the making of the contract as they may deem wise and necessary. The rate of
premium is measured by the character of the risk assumed. The insurance company,
for a comparatively small consideration, undertakes to guarantee the insured
against loss or damage, upon the terms and conditions agreed upon, and upon no
other, and when called upon to pay, in case of loss, the insurer, therefore, may justly
insists upon a fulfillment of these terms. If the insured cannot bring himself within
the conditions of the policy, he is not entitled for the loss. The terms of the policy
constitute the measure of the insurer's liability, and in order to recover the insured
must show himself within those terms; and if it appears that the contract has been
terminated by a violation, on the part of the insured, of its conditions, then there can
be no right of recovery. The compliance of the insured with the terms of the contract
is a condition precedent to the right of recovery."
Recall of the above pronouncements is appropriate because the policies in question
stipulate that "all premium payments are due in advance and any unpunctuality in

making any such payment shall cause this policy to lapse." Wherefore, it would
seem that pursuant to the express terms of the policy, non-payment of premium
produces its avoidance.
The conditions of contracts of Insurance, when plainly expressed in a policy,
are binding upon the parties and should be enforced by the courts, if the
evidence brings the case clearly within their meaning and intent. It tends to
bring the law itself into disrepute when, by astute and subtle distinctions, a
plain case is attempted to be taken without the operation of a clear,
reasonable and material obligation of the contract. Mack vs. Rochester
German Ins. Co., 106 N.Y., 560, 564. (Young vs. Midland Textile Ins. Co., 30
Phil., 617, 622.)
In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was
avoided because the premium had not been paid within the time fixed, since by its
express terms, non-payment of any premium when due or within the thirty-day
period of grace, ipso facto caused the policy to lapse. This goes to show that
although we take the view that insurance policies should be conserved 5 and should
not lightly be thrown out, still we do not hesitate to enforce the agreement of the
parties.
Forfeitures of insurance policies are not favored, but courts cannot for that
reason alone refuse to enforce an insurance contract according to its
meaning. (45 C.J.S., p. 150.)
Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of
premium was the consequence of war, it should be excused and should not cause
the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on Insurance, says that in
determining the effect of non-payment of premiums occasioned by war, the
American cases may be divided into three groups, according as they support the socalled Connecticut Rule, the New York Rule, or the United States Rule.
The first holds the view that "there are two elements in the consideration for which
the annual premium is paid First, the mere protection for the year, and second,
the privilege of renewing the contract for each succeeding year by paying the
premium for that year at the time agreed upon. According to this view of the
contract, the payment of premiums is a condition precedent, the non-performance
would be illegal necessarily defeats the right to renew the contract."
The second rule, apparently followed by the greater number of decisions, hold that
"war between states in which the parties reside merely suspends the contracts of
the life insurance, and that, upon tender of all premiums due by the insured or his
representatives after the war has terminated, the contract revives and becomes fully
operative."

The United States rule declares that the contract is not merely suspended, but is
abrogated by reason of non-payments is peculiarly of the essence of the contract. It
additionally holds that it would be unjust to allow the insurer to retain the reserve
value of the policy, which is the excess of the premiums paid over the actual risk
carried during the years when the policy had been in force. This rule was announced
in the well-known Statham6case which, in the opinion of Professor Vance, is the
correct rule.7
The appellants and some amici curiae contend that the New York rule should be
applied here. The appellee and other amici curiae contend that the United States
doctrine is the orthodox view.
We have read and re-read the principal cases upholding the different theories.
Besides the respect and high regard we have always entertained for decisions of the
Supreme Court of the United States, we cannot resist the conviction that the reasons
expounded in its decision of the Statham case are logically and judicially sound. Like
the instant case, the policy involved in the Statham decision specifies that nonpayment on time shall cause the policy to cease and determine. Reasoning out that
punctual payments were essential, the court said:
. . . it must be conceded that promptness of payment is essential in the
business of life insurance. All the calculations of the insurance company are
based on the hypothesis of prompt payments. They not only calculate on
the receipt of the premiums when due, but on compounding interest upon
them. It is on this basis that they are enabled to offer assurance at the
favorable rates they do. Forfeiture for non-payment is an necessary means
of protecting themselves from embarrassment. Unless it were enforceable,
the business would be thrown into confusion. It is like the forfeiture of
shares in mining enterprises, and all other hazardous undertakings. There
must be power to cut-off unprofitable members, or the success of the whole
scheme is endangered. The insured parties are associates in a great
scheme. This associated relation exists whether the company be a mutual
one or not. Each is interested in the engagements of all; for out of the coexistence of many risks arises the law of average, which underlies the
whole business. An essential feature of this scheme is the mathematical
calculations referred to, on which the premiums and amounts assured are
based. And these calculations, again, are based on the assumption of
average mortality, and of prompt payments and compound interest
thereon. Delinquency cannot be tolerated nor redeemed, except at the
option of the company. This has always been the understanding and the
practice in this department of business. Some companies, it is true, accord
a grace of thirty days, or other fixed period, within which the premium in
arrear may be paid, on certain conditions of continued good health, etc. But
this is a matter of stipulation, or of discretion, on the part of the particular
company. When no stipulation exists, it is the general understanding that
time is material, and that the forfeiture is absolute if the premium be not
paid. The extraordinary and even desperate efforts sometimes made, when
an insured person is in extremes to meet a premium coming due,
demonstrates the common view of this matter.

The case, therefore, is one in which time is material and of the essence and
of the essence of the contract. Non-payment at the day involves absolute
forfeiture if such be the terms of the contract, as is the case here. Courts
cannot with safety vary the stipulation of the parties by introducing equities
for the relief of the insured against their own negligence.
In another part of the decision, the United States Supreme Court considers and
rejects what is, in effect, the New York theory in the following words and phrases:
The truth is, that the doctrine of the revival of contracts suspended during
the war is one based on considerations of equity and justice, and cannot be
invoked to revive a contract which it would be unjust or inequitable to
revive.
In the case of Life insurance, besides the materiality of time in the
performance of the contract, another strong reason exists why the policy
should not be revived. The parties do not stand on equal ground in
reference to such a revival. It would operate most unjustly against the
company. The business of insurance is founded on the law of average; that
of life insurance eminently so. The average rate of mortality is the basis on
which it rests. By spreading their risks over a large number of cases, the
companies calculate on this average with reasonable certainty and safety.
Anything that interferes with it deranges the security of the business. If
every policy lapsed by reason of the war should be revived, and all the back
premiums should be paid, the companies would have the benefit of this
average amount of risk. But the good risks are never heard from; only the
bar are sought to be revived, where the person insured is either dead or
dying. Those in health can get the new policies cheaper than to pay
arrearages on the old. To enforce a revival of the bad cases, whilst the
company necessarily lose the cases which are desirable, would be
manifestly unjust. An insured person, as before stated, does not stand
isolated and alone. His case is connected with and co-related to the cases
of all others insured by the same company. The nature of the business, as a
whole, must be looked at to understand the general equities of the parties.
The above consideration certainly lend themselves to the approval of fair-minded
men. Moreover, if, as alleged, the consequences of war should not prejudice the
insured, neither should they bear down on the insurer.
Urging adoption of the New York theory, counsel for plaintiff point out that the
obligation of the insured to pay premiums was excused during the war owing to
impossibility of performance, and that consequently no unfavorable consequences
should follow from such failure.
The appellee answers, quite plausibly, that the periodic payment of premiums, at
least those after the first, is not an obligation of the insured, so much so that it is not
a debt enforceable by action of the insurer.

Under an Oklahoma decision, the annual premium due is not a debt. It is

not an obligation upon which the insurer can maintain an action against
insured; nor is its settlement governed by the strict rule controlling
payments of debts. So, the court in a Kentucky case declares, in the
opinion, that it is not a debt. . . . The fact that it is payable annually or
semi-annually, or at any other stipulated time, does not of itself constitute
a promise to pay, either express or implied. In case of non-payment the
policy is forfeited, except so far as the forfeiture may be saved by
agreement, by waiver, estoppel, or by statute. The payment of the
premium is entirely optional, while a debt may be enforced at law, and the
fact that the premium is agreed to be paid is without force, in the absence
of an unqualified and absolute agreement to pay a specified sum at some
certain time. In the ordinary policy there is no promise to pay, but it is
optional with the insured whether he will continue the policy or forfeit it. (3
Couch, Cyc. on Insurance, Sec. 623, p. 1996.)
It is well settled that a contract of insurance is sui generis. While the
insured by an observance of the conditions may hold the insurer to his
contract, the latter has not the power or right to compel the insured to
maintain the contract relation with it longer than he chooses. Whether the
insured will continue it or not is optional with him. There being no
obligation to pay for the premium, they did not constitute a
debt. (Noblevs. Southern States M.D. Ins. Co., 157 Ky., 46; 162 S.W., 528.)
(Emphasis ours.)

After perusing the Insurance Act, we are firmly persuaded that the non-payment of
premiums is such a vital defense of insurance companies that since the very
beginning, said Act no. 2427 expressly preserved it, by providing that after the
policy shall have been in force for two years, it shall become incontestable (i.e. the
insurer shall have no defense) except for fraud, non-payment of premiums, and
military or naval service in time of war (sec. 184 [b], Insurance Act). And when
Congress recently amended this section (Rep. Act No. 171), the defense of fraud was
eliminated, while the defense of nonpayment of premiums was preserved. Thus the
fundamental character of the undertaking to pay premiums and the high importance
of the defense of non-payment thereof, was specifically recognized.
In keeping with such legislative policy, we feel no hesitation to adopt the United
States Rule, which is in effect a variation of the Connecticut rule for the sake of
equity. In this connection, it appears that the first policy had no reserve value, and
that the equitable values of the second had been practically returned to the insured
in the form of loan and advance for premium.
For all the foregoing, the lower court's decision absolving the defendant from all
liability on the policies in question, is hereby affirmed, without costs.
Moran, C.J., Ozaeta, Paras, Pablo, Montemayor, Tuason, and Reyes, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

It should be noted that the parties contracted not only for peacetime conditions but
also for times of war, because the policies contained provisions applicable expressly
to wartime days. The logical inference, therefore, is that the parties contemplated
uninterrupted operation of the contract even if armed conflict should ensue.

FIRST DIVISION
G.R. No. L-44059 October 28, 1977

For the plaintiffs, it is again argued that in view of the enormous growth of insurance
business since the Statham decision, it could now be relaxed and even disregarded.
It is stated "that the relaxation of rules relating to insurance is in direct proportion to
the growth of the business. If there were only 100 men, for example, insured by a
Company or a mutual Association, the death of one will distribute the insurance
proceeds among the remaining 99 policy-holders. Because the loss which each
survivor will bear will be relatively great, death from certain agreed or specified
causes may be deemed not a compensable loss. But if the policy-holders of the
Company or Association should be 1,000,000 individuals, it is clear that the death of
one of them will not seriously prejudice each one of the 999,999 surviving insured.
The loss to be borne by each individual will be relatively small."
The answer to this is that as there are (in the example) one million policy-holders,
the "losses" to be considered will not be the death of one but the death of ten
thousand, since the proportion of 1 to 100 should be maintained. And certainly such
losses for 10,000 deaths will not be "relatively small."

THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,

vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendantsappellants.

MARTIN, J.:
This is a novel question in insurance law: Can a common-law wife named as
beneficiary in the life insurance policy of a legally married man claim the proceeds
thereof in case of death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life
Assurance Co., Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider for
Accidental Death for the same amount Buenaventura C. Ebrado designated T.
Ebrado as the revocable beneficiary in his policy. He to her as his wife.

On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was

hit by a failing branch of a tree. As the policy was in force, The Insular Life Assurance
Co., Ltd. liable to pay the coverage in the total amount of P11,745.73, representing
the face value of the policy in the amount of P5,882.00 plus the additional benefits
for accidental death also in the amount of P5,882.00 and the refund of P18.00 paid
for the premium due November, 1969, minus the unpaid premiums and interest
thereon due for January and February, 1969, in the sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the
designated beneficiary therein, although she admits that she and the insured
Buenaventura C. Ebrado were merely living as husband and wife without the benefit
of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured.
She asserts that she is the one entitled to the insurance proceeds, not the commonlaw wife, Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular
Life Assurance Co., Ltd. commenced an action for Interpleader before the Court of
First Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972,
after which, a pre-trial order was entered reading as follows: +.wph!1
During the pre-trial conference, the parties manifested to the
court. that there is no possibility of amicable settlement. Hence,
the Court proceeded to have the parties submit their evidence for
the purpose of the pre-trial and make admissions for the purpose
of pretrial. During this conference, parties Carponia T. Ebrado and
Pascuala Ebrado agreed and stipulated: 1) that the deceased
Buenaventura Ebrado was married to Pascuala Ebrado with whom
she has six (legitimate) namely; Hernando, Cresencio, Elsa,
Erlinda, Felizardo and Helen, all surnamed Ebrado; 2) that during
the lifetime of the deceased, he was insured with Insular Life
Assurance Co. Under Policy No. 009929 whole life plan, dated
September 1, 1968 for the sum of P5,882.00 with the rider for
accidental death benefit as evidenced by Exhibits A for plaintiffs
and Exhibit 1 for the defendant Pascuala and Exhibit 7 for
Carponia Ebrado; 3) that during the lifetime of Buenaventura
Ebrado, he was living with his common-wife, Carponia Ebrado,
with whom she had 2 children although he was not legally
separated from his legal wife; 4) that Buenaventura in accident on
October 21, 1969 as evidenced by the death Exhibit 3 and affidavit
of the police report of his death Exhibit 5; 5) that complainant
Carponia Ebrado filed claim with the Insular Life Assurance Co.
which was contested by Pascuala Ebrado who also filed claim for
the proceeds of said policy 6) that in view ofthe adverse claims the
insurance company filed this action against the two herein

claimants Carponia and Pascuala Ebrado; 7) that there is now due

from the Insular Life Assurance Co. as proceeds of the policy
P11,745.73; 8) that the beneficiary designated by the insured in
the policy is Carponia Ebrado and the insured made reservation to
change the beneficiary but although the insured made the option
to change the beneficiary, same was never changed up to the time
of his death and the wife did not have any opportunity to write the
company that there was reservation to change the designation of
the parties agreed that a decision be rendered based on and
stipulation of facts as to who among the two claimants is entitled
to the policy.
Upon motion of the parties, they are given ten (10) days to file
their simultaneous memoranda from the receipt of this order.
SO ORDERED.
On September 25, 1972, the trial court rendered judgment declaring among others,
Carponia T. Ebrado disqualified from becoming beneficiary of the insured
Buenaventura Cristor Ebrado and directing the payment of the insurance proceeds
to the estate of the deceased insured. The trial court held: +.wph!1
It is patent from the last paragraph of Art. 739 of the Civil Code
that a criminal conviction for adultery or concubinage is not
essential in order to establish the disqualification mentioned
therein. Neither is it also necessary that a finding of such guilt or
commission of those acts be made in a separate independent
action brought for the purpose. The guilt of the donee (beneficiary)
may be proved by preponderance of evidence in the same
proceeding (the action brought to declare the nullity of the
donation).
It is, however, essential that such adultery or concubinage exists
at the time defendant Carponia T. Ebrado was made beneficiary in
the policy in question for the disqualification and incapacity to
exist and that it is only necessary that such fact be established by
preponderance of evidence in the trial. Since it is agreed in their
stipulation above-quoted that the deceased insured and defendant
Carponia T. Ebrado were living together as husband and wife
without being legally married and that the marriage of the insured
with the other defendant Pascuala Vda. de Ebrado was valid and
still existing at the time the insurance in question was purchased
there is no question that defendant Carponia T. Ebrado is
disqualified from becoming the beneficiary of the policy in
question and as such she is not entitled to the proceeds of the
insurance upon the death of the insured.

From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July
11, 1976, the Appellate Court certified the case to Us as involving only questions of
law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the
new Insurance Code (PD No. 612, as amended) does not contain any specific
provision grossly resolutory of the prime question at hand. Section 50 of the
Insurance Act which provides that "(t)he insurance shag be applied exclusively to
the proper interest of the person in whose name it is made" 1 cannot be validly
seized upon to hold that the mm includes the beneficiary. The word "interest" highly
suggests that the provision refers only to the "insured" and not to the beneficiary,
since a contract of insurance is personal in character. 2 Otherwise, the prohibitory
laws against illicit relationships especially on property and descent will be rendered
nugatory, as the same could easily be circumvented by modes of insurance. Rather,
the general rules of civil law should be applied to resolve this void in the Insurance
Law. Article 2011 of the New Civil Code states: "The contract of insurance is
governed by special laws. Matters not expressly provided for in such special laws
shall be regulated by this Code." When not otherwise specifically provided for by the
Insurance Law, the contract of life insurance is governed by the general rules of the
civil law regulating contracts. 3 And under Article 2012 of the same Code, "any
person who is forbidden from receiving any donation under Article 739 cannot be
named beneficiary of a fife insurance policy by the person who cannot make a
donation to him. 4 Common-law spouses are, definitely, barred from receiving
donations from each other. Article 739 of the new Civil Code provides: +.wph!1
The following donations shall be void:
1. Those made between persons who were guilty of adultery or
concubinage at the time of donation;
Those made between persons found guilty of the same criminal
offense, in consideration thereof;
3. Those made to a public officer or his wife, descendants or
ascendants by reason of his office.
In the case referred to in No. 1, the action for declaration of nullity
may be brought by the spouse of the donor or donee; and the guilt
of the donee may be proved by preponderance of evidence in the
same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as
the beneficiary is concerned. Both are founded upon the same consideration:
liberality. A beneficiary is like a donee, because from the premiums of the policy
which the insured pays out of liberality, the beneficiary will receive the proceeds or

profits of said insurance. As a consequence, the proscription in Article 739 of the

new Civil Code should equally operate in life insurance contracts. The mandate of
Article 2012 cannot be laid aside: any person who cannot receive a donation cannot
be named as beneficiary in the life insurance policy of the person who cannot make
the donation.5 Under American law, a policy of life insurance is considered as a
testament and in construing it, the courts will, so far as possible treat it as a will and
determine the effect of a clause designating the beneficiary by rules under which
wins are interpreted. 6
3. Policy considerations and dictates of morality rightly justify the institution of a
barrier between common law spouses in record to Property relations since such hip
ultimately encroaches upon the nuptial and filial rights of the legitimate family There
is every reason to hold that the bar in donations between legitimate spouses and
those between illegitimate ones should be enforced in life insurance policies since
the same are based on similar consideration As above pointed out, a beneficiary in a
fife insurance policy is no different from a donee. Both are recipients of pure
beneficence. So long as manage remains the threshold of family laws, reason and
morality dictate that the impediments imposed upon married couple should likewise
be imposed upon extra-marital relationship. If legitimate relationship is
circumscribed by these legal disabilities, with more reason should an illicit
relationship be restricted by these disabilities. Thus, in Matabuena v.
Cervantes, 7 this Court, through Justice Fernando, said: +.wph!1
If the policy of the law is, in the language of the opinion of the
then Justice J.B.L. Reyes of that court (Court of Appeals), 'to
prohibit donations in favor of the other consort and his
descendants because of and undue and improper pressure and
influence upon the donor, a prejudice deeply rooted in our ancient
law;" por-que no se enganen desponjandose el uno al otro por
amor que han de consuno' (According to) the Partidas (Part IV, Tit.
XI, LAW IV), reiterating the rationale 'No Mutuato amore invicem
spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et
uxorem); then there is very reason to apply the same prohibitive
policy to persons living together as husband and wife without the
benefit of nuptials. For it is not to be doubted that assent to such
irregular connection for thirty years bespeaks greater influence of
one party over the other, so that the danger that the law seeks to
avoid is correspondingly increased. Moreover, as already pointed
out by Ulpian (in his lib. 32 ad Sabinum, fr. 1), 'it would not be just
that such donations should subsist, lest the condition 6f those who
incurred guilt should turn out to be better.' So long as marriage
remains the cornerstone of our family law, reason and morality
alike demand that the disabilities attached to marriage should
likewise attach to concubinage.
It is hardly necessary to add that even in the absence of the above
pronouncement, any other conclusion cannot stand the test of
scrutiny. It would be to indict the frame of the Civil Code for a
failure to apply a laudable rule to a situation which in its essentials

cannot be distinguished. Moreover, if it is at all to be differentiated

the policy of the law which embodies a deeply rooted notion of
what is just and what is right would be nullified if such irregular
relationship instead of being visited with disabilities would be
attended with benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is every any occasion
where the principle of statutory construction that what is within
the spirit of the law is as much a part of it as what is written, this
is it. Otherwise the basic purpose discernible in such codal
provision would not be attained. Whatever omission may be
apparent in an interpretation purely literal of the language used
must be remedied by an adherence to its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before
the disabilities mentioned in Article 739 may effectuate. More specifically, with
record to the disability on "persons who were guilty of adultery or concubinage at
the time of the donation," Article 739 itself provides: +.wph!1
In the case referred to in No. 1, the action for declaration of nullity
may be brought by the spouse of the donor or donee; and the
guilty of the donee may be proved by preponderance of evidence
in the same action.
The underscored clause neatly conveys that no criminal conviction for the offense is
a condition precedent. In fact, it cannot even be from the aforequoted provision that
a prosecution is needed. On the contrary, the law plainly states that the guilt of the
party may be proved "in the same acting for declaration of nullity of donation. And,
it would be sufficient if evidence preponderates upon the guilt of the consort for the
offense indicated. The quantum of proof in criminal cases is not demanded.
In the caw before Us, the requisite proof of common-law relationship between the
insured and the beneficiary has been conveniently supplied by the stipulations
between the parties in the pre-trial conference of the case. It case agreed upon and
stipulated therein that the deceased insured Buenaventura C. Ebrado was married to
Pascuala Ebrado with whom she has six legitimate children; that during his lifetime,
the deceased insured was living with his common-law wife, Carponia Ebrado, with
whom he has two children. These stipulations are nothing less thanjudicial
admissions which, as a consequence, no longer require proof and cannot be
contradicted. 8 A fortiori, on the basis of these admissions, a judgment may be
validly rendered without going through the rigors of a trial for the sole purpose of
proving the illicit liaison between the insured and the beneficiary. In fact, in that
pretrial, the parties even agreed "that a decision be rendered based on this
agreement and stipulation of facts as to who among the two claimants is entitled to
the policy."
ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed.
Carponia T. Ebrado is hereby declared disqualified to be the beneficiary of the late
Buenaventura C. Ebrado in his life insurance policy. As a consequence, the proceeds

of the policy are hereby held payable to the estate of the deceased insured. Costs
against Carponia T. Ebrado.
SO ORDERED.
Teehankee (Chairman), Makasiar, Mu;oz Palma, Fernandez and Guerrero, JJ.,
concur.1wph1.t
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-4611

December 17, 1955

QUA CHEE GAN, plaintiff-appellee,

vs.
LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent,
WARNER, BARNES AND CO., LTD., defendant-appellant.
Delgado, Flores & Macapagal for appellant.
Andres Aguilar, Zacarias Gutierrez Lora, Gregorio Sabater and Perkins, Ponce Enrile
& Contreras for appellee.

REYES, J. B. L., J.:

Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of
First Instance of said province, seeking to recover the proceeds of certain fire
insurance policies totalling P370,000, issued by the Law Union & Rock Insurance Co.,
Ltd., upon certain bodegas and merchandise of the insured that were burned on June
21, 1940. The records of the original case were destroyed during the liberation of
the region, and were reconstituted in 1946. After a trial that lasted several years, the
Court of First Instance rendered a decision in favor of the plaintiff, the dispositive
part whereof reads as follows:
Wherefore, judgment is rendered for the plaintiff and against the defendant
condemning the latter to pay the former
(a) Under the first cause of action, the sum of P146,394.48;
(b) Under the second cause of action, the sum of P150,000;
(c) Under the third cause of action, the sum of P5,000;
(d) Under the fourth cause of action, the sum of P15,000; and

(e) Under the fifth cause of action, the sum of P40,000;

all of which shall bear interest at the rate of 8% per annum in accordance with
Section 91 (b) of the Insurance Act from September 26, 1940, until each is paid, with
costs against the defendant.
The complaint in intervention of the Philippine National Bank is dismissed without
costs. (Record on Appeal, 166-167.)
From the decision, the defendant Insurance Company appealed directly to this Court.
The record shows that before the last war, plaintiff-appellee owned four warehouses
or bodegas (designated as Bodegas Nos. 1 to 4) in the municipality of Tabaco, Albay,
used for the storage of stocks of copra and of hemp, baled and loose, in which the
appellee dealth extensively. They had been, with their contents, insured with the
defendant Company since 1937, and the lose made payable to the Philippine
National Bank as mortgage of the hemp and crops, to the extent of its interest. On
June, 1940, the insurance stood as follows:
Policy No.

Property Insured

2637164 (Exhibit "LL")

Bodega No. 1 (Building)

tried in 1940 for the crime of arson, it being claimed that they had set fire to the
destroyed warehouses to collect the insurance. They were, however, acquitted by
the trial court in a final decision dated July 9, 1941 (Exhibit WW). Thereafter, the civil
suit to collect the insurance money proceeded to its trial and termination in the
Court below, with the result noted at the start of this opinion. The Philippine National
Bank's complaint in intervention was dismissed because the appellee had managed
to pay his indebtedness to the Bank during the pendecy of the suit, and despite the
fire losses.
In its first assignment of error, the insurance company alleges that the trial Court
should have held that the policies were avoided for breach of warranty, specifically
the one appearing on a rider pasted (with other similar riders) on the face of the
policies (Exhibits X, Y, JJ and LL). These riders were attached for the first time in
1939, and the pertinent portions read as follows:
Memo. of Warranty. The undernoted Appliances for the extinction of fire
being kept on the premises insured hereby, and it being declared and
understood that there is an ample and constant water supply with sufficient
pressure available at all seasons for the same, it is hereby warranted that
the said appliances shall be maintained in efficient working order during the
currency of this policy, by reason whereof a discount of 2 1/2 per cent is
allowed on the premium chargeable under this policy.
Hydrants in the compound, not less in number than one for each 150 feet
of external wall measurement of building, protected, with not less than 100
feet of hose piping and nozzles for every two hydrants kept under cover in
convenient places, the hydrants being supplied with water pressure by a
pumping engine, or from some other source, capable of discharging at the
rate of not less than 200 gallons of water per minute into the upper story of
the highest building protected, and a trained brigade of not less than 20
men to work the same.'

Bodega No. 2 (Building)

2637165 (Exhibit "JJ")

Bodega No. 3 (Building)

Bodega No. 4 (Building)
Hemp Press moved by steam engine

2637345 (Exhibit "X")

Merchandise contents (copra and empty sacks of Bodega No. 1)

2637346 (Exhibit "Y")

Merchandise contents (hemp) of Bodega No. 3

2637067 (Exhibit "GG")

Merchandise contents (loose hemp) of Bodega No. 4

Total
Fire of undetermined origin that broke out in the early morning of July 21, 1940, and
lasted almost one week, gutted and completely destroyed Bodegas Nos. 1, 2 and 4,
with the merchandise stored theren. Plaintiff-appellee informed the insurer by
telegram on the same date; and on the next day, the fire adjusters engaged by
appellant insurance company arrived and proceeded to examine and photograph the
premises, pored over the books of the insured and conducted an extensive
investigation. The plaintiff having submitted the corresponding fire claims, totalling
P398,562.81 (but reduced to the full amount of the insurance, P370,000), the
Insurance Company resisted payment, claiming violation of warranties and
conditions, filing of fraudulent claims, and that the fire had been deliberately caused
by the insured or by other persons in connivance with him.
With counsel for the insurance company acting as private prosecutor, Que Chee
Gan, with his brother, Qua Chee Pao, and some employees of his, were indicted and

It is argued that since the bodegas insured had an external wall perimeter of 500
meters or 1,640 feet, the appellee should have eleven (11) fire hydrants in the
compound, and that he actually had only two (2), with a further pair nearby,
belonging to the municipality of Tabaco.
We are in agreement with the trial Court that the appellant is barred by waiver (or
rather estoppel) to claim violation of the so-called fire hydrants warranty, for the
reason that knowing fully all that the number of hydrants demanded therein never
existed from the very beginning, the appellant neverthless issued the policies in
question subject to such warranty, and received the corresponding premiums. It
would be perilously close to conniving at fraud upon the insured to allow appellant to
claims now as void ab initio the policies that it had issued to the plaintiff without
warning of their fatal defect, of which it was informed, and after it had misled the
defendant into believing that the policies were effective.
The insurance company was aware, even before the policies were issued, that in the
premises insured there were only two fire hydrants installed by Qua Chee Gan and
two others nearby, owned by the municipality of TAbaco, contrary to the
requirements of the warranty in question. Such fact appears from positive testimony
for the insured that appellant's agents inspected the premises; and the simple
denials of appellant's representative (Jamiczon) can not overcome that proof. That
such inspection was made is moreover rendered probable by its being a prerequisite

for the fixing of the discount on the premium to which the insured was entitled,
since the discount depended on the number of hydrants, and the fire fighting
equipment available (See "Scale of Allowances" to which the policies were expressly
made subject). The law, supported by a long line of cases, is expressed by American
Jurisprudence (Vol. 29, pp. 611-612) to be as follows:
It is usually held that where the insurer, at the time of the issuance of a
policy of insurance, has knowledge of existing facts which, if insisted on,
would invalidate the contract from its very inception, such knowledge
constitutes a waiver of conditions in the contract inconsistent with the
facts, and the insurer is stopped thereafter from asserting the breach of
such conditions. The law is charitable enough to assume, in the absence of
any showing to the contrary, that an insurance company intends to
executed a valid contract in return for the premium received; and when the
policy contains a condition which renders it voidable at its inception, and
this result is known to the insurer, it will be presumed to have intended to
waive the conditions and to execute a binding contract, rather than to have
deceived the insured into thinking he is insured when in fact he is not, and
to have taken his money without consideration. (29 Am. Jur., Insurance,
section 807, at pp. 611-612.)
The reason for the rule is not difficult to find.
The plain, human justice of this doctrine is perfectly apparent. To allow a
company to accept one's money for a policy of insurance which it then
knows to be void and of no effect, though it knows as it must, that the
assured believes it to be valid and binding, is so contrary to the dictates of
honesty and fair dealing, and so closely related to positive fraud, as to the
abhorent to fairminded men. It would be to allow the company to treat the
policy as valid long enough to get the preium on it, and leave it at liberty to
repudiate it the next moment. This cannot be deemed to be the real
intention of the parties. To hold that a literal construction of the policy
expressed the true intention of the company would be to indict it, for
fraudulent purposes and designs which we cannot believe it to be guilty of
(Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543-544).
The inequitableness of the conduct observed by the insurance company in this case
is heightened by the fact that after the insured had incurred the expense of
installing the two hydrants, the company collected the premiums and issued him a
policy so worded that it gave the insured a discount much smaller than that he was
normaly entitledto. According to the "Scale of Allowances," a policy subject to a
warranty of the existence of one fire hydrant for every 150 feet of external wall
entitled the insured to a discount of 7 1/2 per cent of the premium; while the
existence of "hydrants, in compund" (regardless of number) reduced the allowance
on the premium to a mere 2 1/2 per cent. This schedule was logical, since a greater
number of hydrants and fire fighting appliances reduced the risk of loss. But the
appellant company, in the particular case now before us, so worded the policies that
while exacting the greater number of fire hydrants and appliances, it kept the
premium discount at the minimum of 2 1/2 per cent, thereby giving the insurance
company a double benefit. No reason is shown why appellant's premises, that had
been insured with appellant for several years past, suddenly should be regarded in
1939 as so hazardous as to be accorded a treatment beyond the limits of appellant's
own scale of allowances. Such abnormal treatment of the insured strongly points at
an abuse of the insurance company's selection of the words and terms of the
contract, over which it had absolute control.

These considerations lead us to regard the parol evidence rule, invoked by the
appellant as not applicable to the present case. It is not a question here whether or
not the parties may vary a written contract by oral evidence; but whether testimony
is receivable so that a party may be, by reason of inequitable conduct shown,
estopped from enforcing forfeitures in its favor, in order to forestall fraud or
imposition on the insured.
Receipt of Premiums or Assessments afte Cause for Forfeiture Other than
Nonpayment. It is a well settled rule of law that an insurer which with
knowledge of facts entitling it to treat a policy as no longer in force,
receives and accepts a preium on the policy, estopped to take advantage of
the forfeiture. It cannot treat the policy as void for the purpose of defense
to an action to recover for a loss thereafter occurring and at the same time
treat it as valid for the purpose of earning and collecting further premiums."
(29 Am. Jur., 653, p. 657.)
It would be unconscionable to permit a company to issue a policy under
circumstances which it knew rendered the policy void and then to accept
and retain premiums under such a void policy. Neither law nor good morals
would justify such conduct and the doctrine of equitable estoppel is
peculiarly applicable to the situation. (McGuire vs. Home Life Ins. Co. 94 Pa.
Super Ct. 457.)
Moreover, taking into account the well known rule that ambiguities or obscurities
must be strictly interpreted aganst the prty that caused them, 1the "memo of
warranty" invoked by appellant bars the latter from questioning the existence of the
appliances called for in the insured premises, since its initial expression, "the
undernoted appliances for the extinction of fire being kept on the premises insured
hereby, . . . it is hereby warranted . . .", admists of interpretation as an admission of
the existence of such appliances which appellant cannot now contradict, should the
parol evidence rule apply.
The alleged violation of the warranty of 100 feet of fire hose for every two hydrants,
must be equally rejected, since the appellant's argument thereon is based on the
assumption that the insured was bound to maintain no less than eleven hydrants
(one per 150 feet of wall), which requirement appellant is estopped from enforcing.
The supposed breach of the wter pressure condition is made to rest on the
testimony of witness Serra, that the water supply could fill a 5-gallon can in 3
seconds; appellant thereupon inferring that the maximum quantity obtainable from
the hydrants was 100 gallons a minute, when the warranty called for 200 gallons a
minute. The transcript shows, however, that Serra repeatedly refused and professed
inability to estimate the rate of discharge of the water, and only gave the "5-gallon
per 3-second" rate because the insistence of appellant's counsel forced the witness
to hazard a guess. Obviously, the testimony is worthless and insufficient to establish
the violation claimed, specially since the burden of its proof lay on appellant.
As to maintenance of a trained fire brigade of 20 men, the record is preponderant
that the same was organized, and drilled, from time to give, altho not maintained as
a permanently separate unit, which the warranty did not require. Anyway, it would
be unreasonable to expect the insured to maintain for his compound alone a fire
fighting force that many municipalities in the Islands do not even possess. There is
no merit in appellant's claim that subordinate membership of the business manager
(Co Cuan) in the fire brigade, while its direction was entrusted to a minor employee
unders the testimony improbable. A business manager is not necessarily adept at
fire fighting, the qualities required being different for both activities.

Under the second assignment of error, appellant insurance company avers, that the
insured violated the "Hemp Warranty" provisions of Policy No. 2637165 (Exhibit JJ),
against the storage of gasoline, since appellee admitted that there were 36 cans
(latas) of gasoline in the building designed as "Bodega No. 2" that was a separate
structure not affected by the fire. It is well to note that gasoline is not specifically
mentioned among the prohibited articles listed in the so-called "hemp warranty."
The cause relied upon by the insurer speaks of "oils (animal and/or vegetable and/or
mineral and/or their liquid products having a flash point below 300o Fahrenheit", and
is decidedly ambiguous and uncertain; for in ordinary parlance, "Oils" mean
"lubricants" and not gasoline or kerosene. And how many insured, it may well be
wondered, are in a position to understand or determine "flash point below 003o
Fahrenheit. Here, again, by reason of the exclusive control of the insurance company
over the terms and phraseology of the contract, the ambiguity must be held strictly
against the insurer and liberraly in favor of the insured, specially to avoid a forfeiture
(44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180).
Insurance is, in its nature, complex and difficult for the layman to
understand. Policies are prepared by experts who know and can anticipate
the hearing and possible complications of every contingency. So long as
insurance companies insist upon the use of ambiguous, intricate and
technical provisions, which conceal rather than frankly disclose, their own
intentions, the courts must, in fairness to those who purchase insurance,
construe every ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L.
Ins. Co., 91 Wash. 324, LRA 1917A, 1237.)
An insurer should not be allowed, by the use of obscure phrases and
exceptions, to defeat the very purpose for which the policy was procured
(Moore vs. Aetna Life Insurance Co., LRA 1915D, 264).
We see no reason why the prohibition of keeping gasoline in the premises could not
be expressed clearly and unmistakably, in the language and terms that the general
public can readily understand, without resort to obscure esoteric expression (now
derisively termed "gobbledygook"). We reiterate the rule stated in Bachrach vs.
British American Assurance Co. (17 Phil. 555, 561):
If the company intended to rely upon a condition of that character, it ought
to have been plainly expressed in the policy.
This rigid application of the rule on ambiguities has become necessary in view of
current business practices. The courts cannot ignore that nowadays monopolies,
cartels and concentrations of capital, endowed with overwhelming economic power,
manage to impose upon parties dealing with them cunningly prepared "agreements"
that the weaker party may not change one whit, his participation in the "agreement"
being reduced to the alternative to take it or leave it" labelled since Raymond
Baloilles" contracts by adherence" (con tracts d'adhesion), in contrast to these
entered into by parties bargaining on an equal footing, such contracts (of which
policies of insurance and international bills of lading are prime examples) obviously
call for greater strictness and vigilance on the part of courts of justice with a view to
protecting the weaker party from abuses and imposition, and prevent their
becoming traps for the unwarry (New Civil Coee, Article 24; Sent. of Supreme Court
of Spain, 13 Dec. 1934, 27 February 1942).
Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia
alguna oscuridad, habra de ser tenido en cuenta que al seguro es,

practicamente un contrato de los llamados de adhesion y por consiguiente

en caso de duda sobre la significacion de las clausulas generales de una
poliza redactada por las compafijas sin la intervencion alguna de sus
clientes se ha de adoptar de acuerdo con el articulo 1268 del Codigo
Civil, la interpretacion mas favorable al asegurado, ya que la obscuridad es
imputable a la empresa aseguradora, que debia haberse explicado mas
claramante. (Dec. Trib. Sup. of Spain 13 Dec. 1934)
The contract of insurance is one of perfect good faith (uferrimal fidei) not for the
insured alone, but equally so for the insurer; in fact, it is mere so for the latter, since
its dominant bargaining position carries with it stricter responsibility.
Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2
was only incidental to his business, being no more than a customary 2 day's supply
for the five or six motor vehicles used for transporting of the stored merchandise (t.
s. n., pp. 1447-1448). "It is well settled that the keeping of inflammable oils on the
premises though prohibited by the policy does not void it if such keeping is
incidental to the business." Bachrach vs. British American Ass. Co., 17 Phil. 555,
560); and "according to the weight of authority, even though there are printed
prohibitions against keeping certain articles on the insured premises the policy will
not be avoided by a violation of these prohibitions, if the prohibited articles are
necessary or in customary use in carrying on the trade or business conducted on the
premises." (45 C. J. S., p. 311; also 4 Couch on Insurance, section 966b). It should
also be noted that the "Hemp Warranty" forbade storage only "in the building to
which this insurance applies and/or in any building communicating therewith", and it
is undisputed that no gasoline was stored in the burned bodegas, and that "Bodega
No. 2" which was not burned and where the gasoline was found, stood isolated from
the other insured bodegas.
The charge that the insured failed or refused to submit to the examiners of the
insurer the books, vouchers, etc. demanded by them was found unsubstantiated by
the trial Court, and no reason has been shown to alter this finding. The insured gave
the insurance examiner all the date he asked for (Exhibits AA, BB, CCC and Z), and
the examiner even kept and photographed some of the examined books in his
possession. What does appear to have been rejected by the insured was the
demand that he should submit "a list of all books, vouchers, receipts and other
records" (Age 4, Exhibit 9-c); but the refusal of the insured in this instance was well
justified, since the demand for a list of all the vouchers (which were not in use by
the insured) and receipts was positively unreasonable, considering that such listing
was superfluous because the insurer was not denied access to the records, that the
volume of Qua Chee Gan's business ran into millions, and that the demand was
made just after the fire when everything was in turmoil. That the representatives of
the insurance company were able to secure all the date they needed is proved by
the fact that the adjuster Alexander Stewart was able to prepare his own balance
sheet (Exhibit L of the criminal case) that did not differ from that submitted by the
insured (Exhibit J) except for the valuation of the merchandise, as expressly found by
the Court in the criminal case for arson. (Decision, Exhibit WW).
How valuations may differ honestly, without fraud being involved, was strikingly
illustrated in the decision of the arson case (Exhibit WW) acquiting Qua Choc Gan,
appellee in the present proceedings. The decision states (Exhibit WW, p. 11):
Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan
en Tabaco asi como su existencia de copra y abaca en las bodega al tiempo
del incendio durante el periodo comprendido desde el 1.o de enero al 21 de

junio de 1940 y ha encontrado que Qua Choc Gan ha sufrico una perdida de
P1,750.76 en su negocio en Tabaco. Segun Steward al llegar a este
conclusion el ha tenidoen cuenta el balance de comprobacion Exhibit 'J' que
le ha entregado el mismo acusado Que Choc Gan en relacion con sus libros
y lo ha encontrado correcto a excepcion de los precios de abaca y copra
que alli aparecen que no estan de acuerdo con los precios en el mercado.
Esta comprobacion aparece en el balance mercado exhibit J que fue
preparado por el mismo testigo.
In view of the discrepancy in the valuations between the insured and the adjuster
Stewart for the insurer, the Court referred the controversy to a government auditor,
Apolonio Ramos; but the latter reached a different result from the other two. Not
only that, but Ramos reported two different valuations that could be reached
according to the methods employed (Exhibit WW, p. 35):
La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos
buenos para promovar el comercio y la finanza, pero en el caso presente ha
resultado un tanto cumplicada y acomodaticia, como lo prueba el resultado
del examen hecho por los contadores Stewart y Ramos, pues el juzgado no
alcanza a ver como habiendo examinado las mismas partidas y los mismos
libros dichos contadores hayan de llegara dos conclusiones que difieron
sustancialmente entre si. En otras palabras, no solamente la comprobacion
hecha por Stewart difiere de la comprobacion hecha por Ramos sino que,
segun este ultimo, su comprobacion ha dado lugar a dos resultados
diferentes dependiendo del metodo que se emplea.
Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained.
The insurer attempted to bolster its case with alleged photographs of certain pages
of the insurance book (destroyed by the war) of insured Qua Chee Gan (Exhibits 26A and 26-B) and allegedly showing abnormal purchases of hemp and copra from
June 11 to June 20, 1940. The Court below remained unconvinced of the authenticity
of those photographs, and rejected them, because they were not mentioned not
introduced in the criminal case; and considering the evident importance of said
exhibits in establishing the motive of the insured in committing the arson charged,
and the absence of adequate explanation for their omission in the criminal case, we
cannot say that their rejection in the civil case constituted reversible error.
The next two defenses pleaded by the insurer, that the insured connived at the
loss and that the fraudulently inflated the quantity of the insured stock in the burnt
bodegas, are closely related to each other. Both defenses are predicted on the
assumption that the insured was in financial difficulties and set the fire to defraud
the insurance company, presumably in order to pay off the Philippine National Bank,
to which most of the insured hemp and copra was pledged. Both defenses are fatally
undermined by the established fact that, notwithstanding the insurer's refusal to pay
the value of the policies the extensive resources of the insured (Exhibit WW) enabled
him to pay off the National Bank in a short time; and if he was able to do so, no
motive appears for attempt to defraud the insurer. While the acquittal of the insured
in the arson case is not res judicata on the present civil action, the insurer's
evidence, to judge from the decision in the criminal case, is practically identical in
both cases and must lead to the same result, since the proof to establish the
defense of connivance at the fire in order to defraud the insurer "cannot be
materially less convincing than that required in order to convict the insured of the
crime of arson"(Bachrach vs. British American Assurance Co., 17 Phil. 536).

As to the defense that the burned bodegas could not possibly have contained the
quantities of copra and hemp stated in the fire claims, the insurer's case rests
almost exclusively on the estimates, inferences and conclusionsAs to the defense
that the burned bodegas could not possibly have contained the quantities of copra
and hemp stated in the fire claims, the insurer's case rests almost exclusively on the
estimates, inferences and conclusions of its adjuster investigator, Alexander D.
Stewart, who examined the premises during and after the fire. His testimony,
however, was based on inferences from the photographs and traces found after the
fire, and must yield to the contradictory testimony of engineer Andres Bolinas, and
specially of the then Chief of the Loan Department of the National Bank's Legaspi
branch, Porfirio Barrios, and of Bank Appraiser Loreto Samson, who actually saw the
contents of the bodegas shortly before the fire, while inspecting them for the
mortgagee Bank. The lower Court was satisfied of the veracity and accuracy of these
witnesses, and the appellant insurer has failed to substantiate its charges aganst
their character. In fact, the insurer's repeated accusations that these witnesses were
later "suspended for fraudulent transactions" without giving any details, is a plain
attempt to create prejudice against them, without the least support in fact.
Stewart himself, in testifying that it is impossible to determine from the remains the
quantity of hemp burned (t. s. n., pp. 1468, 1470), rebutted appellant's attacks on
the refusal of the Court below to accept its inferences from the remains shown in the
photographs of the burned premises. It appears, likewise, that the adjuster's
calculations of the maximum contents of the destroyed warehouses rested on the
assumption that all the copra and hemp were in sacks, and on the result of his
experiments to determine the space occupied by definite amounts of sacked copra.
The error in the estimates thus arrived at proceeds from the fact that a large amount
of the insured's stock were in loose form, occupying less space than when kept in
sacks; and from Stewart's obvious failure to give due allowance for the compression
of the material at the bottom of the piles (t. s. n., pp. 1964, 1967) due to the weight
of the overlying stock, as shown by engineer Bolinas. It is probable that the errors
were due to inexperience (Stewart himself admitted that this was the first copra fire
he had investigated); but it is clear that such errors render valueles Stewart's
computations. These were in fact twice passed upon and twice rejected by different
judges (in the criminal and civil cases) and their concordant opinion is practically
conclusive.
The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court
below, since the opinions stated therein were based on ex parte investigations made
at the back of the insured; and the appellant did not present at the trial the original
testimony and documents from which the conclusions in the report were
drawn.lawphi1.net
Appellant insurance company also contends that the claims filed by the insured
contained false and fraudulent statements that avoided the insurance policy. But the
trial Court found that the discrepancies were a result of the insured's erroneous
interpretation of the provisions of the insurance policies and claim forms, caused by
his imperfect knowledge of English, and that the misstatements were innocently
made and without intent to defraud. Our review of the lengthy record fails to
disclose reasons for rejecting these conclusions of the Court below. For example, the
occurrence of previous fires in the premises insured in 1939, altho omitted in the
claims, Exhibits EE and FF, were nevertheless revealed by the insured in his claims
Exhibits Q (filed simultaneously with them), KK and WW. Considering that all these
claims were submitted to the smae agent, and that this same agent had paid the
loss caused by the 1939 fire, we find no error in the trial Court's acceptance of the
insured's explanation that the omission in Exhibits EE and FF was due to
inadvertance, for the insured could hardly expect under such circumstances, that

the 1939 would pass unnoticed by the insurance agents. Similarly, the 20 per cent
overclaim on 70 per cent of the hemo stock, was explained by the insured as caused
by his belief that he was entitled to include in the claim his expected profit on the 70
per cent of the hemp, because the same was already contracted for and sold to
other parties before the fire occurred. Compared with other cases of over-valuation
recorded in our judicial annals, the 20 per cent excess in the case of the insured is
not by itself sufficient to establish fraudulent intent. Thus, in Yu Cua vs. South British
Ins. Co., 41 Phil. 134, the claim was fourteen (14) times (1,400 per cent) bigger than
the actual loss; in Go Lu vs. Yorkshire Insurance Co., 43 Phil., 633, eight (8) times
(800 per cent); in Tuason vs. North China Ins. Co., 47 Phil. 14, six (6) times (600 per
cent); in Tan It vs. Sun Insurance, 51 Phil. 212, the claim totalled P31,860.85 while
the goods insured were inventoried at O13,113. Certainly, the insured's overclaim of
20 per cent in the case at bar, duly explained by him to the Court a quo, appears
puny by comparison, and can not be regarded as "more than misstatement, more
than inadvertence of mistake, more than a mere error in opinion, more than a slight
exaggeration" (Tan It vs. Sun Insurance Office, ante) that would entitle the insurer to
avoid the policy. It is well to note that the overchange of 20 per cent was claimed
only on a part (70 per cent) of the hemp stock; had the insured acted with
fraudulent intent, nothing prevented him from increasing the value of all of his
copra, hemp and buildings in the same proportion. This also applies to the alleged
fraudulent claim for burned empty sacks, that was likewise explained to our
satisfaction and that of the trial Court. The rule is that to avoid a policy, the false
swearing must be wilful and with intent to defraud (29 Am. Jur., pp. 849-851) which
was not the cause. Of course, the lack of fraudulent intent would not authorize the
collection of the expected profit under the terms of the polices, and the trial Court
correctly deducte the same from its award.
We find no reversible error in the judgment appealed from, wherefore the smae is
hereby affirmed. Costs against the appellant. So ordered.
Paras, C. J., Padilla, Montemayor, Reyes, A., Jugo, Labrador, and Concepcion, JJ.,
concur.
Republic of the Philippines
SUPREME COURT
Manila

Gil Carlos and Associates for defendant-appellee Plaridel Surety and Insurance Co.,
Inc.
BARRERA, J.:
These are appeals instituted by Diosdado C. Ty from a single decision of the Court of
First Instance of Manila (in Civ. Cases Nos. 26343, 26344, 26404, 26405, 26406,
26442, which were tried together), dismissing the six separate complaints he filed
against six insurance companies (Filipinas Compaia de Seguros, People's Surety &
Insurance Co., Inc., South Sea Surety & Insurance Co., Inc., The Philippine Guaranty
Company, Inc., Universal Insurance & Indemnity Co., and Plaridel Surety & Insurance
Co., Inc.) for collection from each of them, of the sum of P650.00, as compensation
for the disability of his left hand.
The facts of these cases are not controverted:
Plaintiff-appellant was an employee of Broadway Cotton Factory at Grace Park,
Caloocan City, working as mechanic operator, with monthly salary of P185.00. In the
latter part of 1953, he took Personal Accident Policies from several insurance
companies, among which are herein defendants-appellees, on different
dates,1 effective for 12 months. During the effectivity of these policies, or on
December 24, 1953, a fire broke out in the factory where plaintiff was working. As he
was trying to put out said fire with the help of a fire extinguisher, a heavy object fell
upon his left hand. Plaintiff received treatment at the National Orthopedic Hospital
from December 26, 1953 to February 8, 1954, for the following injuries, to wit:
(1) Fracture, simple, oraximal phalanx, index finger, left;
(2) Fracture, compound, communite proximal phalanx, middle finger, left
and 2nd phalanx simple;
(3) Fracture, compound, communite phalanx, 4th finger, left;

EN BANC
(4) Fracture, simple, middle phalanx, middle finger, left;
G.R. No. L-21821-22 and L-21824-27

May 31, 1966

(5) Lacerated wound, sutured, volar aspect, small finger, left;

DIOSDADO C. TY, plaintiff-appellant,

vs.
FILIPINAS COMPAIA DE SEGUROS, et al., defendants-appellees.
Porfirio V. Villaroman for plaintiff-appellant.
Ramirez and Ortigas for defendants-appellees Filipinas Compaia de Seguros,
Philippine Guaranty Co., Inc. and Universal Insurance and Indemnity Co.
Renato L. Liboro for defendant-appellee People's Surety and Insurance Co., Inc.
Perfecto P. R. Chua Cheng for defendant-appellee South Sea Surety and Insurance
Co., Inc.

(6) Fracture, simple, chip, head, 1st phalanx 5th digit, left.
which injuries, the attending surgeon certified, would cause temporary total
disability of appellant's left hand.
As the insurance companies refused to pay his claim for compensation under the
policies by reason of the said disability of his left hand, Ty filed motions in the
Municipal Court of Manila, which rendered favorable decision. On appeal to the Court
of First Instance by the insurance companies, the cases were dismissed on the

ground that under the uniform terms of the insurance policies, partial disability of
the insured caused by loss of either hand to be compensable, the loss must result in
the amputation of that hand. Hence, these appeals by the insured.1wph1.t
Plaintiff-appellant is basing his claim for indemnity under the provision of the
insurance contract, uniform in all the cases, which reads:
"INDEMNITY FOR TOTAL OR PARTIAL DISABILITY
If the Insured sustains any Bodily Injury which is effected solely through
violent, external, visible and accidental means, and which shall not prove
fatal but shall result, independently of all other causes and within sixty (60)
days from the occurrence, thereof, in Total or Partial Disability of the
Insured, the Company shall pay, subject to the exceptions as provided for
hereinafter, the amount set opposite such injury.
xxx

xxx

xxx

xxx

xxx

xxx

PARTIAL DISABILITY

While we sympathize with the plaintiff or his employer, for whose benefit
the policies were issued, we can not go beyond the clear and express
conditions of the insurance policies, all of which definite partial disability as
loss of either hand by amputation through the bones of the wrist. There was
no such amputation in the case at bar. All that was found by the trial court,
which is not disputed on appeal, was that the physical injuries "caused
temporary total disability of plaintiff's left hand." Note that the disability of
plaintiff's hand was merely temporary, having been caused by fractures of
the index, the middle and the fourth fingers of the left hand.
We might add that the agreement contained in the insurance policies is the law
between the parties. As the terms of the policies are clear, express and specific that
only amputation of the left hand should be considered as a loss thereof, an
interpretation that would include the mere fracture or other temporary disability not
covered by the policies would certainly be unwarranted.2
We find no reason to depart from the foregoing ruling on the matter.
Plaintiff-appellant cannot come to the courts and claim that he was misled by the
terms of the contract. The provision is clear enough to inform the party entering into
that contract that the loss to be considered a disability entitled to indemnity, must
be severance or amputation of that affected member from the body of the insured.

LOSS OF:
Wherefore, finding no error in the decision appealed from, the same is hereby
affirmed, without costs. So ordered.
Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and
Sanchez, JJ., concur.

Either Hand P650.00

xxx

xxx

xxx

Republic of the Philippines

SUPREME COURT
Manila

The loss of a hand shall mean the loss, by amputation through the bones of
the wrist.

EN BANC
Appellant contends that to be entitled to indemnification under the foregoing
provision, it is enough that the insured is disabled to such an extent that he cannot
substantially perform all acts or duties of the kind necessary in the prosecution of
his business. It is argued that what is compensable is the disability and not the
amputation of the hand. The definition of what constitutes loss of hand, placed in
the contract, according to appellant, consequently, makes the provision ambiguous
and calls for the interpretation thereof by this Court.
This is not the first time that the proper construction of this provision, which is
uniformly carried in personal accident policies, has been questioned. Herein
appellant himself has already brought this matter to the attention of this Court in
connection with the other accident policies which he took and under which he had
tried to collect indemnity, for the identical injury that is the basis of the claims in
these cases. And, we had already ruled:

G.R. No. L-16215

June 29, 1963

SIMEON DEL ROSARIO, plaintiff-appellee,

vs.
THE EQUITABLE INSURANCE AND CASUALTY CO., INC., defendant-appellant.
Vicente J. Francisco and Jose R. Francisco for plaintiff-appellee.
K. V. Faylona for defendant-appellant.
PAREDES, J.:
On February 7, 1957, the defendant Equitable Insurance and Casualty Co., Inc.,
issued Personal Accident Policy No. 7136 on the life of Francisco del Rosario, alias
Paquito Bolero, son of herein plaintiff-appellee, binding itself to pay the sum of

P1,000.00 to P3,000.00, as indemnity for the death of the insured. The pertinent
provisions of the Policy, recite:

A rider to the Policy contained the following:

IV. DROWNING

Part I. Indemnity For Death

If the insured sustains any bodily injury which is effected solely through
violent, external, visible and accidental means, and which shall result,
independently of all other causes and within sixty (60) days from the
occurrence thereof, in the Death of the Insured, the Company shall pay the
amount set opposite such injury:

Section 1. Injury sustained other than those specified below unless

excepted hereinafter. . . . . . . .

Section 2. Injury sustained by the wrecking or disablement of a railroad

passenger car or street railway car in or on which the Insured is
travelling as a farepaying passenger. . . . . . . .

Section 3. Injury sustained by the burning of a church, theatre, public

library or municipal administration building while the Insured is therein
at the commencement of the fire. . . . . . . .

P1,000.
00

P1,500.
00

P2,000.
00

It is hereby declared and agreed that exemption clause Letter (h) embodied in PART
VI of the policy is hereby waived by the company, and to form a part of the provision
covered by the policy.
On February 24, 1957, the insured Francisco del Rosario, alias Paquito Bolero, while
on board the motor launch "ISLAMA" together with 33 others, including his
beneficiary in the Policy, Remedios Jayme, were forced to jump off said launch on
account of fire which broke out on said vessel, resulting in the death of drowning, of
the insured and beneficiary in the waters of Jolo. 1wph1.t
On April 13, 1957, Simeon del Rosario, father of the insured, and as the sole heir,
filed a claim for payment with defendant company, and on September 13, 1957,
defendant company paid to him (plaintiff) the sum of P1,000.00, pursuant to Section
1 of Part I of the policy. The receipt signed by plaintiff reads
RECEIVED of the EQUITABLE INSURANCE & CASUALTY CO., INC.,
the sum of PESOS ONE THOUSAND (P1,000.00) Philippine
Currency, being settlement in full for all claims and demands
against said Company as a result of an accident which occurred on
February 26, 1957, insured under out ACCIDENT Policy No. 7136,
causing the death of the Assured.
In view of the foregoing, this policy is hereby surrendered and
CANCELLED.
LOSS COMPUTATION

Section 4. Injury sustained by the wrecking or disablement of a regular

passenger elevator car in which the Insured is being conveyed as a
passenger (Elevator in mines excluded) P2,500.00

Section 5. Injury sustained by a stroke of lightning or by a

cyclone. . . . . . . .

xxx

xxx

Amount of Insurance

P3,000.
00

xxx

Part VI. Exceptions

This policy shall not cover disappearance of the Insured nor shall it cover
Death, Disability, Hospital fees, or Loss of Time, caused to the insured:
. . . (h) By drowning except as a consequence of the wrecking or
disablement in the Philippine waters of a passenger steam or motor vessel
in which the Insured is travelling as a farepaying passenger; . . . .

P1,000.00
__________
vvvvv

On the same date (September 13, 1957), Atty. Vicente J. Francisco, wrote defendant
company acknowledging receipt by his client (plaintiff herein), of the P1,000.00, but
informing said company that said amount was not the correct one. Atty. Francisco
claimed
The amount payable under the policy, I believe should be P1,500.00 under
the provision of Section 2, part 1 of the policy, based on the rule of pari
materia as the death of the insured occurred under the circumstances
similar to that provided under the aforecited section.
Defendant company, upon receipt of the letter, referred the matter to the Insurance
Commissioner, who rendered an opinion that the liability of the company was only
P1,000.00, pursuant to Section 1, Part I of the Provisions of the policy (Exh. F, or 3).
Because of the above opinion, defendant insurance company refused to pay more
than P1,000.00. In the meantime, Atty. Vicente Francisco, in a subsequent letter to
the insurance company, asked for P3,000.00 which the Company refused, to pay.
Hence, a complaint for the recovery of the balance of P2,000.00 more was instituted

with the Court of First Instance of Rizal (Pasay City, Branch VII), praying for it further
sum of P10,000.00 as attorney's fees, expenses of litigation and costs.
Defendant Insurance Company presented a Motion to Dismiss, alleging that the
demand or claim is set forth in the complaint had already been released, plaintiff
having received the full amount due as appearing in policy and as per opinion of the
Insurance Commissioner. An opposition to the motion to dismiss, was presented by
plaintiff, and other pleadings were subsequently file by the parties. On December
28, 1957, the trial court deferred action on the motion to dismiss until termination of
the trial of the case, it appearing that the ground thereof was not indubitable. In the
Answer to the complaint, defendant company practically admitted all the allegations
therein, denying only those which stated that under the policy its liability was
P3,000.00.
On September 1, 1958, the trial court promulgated an Amended Decision, the
pertinent portions of which read
xxx

xxx

". . . . Under the terms of this policy, defendant company agreed to pay
P1,000.00 to P3,000.00 as indemnity for the death of the insured. The
insured died of drowning. Death by drowning is covered by the policy the
pertinent provisions of which reads as follows:
xxx

xxx

"Part I of the policy fixes specific amounts as indemnities in case of

death resulting from "bodily injury which is effected solely thru
violence, external, visible and accidental means" but, Part I of the
Policy is not applicable in case of death by drowning because
death by drowning is not one resulting from "bodily injury which is
affected solely thru violent, external, visible and accidental
means" as "Bodily Injury" means a cut, a bruise, or a wound and
drowning is death due to suffocation and not to any cut, bruise or
wound."
xxx

xxx

xxx

xxx

xxx

. . . plaintiff is therefore entitled to recover P3,000.00. The defendant had

already paid the amount of P1,000.00 to the plaintiff so that there still
remains a balance of P2,000.00 of the amount to which plaintiff is entitled
to recover under the policy Exhibit "A".
The plaintiff asks for an award of P10,000.00 as attorney's fees and
expenses of litigation. However, since it is evident that the defendant had
not acted in bad faith in refusing to pay plaintiff's claim, the Court cannot
award plaintiff's claim for attorney's fees and expenses of litigation.

xxx

Since the contemporaneous and subsequent acts of the parties show that it
was not their intention that the payment of P1,000.00 to the plaintiff and
the signing of the loss receipt exhibit "1" would be considered as releasing
the defendant completely from its liability on the policy in question, said
intention of the parties should prevail over the contents of the loss receipt
"1" (Articles 1370 and 1371, New Civil Code).

xxx

the death of the insured but the policy does not positively state any definite
amount that may be recovered in case of death by drowning, there is an
ambiguity in this respect in the policy, which ambiguity must be interpreted
in favor of the insured and strictly against the insurer so as to allow greater
indemnity.

xxx

Besides, on the face of the policy Exhibit "A" itself, death by drowning is a
ground for recovery apart from the bodily injury because death by bodily
injury is covered by Part I of the policy while death by drowning is covered
by Part VI thereof. But while the policy mentions specific amounts that may
be recovered for death for bodily injury, yet, there is not specific amount
mentioned in the policy for death thru drowning although the latter is,
under Part VI of the policy, a ground for recovery thereunder. Since the
defendant has bound itself to pay P1000.00 to P3,000.00 as indemnity for

IN VIEW OF THE FOREGOING, the Court hereby reconsiders and sets aside
its decision dated July 21, 1958 and hereby renders judgment, ordering the
defendant to pay plaintiff the sum of Two Thousand (P2,000.00) Pesos and
to pay the costs.
The above judgment was appealed to the Court of Appeals on three (3) counts. Said
Court, in a Resolution dated September 29, 1959, elevated the case to this Court,
stating that the genuine issue is purely legal in nature.
All the parties agree that indemnity has to be paid. The conflict centers on how
much should the indemnity be. We believe that under the proven facts and
circumstances, the findings and conclusions of the trial court, are well taken, for
they are supported by the generally accepted principles or rulings on insurance,
which enunciate that where there is an ambiguity with respect to the terms and
conditions of the policy, the same will be resolved against the one responsible
thereof. It should be recalled in this connection, that generally, the insured, has
little, if any, participation in the preparation of the policy, together with the drafting
of its terms and Conditions. The interpretation of obscure stipulations in a contract
should not favor the party who cause the obscurity (Art. 1377, N.C.C.), which, in the
case at bar, is the insurance company.
. . . . And so it has been generally held that the "terms in an insurance
policy, which are ambiguous, equivocal or uncertain . . . are to be construed
strictly against, the insurer, and liberally in favor of the insured so as to
effect the dominant purpose of indemnity or payment to the insured,
especially where a forfeiture is involved," (29 Am. Jur. 181) and the reason
for this rule is that the "insured usually has no voice in the selection or
arrangement of the words employed and that the language of the contract
is selected with great care and deliberation by expert and legal advisers
employed by, and acting exclusively in the interest of, the insurance
company" (44 C.J.S. 1174). Calanoc v. Court of Appeals, et al., G.R. No. L8151, Dec. 16, 1955.
. . . . Where two interpretations, equally fair, of languages used in an
insurance policy may be made, that which allows the greater indemnity will

prevail. (L'Engel v. Scotish Union & Nat. F. Ins. Co., 48 Fla. 82, 37 So. 462,
67 LRA 581 111 Am. St. Rep. 70, 5 Ann. Cas. 749).
At any event, the policy under consideration, covers death or disability by accidental
means, and the appellant insurance company agreed to pay P1,000.00 to P3,000.00.
is indemnity for death of the insured.
In view of the conclusions reached, it would seem unnecessary to discuss the other
issues raised in the appeal.
The judgment appealed from is hereby affirmed. Without costs.
Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Dizon and
Regala, JJ., concur.
Makalintal, J., reserves his vote.

xxx

xxx

4. The Insured may authorize the repair of the Motor Vehicle necessitated
by damage for which the Company may be liable under this policy provided
that:

(b) a detailed estimate of the cost is forwarded to the Company

without delay.

EN BANC

and providing also that the authorized repair limit is P150.00.

May 20, 1966

MISAMIS LUMBER CORPORATION, plaintiff and appellee,

vs.
CAPITAL INSURANCE and SURETY CO., INC., defendant and appellant.
Achacoso, Nera and Ocampo for defendant and appellant.
F. Capistrano, Jr. for plaintiff and appellee.
REYES, J.B.L., J.:
Plaintiff-appellee Misamis Lumber Corporation, under its former name, Lanao Timber
Mills, Inc., insured its Ford Falcon motor car for the amount of P14,000 with the
defendant-appellant, Capital Insurance & Surety Company, Inc. The pertinent
provisions of the policy provided, as follows:
1. The Company will subject to the Limits of Liability indemnify the Insured
against loss or damage to the Motor Vehicle and its accessories and spare
parts whilst thereon.
2. (a) by accidental collision or overturning or collision or overturning
consequent when mechanical breakdown or consequent upon wear and
tear.
xxx

xxx

(a) the estimated cost of such repair does not exceed the
authorized Repair Limit.

Republic of the Philippines

SUPREME COURT
Manila

G.R. No. L-21380

3. At its option, the Company may pay in cash the amount of the loss or
damage or may repair, reinstate or replace the Motor Vehicle or any part
thereof or its accessories or spare parts. The liability of the Company shall
not exceed the value of the parts lost or damaged and the reasonable cost
of fitting such parts or the value of the Motor Vehicle at the time of the loss
or damage whichever is the loss. The Insured's estimate of value stated in
the schedule shall be the maximum amount payable by the Company in
respect of any claim for loss or damage.1wph1.t

xxx

xxx

At around eleven o'clock in the evening of 25 November 1961, and while the abovementioned insurance policy was in force, the insured car, while traveling along in
Aurora Boulevard in front of the Pepsi-Cola plant in Quezon City, passed over a water
hole which the driver did not see because an oncoming car did not dim its light. The
crankcase and flywheel housing of the car broke when it hit a hollow block lying
alongside the water hole. At the instance of the plaintiff-appellee, the car was towed
and repaired by Morosi Motors at its shop at 1906 Taft Avenue Extension at a total
cost of P302.27.
On 29 November 1961, when the repairs on the car had already been made, the
plaintiff-appellee made a report of the accident to the defendant-appellant Capital
Insurance & Surety Company.
Since the defendant-appellant refused to pay for the total cost of to wage and
repairs, suit was filed in the municipal court originally.
The case before Us is now a direct appeal on a point of law from the judgment of the
Court of First Instance of Manila finding for the plaintiff and against the defendantinsurer in its Civil Case No. 51757. Per our resolution on 13 February 1964, it was
resolved to proceed with the case without the appellee's brief, which was filed late.
The defendant-appellant admits liability in the amount of P150, but not for any
excess thereof.

The lower court did not exonerate the said appellant for the excess because,
according to it, the company's absolution would render the insurance contract onesided and that the said insurer had not shown that the cost of repairs in the sum of
P302.27 is unreasonable, excessive or padded, nor had it shown that it could have
undertaken the repairs itself at less expense.
The above reasoning is beside the point, because the insurance policy stipulated in
paragraph 4 that if the insured authorizes the repair the liability of the insurer, per
its sub-paragraph (a), is limited to P150.00. The literal meaning of this stipulation
must control, it being the actual contract, expressly and plainly provided for in the
policy (Art. 1370, Civil Code; Young vs. Midland Textile Ins. Co., 30 Phil. 617; Ty vs.
First Nat. Surety & Assur. Co., Inc., L-16138-45, 29 April 1961).

THIRD DIVISION

G.R. No. 75605 January 22, 1993

RAFAEL (REX) VERENDIA, petitioner,
vs.
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE
PHILIPPINES, respondents.
G.R. No. 76399 January 22, 1993

The lower court's recourse to legal hermeneutics is not called for because paragraph
4 of the policy is clear and specific and leaves no room for interpretation. The
interpretation given is even unjustified because it opposes what was specifically
stipulated. Thus, it will be observed that the policy drew out not only the limits of the
insurer's liability but also the mechanics that the insured had to follow to be entitled
to full indemnity of repairs. The option to undertake the repairs is accorded to the
insurance company per paragraph 2. The said company was deprived of the option
because the insured took it upon itself to have the repairs made, and only notified
the insurer when the repairs were done. As a consequence, paragraph 4, which
limits the company's liability to P150.00, applies.
The insurance contract may be rather onerous ("one-sided", as the lower court put
it), but that in itself does not justify the abrogation of its express terms, terms which
the insured accepted or adhered to and which is the law between the contracting
parties.
Finally, to require the insurer to prove that the cost of the repairs ordered by the
insured is unreasonable, as the appealed decision does, when the insurer was not
given an opportunity to inspect and assess the damage before the repairs were
made, strikes Us as contrary to elementary justice and equity.
For the foregoing reasons, the appealed decision is hereby modified by ordering the
defendant-appellant Capital Insurance & Surety Company, Inc. to pay not more than
P150.00 to the plaintiff-appellee Misamis Lumber Corporation. Each party shall bear
its own costs and attorney's fees.
Bengzon, C.J., Bautista Angelo, Concepcion, Barrera, Dizon, Regala, Makalintal,
Bengzon, J.P., and Sanchez, JJ., concur.
Zaldivar, J., took no part.
Republic of the Philippines
SUPREME COURT
Manila

FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,

vs.
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.
B.L. Padilla for petitioner.
Sabino Padilla, Jr. for Fidelity & Surety, Co.

MELO, J.:
The two consolidated cases involved herein stemmed from the issuance by
Fidelity and Surety Insurance Company of the Philippines (Fidelity for
short) of its Fire Insurance Policy No. F-18876 effective between June 23,
1980 and June 23, 1981 covering Rafael (Rex) Verendia's residential
building located at Tulip Drive, Beverly Hills, Antipolo, Rizal in the amount
of P385,000.00. Designated as beneficiary was the Monte de Piedad &
Savings Bank. Verendia also insured the same building with two other
companies, namely, The Country Bankers Insurance for P56,000.00 under
Policy No. PDB-80-1913 expiring on May 12, 1981, and The Development
Insurance for P400,000.00 under Policy No. F-48867 expiring on June 30,
198l.
While the three fire insurance policies were in force, the insured property
was completely destroyed by fire on the early morning of December 28,
1980. Fidelity was accordingly informed of the loss and despite demands,
refused payment under its policy, thus prompting Verendia to file a
complaint with the then Court of First Instance of Quezon City, praying for
payment of P385,000.00, legal interest thereon, plus attorney's fees and
litigation expenses. The complaint was later amended to include Monte de
Piedad as an "unwilling defendant" (P. 16, Record).

Answering the complaint, Fidelity, among other things, averred that the
policy was avoided by reason of over-insurance; that Verendia maliciously
represented that the building at the time of the fire was leased under a
contract executed on June 25, 1980 to a certain Roberto Garcia, when
actually it was a Marcelo Garcia who was the lessee.
On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A.
Ortiz, ruling in favor of Fidelity. In sustaining the defenses set up by
Fidelity, the trial court ruled that Paragraph 3 of the policy was also
violated by Verendia in that the insured failed to inform Fidelity of his
other insurance coverages with Country Bankers Insurance and
Development Insurance.
Verendia appealed to the then Intermediate Appellate Court and in a
decision promulgated on March 31, 1986, (CA-G.R. No. CV No. 02895,
Coquia, Zosa, Bartolome, and Ejercito (P), JJ.), the appellate court reversed
for the following reasons: (a) there was no misrepresentation concerning
the lease for the contract was signed by Marcelo Garcia in the name of
Roberto Garcia; and (b) Paragraph 3 of the policy contract requiring
Verendia to give notice to Fidelity of other contracts of insurance was
waived by Fidelity as shown by its conduct in attempting to settle the
claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).
Fidelity received a copy of the appellate court's decision on April 4, 1986,
but instead of directly filing a motion for reconsideration within 15 days
therefrom, Fidelity filed on April 21, 1986, a motion for extension of 3 days
within which to file a motion for reconsideration. The motion for extension
was not filed on April 19, 1986 which was the 15th day after receipt of the
decision because said 15th day was a Saturday and of course, the
following day was a Sunday (p. 14., Rollo of G.R. No. 75605). The motion
for extension was granted by the appellate court on April 30, 1986 (p.
15. ibid.), but Fidelity had in the meantime filed its motion for
reconsideration on April 24, 1986 (p. 16, ibid.).
Verendia filed a motion to expunge from the record Fidelity's motion for
reconsideration on the ground that the motion for extension was filed out
of time because the 15th day from receipt of the decision which fell on a
Saturday was ignored by Fidelity, for indeed, so Verendia contended, the
Intermediate Appellate Court has personnel receiving pleadings even on
Saturdays.
The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after
a motion for reconsideration was similarly brushed aside on July 22, 1986
(p. 30, ibid .), the petition herein docketed as G.R. No. 75605 was initiated.
Subsequently, or more specifically on October 21, 1986, the appellate
court denied Fidelity's motion for reconsideration and account thereof.
Fidelity filed on March 31, 1986, the petition for review on certiorari now
docketed as G.R. No. 76399. The two petitions, inter-related as they are,

were consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.
Before we can even begin to look into the merits of the main case which is
the petition for review oncertiorari, we must first determine whether the
decision of the appellate court may still be reviewed, or whether the same
is beyond further judicial scrutiny. Stated otherwise, before anything else,
inquiry must be made into the issue of whether Fidelity could have legally
asked for an extension of the 15-day reglementary period for appealing or
for moving for reconsideration.
As early as 1944, this Court through Justice Ozaeta already pronounced the
doctrine that the pendency of a motion for extension of time to perfect an
appeal does not suspend the running of the period sought to be extended
(Garcia vs. Buenaventura 74 Phil. 611 [1944]). To the same effect were the
rulings in Gibbs vs. CFI of Manila (80 Phil. 160 [1948]) Bello vs.
Fernando (4 SCRA 138 [1962]), and Joe vs. King (20 SCRA 1120 [1967]).
The above cases notwithstanding and because the Rules of Court do not
expressly prohibit the filing of a motion for extension of time to file a
motion for reconsideration in regard to a final order or judgment,
magistrates, including those in the Court of Appeals, held sharply divided
opinions on whether the period for appealing which also includes the
period for moving to reconsider may be extended. The matter was not
definitely settled until this Court issued its Resolution in Habaluyas
Enterprises, Inc. vs. Japson (142 SCRA [1986]), declaring that beginning
one month from the promulgation of the resolution on May 30, 1986
. . . the rule shall be strictly enforced that no motion for
extension of time to file a motion for new trial or
reconsideration shall be filed . . . (at p. 212.)
In the instant case, the motion for extension was filed and granted before
June 30, 1986, although, of course, Verendia's motion to expunge the
motion for reconsideration was not finally disposed until July 22, 1986, or
after the dictum in Habaluyas had taken effect. Seemingly, therefore, the
filing of the motion for extension came before its formal proscription
under Habaluyas, for which reason we now turn our attention to G.R. No.
76399.
Reduced to bare essentials, the issues Fidelity raises therein are: (a)
whether or not the contract of lease submitted by Verendia to support his
claim on the fire insurance policy constitutes a false declaration which
would forfeit his benefits under Section 13 of the policy and (b) whether or
not, in submitting the subrogation receipt in evidence, Fidelity had in
effect agreed to settle Verendia's claim in the amount stated in said
receipt. 1

Verging on the factual, the issue of the veracity or falsity of the lease
contract could have been better resolved by the appellate court for, in a
petition for review on certiorari under Rule 45, the jurisdiction of this
Court is limited to the review of errors of law. The appellate court's
findings of fact are, therefore, conclusive upon this Court except in the
following cases: (1) when the conclusion is a finding grounded entirely on
speculation, surmises, or conjectures; (2) when the inference made is
manifestly absurd, mistaken, or impossible; (3) when there is grave abuse
of discretion in the appreciation of facts; (4) when the judgment is
premised on a misapprehension of facts; (5) when the findings of fact are
conflicting; and (6) when the Court of Appeals in making its findings went
beyond the issues of the case and the same are contrary to the admissions
of both appellant and appellee (Ronquillo v. Court of Appeals, 195 SCRA
433 [1991]). In view of the conflicting findings of the trial court and the
appellate court on important issues in these consolidated cases and it
appearing that the appellate court judgment is based on a
misapprehension of facts, this Court shall review the evidence on record.

monthly rental of P6,500 when in fact, the Provincial Assessor of Rizal had
assessed the property's fair market value to be only P40,300.00, insured
the same property with two other insurance companies for a total
coverage of around P900,000, and created a dead-end for the adjuster by
the disappearance of Robert Garcia.

The contract of lease upon which Verendia relies to support his claim for
insurance benefits, was entered into between him and one Robert Garcia,
married to Helen Cawinian, on June 25, 1980 (Exh. "1"), a couple of days
after the effectivity of the insurance policy. When the rented residential
building was razed to the ground on December 28, 1980, it appears that
Robert Garcia (or Roberto Garcia) was still within the premises. However,
according to the investigation report prepared by Pat. Eleuterio M.
Buenviaje of the Antipolo police, the building appeared to have "no
occupant" and that Mr. Roberto Garcia was "renting on the otherside (sic)
portion of said compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated
testimony that Marcelo Garcia, whom he considered as the real lessee, was
occupying the building when it was burned (TSN, July 27, 1982, p.10).

Considering, however, the foregoing discussion pointing to the fact that

Verendia used a false lease contract to support his claim under Fire
Insurance Policy No. F-18876, the terms of the policy should be strictly
construed against the insured. Verendia failed to live by the terms of the
policy, specifically Section 13 thereof which is expressed in terms that are
clear and unambiguous, that all benefits under the policy shall be forfeited
"If the claim be in any respect fraudulent, or if any false declaration be
made or used in support thereof, or if any fraudulent means or devises are
used by the Insured or anyone acting in his behalf to obtain any benefit
under the policy". Verendia, having presented a false declaration to
support his claim for benefits in the form of a fraudulent lease contract, he
forfeited all benefits therein by virtue of Section 13 of the policy in the
absence of proof that Fidelity waived such provision (Pacific Banking
Corporation vs. Court of Appeals, supra). Worse yet, by presenting a false
lease contract, Verendia, reprehensibly disregarded the principle that
insurance contracts areuberrimae fidae and demand the most abundant
good faith (Velasco vs. Apostol, 173 SCRA 228 [1989]).

Robert Garcia disappeared after the fire. It was only on October 9, 1981
that an adjuster was able to locate him. Robert Garcia then executed an
affidavit before the National Intelligence and Security Authority (NISA) to
the effect that he was not the lessee of Verendia's house and that his
signature on the contract of lease was a complete forgery. Thus, on the
strength of these facts, the adjuster submitted a report dated December 4,
1981 recommending the denial of Verendia's claim (Exh. "2").
Ironically, during the trial, Verendia admitted that it was not Robert Garcia
who signed the lease contract. According to Verendia, it was signed by
Marcelo Garcia, cousin of Robert, who had been paying the rentals all the
while. Verendia, however, failed to explain why Marcelo had to sign his
cousin's name when he in fact was paying for the rent and why he
(Verendia) himself, the lessor, allowed such a ruse. Fidelity's conclusions
on these proven facts appear, therefore, to have sufficient bases; Verendia
concocted the lease contract to deflect responsibility for the fire towards
an alleged "lessee", inflated the value of the property by the alleged

Basically a contract of indemnity, an insurance contract is the law between

the parties (Pacific Banking Corporation vs. Court of Appeals 168 SCRA 1
[1988]). Its terms and conditions constitute the measure of the insurer's
liability and compliance therewith is a condition precedent to the insured's
right to recovery from the insurer (Oriental Assurance Corporation vs.
Court of Appeals, 200 SCRA 459 [1991], citing Perla Compania de Seguros,
Inc. vs. Court of Appeals, 185 SCRA 741 [1991]). As it is also a contract of
adhesion, an insurance contract should be liberally construed in favor of
the insured and strictly against the insurer company which usually
prepares it (Western Guaranty Corporation vs. Court of Appeals, 187 SCRA
652 [1980]).

There is also no reason to conclude that by submitting the subrogation

receipt as evidence in court, Fidelity bound itself to a "mutual agreement"
to settle Verendia's claims in consideration of the amount of P142,685.77.
While the said receipt appears to have been a filled-up form of Fidelity, no
representative of Fidelity had signed it. It is even incomplete as the blank
spaces for a witness and his address are not filled up. More significantly,
the same receipt states that Verendia had received the aforesaid amount.
However, that Verendia had not received the amount stated therein, is
proven by the fact that Verendia himself filed the complaint for the full
amount of P385,000.00 stated in the policy. It might be that there had
been efforts to settle Verendia's claims, but surely, the subrogation receipt
by itself does not prove that a settlement had been arrived at and
enforced. Thus, to interpret Fidelity's presentation of the subrogation

receipt in evidence as indicative of its accession to its "terms" is not only

wanting in rational basis but would be substituting the will of the Court for
that of the parties.

rider, Insurance Policy No. 31944 covers all damages to the properties within its
resort caused by earthquake. Respondent contends that the rider limits its liability
for loss to the two swimming pools of petitioner.

WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in

G.R. No. 76399 is GRANTED and the decision of the then Intermediate
Appellate Court under review is REVERSED and SET ASIDE and that of the
trial court is hereby REINSTATED and UPHELD.

The facts as established by the court a quo, and affirmed by the appellate
court are as follows:

SO ORDERED.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

# Footnotes
1 Fidelity appears to have agreed with the appellate court
that it had waived Verendia's failure to abide by policy
condition No. 3 on disclosure of other insurance policies by
its failure to assign it as an error in the petition in G.R. No.
76399. It must have likewise realized the futility of
assigning it as an error because on the first page of the
policy the following is typewritten: "Other insurances
allowed, the amounts to be declared in the event of loss or
when required."

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its
properties in said resort insured originally with the American Home Assurance
Company (AHAC-AIU). In the first four insurance policies issued by AHAC-AIU from
1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. C, D, E and F; also Exhs.
1, 2, 3 and 4 respectively), the risk of loss from earthquake shock was
extended only to plaintiffs two swimming pools, thus, earthquake shock endt.
(Item 5 only) (Exhs. C-1; D-1, and E and two (2) swimming pools only (Exhs.
C-1; D-1, E and F-1). Item 5 in those policies referred to the two (2)
swimming pools only (Exhs. 1-B, 2-B, 3-B and F-2); that subsequently
AHAC(AIU) issued in plaintiffs favor Policy No. 206-4182383-0 covering the period
March 14, 1988 to March 14, 1989 (Exhs. G also G-1) and in said policy the
earthquake endorsement clause as indicated in Exhibits C-1, D-1, Exhibits E
and F-1 was deleted and the entry under Endorsements/Warranties at the time of
issue read that plaintiff renewed its policy with AHAC (AIU) for the period of March
14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. H) which carried
the entry under Endorsement/Warranties at Time of Issue, which read
Endorsement to Include Earthquake Shock (Exh. 6-B-1) in the amount
of P10,700.00 and paidP42,658.14 (Exhs. 6-A and 6-B) as premium thereof,
computed as follows:
Item -P7,691,000.00 -

on the Clubhouse only

SECOND DIVISION
@ .392%;
[G.R. No. 156167. May 16, 2005]
1,500,000.00 GULF

RESORTS, INC., petitioner, vs.

CORPORATION, respondent.

PHILIPPINE

CHARTER

on the furniture, etc.

INSURANCE
contained in the building

DECISION
PUNO, J.:

above-mentioned@ .490%;
393,000.00-

Before the Court is the petition for certiorari under Rule 45 of the Revised Rules
of Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE CHARTER
INSURANCE CORPORATION. Petitioner assails the appellate court decision [1] which
dismissed its two appeals and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the
scope of the insurance companys liability for earthquake damage to petitioners
properties. Petitioner avers that, pursuant to its earthquake shock endorsement

on the two swimming

pools, only (against the
peril of earthquake
shock only) @ 0.100%

116,600.00-

other buildings include

as follows:
a) Tilter House-

P19,800.00- 0.551%

b) Power House-

P41,000.00- 0.551%

c) House Shed-

P55,000.00 -0.540%

P100,000.00

for furniture, fixtures,

lines air-con and
operating equipment

that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU)
Policy No. 206-4568061-9 (Exh. H) provided that the policy wording and rates in
said policy be copied in the policy to be issued by defendant; that defendant issued
Policy No. 31944 to plaintiff covering the period of March 14, 1990 to March 14,
1991 for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that in the
computation of the premium, defendants Policy No. 31944 (Exh. I), which is the
policy in question, contained on the right-hand upper portion of page 7 thereof, the
following:
Rate-Various
Premium

P37,420.60 F/L
2,061.52 Typhoon
1,030.76 EC
393.00 ES

Doc. Stamps

In consideration of the payment by the insured to the company of the

sum included additional premium the Company agrees, notwithstanding what is
stated in the printed conditions of this policy due to the contrary, that this insurance
covers loss or damage to shock to any of the property insured by this Policy
occasioned by or through or in consequence of earthquake (Exhs. 1-D, 2-D, 3A, 4-B, 5-A, 6-D and 7-C);
that in Exhibit 7-C the word included above the underlined portion was deleted;
that on July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and
plaintiffs properties covered by Policy No. 31944 issued by defendant, including the
two swimming pools in its Agoo Playa Resort were damaged.[2]
After the earthquake, petitioner advised respondent that it would be making a
claim under its Insurance Policy No. 31944 for damages on its properties.
Respondent instructed petitioner to file a formal claim, then assigned the
investigation of the claim to an independent claims adjuster, Bayne Adjusters and
Surveyors, Inc.[3] On July 30, 1990, respondent, through its adjuster, requested
petitioner to submit various documents in support of its claim. On August 7, 1990,
Bayne Adjusters and Surveyors, Inc., through its Vice-President A.R. de Leon,
[4]
rendered a preliminary report[5] finding extensive damage caused by the
earthquake to the clubhouse and to the two swimming pools. Mr. de Leon stated
that except for the swimming pools, all affected items have no coverage for
earthquake shocks.[6] On August 11, 1990, petitioner filed its formal demand [7] for
settlement of the damage to all its properties in the Agoo Playa Resort. On August
23, 1990, respondent denied petitioners claim on the ground that its insurance
policy only afforded earthquake shock coverage to the two swimming pools of the
resort.[8] Petitioner and respondent failed to arrive at a settlement. [9] Thus, on
January 24, 1991, petitioner filed a complaint [10] with the regional trial court of Pasig
praying for the payment of the following:
1.)

The sum of P5,427,779.00, representing losses sustained by the

insured properties, with interest thereon, as computed under par.
29 of the policy (Annex B) until fully paid;

2.)

The sum of P428,842.00 per month, representing continuing losses

sustained by plaintiff on account of defendants refusal to pay the
claims;

3.)

The sum of P500,000.00, by way of exemplary damages;

4.)

The sum of P500,000.00 by way of attorneys fees and expenses of

litigation;

3,068.10

F.S.T.

776.89

Prem. Tax

409.05

TOTAL

02 and 4-A-1; G-2 and 5-C-1; 6-C-1; issued by AHAC (Exhs. C, D, E,

F, G and H) and in Policy No. 31944 issued by defendant, the shock
endorsement provide(sic):

45,159.92;

that the above break-down of premiums shows that plaintiff paid only P393.00 as
premium against earthquake shock (ES); that in all the six insurance policies (Exhs.
C, D, E, F, G and H), the premium against the peril of earthquake shock
is the same, that is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and 3-B-2; F-

5.)

Costs.[11]

Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.[12]
On February 21, 1994, the lower court after trial ruled in favor of the
respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00
against the peril of earthquake shock, the same premium it paid against earthquake
shock only on the two swimming pools in all the policies issued by AHAC(AIU)
(Exhibits C, D, E, F and G). From this fact the Court must consequently
agree with the position of defendant that the endorsement rider (Exhibit 7-C)
means that only the two swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion
hence, where the language used in an insurance contract or application is such as to
create ambiguity the same should be resolved against the party responsible
therefor, i.e., the insurance company which prepared the contract. To the mind of
[the] Court, the language used in the policy in litigation is clear and unambiguous
hence there is no need for interpretation or construction but only application of the
provisions therein.
From the above observations the Court finds that only the two (2) swimming pools
had earthquake shock coverage and were heavily damaged by the earthquake which
struck on July 16, 1990. Defendant having admitted that the damage to the
swimming pools was appraised by defendants adjuster at P386,000.00, defendant
must, by virtue of the contract of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding
paragraph that defendant is liable only for the damage caused to the two (2)
swimming pools and that defendant has made known to plaintiff its willingness and
readiness to settle said liability, there is no basis for the grant of the other damages
prayed for by plaintiff. As to the counterclaims of defendant, the Court does not
agree that the action filed by plaintiff is baseless and highly speculative since such
action is a lawful exercise of the plaintiffs right to come to Court in the honest belief
that their Complaint is meritorious. The prayer, therefore, of defendant for damages
is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of
THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing
damage to the two (2) swimming pools, with interest at 6% per annum from the date
of the filing of the Complaint until defendants obligation to plaintiff is fully paid.
No pronouncement as to costs.[13]

Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an

appeal with the Court of Appeals based on the following assigned errors: [14]
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY
RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY
NO. 31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES SURROUNDING
THE ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES SUBSEQUENT
TO THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO
RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944; EXH I) BY LIMITING
ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE
PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS
ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER
ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts
failure to award it attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and
ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are
not convinced that the last two (2) insurance contracts (Exhs. G and H), which
the plaintiff-appellant had with AHAC (AIU) and upon which the subject insurance
contract with Philippine Charter Insurance Corporation is said to have been based
and copied (Exh. I), covered an extended earthquake shock insurance on all the
insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants
prayer for the imposition of interest 24% on the insurance claim and 6% on loss of
income allegedly amounting toP4,280,000.00. Since the defendant-appellant has
expressed its willingness to pay the damage caused on the two (2) swimming pools,
as the Court a quo and this Court correctly found it to be liable only, it then cannot
be said that it was in default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is
the rule that the award thereof is subject to the sound discretion of the court. Thus,
if such discretion is well-exercised, it will not be disturbed on appeal (Castro et al. v.
CA, et al., G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an
exception rather than a rule, it is necessary for the court to make findings of facts
and law that would bring the case within the exception and justify the grant of such

award (Country Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose
Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that the plaintiffappellants action is not baseless and highly speculative, We find that the Court a
quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and
judgment of the Trial Court hereby AFFIRMED in toto. No costs.[15]
Petitioner filed the present petition raising the following issues: [16]
A.

WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER

RESPONDENTS INSURANCE POLICY NO. 31944, ONLY THE TWO (2)
SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES COVERED
THEREUNDER, ARE INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.

B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS

PRAYER FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED,
ATTORNEYS FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the
properties insured and not only the swimming pools. It used the words any
property insured by this policy, and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock
endorsement is confirmed in the body of the insurance policy itself, which states
that it is [s]ubject to: Other Insurance Clause, Typhoon Endorsement, Earthquake
Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment
Agreement On Long Term Policies.[17]
Third, that the qualification referring to the two swimming pools had already
been deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an
inadvertent omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given
precedence over the wording of the insurance policy, because the rider is the more
deliberate expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.

Seventh, any ambiguity in the earthquake shock endorsement should be

resolved in favor of petitioner and against respondent. It was respondent which
caused the ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock
endorsement should be interpreted as a caveat on the standard fire insurance
policy, such as to remove the two swimming pools from the coverage for the risk of
fire. It should not be used to limit the respondents liability for earthquake shock to
the two swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional
premium was not paid under the extended coverage. The premium for the
earthquake shock coverage was already included in the premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they
intended to extend earthquake shock coverage to all insured properties. When it
secured an insurance policy from respondent, petitioner told respondent that it
wanted an exact replica of its latest insurance policy from American Home
Assurance Company (AHAC-AIU), which covered all the resorts properties for
earthquake shock damage and respondent agreed. After the July 16, 1990
earthquake, respondent assured petitioner that it was covered for earthquake
shock. Respondents insurance adjuster, Bayne Adjusters and Surveyors, Inc.,
likewise requested petitioner to submit the necessary documents for its building
claims and other repair costs. Thus, under the doctrine of equitable estoppel, it
cannot deny that the insurance policy it issued to petitioner covered all of the
properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review
by certiorari under Rule 45 of the Revised Rules of Court as its remedy, and there is
no need for calibration of the evidence in order to establish the facts upon which this
petition is based.
On the other hand, respondent made the following counter arguments: [18]
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990
explicitly extended coverage against earthquake shock to petitioners insured
properties other than on the two swimming pools. Petitioner admitted that from
1984 to 1988, only the two swimming pools were insured against earthquake shock.
From 1988 until 1990, the provisions in its policy were practically identical to its
earlier policies, and there was no increase in the premium paid. AHAC-AIU, in a
letter[19] by its representative Manuel C. Quijano, categorically stated that its
previous policy, from which respondents policy was copied, covered only
earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00
shows that the policy only covered earthquake shock damage on the two swimming
pools. The amount was the same amount paid by petitioner for earthquake shock

coverage on the two swimming pools from 1990-1991. No additional premium was
paid to warrant coverage of the other properties in the resort.

Endorsement. However, the words of the policy reflect the parties clear intention to
limit earthquake shock coverage to the two swimming pools.

Third, the deletion of the phrase pertaining to the limitation of the earthquake
shock endorsement to the two swimming pools in the policy schedule did not
expand the earthquake shock coverage to all of petitioners properties. As per its
agreement with petitioner, respondent copied its policy from the AHAC-AIU policy
provided by petitioner. Although the first five policies contained the said
qualification in their riders title, in the last two policies, this qualification in the title
was deleted. AHAC-AIU, through Mr. J. Baranda III, stated that such deletion was a
mere inadvertence. This inadvertence did not make the policy incomplete, nor did it
broaden the scope of the endorsement whose descriptive title was merely
enumerated. Any ambiguity in the policy can be easily resolved by looking at the
other provisions, specially the enumeration of the items insured, where only the two
swimming pools were noted as covered for earthquake shock damage.

Before petitioner accepted the policy, it had the opportunity to read its
conditions. It did not object to any deficiency nor did it institute any action to reform
the policy. The policy binds the petitioner.

Fourth, in its Complaint, petitioner alleged that in its policies from 1984
through 1988, the phrase Item 5 P393,000.00 on the two swimming pools only
(against the peril of earthquake shock only) meant that only the swimming pools
were insured for earthquake damage. The same phrase is used in toto in the
policies from 1989 to 1990, the only difference being the designation of the two
swimming pools as Item 3.
Fifth, in order for the earthquake shock endorsement to be effective,
premiums must be paid for all the properties covered. In all of its seven insurance
policies, petitioner only paid P393.00 as premium for coverage of the swimming
pools against earthquake shock. No other premium was paid for earthquake shock
coverage on the other properties. In addition, the use of the qualifier ANY instead
of ALL to describe the property covered was done deliberately to enable the parties
to specify the properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its
properties must be included in the earthquake shock coverage. Petitioners own
evidence shows that it only required respondent to follow the exact provisions of its
previous policy from AHAC-AIU. Respondent complied with this requirement.
Respondents only deviation from the agreement was when it modified the
provisions regarding the replacement cost endorsement. With regard to the issue
under litigation, the riders of the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as
would estop it from maintaining that only the two swimming pools were covered for
earthquake shock. The adjusters letter notifying petitioner to present certain
documents for its building claims and repair costs was given to petitioner before the
adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase
Item 5 Only after the descriptive name or title of the Earthquake Shock

Eighth, there is no basis for petitioner to claim damages, attorneys fees and
litigation expenses. Since respondent was willing and able to pay for the damage
caused on the two swimming pools, it cannot be considered to be in default, and
therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of
the case at bar.
First, in the designation of location of risk, only the two swimming pools were
specified as included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of
earthquake shock only)[20]
Second, under the breakdown for premium payments, [21] it was stated that:
PREMIUM RECAPITULATION
ITEM NOS.

AMOUNT

RATES

PREMIUM

xxx
3

393,000.00

0.100%-E/S

393.00[22]

Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly of any of the following occurrences, namely:-(a)

Earthquake, volcanic eruption or other convulsion of nature. [23]

Fourth, the rider attached to the policy, titled Extended Coverage

Endorsement (To Include the Perils of Explosion, Aircraft, Vehicle and Smoke),
stated, viz:
ANNUAL PAYMENT AGREEMENT ON

LONG TERM POLICIES

4. Such assumption of risk is part of a general scheme to distribute

actual losses among a large group of persons bearing a similar risk;
and

THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS

INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF
5% OR 7 % OF THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO
CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE
PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum of P. . . . .
. . . . . . . . . . . . additional premium the Company agrees, notwithstanding what is
stated in the printed conditions of this Policy to the contrary, that this insurance
covers loss or damage (including loss or damage by fire) to any of the property
insured by this Policy occasioned by or through or in consequence of Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as
they may be hereby expressly varied) and that any reference therein to loss or
damage by fire should be deemed to apply also to loss or damage occasioned by or
through or in consequence of Earthquake.[24]
Petitioner contends that pursuant to this rider, no qualifications were placed on
the scope of the earthquake shock coverage. Thus, the policy extended earthquake
shock coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined
and interpreted in consonance with each other. [25] All its parts are reflective of the
true intent of the parties. The policy cannot be construed piecemeal. Certain
stipulations cannot be segregated and then made to control; neither do particular
words or phrases necessarily determine its character. Petitioner cannot focus on the
earthquake shock endorsement to the exclusion of the other provisions. All the
provisions and riders, taken and interpreted together, indubitably show the intention
of the parties to extend earthquake shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the
clear intent of the parties to extend earthquake shock coverage only to the two
swimming pools. Section 2(1) of the Insurance Code defines a contract of insurance
as an agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event. Thus,
an insurance contract exists where the following elements concur:

5. In consideration of the insurer's promise, the insured pays a

premium.[26] (Emphasis ours)
An insurance premium is the consideration paid an insurer for undertaking to
indemnify the insured against a specified peril. [27] In fire, casualty, and marine
insurance, the premium payable becomes a debt as soon as the risk attaches. [28] In
the subject policy, no premium payments were made with regard to earthquake
shock coverage, except on the two swimming pools. There is no mention of any
premium payable for the other resort properties with regard to earthquake shock.
This is consistent with the history of petitioners previous insurance policies from
AHAC-AIU. As borne out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your
insurance policy during the period from March 4, 1984 to March 4,
1985 the coverage on earthquake shock was limited to the two
swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in
the warranty, there is a provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00
corresponding to the two swimming pools only?
A.

Yes, sir.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991

pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you
personally arrange for the procurement of this policy?

1. The insured has an insurable interest;

A.

2. The insured is subject to a risk of loss by the happening of the

designated peril;

Q. Did you also do this through your insurance agency?

3. The insurer assumes the risk;

A.

Yes, sir.

If you are referring to Forte Insurance Agency, yes.

Q. Is Forte Insurance Agency a department or division of your company?

A.

No, sir. They are our insurance agency.

Q. And they are independent of your company insofar as operations are

concerned?
A.

Yes, sir, they are separate entity.

Q. But insofar as the procurement of the insurance policy is concerned

they are of course subject to your instruction, is that not correct?
A.

A.

Yes, sir. The final action is still with us although they can recommend
what insurance to take.

Q. In the procurement of the insurance police (sic) from March 14, 1988
to March 14, 1989, did you give written instruction to Forte
Insurance Agency advising it that the earthquake shock coverage
must extend to all properties of Agoo Playa Resort in La Union?

I examined the policy and seeing that the warranty on the

earthquake shock endorsement has no more limitation referring to
the two swimming pools only, I was contented already that the
previous limitation pertaining to the two swimming pools was
already removed.

Petitioner also cited and relies on the attachment of the phrase Subject to:
Other Insurance Clause, Typhoon Endorsement, Earthquake Shock
Endorsement, Extended Coverage Endorsement, FEA Warranty & Annual
Payment Agreement on Long Term Policies [29] to the insurance policy as proof
of the intent of the parties to extend the coverage for earthquake shock. However,
this phrase is merely an enumeration of the descriptive titles of the riders, clauses,
warranties or endorsements to which the policy is subject, as required under Section
50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the
qualification limiting the coverage to the two swimming pools. The earthquake
shock endorsement cannot stand alone. As explained by the testimony of Juan
Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III[30]

A.

No, sir. We did not make any written instruction, although we made
an oral instruction to that effect of extending the coverage on (sic)
the other properties of the company.

TSN, August 11, 1992

pp. 9-12

Q. And that instruction, according to you, was very important because in

April 1987 there was an earthquake tremor in La Union?
A.

Yes, sir.

Q. And you wanted to protect all your properties against similar tremors
in the [future], is that correct?
A.

Yes, sir.

Q. Now, after this policy was delivered to you did you bother to check
the provisions with respect to your instructions that all properties
must be covered again by earthquake shock endorsement?
A.

Are you referring to the insurance policy issued by American Home

Assurance Company marked Exhibit G?

Atty. Mejia: Yes.

Witness:

Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have
been previously marked by counsel for defendant as Exhibit[s] 1-6
inclusive. Did you have occasion to review of (sic) these six (6)
policies issued by your company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of
time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as
Exhibits C to H respectively carries an earthquake shock
endorsement[?] My question to you is, on the basis on (sic) the
wordings indicated in Exhibits C to H respectively what was the
extent of the coverage [against] the peril of earthquake shock as
provided for in each of the six (6) policies?
xxx

WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G
and H?
A.

Yes, sir.

ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake
shock as provided for in each of the six (6) policies extend to the
two (2) swimming pools only?

DIRECT EXAMINATION OF JUAN BARANDA III

TSN, August 11, 1992
pp. 23-25
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only
Exhibits C, D, E and F inclusive [remained] its coverage against
earthquake shock to two (2) swimming pools only but that Exhibits G
and H respectively entend the coverage against earthquake shock
to all the properties indicated in the respective schedules attached
to said policies, what can you say about that testimony of plaintiffs
witness?
WITNESS:

WITNESS:

As I have mentioned earlier, earthquake shock cannot stand alone

without the other half of it. I assure you that this one covers the two
swimming pools with respect to earthquake shock endorsement.
Based on it, if we are going to look at the premium there has been
no change with respect to the rates. Everytime (sic) there is a
renewal if the intention of the insurer was to include the earthquake
shock, I think there is a substantial increase in the premium. We are
not only going to consider the two (2) swimming pools of the other
as stated in the policy. As I see, there is no increase in the amount
of the premium. I must say that the coverage was not broaden (sic)
to include the other items.

Because it says here in the policies, in the enumeration Earthquake

Shock Endorsement, in the Clauses and Warranties: Item 5 only
(Earthquake Shock Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand
alone basis. For swimming pools we do cover earthquake shock.
For building we covered it for full earthquake coverage which
includes earthquake shock

COURT:
They are the same, the premium rates?
WITNESS:

COURT:
They are the same in the sence (sic), in the amount of the
coverage. If you are going to do some computation based on the
rates you will arrive at the same premiums, your Honor.

As far as earthquake shock endorsement you do not have a specific

coverage for other things other than swimming pool? You are
covering building? They are covered by a general insurance?

CROSS-EXAMINATION OF JUAN BARANDA III

WITNESS:
TSN, September 7, 1992
Earthquake shock coverage could not stand alone. If we are
covering building or another we can issue earthquake shock solely
but that the moment I see this, the thing that comes to my mind is
either insuring a swimming pool, foundations, they are normally
affected by earthquake but not by fire, sir.

pp. 4-6
ATTY. ANDRES:

Would you as a matter of practice [insure] swimming pools for fire

insurance?

Q. Just to be clear about this particular answer of yours Mr. Witness,

what exactly did you tell Atty. Omlas (sic) to copy from Exhibit H
for purposes of procuring the policy from Philippine Charter
Insurance Corporation?

WITNESS:
No, we dont, sir.
Q. That is why the phrase earthquake shock to the two (2) swimming
pools only was placed, is it not?
A.

pp. 4-5

Yes, sir.

A.

Q. You are referring to Exhibit H of course?

ATTY. ANDRES:

A.

Will you not also agree with me that these exhibits, Exhibits G and H
which you have pointed to during your direct-examination, the
phrase Item no. 5 only meaning to (sic) the two (2) swimming
pools was deleted from the policies issued by AIU, is it not?

A.

ATTY. ANDRES:
As an insurance executive will you not attach any significance to the
deletion of the qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is
inadvertent. Being a company underwriter, we do not cover. . it was
inadvertent because of the previous policies that we have issued
with no specific attachments, premium rates and so on. It was
inadvertent, sir.
The Court also
rejects
petitioners contention
that respondents
contemporaneous and subsequent acts to the issuance of the insurance policy
falsely gave the petitioner assurance that the coverage of the earthquake shock
endorsement included all its properties in the resort. Respondent only insured the
properties as intended by the petitioner. Petitioners own witness testified to this
agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC

Yes, sir, to Exhibit H.

Q. So, all the provisions here will be the same except that of the
premium rates?

xxx

TSN, January 14, 1992

I told him that the insurance that they will have to get will have the
same provisions as this American Home Insurance Policy No. 2064568061-9.

Yes, sir. He assured me that with regards to the insurance premium

rates that they will be charging will be limited to this one. I (sic) can
even be lesser.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison
of the provisions and scope of coverage of Exhibits I and H
sometime in the third week of March, 1990 or thereabout?
A.

Yes, sir, about that time.

Q. And at that time did you notice any discrepancy or difference

between the policy wordings as well as scope of coverage of Exhibits
I and H respectively?
A.

No, sir, I did not discover any difference inasmuch (sic) as I was
assured already that the policy wordings and rates were copied from
the insurance policy I sent them but it was only when this case
erupted that we discovered some discrepancies.

Q. With respect to the items declared for insurance coverage did you
notice any discrepancy at any time between those indicated in
Exhibit I and those indicated in Exhibit H respectively?
A.

A.

With regard to the wordings I did not notice any difference because it
was exactly the same P393,000.00 on the two (2) swimming pools
only against the peril of earthquake shock which I understood before
that this provision will have to be placed here because this
particular provision under the peril of earthquake shock only is
requested because this is an insurance policy and therefore cannot
be insured against fire, so this has to be placed.

The verbal assurances allegedly given by respondents representative Atty.

Umlas were not proved. Atty. Umlas categorically denied having given such
assurances.
Finally, petitioner puts much stress on the letter of respondents independent
claims adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the
representative of Bayne Adjusters and Surveyors, Inc., respondent never meant to
lead petitioner to believe that the endorsement for earthquake shock covered
properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding
the extent of coverage of the policy issued by Philippine Charter
Insurance Corporation?
A.

xxx

I remember that when I returned to the office after the inspection, I

got a photocopy of the insurance coverage policy and it was
indicated under Item 3 specifically that the coverage is only for
earthquake shock. Then, I remember I had a talk with Atty. Umlas
(sic), and I relayed to him what I had found out in the policy and he
confirmed to me indeed only Item 3 which were the two swimming
pools have coverage for earthquake shock.

I based my statement on my findings, because upon my examination

of the policy I found out that under Item 3 it was specific on the
wordings that on the two swimming pools only, then enclosed in
parenthesis (against the peril[s] of earthquake shock only), and
secondly, when I examined the summary of premium payment only
Item 3 which refers to the swimming pools have a computation for
premium payment for earthquake shock and all the other items
have no computation for payment of premiums.

In sum, there is no ambiguity in the terms of the contract and its riders.
Petitioner cannot rely on the general rule that insurance contracts are contracts of
adhesion which should be liberally construed in favor of the insured and strictly
against the insurer company which usually prepares it. [31] A contract of adhesion is
one wherein a party, usually a corporation, prepares the stipulations in the contract,
while the other party merely affixes his signature or his "adhesion" thereto. Through
the years, the courts have held that in these type of contracts, the parties do not
bargain on equal footing, the weaker party's participation being reduced to the
alternative to take it or leave it. Thus, these contracts are viewed as traps for the
weaker party whom the courts of justice must protect.[32] Consequently, any
ambiguity therein is resolved against the insurer, or construed liberally in favor of
the insured.[33]
The case law will show that this Court will only rule out blind adherence to
terms where facts and circumstances will show that they are basically one-sided.
[34]
Thus, we have called on lower courts to remain careful in scrutinizing the factual
circumstances behind each case to determine the efficacy of the claims of
contending parties. In Development Bank of the Philippines v. National
Merchandising Corporation, et al.,[35] the parties, who were acute businessmen
of experience, were presumed to have assented to the assailed documents with full
knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar.
Petitioner cannot claim it did not know the provisions of the policy. From the
inception of the policy, petitioner had required the respondent to copy verbatim the
provisions and terms of its latest insurance policy from AHAC-AIU. The testimony of
Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of
petitioner, is reflective of petitioners knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]
TSN, September 23, 1991

xxx
pp. 20-21
Q. Now, may we know from you Engr. de Leon your basis, if any, for
stating that except for the swimming pools all affected items have
no coverage for earthquake shock?

Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would
want for those facilities in Agoo Playa?
A.

Yes, sir. I told him that I will agree to that renewal of this policy under
Philippine Charter Insurance Corporation as long as it will follow the
same or exact provisions of the previous insurance policy we had
with American Home Assurance Corporation.

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS

REYES, petitioners,
vs.
HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and
RAMON MONTILLA PATERNO, JR., respondents.
Ponce Enrile, Cayetano, Reyes and Manalastas for petitioners.

Q. Did you take any step Mr. Witness to ensure that the provisions which
you wanted in the American Home Insurance policy are to be
incorporated in the PCIC policy?

Oscar Z. Benares for private respondent.

A.

QUIASON, J.:

Yes, sir.

Q. What steps did you take?

A.

When I examined the policy of the Philippine Charter Insurance

Corporation I specifically told him that the policy and wordings shall
be copied from the AIU Policy No. 206-4568061-9.

This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of
Court, with preliminary injunction or temporary restraining order, to annul and set
aside the Order dated November 6, 1986 of the Insurance Commissioner and the
entire proceedings taken in I.C. Special Case No. 1-86.
We grant the petition.

Respondent, in compliance with the condition set by the petitioner, copied AIU
Policy No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that
there was variance in some terms, specifically in the replacement cost endorsement,
but the principal provisions of the policy remained essentially similar to AHAC-AIUs
policy. Consequently, we cannot apply the "fine print" or "contract of adhesion" rule
in this case as the parties intent to limit the coverage of the policy to the two
swimming pools only is not ambiguous.[37]

The instant case arose from a letter-complaint of private respondent Ramon M.

Paterno, Jr. dated April 17, 1986, to respondent Commissioner, alleging certain
problems encountered by agents, supervisors, managers and public consumers of
the Philippine American Life Insurance Company (Philamlife) as a result of certain
practices by said company.

IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The

petition for certiorari is dismissed. No costs.

In a letter dated April 23, 1986, respondent Commissioner requested petitioner

Rodrigo de los Reyes, in his capacity as Philamlife's president, to comment on
respondent Paterno's letter.

SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los Reyes
suggested that private respondent "submit some sort of a 'bill of particulars' listing
and citing actual cases, facts, dates, figures, provisions of law, rules and regulations,
and all other pertinent data which are necessary to enable him to prepare an
intelligent reply" (Rollo, p. 37). A copy of this letter was sent by the Insurance
Commissioner to private respondent for his comments thereon.
On May 16, 1986, respondent Commissioner received a letter from private
respondent maintaining that his letter-complaint of April 17, 1986 was sufficient in
form and substance, and requested that a hearing thereon be conducted.

FIRST DIVISION
Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6,
1986, reiterated his claim that private respondent's letter of May 16, 1986 did not
supply the information he needed to enable him to answer the letter-complaint.
G.R. No. 76452 July 26, 1994

On July 14, a hearing on the letter-complaint was held by respondent Commissioner

on the validity of the Contract of Agency complained of by private respondent.
In said hearing, private respondent was required by respondent Commissioner to
specify the provisions of the agency contract which he claimed to be illegal.
On August 4, private respondent submitted a letter of specification to respondent
Commissioner dated July 31, 1986, reiterating his letter of April 17, 1986 and
praying that the provisions on charges and fees stated in the Contract of Agency
executed between Philamlife and its agents, as well as the implementing provisions
as published in the agents' handbook, agency bulletins and circulars, be declared as
null and void. He also asked that the amounts of such charges and fees already
deducted and collected by Philamlife in connection therewith be reimbursed to the
agents, with interest at the prevailing rate reckoned from the date when they were
deducted.
Respondent Commissioner furnished petitioner De los Reyes with a copy of private
respondent's letter of July 31, 1986, and requested his answer thereto.
Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter
alia that:
(1) Private respondent's letter of August 11, 1986 does not contain
any of the particular information which Philamlife was seeking
from him and which he promised to submit.
(2) That since the Commission's quasi-judicial power was being
invoked with regard to the complaint, private respondent must file
a verified formal complaint before any further proceedings.
In his letter dated September 9, 1986, private respondent asked for the resumption
of the hearings on his complaint.
On October 1, private respondent executed an affidavit, verifying his letters of April
17, 1986, and July 31, 1986.
In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant VicePresident and Executive Assistant to the President, asked that respondent
Commission first rule on the questions of the jurisdiction of the Insurance
Commissioner over the subject matter of the letters-complaint and the legal
standing of private respondent.
On October 27, respondent Commissioner notified both parties of the hearing of the
case on November 5, 1986.
On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the
following grounds;

1. The Subpoena/Notice has no legal basis and is premature

because:
(1) No complaint sufficient in form and contents
has been filed;
(2) No
summons
has been
issued nor
received by
the
respondent
De los Reyes,
and hence,
no
jurisdiction
has been
acquired
over his
person;
(3) No
answer has
been filed,
and hence,
the hearing
scheduled on
November 5,
1986 in the
Subpoena/No
tice, and
wherein the
respondent
is required to
appear, is
premature
and lacks
legal basis.
II. The Insurance Commission has no jurisdiction over;
(1) the subject matter or nature of the action;
and
(2) over the parties involved (Rollo, p. 102).

In the Order dated November 6, 1986, respondent Commissioner denied the Motion
to Quash. The dispositive portion of said Order reads:
NOW, THEREFORE, finding the position of complainant thru
counsel tenable and considering the fact that the instant case is
an informal administrative litigation falling outside the operation of
the aforecited memorandum circular but cognizable by this
Commission, the hearing officer, in open session ruled as it is
hereby ruled to deny the Motion to Quash Subpoena/Notice for
lack of merit (Rollo, p. 109).
Hence, this petition.
II
The main issue to be resolved is whether or not the resolution of the legality of the
Contract of Agency falls within the jurisdiction of the Insurance Commissioner.
Private respondent contends that the Insurance Commissioner has jurisdiction to
take cognizance of the complaint in the exercise of its quasi-judicial powers. The
Solicitor General, upholding the jurisdiction of the Insurance Commissioner, claims
that under Sections 414 and 415 of the Insurance Code, the Commissioner has
authority to nullify the alleged illegal provisions of the Contract of Agency.
III
The general regulatory authority of the Insurance Commissioner is described in
Section 414 of the Insurance Code, to wit:
The Insurance Commissioner shall have the duty to see that all
laws relating to insurance, insurance companies and other
insurance matters, mutual benefit associations and trusts for
charitable uses are faithfully executed and to perform the duties
imposed upon him by this Code, . . .
On the other hand, Section 415 provides:
In addition to the administrative sanctions provided elsewhere in
this Code, the Insurance Commissioner is hereby authorized, at his
discretion, to impose upon insurance companies, their directors
and/or officers and/or agents, for any willful failure or refusal to
comply with, or violation of any provision of this Code, or any
order, instruction, regulation or ruling of the Insurance
Commissioner, or any commission of irregularities, and/or
conducting business in an unsafe and unsound manner as may be
determined by the the Insurance Commissioner, the following:

(a) fines not in excess of five hundred pesos a

day; and
(b)
suspension,
or after due
hearing,
removal of
directors
and/or
officers
and/or
agents.
A plain reading of the above-quoted provisions show that the Insurance
Commissioner has the authority to regulate the business of insurance, which is
defined as follows:
(2) The term "doing an insurance business" or "transacting an
insurance business," within the meaning of this Code, shall include
(a) making or proposing to make, as insurer, any insurance
contract;
(b) making, or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to any other
legitimate business or activity of the surety; (c) doing any kind of
business, including a reinsurance business, specifically recognized
as constituting the doing of an insurance business within the
meaning of this Code; (d) doing or proposing to do any business in
substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code. (Insurance Code,
Sec. 2[2]; Emphasis supplied).
Since the contract of agency entered into between Philamlife and its agents is not
included within the meaning of an insurance business, Section 2 of the Insurance
Code cannot be invoked to give jurisdiction over the same to the Insurance
Commissioner. Expressio unius est exclusio alterius.
With regard to private respondent's contention that the quasi-judicial power of the
Insurance Commissioner under Section 416 of the Insurance Code applies in his
case, we likewise rule in the negative. Section 416 of the Code in pertinent part,
provides:
The Commissioner shall have the power to adjudicate claims and
complaints involving any loss, damage or liability for which an
insurer may be answerable under any kind of policy or contract of
insurance, or for which such insurer may be liable under a contract
of suretyship, or for which a reinsurer may be used under any
contract or reinsurance it may have entered into, or for which a

mutual benefit association may be held liable under the

membership certificates it has issued to its members, where the
amount of any such loss, damage or liability, excluding interest,
costs and attorney's fees, being claimed or sued upon any kind of
insurance, bond, reinsurance contract, or membership certificate
does not exceed in any single claim one hundred thousand pesos.
A reading of the said section shows that the quasi-judicial power of the Insurance
Commissioner is limited by law "to claims and complaints involving any loss,
damage or liability for which an insurer may be answerable under any kind of policy
or contract of insurance, . . ." Hence, this power does not cover the relationship
affecting the insurance company and its agents but is limited to adjudicating claims
and complaints filed by the insured against the insurance company.

[G.R. No. 125678. March 18, 2002]

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS
and JULITA TRINOS, respondents.
DECISION
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a
health care coverage with petitioner Philamcare Health Systems, Inc. In the
standard application form, he answered no to the following question:

While the subject of Insurance Agents and Brokers is discussed under Chapter IV,
Title I of the Insurance Code, the provisions of said Chapter speak only of the
licensing requirements and limitations imposed on insurance agents and brokers.

Have you or any of your family members ever consulted or been treated for high
blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic
ulcer? (If Yes, give details).[1]

The Insurance Code does not have provisions governing the relations between
insurance companies and their agents. It follows that the Insurance Commissioner
cannot, in the exercise of its quasi-judicial powers, assume jurisdiction over
controversies between the insurance companies and their agents.

The application was approved for a period of one year from March 1, 1988 to
March 1, 1989. Accordingly, he was issued Health Care Agreement No.
P010194. Under the agreement, respondents husband was entitled to avail of
hospitalization benefits, whether ordinary or emergency, listed therein. He was also
entitled to avail of out-patient benefits such as annual physical examinations,
preventive health care and other out-patient services.

We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180
SCRA 445 (1989), andInvestment Planning Corporation of the Philippines v. Social
Security Commission, 21 SCRA 904 (1962), that an insurance company may have
two classes of agents who sell its insurance policies: (1) salaried employees who
keep definite hours and work under the control and supervision of the company; and
(2) registered representatives, who work on commission basis.
Under the first category, the relationship between the insurance company and its
agents is governed by the Contract of Employment and the provisions of the Labor
Code, while under the second category, the same is governed by the Contract of
Agency and the provisions of the Civil Code on the Agency. Disputes involving the
latter are cognizable by the regular courts.
WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the
Insurance Commission is SET ASIDE.
SO ORDERED.
Cruz, Davide, Jr. and Kapunan, JJ., concur.
Bellosillo, J,. is on leave.
FIRST DIVISION

Upon the termination of the agreement, the same was extended for another
year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1,
1990. The amount of coverage was increased to a maximum sum of P75,000.00 per
disability.[2]
During the period of his coverage, Ernani suffered a heart attack and was
confined at the Manila Medical Center (MMC) for one month beginning March 9,
1990. While her husband was in the hospital, respondent tried to claim the benefits
under the health care agreement. However, petitioner denied her claim saying that
the Health Care Agreement was void. According to petitioner, there was a
concealment regarding Ernanis medical history. Doctors at the MMC allegedly
discovered at the time of Ernanis confinement that he was hypertensive, diabetic
and asthmatic, contrary to his answer in the application form. Thus, respondent
paid the hospitalization expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a
physical therapist at home. Later, he was admitted at the Chinese General
Hospital. Due to financial difficulties, however, respondent brought her husband
home again. In the morning of April 13, 1990, Ernani had fever and was feeling very
weak. Respondent was constrained to bring him back to the Chinese General
Hospital where he died on the same day.

On July 24, 1990, respondent instituted with the Regional Trial Court of Manila,
Branch 44, an action for damages against petitioner and its president, Dr. Benito
Reverente, which was docketed as Civil Case No. 90-53795. She asked for
reimbursement of her expenses plus moral damages and attorneys fees. After trial,
the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the
plaintiff Julita Trinos, ordering:
1.
Defendants to pay and reimburse the medical and hospital coverage of the
late Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully
paid to plaintiff who paid the same;

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the
designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute
actual losses among a large group of persons bearing a similar risk;
and
5. In consideration of the insurers promise, the insured pays a premium.
[8]

2.
Defendants to pay the reduced amount of moral damages of P10,000.00 to
plaintiff;
3.
Defendants to pay the reduced amount of P10,000.00 as exemplary damages
to plaintiff;

Section 3 of the Insurance Code states that any contingent or unknown event,
whether past or future, which may damnify a person having an insurable interest
against him, may be insured against. Every person has an insurable interest in the
life and health of himself. Section 10 provides:

4.

Every person has an insurable interest in the life and health:

Defendants to pay attorneys fees of P20,000.00, plus costs of suit.

SO ORDERED.[3]

(1)

of himself, of his spouse and of his children;

On appeal, the Court of Appeals affirmed the decision of the trial court but
deleted all awards for damages and absolved petitioner Reverente. [4] Petitioners
motion for reconsideration was denied. [5]Hence, petitioner brought the instant
petition for review, raising the primary argument that a health care agreement is not
an insurance contract; hence the incontestability clause under the Insurance
Code[6]does not apply.

(2)

of any person on whom he depends wholly or in part for education

or support, or in whom he has a pecuniary interest;

(3)

of any person under a legal obligation to him for the payment of

money, respecting property or service, of which death or illness
might delay or prevent the performance; and

(4)

of any person upon whose life any estate or interest vested in him
depends.

Petitioner argues that the agreement grants living benefits, such as medical
check-ups and hospitalization which a member may immediately enjoy so long as he
is alive upon effectivity of the agreement until its expiration one-year
thereafter. Petitioner also points out that only medical and hospitalization benefits
are given under the agreement without any indemnification, unlike in an insurance
contract where the insured is indemnified for his loss. Moreover, since Health Care
Agreements are only for a period of one year, as compared to insurance contracts
which last longer,[7] petitioner argues that the incontestability clause does not apply,
as the same requires an effectivity period of at least two years. Petitioner further
argues that it is not an insurance company, which is governed by the Insurance
Commission, but a Health Maintenance Organization under the authority of the
Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event. An
insurance contract exists where the following elements concur:

In the case at bar, the insurable interest of respondents husband in obtaining

the health care agreement was his own health. The health care agreement was in
the nature of non-life insurance, which is primarily a contract of indemnity. [9] Once
the member incurs hospital, medical or any other expense arising from sickness,
injury or other stipulated contingent, the health care provider must pay for the same
to the extent agreed upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners
required respondents husband to sign an express authorization for any person,
organization or entity that has any record or knowledge of his health to furnish any
and all information relative to any hospitalization, consultation, treatment or any

other medical advice or examination.[10] Specifically, the Health Care Agreement

signed by respondents husband states:
We hereby declare and agree that all statement and answers contained herein and
in any addendum annexed to this application are full, complete and true and bind all
parties in interest under the Agreement herein applied for, that there shall be no
contract of health care coverage unless and until an Agreement is issued on this
application and the full Membership Fee according to the mode of payment applied
for is actually paid during the lifetime and good health of proposed Members; that
no information acquired by any Representative of PhilamCare shall be binding upon
PhilamCare unless set out in writing in the application; that any physician is, by
these presents, expressly authorized to disclose or give testimony at anytime
relative to any information acquired by him in his professional capacity upon any
question affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this application shall
be a ratification of any correction in or addition to this application as stated in the
space for Home Office Endorsement.[11] (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant
for authorization to inquire about the applicants medical history, thus:
I hereby authorize any person, organization, or entity that has any record or
knowledge of my health and/or that of __________ to give to the PhilamCare Health
Systems, Inc. any and all information relative to any hospitalization, consultation,
treatment or any other medical advice or examination. This authorization is in
connection with the application for health care coverage only. A photographic copy
of this authorization shall be as valid as the original.[12] (Underscoring ours)

inducing the acceptance of the risk, or its acceptance at a lower rate of premium,
and this is likewise the rule although the statement is material to the risk, if the
statement is obviously of the foregoing character, since in such case the insurer is
not justified in relying upon such statement, but is obligated to make further
inquiry. There is a clear distinction between such a case and one in which the
insured is fraudulently and intentionally states to be true, as a matter of expectation
or belief, that which he then knows, to be actually untrue, or the impossibility of
which is shown by the facts within his knowledge, since in such case the intent to
deceive the insurer is obvious and amounts to actual fraud.[15] (Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract. [16] Concealment as a defense for the health care
provider or insurer to avoid liability is an affirmative defense and the duty to
establish such defense by satisfactory and convincing evidence rests upon the
provider or insurer. In any case, with or without the authority to investigate,
petitioner is liable for claims made under the contract. Having assumed a
responsibility under the agreement, petitioner is bound to answer the same to the
extent agreed upon. In the end, the liability of the health care provider attaches
once the member is hospitalized for the disease or injury covered by the agreement
or whenever he avails of the covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, a concealment entitles the injured
party to rescind a contract of insurance. The right to rescind should be exercised
previous to the commencement of an action on the contract. [17] In this case, no
rescission was made. Besides, the cancellation of health care agreements as in
insurance policies require the concurrence of the following conditions:
1.

Petitioner cannot rely on the stipulation regarding Invalidation of agreement

which reads:
Failure to disclose or misrepresentation of any material information by the member
in the application or medical examination, whether intentional or unintentional, shall
automatically invalidate the Agreement from the very beginning and liability of
Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or
misrepresented information is deemed material if its revelation would have resulted
in the declination of the applicant by Philamcare or the assessment of a higher
Membership Fee for the benefit or benefits applied for.[13]
The answer assailed by petitioner was in response to the question relating to
the medical history of the applicant. This largely depends on opinion rather than
fact, especially coming from respondents husband who was not a medical
doctor. Where matters of opinion or judgment are called for, answers made in good
faith and without intent to deceive will not avoid a policy even though they are
untrue.[14]Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or
judgment of the insured will not avoid the policy if there is no actual fraud in

Prior notice of cancellation to insured;

2.
Notice must be based on the occurrence after effective date of the policy of
one or more of the grounds mentioned;
3.
Must be in writing, mailed or delivered to the insured at the address shown in
the policy;
4.
Must state the grounds relied upon provided in Section 64 of the Insurance
Code and upon request of insured, to furnish facts on which cancellation is based. [18]
None of the above pre-conditions was fulfilled in this case. When the terms of
insurance contract contain limitations on liability, courts should construe them in
such a way as to preclude the insurer from non-compliance with his obligation.
[19]
Being a contract of adhesion, the terms of an insurance contract are to be
construed strictly against the party which prepared the contract the insurer. [20] By
reason of the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly interpreted
against the insurer and liberally in favor of the insured, especially to avoid forfeiture.
[21]
This is equally applicable to Health Care Agreements. The phraseology used in
medical or hospital service contracts, such as the one at bar, must be liberally

construed in favor of the subscriber, and if doubtful or reasonably susceptible of two

interpretations the construction conferring coverage is to be adopted, and
exclusionary clauses of doubtful import should be strictly construed against the
provider.[22]
Anent the incontestability of the membership of respondents husband, we
quote with approval the following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health
Systems Inc. had twelve months from the date of issuance of the Agreement within
which to contest the membership of the patient if he had previous ailment of
asthma, and six months from the issuance of the agreement if the patient was sick
of diabetes or hypertension. The periods having expired, the defense of concealment
or misrepresentation no longer lie.[23]
Finally, petitioner alleges that respondent was not the legal wife of the
deceased member considering that at the time of their marriage, the deceased was
previously married to another woman who was still alive. The health care agreement
is in the nature of a contract of indemnity. Hence, payment should be made to the
party who incurred the expenses. It is not controverted that respondent paid all the
hospital and medical expenses. She is therefore entitled to reimbursement. The
records adequately prove the expenses incurred by respondent for the deceaseds
hospitalization, medication and the professional fees of the attending physicians. [24]
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed
decision of the Court of Appeals dated December 14, 1995 is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, and Kapunan, JJ., concur.

FIRST DIVISION
[G.R. No. 154514. July 28, 2005]
WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE
AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL
UNDERWRITING ASSOCIATION (BERMUDA) LTD., respondents.
DECISION
QUISUMBING, J.:

This petition for review assails the Decision[1] dated July 30, 2002 of the Court
of Appeals in CA-G.R. SP No. 60144, affirming the Decision[2] dated May 3, 2000 of
the Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that
there was no violation of the Insurance Code and the respondents do not need
license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and
indemnity coverage for its vessels from The Steamship Mutual Underwriting
Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and
Surety Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of
Entry and Acceptance.[3] Pioneer also issued receipts evidencing payments for the
coverage. When White Gold failed to fully pay its accounts, Steamship Mutual
refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of
sum of money to recover the latters unpaid balance. White Gold on the other hand,
filed a complaint before the Insurance Commission claiming that Steamship Mutual
violated Sections 186[4] and 187[5] of the Insurance Code, while Pioneer violated
Sections 299,[6] 300[7] and 301[8] in relation to Sections 302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no
need for Steamship Mutual to secure a license because it was not engaged in the
insurance business. It explained that Steamship Mutual was a Protection and
Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as
insurance agent and/or a broker for Steamship Mutual because Steamship Mutual
was not engaged in the insurance business. Moreover, Pioneer was already
licensed, hence, a separate license solely as agent/broker of Steamship Mutual was
already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In
its decision, the appellate court distinguished between P & I Clubs vis-vis conventional insurance. The appellate court also held that Pioneer merely acted
as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by
the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT
DOING BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS
TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT
NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE
PHILIPPINES.

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY
EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.

(a) making or proposing to make, as insurer, any insurance contract;

(b) making, or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or
activity of the surety;

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT
SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF
RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT
PIONEER AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT
PIONEER.[9]
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club,
engaged in the insurance business in the Philippines? (2) Does Pioneer need a
license as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual
admits it does not have a license to do business in the Philippines although Pioneer
is its resident agent. This relationship is reflected in the certifications issued by the
Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the
insurance business. To buttress its assertion, it cites the definition of a P & I Club
in Hyopsung Maritime Co., Ltd. v. Court of Appeals [10] as an association composed of
shipowners in general who band together for the specific purpose of providing
insurance cover on a mutual basis against liabilities incidental to shipowning that
the members incur in favor of third parties. It stresses that as a P & I Club,
Steamship Mutuals primary purpose is to solicit and provide protection and
indemnity coverage and for this purpose, it has engaged the services of Pioneer to
act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not
engaged in the insurance business in the Philippines. It is merely an association of
vessel owners who have come together to provide mutual protection against
liabilities incidental to shipowning.[11] Respondents aver Hyopsung is inapplicable in
this case because the issue inHyopsung was the jurisdiction of the court
over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an
insurance business or transacting an insurance business. These are:

(c) doing any kind of business, including a reinsurance business, specifically

recognized as constituting the doing of an insurance business within the
meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of
the foregoing in a manner designed to evade the provisions of this Code.
. . .
The same provision also provides, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions, or that no separate or
direct consideration is received therefor, shall not preclude the existence of an
insurance business.[12]
The test to determine if a contract is an insurance contract or not, depends on
the nature of the promise, the act required to be performed, and the exact nature of
the agreement in the light of the occurrence, contingency, or circumstances under
which the performance becomes requisite. It is not by what it is called.[13]
Basically, an insurance contract is a contract of indemnity. In it, one
undertakes for a consideration to indemnify another against loss, damage or liability
arising from an unknown or contingent event.[14]
In particular, a marine insurance undertakes to indemnify the assured against
marine losses, such as the losses incident to a marine adventure. [15] Section 99[16] of
the Insurance Code enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the
members are both the insurer and insured. In it, the members all contribute, by a
system of premiums or assessments, to the creation of a fund from which all losses
and liabilities are paid, and where the profits are divided among themselves, in
proportion to their interest.[17] Additionally, mutual insurance associations, or clubs,
provide three types of coverage, namely, protection and indemnity, war risks, and
defense costs.[18]
A P & I Club is a form of insurance against third party liability, where the
third party is anyone other than the P & I Club and the members. [19] By definition
then, Steamship Mutual as a P & I Club is a mutual insurance association engaged in
the marine insurance business.

The records reveal Steamship Mutual is doing business in the country albeit
without the requisite certificate of authority mandated by Section 187 [20] of the
Insurance Code. It maintains a resident agent in the Philippines to solicit insurance
and to collect payments in its behalf. We note that Steamship Mutual even renewed
its P & I Club cover until it was cancelled due to non-payment of the calls. Thus, to
continue doing business here, Steamship Mutual or through its agent Pioneer, must
secure a license from the Insurance Commission.

SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

Since a contract of insurance involves public interest, regulation by the State is

necessary. Thus, no insurer or insurance company is allowed to engage in the
insurance business without a license or a certificate of authority from the Insurance
Commission.[21]
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the
certificate of registration[22] issued by the Insurance Commission. It has been
licensed to do or transact insurance business by virtue of the certificate of
authority[23] issued by the same agency. However, a Certification from the
Commission states that Pioneer does not have a separate license to be an
agent/broker of Steamship Mutual.[24]
Although Pioneer is already licensed as an insurance company, it needs a
separate license to act as insurance agent for Steamship Mutual. Section 299 of the
Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the
solicitation or procurement of applications for insurance, or receive for services in
obtaining insurance, any commission or other compensation from any insurance
company doing business in the Philippines or any agent thereof, without first
procuring a license so to act from the Commissioner, which must be renewed
annually on the first day of January, or within six months thereafter. . .
Finally, White Gold seeks revocation of Pioneers certificate of authority and
removal of its directors and officers. Regrettably, we are not the forum for these
issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30,
2002 of the Court of Appeals affirming the Decision dated May 3, 2000 of the
Insurance Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual
Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety
Corporation are ORDERED to obtain licenses and to secure proper authorizations to
do business as insurer and insurance agent, respectively. The petitioners prayer for
the revocation of Pioneers Certificate of Authority and removal of its directors and
officers, is DENIED. Costs against respondents.

EN BANC
G.R. No. L-2294

May 25, 1951

FILIPINAS COMPAIA DE SEGUROS, petitioner,

vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc.,
after payment of corresponding premium, obtained from the petitioner ,Filipinas Cia.
de Seguros, fire policy No. 29333 in the sum of P1000,000, covering merchandise
contained in a building located at No. 711 Roman Street, Binondo Manila. On
February 27, 1942, or during the Japanese military occupation, the building and
insured merchandise were burned. In due time the respondent submitted to the
petitioner its claim under the policy. The salvage goods were sold at public auction
and, after deducting their value, the total loss suffered by the respondent was fixed
at P92,650. The petitioner refused to pay the claim on the ground that the policy in
favor of the respondent had ceased to be in force on the date the United States
declared war against Germany, the respondent Corporation (though organized under
and by virtue of the laws of the Philippines) being controlled by the German subjects
and the petitioner being a company under American jurisdiction when said policy
was issued on October 1, 1941. The petitioner, however, in pursuance of the order of
the Director of Bureau of Financing, Philippine Executive Commission, dated April 9,
1943, paid to the respondent the sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in the Court of First Instance of
Manila for the purpose of recovering from the respondent the sum of P92,650 above
mentioned. The theory of the petitioner is that the insured merchandise were burned
up after the policy issued in 1941 in favor of the respondent corporation has ceased
to be effective because of the outbreak of the war between the United States and
Germany on December 10, 1941, and that the payment made by the petitioner to
the respondent corporation during the Japanese military occupation was under

pressure. After trial, the Court of First Instance of Manila dismissed the action
without pronouncement as to costs. Upon appeal to the Court of Appeals, the
judgment of the Court of First Instance of Manila was affirmed, with costs. The case
is now before us on appeal by certiorari from the decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner that the respondent
corporation became an enemy when the United States declared war against
Germany, relying on English and American cases which held that a corporation is a
citizen of the country or state by and under the laws of which it was created or
organized. It rejected the theory that nationality of private corporation is determine
by the character or citizenship of its controlling stockholders.
There is no question that majority of the stockholders of the respondent corporation
were German subjects. This being so, we have to rule that said respondent became
an enemy corporation upon the outbreak of the war between the United States and
Germany. The English and American cases relied upon by the Court of Appeals have
lost their force in view of the latest decision of the Supreme Court of the United
States in Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92
Law. Ed. Advance Opinions, No. 4, pp. 148-153, in which the controls test has been
adopted. In "Enemy Corporation" by Martin Domke, a paper presented to the Second
International Conference of the Legal Profession held at the Hague (Netherlands) in
August. 1948 the following enlightening passages appear:
Since World War I, the determination of enemy nationality of corporations
has been discussion in many countries, belligerent and neutral. A
corporation was subject to enemy legislation when it was controlled by
enemies, namely managed under the influence of individuals or
corporations, themselves considered as enemies. It was the English courts
which first the Daimler case applied this new concept of "piercing the
corporate veil," which was adopted by the peace of Treaties of 1919 and
the Mixed Arbitral established after the First World War.
The United States of America did not adopt the control test during the First
World War. Courts refused to recognized the concept whereby Americanregistered corporations could be considered as enemies and thus subject to
domestic legislation and administrative measures regarding enemy
property.
World War II revived the problem again. It was known that German and
other enemy interests were cloaked by domestic corporation structure. It
was not only by legal ownership of shares that a material influence could
be exercised on the management of the corporation but also by long term
loans and other factual situations. For that reason, legislation on enemy
property enacted in various countries during World War II adopted by
statutory provisions to the control test and determined, to various degrees,
the incidents of control. Court decisions were rendered on the basis of such
newly enacted statutory provisions in determining enemy character of
domestic corporation.

The United States did not, in the amendments of the Trading with the
Enemy Act during the last war, include as did other legislations the
applications of the control test and again, as in World War I, courts refused
to apply this concept whereby the enemy character of an American or
neutral-registered corporation is determined by the enemy nationality of
the controlling stockholders.
Measures of blocking foreign funds, the so called freezing regulations, and
other administrative practice in the treatment of foreign-owned property in
the United States allowed to large degree the determination of enemy
interest in domestic corporations and thus the application of the control
test. Court decisions sanctioned such administrative practice enacted under
the First War Powers Act of 1941, and more recently, on December 8, 1947,
the Supreme Court of the United States definitely approved of the control
theory. In Clark vs. Uebersee Finanz Korporation, A. G., dealing with a Swiss
corporation allegedly controlled by German interest, the Court: "The
property of all foreign interest was placed within the reach of the vesting
power (of the Alien Property Custodian) not to appropriate friendly or
neutral assets but to reach enemy interest which masqueraded under those
innocent fronts. . . . The power of seizure and vesting was extended to all
property of any foreign country or national so that no innocent appearing
device could become a Trojan horse."
It becomes unnecessary, therefore, to dwell at length on the authorities cited in
support of the appealed decision. However, we may add that, in Haw Pia vs. China
Banking Corporation,* 45 Off Gaz., (Supp. 9) 299, we already held that China
Banking Corporation came within the meaning of the word "enemy" as used in the
Trading with the Enemy Acts of civilized countries not only because it was
incorporated under the laws of an enemy country but because it was controlled by
enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that
"anyone except a public enemy may be insured." It stands to reason that an
insurance policy ceases to be allowable as soon as an insured becomes a public
enemy.
Effect of war, generally. All intercourse between citizens of belligerent
powers which is inconsistent with a state of war is prohibited by the law of
nations. Such prohibition includes all negotiations, commerce, or trading
with the enemy; all acts which will increase, or tend to increase, its income
or resources; all acts of voluntary submission to it; or receiving its
protection; also all acts concerning the transmission of money or goods;
and all contracts relating thereto are thereby nullified. It further prohibits
insurance upon trade with or by the enemy, upon the life or lives of aliens
engaged in service with the enemy; this for the reason that the subjects of
one country cannot be permitted to lend their assistance to protect by
insurance the commerce or property of belligerent, alien subjects, or to do
anything detrimental too their country's interest. The purpose of war is to
cripple the power and exhaust the resources of the enemy, and it is

inconsistent that one country should destroy its enemy's property and
repay in insurance the value of what has been so destroyed, or that it
should in such manner increase the resources of the enemy, or render it
aid, and the commencement of war determines, for like reasons, all trading
intercourse with the enemy, which prior thereto may have been lawful. All
individuals therefore, who compose the belligerent powers, exist, as to each
other, in a state of utter exclusion, and are public enemies. (6 Couch, Cyc.
of Ins. Law, pp. 5352-5353.)

only the equivalent, in actual Philippines currency of P92,650 paid on April 19, 1943,
in accordance with the rate fixed in the Ballantyne scale.

In the case of an ordinary fire policy, which grants insurance only from
year, or for some other specified term it is plain that when the parties
become alien enemies, the contractual tie is broken and the contractual
rights of the parties, so far as not vested. lost. (Vance, the Law on
Insurance, Sec. 44, p. 112.)

Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo, JJ., concur.

The respondent having become an enemy corporation on December 10, 1941, the
insurance policy issued in its favor on October 1, 1941, by the petitioner (a
Philippine corporation) had ceased to be valid and enforcible, and since the insured
goods were burned after December 10, 1941, and during the war, the respondent
was not entitled to any indemnity under said policy from the petitioner. However,
elementary rules of justice (in the absence of specific provision in the Insurance
Law) require that the premium paid by the respondent for the period covered by its
policy from December 11, 1941, should be returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main issue hinges on the
question of whether the policy in question became null and void upon the
declaration of war between the United States and Germany on December 10, 1941,
and its judgment in favor of the respondent corporation was predicated on its
conclusion that the policy did not cease to be in force. The Court of Appeals
necessarily assumed that, even if the payment by the petitioner to the respondent
was involuntary, its action is not tenable in view of the ruling on the validity of the
policy. As a matter of fact, the Court of Appeals held that "any intimidation resorted
to by the appellee was not unjust but the exercise of its lawful right to claim for and
received the payment of the insurance policy," and that the ruling of the Bureau of
Financing to the effect that "the appellee was entitled to payment from the appellant
was, well founded." Factually, there can be no doubt that the Director of the Bureau
of Financing, in ordering the petitioner to pay the claim of the respondent, merely
obeyed the instruction of the Japanese Military Administration, as may be seen from
the following: "In view of the findings and conclusion of this office contained in its
decision on Administrative Case dated February 9, 1943 copy of which was sent to
your office and the concurrence therein of the Financial Department of the Japanese
Military Administration, and following the instruction of said authority, you are
hereby ordered to pay the claim of Messrs. Christern, Huenefeld & Co., Inc. The
payment of said claim, however, should be made by means of crossed check."
(Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the respondent under
the circumstances on this case. However, the petitioner will be entitled to recover

Wherefore, the appealed decision is hereby reversed and the respondent corporation
is ordered to pay to the petitioner the sum of P77,208.33, Philippine currency, less
the amount of the premium, in Philippine currency, that should be returned by the
petitioner for the unexpired term of the policy in question, beginning December 11,
1941. Without costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-14300

January 19, 1920

SAN MIGUEL BREWERY, ETC., plaintiff-appellee,

vs.
LAW UNION AND ROCK INSURANCE CO., (LTD.) ET AL., defendants-appellees.
HENRY HARDING, defendant-appellant.
Crossfield and O'Brien for appellant Harding.
Lawrence and Ross for appellee Law Union etc. Ins. Co.
Sanz and Luzuriaga for appellee "Filipinas, Compaia de Seguros."
No appearance for the other appellee.
STREET, J.:
This action was begun on October 8, 1917, in the Court of First Instance of the city of
Manila by the plaintiff, the San Miguel Brewery, for the purpose of recovering upon
two policies of insurance underwritten respectively by Law Union and Rock
Insurance Company (Ltd.), and the "Filipinas" Compania de Seguros, for the sum of
P7,500 each, insuring certain property which has been destroyed by fire. The
plaintiff, the San Miguel Brewery, is named as the party assured in the two policies
referred to, but it is alleged in the complaint that said company was in reality
interested in the property which was the subject of insurance in the character of a
mortgage creditor only, and that the owner of said property upon the date the
policies were issued was one D. P. Dunn who was later succeeded as owner by one
Henry Harding. Accordingly said Harding was made a defendant, as a person
interested in the subject of the litigation.
The prayer of the complaint is that judgment be entered in favor of the plaintiff
against the two companies named for the sum of P15,000, with interest and costs,
and further that upon satisfaction of the balance of P4,505.30 due to the plaintiff

upon the mortgage debt, and upon the cancellation of the mortgage, the plaintiff be
absolved from liability to the defendants or any of them. The peculiar form of the
latter part of the prayer is evidently due to the design of the plaintiff to lay a
foundation for Harding to recover the difference between the plaintiff's credit and
the amount for which the property was insured. Accordingly, as was to be expected,
Harding answered, admitting the material allegations of the complaint and claiming
for himself the right to recover the difference between the plaintiff's mortgage credit
and the face value of the policies. The two insurance companies also answered,
admitting in effect their liability to the San Miguel Brewery to the extent of its
mortgage credit, but denying liability to Harding on the ground that under the
contracts of insurance the liability of the insurance companies was limited to the
insurable interest of the plaintiff therein. Soon after the action was begun the
insurance companies effected a settlement with the San Miguel Brewery by paying
the full amount of the credit claimed by it, with the result that the litigation as
between the original plaintiff and the two insurance companies came to an end,
leaving the action to be prosecuted to final judgement by the defendant Harding
with respect to the balance claimed to be due to him upon the policies.
Upon hearing the evidence the trial judge came to the conclusion that Harding had
no right of action whatever against the companies and absolved them from liability
without special finding as to costs. From this decision the said Henry Harding has
appealed.
The two insurance companies who are named as defendants do not dispute their
liability to the San Miguel Brewery, to the extent already stated, and the only
question here under discussion is that of the liability of the insurance companies to
Harding. It is therefore necessary to take account of such facts only as bear upon
this aspect of the case.
In this connection it appears that on January 12, 1916, D. P. Dunn, then the owner of
the property to which the insurance relates, mortgaged the same to the San Miguel
Brewery to secure a debt of P10,000. In the contract of mortgage Dunn agreed to
keep the property insured at his expense to the full amount of its value in companies
to be selected by the Brewery Company and authorized the latter in case of loss to
receive the proceeds of the insurance and to retain such part as might be necessary
to cover the mortgage debt. At the same time, in order more conveniently to
accomplish the end in view, Dunn authorized and requested the Brewery Company
to effect said insurance itself. Accordingly on the same date Antonio Brias, general
manager of the Brewery, made a verbal application to the Law Union and Rock
Insurance Company for insurance to the extent of P15,000 upon said property. In
reply to a question of the company's agent as to whether the Brewery was the
owner of the property, he stated that the company was interested only as a
mortgagee. No information was asked as to who was the owner of the property, and
no information upon this point was given.
It seems that the insurance company to whom this application was directed did not
want to carry more than one-half the risk. It therefore issued its own policy for
P7,500 and procured a policy in a like amount to be issued by the
"Filipinas" Compania de Seguros. Both policies were issued in the name of the San

Miguel Brewery as the assured, and contained no reference to any other interest in
the property. Both policies contain the usual clause requiring assignments to be
approved and noted on the policy. The premiums were paid by the Brewery and
charged to Dunn. A year later the policies were renewed, without change, the
renewal premiums being paid by the Brewery, supposedly for the account of the
owner. In the month of March of the year 1917 Dunn sold the insured property to the
defendant Henry Harding, but not assignment of the insurance, or of the insurance
policies, was at any time made to him.
We agree with the trial court that no cause of action in Henry Harding against the
insurance companies is show. He is not a party to the contracts of insurance and
cannot directly maintain an action thereon. (Uy Tam and Uy Yetvs. Leonard, 30 Phil.
Rep., 471.) His claim is merely of an equitable and subsidiary nature and must be
made effective, if at all, through the San Miguel Brewery in whose name the
contracts are written. Now the Brewery, as mortgagee of the insured property,
undoubtedly had an insurable interest therein; but it could not, in any event, recover
upon these policies an amount in excess of its mortgage credit. In this connection it
will be remembered that Antonio Brias, upon making application for the insurance,
informed the company with which the insurance was placed that the Brewery was
interested only as a mortgagee. It would, therefore, be impossible for the Brewery
mortgage on the insured property.
This conclusion is not only deducible from the principles governing the operation and
effect of insurance contracts in general but the point is clearly covered by the
express provisions of sections 16 and 50 of the Insurance Act (Act No. 2427). In the
first of the sections cited, it is declared that "the measure of an insurable interest in
property is the extent to which the insured might be damnified by loss or injury
thereof" (sec. 16); while in the other it is stated that "the insurance shall be applied
exclusively to the proper interest of the person in whose name it is made unless
otherwise specified in the policy" (sec. 50).
These provisions would have been fatal to any attempt at recovery even by D. P.
Dunn, if the ownership of the property had continued in him up to the time of the
loss; and as regards Harding, an additional insuperable obstacle is found in the fact
that the ownership of the property had been charged, prior to the loss, without any
corresponding change having been effected in the policy of insurance. In section 19
of the Insurance Act we find it stated that "a change of interest in any part of a thing
insured unaccompanied by a corresponding change of interest in the insurance,
suspends the insurance to an equivalent extent, until the interest in the thing and
the interest in the insurance are vested in the same person." Again in section 55 it is
declared that "the mere transfer of a thing insured does not transfer the policy, but
suspends it until the same person becomes the owner of both the policy and the
thing insured."
Undoubtedly these policies of insurance might have been so framed as to have been
"payable to the Sane Miguel Brewery, mortgagee, as its interest may appear,
remainder to whomsoever, during the continuance of the risk, may become the
owner of the interest insured." (Sec 54, Act No. 2427.) Such a clause would have
proved an intention to insure the entire interest in the property, not merely the

insurable interest of the San Miguel Brewery, and would have shown exactly to
whom the money, in case of loss, should be paid. But the policies are not so written.
It is easy to collect from the facts stated in the decision of the trial judge, no less
than from the testimony of Brias, the manager of the San Miguel Brewery, that, as
the insurance was written up, the obligation of the insurance companies was
different from that contemplated by Dunn, at whose request the insurance was
written, and Brias. In the contract of mortgage Dunn had agreed, at his own
expense, to insure the mortgaged property for its full value and to indorse the
policies in such manner as to authorize the Brewery Company to receive the
proceeds in case of loss and to retain such part thereof as might be necessary to
satisfy the remainder then due upon the mortgage debt. Instead, however, of
effecting the insurance himself Dunn authorized and requested the Brewery
Company to procure insurance on the property in the amount of P15,000 at Dunn's
expense. The Brewery Company undertook to carry this mandate into effect, and it
of course became its duty to procure insurance of the character contemplated, that
is, to have the policies so written as to protect not only the insurable interest of the
Brewery, but also the owner. Brias seems to have supposed that the policies as
written had this effect, but in this he was mistaken. It was certainly a hardship on
the owner to be required to pay the premiums upon P15,000 of insurance when he
was receiving no benefit whatever except in protection to the extent of his
indebtedness to the Brewery. The blame for the situation thus created rests,
however, with the Brewery rather than with the insurance companies, and there is
nothing in the record to indicate that the insurance companies were requested to
write insurance upon the insurable interest of the owner or intended to make
themselves liable to that extent.
If during the negotiations which resulted in the writing of this insurance, it had been
agreed between the contracting parties that the insurance should be so written as to
protect not only the interest of the mortgagee but also the residuary interest of the
owner, and the policies had been, by inadvertence, ignorance, or mistake written in
the form in which they were issued, a court would have the power to reform the
contracts and give effect to them in the sense in which the parties intended to be
bound. But in order to justify this, it must be made clearly to appear that the minds
of the contracting parties did actually meet in agreement and that they labored
under some mutual error or mistake in respect to the expression of their purpose.
Thus, in Bailey vs. American Central Insurance Co. (13 Fed., 250), it appeared that a
mortgage desiring to insure his own insurable interest only, correctly stated his
interest, and asked that the same be insured. The insurance company agreed to
accept the risk, but the policy was issued in the name of the owner, because of the
mistaken belief of the company's agent that the law required it to be so drawn. It
was held that a court of equity had the power, at the suit of the mortgage, to reform
the instrument and give judgment in his favor for the loss thereunder, although it
had been exactly as it was. Said the court: "If the applicant correctly states his
interest and distinctly asks for an insurance thereon, and the agent of the insurer
agrees to comply with his request, and assumes to decide upon the form of the
policy to be written for that purpose, and by mistake of law adopts the wrong form, a
court of equity will reform the instrument so as to make it insurance upon the
interest named." (See also Fink vs. Queens Insurance Co., 24 Fed., 318;

Esch vs. Home Insurance Co., 78 Iowa, 334; 16 Am. St. Rep., 443; Woodbury Savings
etc., Co., vs.Charter Oak Insurance Co., 31 Conn., 517; Balen vs. Hanover Fire
Insurance Co., 67 Mich., 179.)
Similarly, in cases where the mortgage is by mistake described as owner, the court
may grant reformation and permit a recovery by the mortgage in his character as
such. (Dalton vs. Milwaukee etc. Insurance Co., 126 Iowa, 377; Spare vs. Home
Mutual Insurance Co., 17 Fed., 568.) In Thompson vs. Phoenix Insurance Co. (136
U.S., 287; 34 L. 3d., 408), it appeared that one Kearney made application to an
insurance company for insurance on certain property in his hands as receiver and it
was understood between him and the company's agent that, in case of loss, the
proceeds of the policy should accrue to him and his successors as receiver and to
others whom it might concern. However, the policy, as issued, was so worded as to
be payable only to him as receiver. In an action brought on the policy by a successor
of Kearney, it was alleged that the making of the contract in this form was due to
inadvertence, accident, and mistake upon the part of both Kearney and the
company.
Said the court:
If by inadvertence, accident, or mistake the terms of the contract were not
fully set forth in the policy, the plaintiff is entitled to have it reformed.
In another case the same court said:
We have before us a contract from which by mistake, material stipulations have
been omitted, whereby the true intent and meaning of the parties are not fully or
accurately expressed. There was a definite concluded agreement as to insurance,
which, in point of time, preceded the preparation and delivery of the policy, and this
is demonstrated by legal and exact evidence, which removes all doubt as to the
sense and undertaking of the parties. In the agreement there has been a mutual
mistake, caused chiefly by that contracting party who now seeks to limit the
insurance to an interest in the property less than that agreed to be insured. The
written agreement did not effect that which the parties intended. That a court of
equity can afford relief in such a case, is, we think, well settled by the authorities.
(Smell vs. Atlantic, etc., Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.)
But to justify the reformation of a contract, the proof must be of the most
satisfactory character, and it must clearly appear that the contract failed to express
the real agreement between the parties. (Philippine Sugar Estates Development
Company vs. Government of the Philippine Islands, 62 L. ed.,
1177, reversing Government of Philippine Island vs. Philippine Sugar Estates
Development Co., 30 Phil. Rep., 27.)
In the case now before us the proof is entirely insufficient to authorize the
application of the doctrine state in the foregoing cases, for it is by means clear from
the testimony of Brias and none other was offered that the parties intended for

the policy to cover the risk of the owner in addition to that of the mortgagee. It
results that the defendant Harding is not entitled to relief in any aspect of the case.
The judgment is therefore affirmed, with costs against the appellant. So ordered.
Arellano, C.J., Johnson, Araullo, Malcolm and Avancea, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

Loss if any, payable to the Philippine National Bank as their interest may
appear, subject to the terms, conditions and warranties of this policy (Exh.
A).

EN BANC
G.R. No. L-15184

May 31, 1963

SAURA IMPORT & EXPORT CO., INC., plaintiff-appellant,

vs.
PHILIPPINE INTERNATIONAL SURETY CO., INC., and PHILIPPINE NATIONAL
BANK, defendants-appellees.
Saura, Magno & Associates for plaintiff-appellant.
Tolentino, Garcia and D. R. Cruz for defendant-appellee Philippine International
Surety Co., Inc.
Ramon B. de los Reyes and Antonio P. Cruz for defendant-appellee Philippine
National Bank.
PAREDES, J.:
Instant case was certified by the Court of Appeals to Us, it appearing that the issues
involved are purely of law.
On December 26, 1952, the Saura Import & Export Co Inc., mortgaged to the Phil.
National Bank, a parcel of land covered by T.C.T. No. 40445 of the Registry of Deeds
of Davao, issued in its name, to secure the payment of promissory note of
P27,000.00 (Exhs. P, B-2). On April 30, 1953, the mortgage was amended to
guarantee an increased amount, bringing the total mortgaged debt to P37,000.00
(Exhs. P-2, B-3). The provisions of the mortgaged contact, pertinent to the resolution
of the present case, provide as follows
2. . . . he shall insure the mortgaged property at all times against fire and
earthquake for an amount and with such company satisfactory to the
Mortgagee, indorsing to the latter the corresponding policies; he shall keep
the mortgaged property in good condition, making repairs and protecting
walls that may be necessary; . . .
xxx

xxx

Erected on the land mortgaged, was a building of strong materials owned by the
mortgagor Saura Import & Export Co., Inc., which had always been covered by
insurance, many years prior to the mortgage contract. Pursuant to the requirement,
Saura insured the building and its contents with the Philippine International Surety,
an insurance firm acceptable to mortgagee Bank, for P29,000.00 against fire for the
period of one year from October 2, 1954. As required therefor, the insurance policy
was endorsed to the mortgagee PNB, in a Memo which states

xxx

The policy was delivered to the mortgagee Bank by Saura. On October 15, 1954,
barely thirteen (13) days after the issuance of the fire insurance policy (October 2,
1954), the insurer cancelled the same, effective as of the date of issue (Exh. A-2).
Notice of the cancellation was given to appellee bank in writing, sent by Registered
Mail and personally addressed to Fortunato Domingo, Branch Manager of the
appellee Bank's Davao Branch, and was received by the Bank on November 8, 1954.
On April 6, 1955, the building and its contents, worth P40,685.69 were burned. On
April 11, 1955, Saura filed a claim with the Insurer and mortgagee Bank. Upon the
presentation of notice of loss with the PNB, Saura learned for the first time that the
policy had previously been cancelled on October 2, 1954, by the insurer, when
Saura's folder in the Bank's filed was opened and the notice of cancellation (original
and duplicate) sent by the Insurer to the Bank, was found. Upon refusal of the
Insurer Philippine International Surety to pay the amount of the insurance, Civil Case
No. 26847 was filed with the Manila CFI against the Insurer, and the PNB was later
included as party defendant, after it had refused to prosecute the case jointly with
Saura Import & Export Co., Inc.
At the trial, it was established that neither the Insurer nor the mortgagee Bank
informed the plaintiff Saura of the cancellation of the policy. On April 30, 1957, the
court a quo rendered the following judgment
. . . IN VIEW WHEREOF, complaint dismissed; costs against the plaintiff; but
as there is no proof on the counterclaim of the Philippines International
Surety, the same is also dismissed.
Wherefore, the parties respectfully pray that the foregoing stipulation of
facts be admitted and approved by this Honorable Court, without prejudice
to the parties adducing other evidence to prove their case not covered by
this stipulation of facts. 1wph1.t
A motion to reconsider the above judgment, seasonably presented on May 14, 1957,
was subsequently denied. The decision rendered and the resolution denying the
motion for reconsideration constitute the subject of the instant appeal by plaintiff
Saura on the three alleged errors, which converge on the correctness of the ruling,
wholly dismissing the complaint absolving both the insurance company and the
bank from liability.

In the determination of liabilities of the parties herein, let us look into the general
principles of insurance, in matters of cancellations of policy by the insurer. Fire
insurance policies and other contracts of insurance upon property, in addition to the
common provision for cancellation of the policy upon request of the insured,
generally provide for cancellation by the insurer by notice to the insured for a
prescribed period, which is usually 5 days, and the return of the unearned portion of
the premium paid by the insured, such provision for cancellation upon notice being
authorized by statutes in some jurisdiction, either specifically or as a provision of an
adopted standard form of policy. The purpose of provisions or stipulations for notice
to the insured, is to prevent the cancellation of the policy, without allowing the
insured ample opportunity to negotiate for other insurance in its stead. The form
and sufficiency of a notice of cancellation is determined by policy provisions. In
order to form the basis for the cancellation of a policy, notice to the insured n not be
in any particular form, in the absence of a statute or policy provision prescribing
such form, and it is sufficient, so long as it positively and unequivocally indicates to
the insured, that it is the intention of the company that the policy shall cease to be
binding. Where the policy contains no provisions that a certain number of days
notice shall be given, a reasonable notice and opportunity to obtain other insurance
must be given. Actual personal notice to the insured is essential to a cancellation
under a provision for cancellation by notice. The actual receipt by the insured of a
notice of cancellation is universally recognized as a condition precedent to a
cancellation of the policy by the insurer, and consequently a letter containing notice
of cancellation which is mailed by the insurer but not received by the insured, is
ineffective as cancellation (29 Am. Jur. pp. 732-741).
The policy in question (Exh. A), does not provide for the notice, its form or period.
The Insurance Law, Act No. 2427, does not likewise provide for such notice. This
being the case, it devolves upon the Court to apply the generally accepted principles
of insurance, regarding cancellation of the insurance policy by the insurer. From
what has been heretofore stated, actual notice of cancellation in a clear and
unequivocal manner, preferably in writing, in view of the importance of an insurance
contract, should be given by the insurer to the insured, so that the latter might be
given an opportunity to obtain other insurance for his own protection. The notice
should be personal to the insured and not to and/or through any unauthorized
person by the policy. In the case at bar, the defendant insurance company, must
have realized the paramount importance of sending a notice of cancellation, when it
sent the notice of cancellation of the policy to the defendant bank (as mortgagee),
but not to the insured with which it (insurance company) had direct dealing. It was
the primary duty of the defendant-appellee insurance company to notify the insured,
but it did not. It should be stated that the house and its contents were burned on
April 6, 1955, at the time when the policy was enforced (October 2, 1954 to October
2, 1955); and that under the facts, as found by the trial court, to which We are
bound, it is evident that both the insurance company and the appellee bank failed,
wittingly or unwittingly, to notify the insured appellant Saura of the cancellation
made.

Of course, the defendant insurance company contends that it gave notice to the
defendant-appellee bank as mortgagee of the property, and that was already a
substantial compliance with its duty to notify the insured of the cancellation of the
policy. But notice to the bank, as far appellant herein is concerned, is not effective
notice.
If a mortgage or lien exists against the property insured, and the policy
contains a clause stating that loss, if any, shall be payable to such
mortgagee or the holder of such lien as interest may appear, notice of
cancellation to the mortgagee or lienholder alone is ineffective as a
cancellation of the policy to the owner of the property. (Connecticut Ins. Co.
v. Caumisar, 218 Ky. 378, 391 SW 776, cited in 29 Am. Jur. p. 743).
Upon authority of the above case, therefore, the liability of the insurance company
becomes a fact.
It may be argued that in the appeal brief of appellant, no error has been assigned
against the insurance company and no prayer is found therein asking that it be
made liable. It must be noted, however, that the case was dismissed the lower court
and the main object of the appeal is to secure a reversal of the said judgment. This
Court is clothed with ample authority to review matters, even if they are not
assigned as errors in the appeal, if it finds that their consideration is necessary in
arriving at a just decision of the case. Thus it was held:
While an assignment of error which is required by law or rule of court has
been held essential to appellate review, only those assigned will be
considered, there are a number of cases which appear to accord to the
appellate court a broad discretionary power to waive the lack of proper
assignment of errors and consider errors not assigned. And an unassigned
error closely related to an error properly assigned, or upon which the
determination of the question raised by the error properly assigned is
dependent, will be considered by the appellate court notwithstanding the
failure to assign it as error. (Hernandez v. Andal, 78 Phil. 198-199).
Although assigned errors apparently appear to be directed against the appellee bank
alone, they in essence, seek a reversal of the decision on dismissal, entered by the
lower court, which in the main has for its purpose the finding of liability on the
policy. In the course of our examination of the records of the case, the decision and
the errors assigned, We found that liability attached principally the insurance
company, for its failure to give notice of the cancellation of the policy to herein
appellant itself.
Because of the conclusions reached, We find it unnecessary to discuss the errors
assigned against appellee bank.
WHEREFORE, the decision appealed from is hereby reversed, and another is entered,
condemning the defendant-appellee Philippine International Surety Co., Inc., to pay

Saura Import & Export Co., Inc., appellant herein, the sum of P29,000.00, the
amount involved in Policy No. 429, subject-matter of the instant case. Without costs.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Dizon,
Regala and Makalintal, JJ., concur.
Labrador, J., took no part.

the defendant be ordered to pay to plaintiff the difference between the alleged
indebtedness of plaintiff and the sum received by defendant from the
aforementioned insurance company, plus the sum allegedly paid to defendant as
interest on the alleged indebtedness.

Republic of the Philippines

SUPREME COURT
Manila

On December 19, 1952, defendant filed her answer setting up as special defense
that the transaction entered into between the plaintiff and defendant is one of sale
with option to repurchase but that the period for repurchase had expired without

EN BANC

plaintiff having returned the price agreed upon as a result of which the ownership of
the property had become consolidated in the defendant. Defendant also set up

November 28, 1955

certain counterclaims which involve a total amount of P4,900.

G.R. No. L-7667

On April 7, 1953, the case was set for trial on the merits, but because of several

CHERIE PALILEO, plaintiff-appellee,

postponements asked by the parties, the same has to be set anew for trial on

vs.

January 12, 1954. On this date, neither the defendant nor her counsel appeared,

BEATRIZ COSIO, defendant-appellant.

even if the latter had been notified of the postponement almost a month earlier, and
so the court received the evidence of the plaintiff. On January 18, 1954, the court,

Claro M. Recto for appellant.

Bengson, Villegas, Jr. and Villar for appellee.

BAUTISTA ANGELO, J.:

Plaintiff filed a complaint against defendant in the Court of First Instance of Manila
praying that (1) the transaction entered into between them on December 18, 1951
be declared as one of loan, and the document executed covering the transaction as
one of equitable mortgage to secure the payment of said loan; (2) the defendant be
ordered to credit to the plaintiff with the necessary amount from the sum received
by the defendant from the Associated Insurance & Surety Co., Inc. and to apply the
same to the payment of plaintiff's obligation thus considering it as fully paid; and (3)

having in view the evidence presented, rendered judgment granting the relief
prayed for in the complaint.

On February 2, 1954, the original counsel for the defendant was substituted and the
new counsel immediately moved that the judgment be set aside on the ground that,
due to mistake or excusable negligence, defendant was unable to present her
evidence and the decision was contrary to law, and this motion having been denied,
defendant took the present appeal.

The important issue to be determined in this appeal is whether the lower court
committed a grave abuse of discretion in not reopening the case to give defendant

an opportunity to present her evidence considering that the failure of her original

when the case was called for trial." These reasons, it is intimated, constitute

counsel to appear was due to mistake or execusable negligence which ordinary

excusable negligence which ordinary prudence could not have guarded against and

prudence could not have guarded against.

should have been considered by the trial court as sufficient justification to grant the
petition of defendant for a rehearing.

The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February
11, 1953, said counsel showed interest in the early disposal of this case by moving

It is a well-settled rule that the granting of a motion to set aside a judgment or order

the court to have it set for trial. The first date set was April 7, 1953, but no hearing

on the ground of mistake or excusable negligence is addressed to the sound

was had on that date because plaintiff had moved to postpone it. The case was next

discretion of the court (see Coombs vs. Santos, 24 Phil., 446; Daipan vs. Sigabu, 25,

set for hearing on April 28, 1953, but on motion again of plaintiff, the hearing was

Phil., 184). And an order issued in the exercise of such discretion is ordinarily not to

transferred to November 6, 1953. Then, upon petition of defendant, the trial had to

be disturbed unless it is shown that the court has gravely abused such discretion.

be moved to December 15, 1953, and because Atty. Guerrero could not appear on

(See Tell vs. Tell, 48 Phil., 70; Macke vs. Camps, 5 Phil., 185; Calvo vs. De Gutierrez,

said date because of a case he had in Cebu City, the hearing was postponed to

4 Phil., 203; Manzanares vs.Moreta, 38 Phil., 821; Salva vs. Palacio and Leuterio, 90

January 18, 1954.

Phil., 731.) In denying the motion for reopening the trial court said: "After going over
the same arguments, this Court is of the opinion, and so holds that the decision of

And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty.
Guerrero was appointed Undersecretary of Foreign Affairs. It is now contended that
the appointment was so sudden and unexpected that Atty. Guerrero, after taking his
oath, was unable to wind up his private cases or make any preparation at all. It is

this Court of January 18, 1954 should not be disturbed." Considering the stature,
ability and experience of counsel Leon Ma. Guerrero, and the fact that he was given
almost one month notice before the date set for trial, we are persuaded to conclude
that the trial court did not abuse its discretion in refusing to reconsider its decision.

averred that "The days that followed his appointment were very busy days for
defendant's former counsel. There was an immediate need for clearing the backlog

Coming now to the merits of the case, we note that the lower court made the

of official business, including the reorganization of the Department of Foreign Affairs

following findings: On December 18, 1951, plaintiff obtained from defendant a loan

and our Foreign Service, and more importantly, he had to assist the Secretary of

in the sum of P12,000 subject to the following conditions: (a) that plaintiff shall pay

Foreign Affairs in negotiations of national importance like the Japanese reparations,

to defendant an interest in the amount of P250 a month; (b) that defendant shall

and the revision of the trade agreement with the United States, that, Atty. Guerrero

deduct from the loan certain obligations of plaintiff to third persons amounting to

had to work as much as fourteen hours daily . . . Because of all these unavoidable

P4,550, plus the sum of P250 as interest for the first month; and (c) that after

confusion that followed in the wake of Atty. Guerrero's sudden and unexpected

making the above deductions, defendant shall deliver to plaintiff only the balance of

appointment, the trial of this case scheduled for January 18, 1954 escaped his

the loan of P12,000.

memory, and consequently, Atty. Guerrero and the defendant were unable to appear

Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a

months as interest on the sum of P12,000 loaned to plaintiff and the legal interest

total of P2,250.00 corresponding to nine months from December 18, 1951, on the

allowed by law in this transaction does not exceed 12 per cent per annum, or the

basis of P250.00 a month, which is more than the maximum interest authorized by

sum of P1,440 for one year, so the herein plaintiff and overpaid the sum of P810 to

law. To secure the payment of the aforesaid loan, defendant required plaintiff to sign

the defendant, which this Court hereby likewise orders the said defendant to refund

a document known as "Conditional Sale of Residential Building", purporting to

to herein plaintiff, plus the balance of P1,107 representing the difference of the sum

convey to defendant, with right to repurchase, a two-story building of strong

loan of P12,000 and the collected insurance of P13,107 from the insurance company

materials belonging to plaintiff. This document did not express the true intention of

abovementioned to which the herein plaintiff is entitled to receive, and to pay the

the parties which was merely to place said property as security for the payment of

costs.

the loan.
The question that now arises is: Is the trial court justified in considering the
After the execution of the aforesaid document, defendant insured the building

obligation of plaintiff fully compensated by the insurance amount and in ordering

against fire with the Associated Insurance & Surety Co., Inc. for the sum of P15,000,

defendant to refund to plaintiff the sum of P1,107 representing the difference of the

the insurance policy having been issued in the name of defendant. The building was

loan of P12,000 and the sum of P13,107 collected by said defendant from the

partly destroyed by fire and, after proper demand, defendant collected from the

insurance company notwithstanding the fact that it was not proven that the

insurance company an indemnity of P13,107.00. Plaintiff demanded from defendant

insurance was taken for the benefit of the mortgagor?

that she be credited with the necessary amount to pay her obligation out of the
insurance proceeds but defendant refused to do so. And on the strength of these
facts, the court rendered decision the dispositive part of which reads as follows:

Is is our opinion that on this score the court is in error for its ruling runs counter to
the rule governing an insurance taken by a mortgagee independently of the
mortgagor. The rule is that "where a mortgagee, independently of the mortgagor,

Wherefore, judgment is hereby rendered declaring the transaction had between

insures the mortgaged property in his own name and for his own interest, he is

plaintiff and defendant, as shown in Exhibit A, an equitable mortgage to secure the

entitled to the insurance proceeds in case of loss, but in such case, he is not allowed

payment of the sum of P12,000 loaned by the defendant to plaintiff; ordering the

to retain his claim against the mortgagor, but is passed by subrogation to the insurer

defendant to credit the sum of P13,107 received by the defendant from the

to the extent of the money paid." (Vance on Insurance, 2d ed., p. 654) Or, stated in

Associated Insurance & surety Co., Inc. to the payment of plaintiff's obligation in the

another way, "the mortgagee may insure his interest in the property independently

sum of P12,000.00 as stated in the complaint, thus considering the agreement of

of the mortgagor. In that event, upon the destruction of the property the insurance

December 18, 1951 between the herein plaintiff and defendant completely paid and

money paid to the mortgagee will not inure to the benefit of the mortgagor, and the

leaving still a balance in the sum of P1,107 from the insurance collected by

amount due under the mortgage debt remains unchanged. The

defendant; that as plaintiff had paid to the defendant the sum of P2,250.00 for nine

mortgagee, however, is not allowed to retain his claim against the mortgagor, but it

passes by subrogation to the insurer, to the extent of the insurance money paid."

property mortgaged inured to the benefit of the plaintiff and in ordering said

(Vance on Insurance, 3rd ed., pp. 772-773) This is the same rule upheld by this Court

defendant to deliver to the plaintiff the difference between her indebtedness and the

in a case that arose in this jurisdiction. In the case mentioned, an insurance contract

amount of insurance received by the defendant, for, in the light of the majority rule

was taken out by the mortgagee upon his own interest, it being stipulated that the

we have above enunciated, the correct solution should be that the proceeds of the

proceeds would be paid to him only and when the case came up for decision, this

insurance should be delivered to the defendant but that her claim against the

Court held that the mortgagee, in case of loss, may only recover upon the policy to

plaintiff should be considered assigned to the insurance company who is deemed

the extent of his credit at the time of the loss. It was declared that the mortgaged

subrogated to the rights of the defendant to the extent of the money paid as

had no right of action against the mortgagee on the policy. (San Miguel

indemnity.

Brewery vs. Law Union, 40 Phil., 674.)

Consistent with the foregoing pronouncement, we therefore modify the judgment of
It is true that there are authorities which hold that "If a mortgagee procures

the lower court as follows:(1) the transaction had between the plaintiff and

insurance on his separate interest at his own expense and for his own benefit,

defendant as shown in Exhibit A is merely an equitable mortgage intended to secure

without any agreement with the mortgagor with respect thereto, the mortgagor has

the payment of the loan of P12,000;(2) that the proceeds of the insurance

no interest in the policy, and is not entitled to have the insurance proceeds applied

amounting to P13,107.00 was properly collected by defendant who is not required to

in reduction of the mortgage debt" (19 R.C.L., p. 405), and that, furthermore, the

account for it to the plaintiff; (3) that the collection of said insurance proceeds shall

mortgagee "has still a right to recover his whole debt of the mortgagor."

not be deemed to have compensated the obligation of the plaintiff to the defendant,

(King vs. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins. Co. vs. Boyden 9 Allen, 123;

but bars the latter from claiming its payment from the former; and (4) defendant

See also Loomis vs. Eagle Life & Health Ins. Co., 6 Gray, 396; Washington Mills

shall pay to the plaintiff the sum of P810.00 representing the overpayment made by

Emery Mfg. Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506;

plaintiff by way of interest on the loan. No pronouncement as to costs.

Foster vs. Equitable Mut. F. Ins. Co., 2 Gray 216.) But these authorities merely
represent the minority view (See case note, 3 Lawyers' Report Annotated, new
series, p. 79). "The general rule and the weight of authority is, that the insurer is

Bengzon, Montemayor, Reyes, A., Jugo, Labrador , Concepcion, and Reyes, J.B.L., JJ.,
concur.

thereupon subrogated to the rights of the mortgagee under the mortgage. This is

SECOND DIVISION

put upon the analogy of the situation of the insurer to that of a surety." (Jones on

[G.R. No. 113899. October 13, 1999]

Mortgages, Vol. I, pp. 671-672.)

GREAT PACIFIC LIFE ASSURANCE CORP., petitioner vs. COURT OF APPEALS

AND MEDARDA V. LEUTERIO, respondents.

Considering the foregoing rules, it would appear that the lower court erred in
declaring that the proceeds of the insurance taken out by the defendant on the

DECISION

QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the
Decision[1] dated May 17, 1993, of the Court of Appeals and its Resolution [2] dated
January 4, 1994 in CA-G.R. CV No. 18341. The appellate court affirmed in toto the
judgment of the Misamis Oriental Regional Trial Court, Branch 18, in an insurance
claim filed by private respondent against Great Pacific Life Assurance Co. The
dispositive portion of the trial courts decision reads:
WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE
ASSURANCE CORPORATION as insurer under its Group policy No. G-1907, in relation
to Certification B-18558 liable and ordered to pay to the DEVELOPMENT BANK OF
THE PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the amount of
EIGHTY SIX THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing the claims
for damages, attorneys fees and litigation expenses in the complaint and
counterclaim, with costs against the defendant and dismissing the complaint in
respect to the plaintiffs, other than the widow-beneficiary, for lack of cause of
action.[3]
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great
Pacific Life Assurance Corporation (hereinafter Grepalife) and Development Bank of
the Philippines (hereinafter DBP). Grepalife agreed to insure the lives of eligible
housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor
of DBP applied for membership in the group life insurance plan. In an application
form, Dr. Leuterio answered questions concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition, high
blood pressure, cancer, diabetes, lung, kidney or stomach disorder or any
other physical impairment?
Answer: No. If so give details ___________.

insurance coverage on November 15, 1983. Grepalife insisted that Dr. Leuterio did
not disclose he had been suffering from hypertension, which caused his
death. Allegedly, such non-disclosure constituted concealment that justified the
denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V.
Leuterio, filed a complaint with the Regional Trial Court of Misamis Oriental, Branch
18, against Grepalife for Specific Performance with Damages. [5] During the trial, Dr.
Hernando Mejia, who issued the death certificate, was called to testify. Dr. Mejias
findings, based partly from the information given by the respondent widow, stated
that Dr. Leuterio complained of headaches presumably due to high blood
pressure. The inference was not conclusive because Dr. Leuterio was not autopsied,
hence, other causes were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent
widow and against Grepalife. On May 17, 1993, the Court of Appeals sustained the
trial courts decision. Hence, the present petition. Petitioners interposed the
following assigned errors:
"1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT
LIABLE TO THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP)
WHICH IS NOT A PARTY TO THE CASE FOR PAYMENT OF THE
PROCEEDS OF A MORTGAGE REDEMPTION INSURANCE ON THE LIFE OF
PLAINTIFFS HUSBAND WILFREDO LEUTERIO ONE OF ITS LOAN
BORROWERS, INSTEAD OF DISMISSING THE CASE AGAINST
DEFENDANT-APPELLANT [Petitioner Grepalife] FOR LACK OF CAUSE OF
ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT
OF JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND
OVER THE PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO
PAY TO DBP THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY
EVIDENCE TO SHOW HOW MUCH WAS THE ACTUAL AMOUNT PAYABLE
TO DBP IN ACCORDANCE WITH ITS GROUP INSURANCE CONTRACT
WITH DEFENDANT-APPELLANT.

8. Are you now, to the best of your knowledge, in good health?

Answer: [ x ] Yes [

] No.[4]

On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance

coverage of Dr. Leuterio, to the extent of his DBP mortgage indebtedness amounting
to eighty-six thousand, two hundred (P86,200.00) pesos.
On August 6, 1984, Dr. Leuterio died due to massive cerebral hemorrhage.
Consequently, DBP submitted a death claim to Grepalife. Grepalife denied the claim
alleging that Dr. Leuterio was not physically healthy when he applied for an

4. THE LOWER COURT ERRED IN - HOLDING THAT THERE WAS NO

CONCEALMENT OF MATERIAL INFORMATION ON THE PART OF
WILFREDO LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP IN THE
GROUP LIFE INSURANCE PLAN BETWEEN DEFENDANT-APPELLANT OF
THE INSURANCE CLAIM ARISING FROM THE DEATH OF WILFREDO
LEUTERIO.[6]
Synthesized below are the assigned errors for our resolution:

1. Whether the Court of Appeals erred in holding petitioner liable to DBP

as beneficiary in a group life insurance contract from a complaint filed
by the widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio
concealed that he had hypertension, which would vitiate the
insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the
amount of eighty six thousand, two hundred (P86,200.00) pesos
without proof of the actual outstanding mortgage payable by the
mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr.
Leuterio, not the real party in interest, hence the trial court acquired no jurisdiction
over the case. It argues that when the Court of Appeals affirmed the trial courts
judgment, Grepalife was held liable to pay the proceeds of insurance contract in
favor of DBP, the indispensable party who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged
properties and the parties to this type of contract. The rationale of a group
insurance policy of mortgagors, otherwise known as the mortgage redemption
insurance, is a device for the protection of both the mortgagee and the
mortgagor. On the part of the mortgagee, it has to enter into such form of contract
so that in the event of the unexpected demise of the mortgagor during the
subsistence of the mortgage contract, the proceeds from such insurance will be
applied to the payment of the mortgage debt, thereby relieving the heirs of the
mortgagor from paying the obligation.[7] In a similar vein, ample protection is given
to the mortgagor under such a concept so that in the event of death; the mortgage
obligation will be extinguished by the application of the insurance proceeds to the
mortgage indebtedness.[8] Consequently, where the mortgagor pays the insurance
premium under the group insurance policy, making the loss payable to the
mortgagee, the insurance is on the mortgagors interest, and the mortgagor
continues to be a party to the contract. In this type of policy insurance, the
mortgagee is simply an appointee of the insurance fund, such loss-payable clause
does not make the mortgagee a party to the contract. [9]
Section 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of property effects insurance in his
own name providing that the loss shall be payable to the mortgagee, or assigns a
policy of insurance to a mortgagee, the insurance is deemed to be upon the interest
of the mortgagor, who does not cease to be a party to the original contract, and any
act of his, prior to the loss, which would otherwise avoid the insurance, will have the
same effect, although the property is in the hands of the mortgagee, but any act
which, under the contract of insurance, is to be performed by the mortgagor, may
be performed by the mortgagee therein named, with the same effect as if it had
been performed by the mortgagor.

The insured private respondent did not cede to the mortgagee all his rights or
interests in the insurance, the policy stating that: In the event of the debtors
death before his indebtedness with the Creditor [DBP] shall have been fully paid, an
amount to pay the outstanding indebtedness shall first be paid to the creditor and
the balance of sum assured, if there is any, shall then be paid to the beneficiary/ies
designated by the debtor.[10] When DBP submitted the insurance claim against
petitioner, the latter denied payment thereof, interposing the defense of
concealment committed by the insured. Thereafter, DBP collected the debt from the
mortgagor and took the necessary action of foreclosure on the residential lot of
private respondent.[11] In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co. [12] we
held:
Insured, being the person with whom the contract was made, is primarily the
proper person to bring suit thereon. * * * Subject to some exceptions, insured may
thus sue, although the policy is taken wholly or in part for the benefit of another
person named or unnamed, and although it is expressly made payable to another as
his interest may appear or otherwise. * * * Although a policy issued to a mortgagor
is taken out for the benefit of the mortgagee and is made payable to him, yet the
mortgagor may sue thereon in his own name, especially where the mortgagees
interest is less than the full amount recoverable under the policy, * * *.
And in volume 33, page 82, of the same work, we read the following:
Insured may be regarded as the real party in interest, although he has assigned the
policy for the purpose of collection, or has assigned as collateral security any
judgment he may obtain.[13]
And since a policy of insurance upon life or health may pass by transfer, will or
succession to any person, whether he has an insurable interest or not, and such
person may recover it whatever the insured might have recovered, [14] the widow of
the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner
interposed as its defense to annul the insurance contract. Petitioner contends that
Dr. Leuterio failed to disclose that he had hypertension, which might have caused his
death. Concealment exists where the assured had knowledge of a fact material to
the risk, and honesty, good faith, and fair dealing requires that he should
communicate it to the assured, but he designedly and intentionally withholds the
same.[15]
Petitioner merely relied on the testimony of the attending physician, Dr.
Hernando Mejia, as supported by the information given by the widow of the
decedent. Grepalife asserts that Dr. Mejias technical diagnosis of the cause of
death of Dr. Leuterio was a duly documented hospital record, and that the widows
declaration that her husband had possible hypertension several years ago should
not be considered as hearsay, but as part of res gestae.

On the contrary the medical findings were not conclusive because Dr. Mejia did
not conduct an autopsy on the body of the decedent. As the attending physician, Dr.
Mejia stated that he had no knowledge of Dr. Leuterios any previous hospital
confinement.[16] Dr. Leuterios death certificate stated that hypertension was only
the possible cause of death. The private respondents statement, as to the
medical history of her husband, was due to her unreliable recollection of
events. Hence, the statement of the physician was properly considered by the trial
court as hearsay.
The question of whether there was concealment was aptly answered by the
appellate court, thus:
The insured, Dr. Leuterio, had answered in his insurance application that he was in
good health and that he had not consulted a doctor or any of the enumerated
ailments, including hypertension; when he died the attending physician had certified
in the death certificate that the former died of cerebral hemorrhage, probably
secondary to hypertension. From this report, the appellant insurance company
refused to pay the insurance claim. Appellant alleged that the insured had
concealed the fact that he had hypertension.
Contrary to appellants allegations, there was no sufficient proof that the insured
had suffered from hypertension. Aside from the statement of the insureds widow
who was not even sure if the medicines taken by Dr. Leuterio were for hypertension,
the appellant had not proven nor produced any witness who could attest to Dr.
Leuterios medical history...
xxx
Appellant insurance company had failed to establish that there was concealment
made by the insured, hence, it cannot refuse payment of the claim. [17]
The fraudulent intent on the part of the insured must be established to entitle
the insurer to rescind the contract. [18] Misrepresentation as a defense of the insurer
to avoid liability is an affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the insurer. [19] In the case at bar,
the petitioner failed to clearly and satisfactorily establish its defense, and is
therefore liable to pay the proceeds of the insurance.

indebtedness to DBP at the time of the mortgagors death. Hence, for private
respondents failure to establish the same, the action for specific performance
should be dismissed. Petitioners claim is without merit. A life insurance policy is a
valued policy.[20] Unless the interest of a person insured is susceptible of exact
pecuniary measurement, the measure of indemnity under a policy of insurance upon
life or health is the sum fixed in the policy. [21] The mortgagor paid the premium
according to the coverage of his insurance, which states that:
The policy states that upon receipt of due proof of the Debtors death during the
terms of this insurance, a death benefit in the amount of P86,200.00 shall be paid.
In the event of the debtors death before his indebtedness with the creditor shall
have been fully paid, an amount to pay the outstanding indebtedness shall first be
paid to the Creditor and the balance of the Sum Assured, if there is any shall then be
paid to the beneficiary/ies designated by the debtor. [22] (Emphasis omitted)
However, we noted that the Court of Appeals decision was promulgated on
May 17, 1993. In private respondents memorandum, she states that DBP
foreclosed in 1995 their residential lot, in satisfaction of mortgagors outstanding
loan. Considering this supervening event, the insurance proceeds shall inure to the
benefit of the heirs of the deceased person or his beneficiaries. Equity dictates that
DBP should not unjustly enrich itself at the expense of another (Nemo cum alterius
detrimenio protest). Hence, it cannot collect the insurance proceeds, after it already
foreclosed on the mortgage. The proceeds now rightly belong to Dr. Leuterios heirs
represented by his widow, herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of
the Court of Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the
petitioner is ORDERED to pay the insurance proceeds amounting to Eighty-six
thousand, two hundred (P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo
Leuterio (deceased), upon presentation of proof of prior settlement of mortgagors
indebtedness to Development Bank of the Philippines. Costs against petitioner.
SO ORDERED.
Mendoza, Buena, and De Leon Jr., JJ., concur.
Bellosillo, (Chairman), J., on official leave.

And that brings us to the last point in the review of the case at bar. Petitioner
claims that there was no evidence as to the amount of Dr. Leuterios outstanding