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Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 114427 February 6, 1995
ARMANDO GEAGONIA, petitioner,
vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.
DAVIDE, JR., J.:
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Four our review under Rule 45 of the Rules of Court is the decision of the Court of Appeals
in CA-G.R. SP No. 31916, entitled "Country Bankers Insurance Corporation versus Armando
Geagonia," reversing the decision of the Insurance Commission in I.C. Case No. 3340 which
awarded the claim of petitioner Armando Geagonia against private respondent Country
Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the public market of San Francisco,
Agusan del Sur. On 22 December 1989, he obtained from the private respondent fire
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insurance policy No. F-14622 for P100,000.00. The period of the policy was from 22
December 1989 to 22 December 1990 and covered the following: "Stock-in-trade consisting
principally of dry goods such as RTW's for men and women wear and other usual to assured's
business."
The petitioner declared in the policy under the subheading entitled CO-INSURANCE that
Mercantile Insurance Co., Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the
petitioner had in his inventory stocks amounting to P392,130.50, itemized as follows:
Zenco Sales, Inc.
F. Legaspi Gen. Merchandise
Cebu Tesing Textiles

P55,698.00
86,432.50
250,000.00 (on credit)

P392,130.50

The policy contained the following condition:


3. The insured shall give notice to the Company of any insurance or
insurances already affected, or which may subsequently be effected,
covering any of the property or properties consisting of stocks in trade,
goods in process and/or inventories only hereby insured, and unless such
notice be given and the particulars of such insurance or insurances be
stated therein or endorsed in this policy pursuant to Section 50 of the
Insurance Code, by or on behalf of the Company before the occurrence of
any loss or damage, all benefits under this policy shall be deemed
forfeited, provided however, that this condition shall not apply when the

total insurance or insurances in force at the time of the loss or damage is


not more than P200,000.00.
On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market
of San Francisco, Agusan del Sur. The petitioner's insured stock-in-trade were completely
destroyed prompting him to file with the private respondent a claim under the policy. On 28
December 1990, the private respondent denied the claim because it found that at the time of
the loss the petitioner's stocks-in-trade were likewise covered by fire insurance policies No.
GA-28146 and No. GA-28144, for P100,000.00 each, issued by the Cebu Branch of the
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Philippines First Insurance Co., Inc. (hereinafter PFIC). These policies indicate that the
insured was "Messrs. Discount Mart (Mr. Armando Geagonia, Prop.)" with a mortgage clause
reading:
MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles,
Cebu City as their interest may appear subject to the terms of this policy.
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CO-INSURANCE DECLARED: P100,000. Phils. First CEB/F 24758.
The basis of the private respondent's denial was the petitioner's alleged violation of
Condition 3 of the policy.
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The petitioner then filed a complaint against the private respondent with the Insurance
Commission (Case No. 3340) for the recovery of P100,000.00 under fire insurance policy No.
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F-14622 and for attorney's fees and costs of litigation. He attached as Annex "AM" thereof
his letter of 18 January 1991 which asked for the reconsideration of the denial. He admitted
in the said letter that at the time he obtained the private respondent's fire insurance policy
he knew that the two policies issued by the PFIC were already in existence; however, he had
no knowledge of the provision in the private respondent's policy requiring him to inform it of
the prior policies; this requirement was not mentioned to him by the private respondent's
agent; and had it been mentioned, he would not have withheld such information. He further
asserted that the total of the amounts claimed under the three policies was below the actual
value of his stocks at the time of loss, which was P1,000,000.00.
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In its answer, the private respondent specifically denied the allegations in the complaint and
set up as its principal defense the violation of Condition 3 of the policy.
8
In its decision of 21 June 1993, the Insurance Commission found that the petitioner did not
violate Condition 3 as he had no knowledge of the existence of the two fire insurance policies
obtained from the PFIC; that it was Cebu Tesing Textiles which procured the PFIC policies
without informing him or securing his consent; and that Cebu Tesing Textile, as his creditor,
had insurable interest on the stocks. These findings were based on the petitioner's testimony
that he came to know of the PFIC policies only when he filed his claim with the private
respondent and that Cebu Tesing Textile obtained them and paid for their premiums without
informing him thereof. The Insurance Commission then decreed:
WHEREFORE, judgment is hereby rendered ordering the respondent
company to pay complainant the sum of P100,000.00 with legal interest
from the time the complaint was filed until fully satisfied plus the amount
of P10,000.00 as attorney's fees. With costs. The compulsory
counterclaim of respondent is hereby dismissed.

Its motion for the reconsideration of the decision having been denied by the Insurance
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Commission in its resolution of 20 August 1993, the private respondent appealed to the
Court of Appeals by way of a petition for review. The petition was docketed as CA-G.R. SP No.
31916.
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In its decision of 29 December 1993, the Court of Appeals reversed the decision of the
Insurance Commission because it found that the petitioner knew of the existence of the two
other policies issued by the PFIC. It said:
It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144
that the insurance was taken in the name of private respondent
[petitioner herein]. The policy states that "DISCOUNT MART (MR.
ARMANDO GEAGONIA, PROP)" was the assured and that "TESING
TEXTILES" [was] only the mortgagee of the goods.
In addition, the premiums on both policies were paid for by private
respondent, not by the Tesing Textiles which is alleged to have taken out
the other insurance without the knowledge of private respondent. This is
shown by Premium Invoices nos. 46632 and 46630. (Annexes M and N).
In both invoices, Tesing Textiles is indicated to be only the mortgagee of
the goods insured but the party to which they were issued were the
"DISCOUNT MART (MR. ARMANDO GEAGONIA)."
In is clear that it was the private respondent [petitioner herein] who took
out the policies on the same property subject of the insurance with
petitioner. Hence, in failing to disclose the existence of these insurances
private respondent violated Condition No. 3 of Fire Policy No. 1462. . . .
Indeed private respondent's allegation of lack of knowledge of the
provisions insurances is belied by his letter to petitioner [of 18 January
1991. The body of the letter reads as follows;]
xxx xxx xxx
Please be informed that I have no knowledge of the
provision requiring me to inform your office about my
prior insurance under FGA-28146 and F-CEB-24758.
Your representative did not mention about said
requirement at the time he was convincing me to
insure with you. If he only die or even inquired if I had
other existing policies covering my establishment, I
would have told him so. You will note that at the time
he talked to me until I decided to insure with your
company the two policies aforementioned were
already in effect. Therefore I would have no reason to
withhold such information and I would have desisted
to part with my hard earned peso to pay the
insurance premiums [if] I know I could not recover
anything.

Sir, I am only an ordinary businessman interested in


protecting my investments. The actual value of my
stocks damaged by the fire was estimated by the
Police Department to be P1,000,000.00 (Please see
xerox copy of Police Report Annex "A"). My Income
Statement as of December 31, 1989 or five months
before the fire, shows my merchandise inventory was
already some P595,455.75. . . . These will support my
claim that the amount claimed under the three
policies are much below the value of my stocks lost.
xxx xxx xxx
The letter contradicts private respondent's pretension that he did not
know that there were other insurances taken on the stock-in-trade and
seriously puts in question his credibility.
His motion to reconsider the adverse decision having been denied, the petitioner filed the
instant petition. He contends therein that the Court of Appeals acted with grave abuse of
discretion amounting to lack or excess of jurisdiction:
A . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE
COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH THE DUTY OF
DETERMINING INSURANCE CLAIM AND WHOSE DECISION IS ACCORDED
RESPECT AND EVEN FINALITY BY THE COURTS;
B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT
PRESENTED AS EVIDENCE DURING THE HEARING OR TRIAL; AND
C . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN
AGAINST THE PRIVATE RESPONDENT.
The chief issues that crop up from the first and third grounds are (a) whether the petitioner
had prior knowledge of the two insurance policies issued by the PFIC when he obtained the
fire insurance policy from the private respondent, thereby, for not disclosing such fact,
violating Condition 3 of the policy, and (b) if he had, whether he is precluded from recovering
therefrom.
The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter
of reconsideration of 18 January 1991, is without merit. The petitioner claims that the said
letter was not offered in evidence and thus should not have been considered in deciding the
case. However, as correctly pointed out by the Court of Appeals, a copy of this letter was
attached to the petitioner's complaint in I.C. Case No. 3440 as Annex "M" thereof and made
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integral part of the complaint. It has attained the status of a judicial admission and since its
due execution and authenticity was not denied by the other party, the petitioner is bound by
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it even if it were not introduced as an independent evidence.
As to the first issue, the Insurance Commission found that the petitioner had no knowledge
of the previous two policies. The Court of Appeals disagreed and found otherwise in view of
the explicit admission by the petitioner in his letter to the private respondent of 18 January
1991, which was quoted in the challenged decision of the Court of Appeals. These divergent

findings of fact constitute an exception to the general rule that in petitions for review under
Rule 45, only questions of law are involved and findings of fact by the Court of Appeals are
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conclusive and binding upon this Court.
We agree with the Court of Appeals that the petitioner knew of the prior policies issued by
the PFIC. His letter of 18 January 1991 to the private respondent conclusively proves this
knowledge. His testimony to the contrary before the Insurance Commissioner and which the
latter relied upon cannot prevail over a written admission made ante litem motam. It was,
indeed, incredible that he did not know about the prior policies since these policies were not
new or original. Policy No. GA-28144 was a renewal of Policy No. F-24758, while Policy No.
GA-28146 had been renewed twice, the previous policy being F-24792.
Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not
proscribed by law. Its incorporation in the policy is allowed by Section 75 of the Insurance
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Code which provides that "[a] policy may declare that a violation of specified provisions
thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the
policy." Such a condition is a provision which invariably appears in fire insurance policies and
is intended to prevent an increase in the moral hazard. It is commonly known as the
additional or "other insurance" clause and has been upheld as valid and as a warranty that no
other insurance exists. Its violation would thus avoid the
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policy. However, in order to constitute a violation, the other insurance must be upon same
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subject matter, the same interest therein, and the same risk.
As to a mortgaged property, the mortgagor and the mortgagee have each an independent
insurable interest therein and both interests may be one policy, or each may take out a
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separate policy covering his interest, either at the same or at separate times. The
mortgagor's insurable interest covers the full value of the mortgaged property, even though
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the mortgage debt is equivalent to the full value of the property. The mortgagee's
insurable interest is to the extent of the debt, since the property is relied upon as security
thereof, and in insuring he is not insuring the property but his interest or lien thereon. His
insurable interest is prima facie the value mortgaged and extends only to the amount of the
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debt, not exceeding the value of the mortgaged property. Thus, separate insurances
covering different insurable interests may be obtained by the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the
usual practice. The mortgagee may be made the beneficial payee in several ways. He may
become the assignee of the policy with the consent of the insurer; or the mere pledgee
without such consent; or the original policy may contain a mortgage clause; or a rider making
the policy payable to the mortgagee "as his interest may appear" may be attached; or a
"standard mortgage clause," containing a collateral independent contract between the
mortgagee and insurer, may be attached; or the policy, though by its terms payable
absolutely to the mortgagor, may have been procured by a mortgagor under a contract duty
to insure for the mortgagee's benefit, in which case the mortgagee acquires an equitable lien
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upon the proceeds.
In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as
his interest may appear, the mortgagee is only a beneficiary under the contract, and

recognized as such by the insurer but not made a party to the contract himself. Hence, any
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act of the mortgagor which defeats his right will also defeat the right of the mortgagee.
This kind of policy covers only such interest as the mortgagee has at the issuing of the policy.
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On the other hand, a mortgagee may also procure a policy as a contracting party in
accordance with the terms of an agreement by which the mortgagor is to pay the premiums
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upon such insurance. It has been noted, however, that although the mortgagee is himself
the insured, as where he applies for a policy, fully informs the authorized agent of his
interest, pays the premiums, and obtains on the assurance that it insures him, the policy is in
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fact in the form used to insure a mortgagor with loss payable clause.
The fire insurance policies issued by the PFIC name the petitioner as the assured and contain
a mortgage clause which reads:
Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as
their interest may appear subject to the terms of this policy.
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved in
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General Insurance and Surety Corp. vs. Ng Hua or in Pioneer Insurance & Surety Corp. vs.
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Yap, which read:
The insured shall give notice to the company of any insurance or
insurances already effected, or which may subsequently be effected
covering any of the property hereby insured, and unless such notice be
given and the particulars of such insurance or insurances be stated in or
endorsed on this Policy by or on behalf of the Company before the
occurrence of any loss or damage, all benefits under this Policy shall be
forfeited.
or in the 1930 case of Santa Ana vs. Commercial Union Assurance
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Co. which provided "that any outstanding insurance upon the whole or a portion
of the objects thereby assured must be declared by the insured in writing and he
must cause the company to add or insert it in the policy, without which such policy
shall be null and void, and the insured will not be entitled to indemnity in case of
loss," Condition 3 in the private respondent's policy No. F-14622 does not
absolutely declare void any violation thereof. It expressly provides that the
condition "shall not apply when the total insurance or insurances in force at the
time of the loss or damage is not more than P200,000.00."
It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted
liberally in favor of the insured and strictly against the company, the reason being,
undoubtedly, to afford the greatest protection which the insured was endeavoring to secure
when he applied for insurance. It is also a cardinal principle of law that forfeitures are not
favored and that any construction which would result in the forfeiture of the policy benefits
for the person claiming thereunder, will be avoided, if it is possible to construe the policy in a
manner which would permit recovery, as, for example, by finding a waiver for such
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forfeiture. Stated differently, provisions, conditions or exceptions in policies which tend to

work a forfeiture of insurance policies should be construed most strictly against those for
whose benefits they are inserted, and most favorably toward those against whom they are
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intended to operate. The reason for this is that, except for riders which may later be
inserted, the insured sees the contract already in its final form and has had no voice in the
selection or arrangement of the words employed therein. On the other hand, the language of
the contract was carefully chosen and deliberated upon by experts and legal advisers who
had acted exclusively in the interest of the insurers and the technical language employed
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therein is rarely understood by ordinary laymen.
With these principles in mind, we are of the opinion that Condition 3 of the subject policy is
not totally free from ambiguity and must, perforce, be meticulously analyzed. Such analysis
leads us to conclude that (a) the prohibition applies only to double insurance, and (b) the
nullity of the policy shall only be to the extent exceeding P200,000.00 of the total policies
obtained.
The first conclusion is supported by the portion of the condition referring to other insurance
"covering any of the property or properties consisting of stocks in trade, goods in process
and/or inventories only hereby insured," and the portion regarding the insured's declaration
on the subheading CO-INSURANCE that the co-insurer is Mercantile Insurance Co., Inc. in the
sum of P50,000.00. A double insurance exists where the same person is insured by several
insurers separately in respect of the same subject and interest. As earlier stated, the
insurable interests of a mortgagor and a mortgagee on the mortgaged property are distinct
and separate. Since the two policies of the PFIC do not cover the same interest as that
covered by the policy of the private respondent, no double insurance exists. The nondisclosure then of the former policies was not fatal to the petitioner's right to recover on the
private respondent's policy.
Furthermore, by stating within Condition 3 itself that such condition shall not apply if the
total insurance in force at the time of loss does not exceed P200,000.00, the private
respondent was amenable to assume a co-insurer's liability up to a loss not exceeding
P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the rationale
behind the incorporation of "other insurance" clause in fire policies is to prevent overinsurance and thus avert the perpetration of fraud. When a property owner obtains
insurance policies from two or more insurers in a total amount that exceeds the property's
value, the insured may have an inducement to destroy the property for the purpose of
collecting the insurance. The public as well as the insurer is interested in preventing a
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situation in which a fire would be profitable to the insured.
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in
CA-G.R. SP No. 31916 is SET ASIDE and the decision of the Insurance Commission in Case No.
3340 is REINSTATED.
Costs against private respondent Country Bankers Insurance Corporation.
SO ORDERED.

G.R. No. L-7667

November 28, 1955

CHERIE PALILEO, plaintiff-appellee,


vs.
BEATRIZ COSIO, defendant-appellant.
Claro M. Recto for appellant.
Bengson, Villegas, Jr. and Villar for appellee.

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) 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.
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 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 certain counterclaims which involve a
total amount of P4,900.
On April 7, 1953, the case was set for trial on the merits, but because of several
postponements asked by the parties, the same has to be set anew for trial on January 12,
1954. On this date, neither the defendant nor her counsel appeared, 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, 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 counsel to appear was due to
mistake or execusable negligence which ordinary prudence could not have guarded against.
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 the court to
have it set for trial. The first date set was April 7, 1953, but no hearing was had on that date
because plaintiff had moved to postpone it. The case was next set for hearing on April 28,

1953, but on motion again of plaintiff, the hearing was transferred to November 6, 1953.
Then, upon petition of defendant, the trial had to be moved to December 15, 1953, and
because Atty. Guerrero could not appear on said date because of a case he had in Cebu City,
the hearing was postponed to January 18, 1954.
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 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 of official business, including the reorganization of
the Department of Foreign Affairs and our Foreign Service, and more importantly, he had to
assist the Secretary of Foreign Affairs in negotiations of national importance like the
Japanese reparations, and the revision of the trade agreement with the United States, that,
Atty. Guerrero had to work as much as fourteen hours daily . . . Because of all these
unavoidable confusion that followed in the wake of Atty. Guerrero's sudden and unexpected
appointment, the trial of this case scheduled for January 18, 1954 escaped his memory, and
consequently, Atty. Guerrero and the defendant were unable to appear when the case was
called for trial." These reasons, it is intimated, constitute excusable negligence which
ordinary prudence could not have guarded against and should have been considered by the
trial court as sufficient justification to grant the petition of defendant for a rehearing.
It is a well-settled rule that the granting of a motion to set aside a judgment or order on the
ground of mistake or excusable negligence is addressed to the sound discretion of the court
(see Coombs vs. Santos, 24 Phil., 446; Daipan vs. Sigabu, 25, Phil., 184). And an order issued
in the exercise of such discretion is ordinarily not to be disturbed unless it is shown that the
court has gravely abused such discretion. (See Tell vs. Tell, 48 Phil., 70; Macke vs. Camps, 5
Phil., 185; Calvo vs. De Gutierrez, 4 Phil., 203; Manzanares vs. Moreta, 38 Phil., 821; Salva vs.
Palacio and Leuterio, 90 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 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.
Coming now to the merits of the case, we note that the lower court made the following
findings: On December 18, 1951, plaintiff obtained from defendant a loan in the sum of
P12,000 subject to the following conditions: (a) that plaintiff shall pay to defendant an
interest in the amount of P250 a month; (b) that defendant shall deduct from the loan
certain obligations of plaintiff to third persons amounting to P4,550, plus the sum of P250 as
interest for the first month; and (c) that after making the above deductions, defendant shall
deliver to plaintiff only the balance of the loan of P12,000.
Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of
P2,250.00 corresponding to nine months from December 18, 1951, on the basis of P250.00 a
month, which is more than the maximum interest authorized by law. To secure the payment

of the aforesaid loan, defendant required plaintiff to sign a document known as "Conditional
Sale of Residential Building", purporting to convey to defendant, with right to repurchase, a
two-story building of strong materials belonging to plaintiff. This document did not express
the true intention of the parties which was merely to place said property as security for the
payment of the loan.
After the execution of the aforesaid document, defendant insured the building against fire
with the Associated Insurance & Surety Co., Inc. for the sum of P15,000, the insurance policy
having been issued in the name of defendant. The building was partly destroyed by fire and,
after proper demand, defendant collected from the insurance company an indemnity of
P13,107.00. Plaintiff demanded from defendant 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:
Wherefore, judgment is hereby rendered declaring the transaction had between
plaintiff and defendant, as shown in Exhibit A, an equitable mortgage to secure the
payment of the sum of P12,000 loaned by the defendant to plaintiff; ordering the
defendant to credit the sum of P13,107 received by the defendant from the
Associated Insurance & surety Co., Inc. to the payment of plaintiff's obligation in
the sum of P12,000.00 as stated in the complaint, thus considering the agreement
of December 18, 1951 between the herein plaintiff and defendant completely paid
and leaving still a balance in the sum of P1,107 from the insurance collected by
defendant; that as plaintiff had paid to the defendant the sum of P2,250.00 for
nine months as interest on the sum of P12,000 loaned to plaintiff and the legal
interest allowed by law in this transaction does not exceed 12 per cent per annum,
or the sum of P1,440 for one year, so the herein plaintiff and overpaid the sum of
P810 to the defendant, which this Court hereby likewise orders the said defendant
to refund to herein plaintiff, plus the balance of P1,107 representing the difference
of the sum loan of P12,000 and the collected insurance of P13,107 from the
insurance company abovementioned to which the herein plaintiff is entitled to
receive, and to pay the costs.
The question that now arises is: Is the trial court justified in considering the obligation of
plaintiff fully compensated by the insurance amount and in ordering defendant to refund to
plaintiff the sum of P1,107 representing the difference of the loan of P12,000 and the sum of
P13,107 collected by said defendant from the insurance company notwithstanding the fact
that it was not proven that the insurance was taken for the benefit of the mortgagor?
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, insures the mortgaged property
in his own name and for his own interest, he is entitled to the insurance proceeds in case of
loss, but in such case, he is not allowed to retain his claim against the mortgagor, but is
passed by subrogation to the insurer to the extent of the money paid." (Vance on Insurance,
2d ed., p. 654)Or, stated in another way, "the mortgagee may insure his interest in the

property independently of the mortgagor. In that event, upon the destruction of the
property the insurance money paid to the mortgagee will not inure to the benefit of the
mortgagor, and the amount due under the mortgage debt remains unchanged. The
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." (Vance on
Insurance, 3rd ed., pp. 772-773) This is the same rule upheld by this Court in a case that
arose in this jurisdiction. In the case mentioned, an insurance contract was taken out by the
mortgagee upon his own interest, it being stipulated that the proceeds would be paid to him
only and when the case came up for decision, this Court held that the mortgagee, in case of
loss, may only recover upon the policy to the extent of his credit at the time of the loss. It
was declared that the mortgaged had no right of action against the mortgagee on the policy.
(San Miguel Brewery vs. Law Union, 40 Phil., 674.)
It is true that there are authorities which hold that "If a mortgagee procures insurance on his
separate interest at his own expense and for his own benefit, without any agreement with
the mortgagor with respect thereto, the mortgagor has no interest in the policy, and is not
entitled to have the insurance proceeds applied in reduction of the mortgage debt" (19
R.C.L., p. 405), and that, furthermore, the mortgagee "has still a right to recover his whole
debt of the mortgagor." (King vs. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins. Co. vs.
Boyden 9 Allen, 123; See also Loomis vs. Eagle Life & Health Ins. Co., 6 Gray, 396; Washington
Mills Emery Mfg. Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506; 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 thereupon subrogated to the rights of the mortgagee under
the mortgage. This is put upon the analogy of the situation of the insurer to that of a surety."
(Jones on Mortgages, Vol. I, pp. 671-672.)
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 property mortgaged inured
to the benefit of the plaintiff and in ordering said defendant to deliver to the plaintiff the
difference between her indebtedness and the amount of insurance received by the
defendant, for, in the light of the majority rule we have above enunciated, the correct
solution should be that the proceeds of the insurance should be delivered to the defendant
but that her claim against the plaintiff should be considered assigned to the insurance
company who is deemed subrogated to the rights of the defendant to the extent of the
money paid as indemnity.
Consistent with the foregoing pronouncement, we therefore modify the judgment of the
lower court as follows:(1) the transaction had between the plaintiff and defendant as shown
in Exhibit A is merely an equitable mortgage intended to secure the payment of the loan of
P12,000;(2) that the proceeds of the insurance amounting to P13,107.00 was properly
collected by defendant who is not required to account for it to the plaintiff; (3) that the
collection of said insurance proceeds shall not be deemed to have compensated the
obligation of the plaintiff to the defendant, but bars the latter from claiming its payment
from the former; and (4) defendant shall pay to the plaintiff the sum of P810.00 representing

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


costs.

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


THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.
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 common-law 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
1
name it is made" 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
2
"insured" and not to the beneficiary, since a contract of insurance is personal in character.
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
3
contracts. 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
4
policy by the person who cannot make a donation to him. 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
5
person who cannot make the donation. 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
6
wins are interpreted.
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
7
relationship be restricted by these disabilities. Thus, in Matabuena v. Cervantes, 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 than judicial admissions which, as a consequence, no longer require proof and
8
cannot be contradicted. 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.

G.R. No. L-6114 October 30, 1954


SOUTHERN LUZON EMPLOYEES' ASSOCIATION, plaintiff,
vs.
JUANITA GOLPEO, ET AL., defendants-appellants;
AQUILINO MALOLES , ET AL., defendants-appellees;
ELSIE HICBAN, ET AL., defendants;
MARCELINO CONCEPCION, ET AL., intervenors-appellants.
Enrique Al. Capistrano, Pio O. Golfeo, Jose E. Erfe and Hilario Mutuc for appellants.
Manuel Alvero and Elden B. Brion for appellees.
Juan A. Baes for defendant Elsie Hicban.
PARAS, C.J.:
The plaintiff, Southern Luzon Employees' Association is composed of laborers and employees
of Laguna tayabas Bus Co., and Batangas Transportation Company, and one of its purposes is
mutual aid of its members and their defendants in case of death. Roman A. Concepcion was a
member until his death on December 13, 1950. The association adopted on September 17,
1949 the following resolution:
RESOLVED: That a family record card of each member be printed wherein the
members will put down his dependents and/or beneficiaries.
BE IT RESOLVED, FURTHER, that a member may, if he chooses, put down his
common-law wife as his beneficiary and/or children had with her as the case may
be; that in case of a widower, he may put down his legitimate children with the
first marriage who are below 21 years of age, single, and may at the same time,
also name his common-law wife, if he has any, as dependents and/or beneficiaries;
and
BE IT RESOLVED: That such person so named by the member will be sole persons to
be recognized by the Association regarding claims for condolence contributions.
In the form required by the association to be accomplished by its members, with reference to
the death benefit, Roman A. Concepcion listed as his beneficiaries Aquilina Maloles, Roman
M. Concepcion, Jr., Estela M. Concepcion, Rolando M. Concepcion and Robin M. Concepcion.
After the death of Roman A. Concepcion, the association was able to collect voluntary
contributions from its members amounting to P2,5055. Three sets of claimants presented

themselves, namely, (1) Juanita Golpeo, legal wife of Roman A. Concepcion, and her children,
named beneficiaries by the deceased; and (3) Elsie Hicban, another common law wife of
Roman A. Concepcion, and her child. The plaintiff association was accordingly constrained to
institute in the Court of First Instance of Laguna the present action for interpleading against
the three conflicting claimants as defendants. Marcelino and Josefina Concepcion, children of
the deceased Roman A. Concepcion with Juanita Golpeo, intervened in their own rights,
aligning themselves with the defendants, Juanita Golpeo and her minor children. After
hearing, the court rendered a decision, declaring the defendants Aquilina Maloles and her
children the sole beneficiaries of the sum of P2,505.00, and ordering the plaintiff to deliver
said amount to them. From this decision only the defendants Juanita Golpeo and her minor
children and the intervenors Marcelino and Josefina Concepcion have appealed to this court.
The decision is based mainly on the theory that the contract between the plaintiff and the
deceased Roman A. Concepcion partook of the nature of an insurance and that, therefore,
the amount in question belonged exclusively to the beneficiaries, invoking the following
pronouncements of this Court in the case of Del Val vs. Del Val, 29 Phil., 534:
With the finding of the trial court that the proceeds of the life-insurance policy
belongs exclusively to the defendant as his individual and separate property, we
agree. That the proceeds of an insurance policy belong exclusively to the
beneficiary and not to the estate of the person whose life was insured, and that
such proceeds are the separate and individual property of the beneficiary, and not
of the heirs of the person whose life was insured, is the doctrine in America. We
believe that the same doctrine obtains in these Islands by virtue of section 428 of
the Code of Commerce, which reads:
"The amounts which the underwriter must deliver to the person insured, in
fulfillment of the contract, shall be the property creditors of any kind whatsoever
of the person who effected the insurance in favor of the formers."
It is claimed by the attorney for the plaintiffs that the section just quoted in
subordinated to the provisions of the civil code as found in article 10035. This
article reads:
"An heir by force of law surviving with others of the same character to a succession
must bring into the hereditary estate the property or securities he may bring into
the hereditary estate the property or securities he may have been received from
the deceased during the life of the same, by way of dowry, gift, or for any good
consideration, in order to compute it in fixing the legal portions and in the amount
of the division."
Counsel also claims that the proceed of the insurance policy were donation or gift
made by the father during his lifetime to the defendant and that, as such, its
ultimate destination is determined by those provisions of the Civil Code which
relate to donations, especially article 819. This article provides that "gifts made to
children which are not betterments shall be considered as part of their legal
portion."

We cannot agree with these contention. The contract of life insurance is a special
contract and the destination of the proceeds thereof is determined by special laws
which deal exclusively with that subject. The Civil Code has no provisions which
relate directly and specifically to life-insurance contract or to the destination of lifeinsurance proceeds. That subject is regulate exclusively by the Code of Commerce
which provides for the terms of the contract, the relations of the parties and the
destination of the proceeds of the policy. (Supra, pp. 540-541.)
It is argued for the appellants, however, that the Insurance Law is not applicable because the
plaintiff is a mutual benefit association as defined in section 1628 of the Revised
Administrative Code. This argument evidently ignore the fact that the trial court has no
considered the plaintiff as a regular insurance company but merely ruled that the death
benefit in question is analogous to an insurance. Moreover, section 1628 of the Revised
Administrative Code defines a mutual benefit association as one, among others, "providing
for any method of accident or life insurance among its members out of dues or assessments
collected from the membership." The comparison made in the appealed decision is,
therefore, well taken.
Appellant also contend that the stipulation between the plaintiff and the deceased Roman A.
Concepcion regarding the specification of the latter's beneficiaries, and the resolution of
September 17, 1949, are void for the being contrary to law, moral or public policy.
Specifically, the appellants cite article 2012 of the new Civil Code providing that "Any person
who is forbidden from receiving any donation under article 739 cannot be named beneficiary
of a life insurance policy and by the person who cannot make any donation to him, according
to said article." Inasmuch as, according to article 739 of the new Civil Code, a donation is
valid when made "between persons who are guilty or adultery or concubinage at the time of
the donation," it is alleged that the defendant-appellee Aquilina Maloles, cannot be named a
beneficiary, every assuming that the insurance law is applicable. Without considering the
intimation in the brief for the defendant appellees that appellant Juanita Golpeo, by her
silence and actions, had acquiesced in the illicit relations between her husband and appellee
Aquilina Maloles, appellant argument would certainly not apply to the children of Aquilina
likewise named beneficiaries by the deceased Roman A. Concepcion. As a matter of a fact the
new Civil Code recognized certain successional rights of illegitimate children. (Article 287.)
The other contention advanced rather exhaustively by counsel for appellants, and the
citations in support there of are either negative or rendered inapplicable by the decisive
considerations already stated. In this connection it is noteworthy that the estate of the
deceased Roman A. Concepcion was not entirely left without anything legally due it since it is
an admitted fact that the sum of P2,500 was paid by Laguna Tayabas Bus Co., employer of
the deceased to the appellants under the Workmen's Compensation Act. Wherefore, the
appealed decision is affirmed, and it is so ordered without costs.

G.R. No. 23703

September 28, 1925

HILARIO GERCIO, plaintiff-appellee,


vs.
SUN LIFE ASSURANCE OF CANADA, ET AL., defendants.
SUN LIFE ASSURANCE OF CANADA, appellant.
Fisher, DeWitt, Perkins and Brady and Jesus Trinidad for appellant.
Vicente Romualdez, Feria and La O and P. J. Sevilla for appellee.
MALCOLM, J.:
The question of first impression in the law of life insurance to be here decided is whether the
insured the husband has the power to change the beneficiary the former wife and
to name instead his actual wife, where the insured and the beneficiary have been divorced
and where the policy of insurance does not expressly reserve to the insured the right to
change the beneficiary. Although the authorities have been exhausted, no legal situation
exactly like the one before us has been encountered.
Hilario Gercio, the insured, is the plaintiff. The Sun Life Assurance Co. of Canada, the insurer,
and Andrea Zialcita, the beneficiary, are the defendants. The complaint is in the nature of
mandamus. Its purpose is to compel the defendant Sun Life Assurance Co. of Canada to
change the beneficiary in the policy issued by the defendant company on the life of the
plaintiff Hilario Gercio, with one Andrea Zialcita as beneficiary.
A default judgment was taken in the lower court against the defendant Andrea Zialcita. The
other defendant, the Sun Life Assurance Co. of Canada, first demurred to the complaint and
when the demurrer was overruled, filed an answer in the nature of a general denial. The case
was then submitted for decision on an agreed statement of facts. The judgment of the trial
court was in favor of the plaintiff without costs, and ordered the defendant company to
eliminate from the insurance policy the name of Andrea Zialcita as beneficiary and to
substitute therefor such name as the plaintiff might furnish to the defendant for that
purpose.
The Sun Life Assurance Co. of Canada has appealed and has assigned three errors alleged to
have been committed by the lower court. The appellee has countered with a motion which
asks the court to dismiss the appeal of the defendant Sun Life Assurance Co. of Canada, with
costs.
As the motion presented by the appellee and the first two errors assigned by the appellant
are preliminary in nature, we will pass upon the first. Appellee argues that the "substantial
defendant" was Andrea Zialcita, and that since she was adjudged in default, the Sun Life
Assurance Co. of Canada has no interest in the appeal. It will be noticed, however, that the
complaint prays for affirmative relief against the insurance company. It will be noticed
further that it is stipulated that the insurance company has persistently refused to change
the beneficiary as desired by the plaintiff. As the rights of Andrea Zialcita in the policy are
rights which are enforceable by her only against the insurance company, the defendant
insurance company will only be fully protected if the question at issue is conclusively
determined. Accordingly, we have decided not to accede to the motion of the appellee and
not to order the dismissal of the appeal of the appellant.

This brings us to the main issue. Before, however, discussing its legal aspects, it is advisable
to have before us the essential facts. As they are stipulated, this part of the decision can
easily be accomplished.
On January 29, 1910, the Sun Life Assurance Co. of Canada issued insurance policy No.
161481 on the life of Hilario Gercio. The policy was what is known as a twenty-year
endowment policy. By its terms, the insurance company agreed to insure the life of Hilario
Gercio for the sum of P/2,000, to be paid him on February 1, 1930, or if the insured should
die before said date, then to his wife, Mrs. Andrea Zialcita, should she survive him; otherwise
to the executors, administrators, or assigns of the insured. The policy also contained a
schedule of reserves, amounts in cash, paid-up policies, and renewed insurance, guaranteed.
The policy did not include any provision reserving to the insured the right to change the
beneficiary.
On the date the policy was issued, Andrea Zialcita was the lawful wife of Hilario Gercio.
Towards the end of the year 1919, she was convicted of the crime of adultery. On September
4, 1920, a decree of divorce was issued in civil case no. 17955, which had the effect of
completely dissolving the bonds of matrimony contracted by Hilario Gercio and Andrea
Zialcita.
On March 4, 1922, Hilario Gercio formally notified the Sun Life Assurance Co. of Canada that
he had revoked his donation in favor of Andrea Zialcita, and that he had designated in her
stead his present wife, Adela Garcia de Gercio, as the beneficiary of the policy. Gercio
requested the insurance company to eliminate Andrea Zialcita as beneficiary. This, the
insurance company has refused and still refuses to do.
With all of these introductory matters disposed of and with the legal question to the
forefront, it becomes our first duty to determine what law should be applied to the facts. In
this connection, it should be remembered that the insurance policy was taken out in 1910,
that the Insurance Act. No. 2427, became effective in 1914, and that the effort to change the
beneficiary was made in 1922. Should the provisions of the Code of Commerce and the Civil
Code in force in 1910, or the provisions of the Insurance Act now in force, or the general
principles of law, guide the court in its decision?
On the supposition, first, that the Code of Commerce is applicable, yet there can be found in
it no provision either permitting or prohibiting the insured to change the beneficiary.
On the supposition, next, that the Civil Code regulates insurance contracts, it would be most
difficult, if indeed it is practicable, to test a life insurance policy by its provisions. Should the
insurance contract, whereby the husband names the wife as the beneficiary, be denominated
a donation inter vivos, a donation causa mortis, a contract in favor of a third person, or an
aleatory contract? The subject is further complicated by the fact that if an insurance contract
should be considered a donation, a husband may then never insure his life in favor of his wife
and vice versa, inasmuch as article 1334 prohibits all donations between spouses during
marriage. It would seem, therefore, that this court was right when in the case of Del Val vs.
Del Val ([1915]), 29 Phil., 534), it declined to consider the proceeds of the insurance policy as
a donation or gift, saying "the contract of life insurance is a special contract and the
destination of the proceeds thereof is determined by special laws which deal exclusively with

that subject. The Civil Code has no provisions which relate directly and specifically to lifeinsurance contracts or to the destination of life-insurance proceeds. . . ." Some satisfaction is
gathered from the perplexities of the Louisiana Supreme Court, a civil law jurisdiction, where
the jurists have disagreed as to the classification of the insurance contract, but have agreed
in their conclusions as will hereafter see. (Re Succession of Leone Desforges [1914], 52 L.R.A.
[N.S.], 689; Lambert vs Penn Mutual Life Insurance Company of Philadelphia and L'Hote & Co.
[1898], 50 La. Ann., 1027.)
On the further supposition that the Insurance Act applies, it will be found that in this Law,
there is likewise no provision either permitting or prohibiting the insured to change the
beneficiary.
We must perforce conclude that whether the case be considered as of 1910, or 1914, or
1922, and whether the case be considered in the light of the Code of Commerce, the Civil
Code, or the Insurance Act, the deficiencies in the law will have to be supplemented by the
general principles prevailing on the subject. To that end, we have gathered the rules which
follow from the best considered American authorities. In adopting these rules, we do so with
the purpose of having the Philippine Law of Insurance conform as nearly as possible to the
modern Law of Insurance as found in the United States proper.
The wife has an insurable interest in the life of her husband. The beneficiary has an absolute
vested interest in the policy from the date of its issuance and delivery. So when a policy of
life insurance is taken out by the husband in which the wife is named as beneficiary, she has
a subsisting interest in the policy. And this applies to a policy to which there are attached the
incidents of a loan value, cash surrender value, an automatic extension by premiums paid,
and to an endowment policy, as well as to an ordinary life insurance policy. If the husband
wishes to retain to himself the control and ownership of the policy he may so provide in the
policy. But if the policy contains no provision authorizing a change of beneficiary without the
beneficiary's consent, the insured cannot make such change. Accordingly, it is held that a life
insurance policy of a husband made payable to the wife as beneficiary, is the separate
property of the beneficiary and beyond the control of the husband.
As to the effect produced by the divorce, the Philippine Divorce Law, Act No. 2710, merely
provides in section 9 that the decree of divorce shall dissolve the community property as
soon as such decree becomes final. Unlike the statutes of a few jurisdictions, there is no
provision in the Philippine Law permitting the beneficiary in a policy for the benefit of the
wife of the husband to be changed after a divorce. It must follow, therefore, in the absence
of a statute to the contrary, that if a policy is taken out upon a husband's life the wife is
named as beneficiary therein, a subsequent divorce does not destroy her rights under the
policy.
These are some of the pertinent principles of the Law of Insurance. To reinforce them, we
would, even at the expense of clogging the decision with unnecessary citation of authority,
bring to notice certain decisions which seem to us to have controlling influence.
To begin with, it is said that our Insurance Act is mostly taken from the statute of California.
It should prove of interest, therefore, to know the stand taken by the Supreme Court of that

State. A California decision oft cited in the Cyclopedias is Yore vs. Booth ([1895]), 110 Cal.,
238; 52 Am. St. Rep., 81), in which we find the following:
. . . It seems to be the settled doctrine, with but slight dissent in the courts of this
country, that a person who procures a policy upon his own life, payable to a
designated beneficiary, although he pays the premiums himself, and keeps the
policy in his exclusive possession, has no power to change the beneficiary, unless
the policy itself, or the charter of the insurance company, so provides. In policy,
although he has parted with nothing, and is simply the object of another's bounty,
has acquired a vested and irrevocable interest in the policy, which he may keep
alive for his own benefit by paying the premiums or assessments if the person who
effected the insurance fails or refuses to do so.
As carrying great weight, there should also be taken into account two decisions coming from
the Supreme Court of the United States. The first of these decisions, in point of time, is
Connecticut Mutual Life Insurance Company vs Schaefer ([1877]), 94 U.S., 457). There, Mr.
Justice Bradley, delivering the opinion of the court, in part said:
This was an action on a policy of the court, in part said: July 25, 1868, on the joint
lives of George F. and Francisca Schaefer, then husband and wife, payable to the
survivor on the death of either. In January, 1870, they were divorced, and alimony
was decreed and paid to the wife, and there was never any issue of the marriage.
They both subsequently married again, after which, in February, 1871, George F.
Schaefer died. This action was brought by Francisca, the survivor.
xxx
xxx
xxx
The other point, relating to the alleged cessation of insurable interest by reason of
the divorce of the parties, is entitled to more serious consideration, although we
have very little difficulty in disposing of it.
It will be proper, in the first place, to ascertain what is an insurable interest. It is
generally agreed that mere wager policies, that is, policies in which the insured
party has no interest in its loss or destruction, are void, as against public policy. . . .
But precisely what interest is necessary, in order to take a policy out of the
category of mere wager, has been the subject of much discussion. In marine and
fire insurance the difficulty is not so great, because there insurance is considered as
strictly an indemnity. But in life insurance the loss can seldom be measured by
pecuniary values. Still, an interest of some sort in the insured life must exist. A man
cannot take out insurance on the life of a total stranger, nor on that of one who is
not so connected with him as to make the continuance of the life a matter of some
real interest to him.
It is well settled that a man has an insurable interest in his own life and in that of
his wife and children; a woman in the life of her husband; and the creditor in the
life of his debtor. Indeed it may be said generally that any reasonable expectation
of pecuniary benefit or advantage from the continued life of another creates an
insurable interest in such life. And there is no doubt that a man may effect an
insurance on his own life for the benefit of a relative or fried; or two or more

persons, on their joint lives, for the benefit of the survivor or survivors. The old
tontines were based substantially on this principle, and their validity has never
been called in question.
xxx
xxx
xxx
The policy in question might, in our opinion, be sustained as a joint insurance,
without reference to any other interest, or to the question whether the cessation
of interest avoids a policy good at its inception. We do not hesitate to say,
however, that a policy taken out in good faith and valid at its inception, is not
avoided by the cessation of the insurable interest, unless such be the necessary
effect of the provisions of the policy itself. . . .
. . . .In our judgment of life policy, originally valid, does not cease to be so by the
cessation of the assured party's interest in the life insured.
Another controlling decision of the United States Supreme Court is that of the Central
National Bank of Washington City vs. Hume ([1888], 128 U.S., 134). Therein, Mr. Chief Justice
Fuller, as the organ of the court, announced the following doctrines:
We think it cannot be doubted that in the instance of contracts of insurance with a
wife or children, or both, upon their insurable interest in the life of the husband or
father, the latter, while they are living, can exercise no power of disposition over
the same without their consent, nor has he any interest therein of which he can
avail himself; nor upon his death have his personal representatives or his creditors
any interest in the proceeds of such contracts, which belong to the beneficiaries to
whom they are payable.
It is indeed the general rule that a policy, and the money to become due under it,
belong, the moment it is issued, to the person or persons named in it as the
beneficiary or beneficiaries, and that there is no power in the person procuring the
insurance, by any act of his, by deed or by will, to transfer to any other person the
interest of the person named.
A jurisdiction which found itself in somewhat the same situation as the Philippines, because
of having to reconcile the civil law with the more modern principles of insurance, is
Louisiana. In a case coming before the Federal Courts, In re Dreuil & Co. ([1915]), 221 Fed.,
796), the facts were that an endowment insurance policy provided for payment of the
amount thereof at the expiration of twenty years to the insured, or his executors,
administrators, or assigns, with the proviso that, if the insured die within such period,
payment was to be made to his wife if she survive him. It was held that the wife has a vested
interest in the policy, of which she cannot be deprived without her consent. Foster, District
Judge, announced:
In so far as the law of Louisiana is concerned, it may also be considered settled that
where a policy is of the semitontine variety, as in this case, the beneficiary has a
vested right in the policy, of which she cannot be deprived without her consent.
(Lambert vs Penn Mutual Life Ins. Co., 50 La. Ann., 1027; 24 South., 16.) (See in
same connection a leading decision of the Louisiana Supreme Court, Re Succession
of Leonce Desforges, [1914], 52 L.R.A. [N.S.], 689.)

Some question has arisen as to the power of the insured to destroy the vested interest of the
beneficiary in the policy. That point is well covered in the case of Entwistle vs. Travelers
Insurance Company ([1902], 202 Pa. St., 141). To quote:
. . . The interest of the wife was wholly contingent upon her surviving her husband,
and she could convey no greater interest in the policy than she herself had. The
interest of the children of the insured, which was created for them by the contract
when the policy was issued; vested in them at the same time that the interest of
the wife became vested in her. Both interests were contingent. If the wife die
before the insured, she will take nothing under the policy. If the insured should die
before the wife, then the children take nothing under the policy. We see no reason
to discriminate between the wife and the children. They are all payees, under the
policy, and together constitute the assured.
The contingency which will determine whether the wife, or the children as a class
will take the proceeds, has not as yet happened; all the beneficiaries are living, and
nothing has occurred by which the rights of the parties are in any way changed. The
provision that the policy may be converted into cash at the option of the holder
does not change the relative rights of the parties. We agree entirely with the
suggestion that "holder" or "holders", as used in this connection, means those who
in law are the owners of the policy, and are entitled to the rights and benefits
which may accrue under it; in other words, all the beneficiaries; in the present
case, not only the wife, by the children of the insured. If for any reason, prudence
required the conversion of the policy into cash, a guardian would have no special
difficulty in reasonable protecting the interest of his wards. But however that may
be, it is manifest that the option can only be exercised by those having the full legal
interest in the policy, or by their assignee. Neither the husband, nor the wife, nor
both together had power to destroy the vested interest of the children in the
policy.
The case most nearly on all fours with the one at bar is that of Wallace vs Mutual Benefit Life
Insurance Co. ([1906], 97 Minn., 27; 3 L.R.A. [N.S.], 478). The opinion there delivered also
invokes added interest when it is noted that it was written by Mr. Justice Elliott, the author
of a text on insurance, later a member of this court. In the Minnesota case cited, one Wallace
effected a "twenty-year endowment" policy of insurance on his life, payable in the event of
his death within twenty years to Emma G. Wallace, his wife, but, if he lived, to himself at the
end of twenty years. If Wallace died before the death of his wife, within the twenty years,
the policy was payable to the personal representatives of the insured. During the pendency
of divorce proceedings, the parties signed a contract by which Wallace agreed that, if a
divorce was granted to Mrs. Wallace, the court might award her certain specified property as
alimony, and Mrs. Wallace agreed to relinquish all claim to any property arising out of the
relation of husband and wife. The divorce was granted. An action was brought by Wallace to
compel Mrs. Wallace to relinquish her interest in the insurance policy. Mr. Justice Elliott said:
As soon as the policy was issued Mrs. Wallace acquired a vested interest therein, of
which she could not be deprived without her consent, except under the terms of

the contract with the insurance company. No right to change the beneficiary was
reserved. Her interest in the policy was her individual property, subject to be
divested only by her death, the lapse of time, or by the failure of the insured to pay
the premiums. She could keep the policy alive by paying the premiums, if the
insured did not do so. It was contingent upon these events, but it was free from the
control of her husband. He had no interest in her property in this policy, contingent
or otherwise. Her interest was free from any claim on the part of the insured or his
creditors. He could deprive her of her interest absolutely in but one way, by living
more than twenty years. We are unable to see how the plaintiff's interest in the
policy was primary or superior to that of the husband. Both interests were
contingent, but they were entirely separate and distinct, the one from the other.
The wife's interest was not affected by the decree of court which dissolved the
marriage contract between the parties. It remains her separate property, after the
divorce as before. . .
. . . . The fact that she was his wife at the time the policy was issued may have
been, and undoubtedly was, the reason why she was named as beneficiary in the
event of his death. But her property interest in the policy after it was issued did not
in any reasonable sense arise out of the marriage relation.
Somewhat the same question came before the Supreme Court of Kansas in the leading case
of Filley vs. Illinois Life Insurance Company ([1914]), 91 Kansas, 220; L.R.A. [1915 D], 130). It
was held, following consideration extending to two motions for rehearing, as follows:
The benefit accruing from a policy of life insurance upon the life of a married man,
payable upon his death to his wife, naming her, is payable to the surviving
beneficiary named, although she may have years thereafter secured a divorce from
her husband, and he was thereafter again married to one who sustained the
relation of wife to him at the time of his death.
The rights of a beneficiary in an ordinary life insurance policy become vested upon
the issuance of the policy, and can thereafter, during the life of the beneficiary, be
defeated only as provided by the terms of the policy.
If space permitted, the following corroborative authority could also be taken into account:
Joyce, The Law of Insurance, second edition, vol. 2, pp. 1649 et seq.; 37 Corpus Juris, pp. 394
et seq.; 14 R.C.L., pp. 1376 et seq.; Green vs. Green ([1912], 147 Ky., 608; 39 L.R.A. [N.S.],
370); Washington Life Insurance Co. vs. Berwald ([1903], 97 Tex., 111); Begley vs. Miller
([1907]), 137 Ill., App., 278); Blum vs. New York L. Ins. Co. ([1906], 197 Mo., 513; 8 L.R.A.
[N.S.], 923; Union Central Life Ins. Co. vs. Buxer ([1900], 62 Ohio St., 385; 49 L.R.A., 737);
Griffith vs. New York Life Ins. Co. ([1894], 101 Cal., 627; 40 Am. St. Rep., 96); Preston vs. Conn.
Mut. L. Ins. Co. of Hartford ([1902]); 95 Md., 101); Snyder vs. Supreme Ruler of Fraternal
Mystic Circle ([1909], 122 Tenn. 248; 45 L.R.A. [N.S.], 209); Lloyd vs. Royal Union Mut. L. Ins.
Co. ([1917], 245 Fed., 162); Phoenix Mut. L. Ins. Co. vs. Dunham ([1878], 46 Conn., 79; 33 Am.
Rep., 14); McKee vs. Phoenix Ins. Co. ([1859], 28 Mo., 383; 75 Am. Rep., 129); Supreme
Council American Legion of Honor vs. Smith and Smith ([1889], 45 N.J. Eq., 466); Overhiser vs.
Overhiser ([1900], 63 Ohio St., 77; 81 Am. St. Rep., 612; 50 L.R.A., 552); Condon vs. New York

Life Insurance Co. ([1918], 183 Iowa, 658); with which compare Foster vs. Gile ([1880], 50
Wis., 603) and Hatch vs. Hatch ([1904], 35 Tex. Civ. App., 373).
On the admitted facts and the authorities supporting the nearly universally accepted
principles of insurance, we are irresistibly led to the conclusion that the question at issue
must be answered in the negative.
The judgment appealed from will be reversed and the complaint ordered dismissed as to the
appellant, without special pronouncement as to the costs in either instance. So ordered.

G.R. No. L-28093 January 30, 1971


BASILIA BERDIN VDA. DE CONSUEGRA; JULIANA, PACITA, MARIA LOURDES, JOSE, JR.,
RODRIGO, LINEDA and LUIS, all surnamed CONSUEGRA, petitioners-appellants,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, COMMISSIONER OF PUBLIC HIGHWAYS,
HIGHWAY DISTRICT ENGINEER OF SURIGAO DEL NORTE, COMMISSIONER OF CIVIL SERVICE,
and ROSARIO DIAZ, respondents-appellees.
Bernardino O. Almeda for petitioners-appellants.
Binag and Arevalo, Jr. for respondent-appellee Government Service Insurance System.
Office of the Solicitor General for other respondents-appellees.
ZALDIVAR, J.:
Appeal on purely questions of law from the decision of the Court of First Instance of Surigao
del Norte, dated March 7, 1967, in its Special Proceeding No. 1720.
The pertinent facts, culled from the stipulation of facts submitted by the parties, are the
following:
The late Jose Consuegra, at the time of his death, was employed as a shop foreman of the
office of the District Engineer in the province of Surigao del Norte. In his lifetime, Consuegra
contracted two marriages, the first with herein respondent Rosario Diaz, solemnized in the
parish church of San Nicolas de Tolentino, Surigao, Surigao, on July 15, 1937, out of which
marriage were born two children, namely, Jose Consuegra, Jr. and Pedro Consuegra, but both
predeceased their father; and the second, which was contracted in good faith while the first
marriage was subsisting, with herein petitioner Basilia Berdin, on May 1, 1957 in the same
parish and municipality, out of which marriage were born seven children, namely, Juliana,
Pacita, Maria Lourdes, Jose, Rodrigo, Lenida and Luz, all surnamed Consuegra.
Being a member of the Government Service Insurance System (GSIS, for short) when
Consuegra died on September 26, 1965, the proceeds of his life insurance under policy No.
601801 were paid by the GSIS to petitioner Basilia Berdin and her children who were the
beneficiaries named in the policy. Having been in the service of the government for 22.5028
years, Consuegra was entitled to retirement insurance benefits in the sum of P6,304.47
pursuant to Section 12(c) of Commonwealth Act 186 as amended by Republic Acts 1616 and
3836. Consuegra did not designate any beneficiary who would receive the retirement

insurance benefits due to him. Respondent Rosario Diaz, the widow by the first marriage,
filed a claim with the GSIS asking that the retirement insurance benefits be paid to her as the
only legal heir of Consuegra, considering that the deceased did not designate any beneficiary
with respect to his retirement insurance benefits. Petitioner Basilia Berdin and her children,
likewise, filed a similar claim with the GSIS, asserting that being the beneficiaries named in
the life insurance policy of Consuegra, they are the only ones entitled to receive the
retirement insurance benefits due the deceased Consuegra. Resolving the conflicting claims,
the GSIS ruled that the legal heirs of the late Jose Consuegra were Rosario Diaz, his widow by
his first marriage who is entitled to one-half, or 8/16, of the retirement insurance benefits,
on the one hand; and Basilia Berdin, his widow by the second marriage and their seven
children, on the other hand, who are entitled to the remaining one-half, or 8/16, each of
them to receive an equal share of 1/16.
Dissatisfied with the foregoing ruling and apportionment made by the GSIS, Basilia Berdin
1
and her children filed on October 10, 1966 a petition for mandamus with preliminary
injunction in the Court of First Instance of Surigao, naming as respondents the GSIS, the
Commissioner of Public Highways, the Highway District Engineer of Surigao del Norte, the
Commissioner of Civil Service, and Rosario Diaz, praying that they (petitioners therein) be
declared the legal heirs and exclusive beneficiaries of the retirement insurance of the late
Jose Consuegra, and that a writ of preliminary injunction be issued restraining the
implementation of the adjudication made by the GSIS. On October 26, 1966, the trial court
issued an order requiring therein respondents to file their respective answers, but refrained
from issuing the writ of preliminary injunction prayed for. On February 11, 1967, the parties
submitted a stipulation of facts, prayed that the same be admitted and approved and that
judgment be rendered on the basis of the stipulation of facts. On March 7, 1967, the court
below rendered judgment, the pertinent portions of which are quoted hereunder:
This Court, in conformity with the foregoing stipulation of facts, likewise
is in full accord with the parties with respect to the authority cited by
them in support of said stipulation and which is herein-below cited for
purposes of this judgment, to wit:
"When two women innocently and in good faith are legally united in holy
matrimony to the same man, they and their children, born of said
wedlock, will be regarded as legitimate children and each family be
entitled to one half of the estate. Lao & Lao vs. Dee Tim, 45 Phil. 739;
Estrella vs. Laong Masa, Inc., (CA) 39 OG 79; Pisalbon vs. Bejec, 74 Phil.
88.
WHEREFORE, in view of the above premises, this Court is of the opinion
that the foregoing stipulation of facts is in order and in accordance with
law and the same is hereby approved. Judgment, therefore, is hereby
rendered declaring the petitioner Basilia Berdin Vda. de Consuegra and
her co-petitioners Juliana, Pacita, Maria Lourdes, Jose, Jr., Rodrigo, Lenida
and Luis, all surnamed Consuegra, beneficiary and entitled to one-half
(1/2) of the retirement benefit in the amount of Six Thousand Three

Hundred Four Pesos and Fourty-Seven Centavos (P6,304.47) due to the


deceased Jose Consuegra from the Government Service Insurance System
or the amount of P3,152.235 to be divided equally among them in the
proportional amount of 1/16 each. Likewise, the respondent Rosario Diaz
Vda. de Consuegra is hereby declared beneficiary and entitled to the
other half of the retirement benefit of the late Jose Consuegra or the
amount of P3,152.235. The case with respect to the Highway District
Engineer of Surigao del Norte is hereby ordered dismissed.
Hence the present appeal by herein petitioners-appellants, Basilia Berdin and her children.
It is the contention of appellants that the lower court erred in not holding that the
designated beneficiaries in the life insurance of the late Jose Consuegra are also the exclusive
beneficiaries in the retirement insurance of said deceased. In other words, it is the
submission of appellants that because the deceased Jose Consuegra failed to designate the
beneficiaries in his retirement insurance, the appellants who were the beneficiaries named in
the life insurance should automatically be considered the beneficiaries to receive the
retirement insurance benefits, to the exclusion of respondent Rosario Diaz. From the
arguments adduced by appellants in their brief We gather that it is their stand that the
system of life insurance and the system of retirement insurance, that are provided for in
Commonwealth Act 186 as amended, are simply complementary to each other, or that one is
a part or an extension of the other, such that whoever is named the beneficiary in the life
insurance is also the beneficiary in the retirement insurance when no such beneficiary is
named in the retirement insurance.
The contention of appellants is untenable.
It should be noted that the law creating the Government Service Insurance System is
Commonwealth Act 186 which was enacted by the National Assembly on November 14,
1936. As originally approved, Commonwealth Act 186 provided for the compulsory
membership in the Government Service Insurance System of all regularly and permanently
appointed officials and employees of the government, considering as automatically insured
on life all such officials and employees, and issuing to them the corresponding membership
2
policy under the terms and conditions as provided in the Act.
Originally, Commonwealth Act 186 provided for life insurance only. Commonwealth Act 186
was amended by Republic Act 660 which was enacted by the Congress of the Philippines on
June 16, 1951, and, among others, the amendatory Act provided that aside from the system
of life insurance under the Government Service Insurance System there was also established
the system of retirement insurance. Thus, We will note in Republic Act 660 that there is a
chapter on life insurance and another chapter on retirement insurance. 3 Under the chapter
on life insurance are sections 8, 9 and 10 of Commonwealth Act 186, as amended; and under
the chapter on retirement insurance are sections 11, 12, 13 and 13-A. On May 31, 1957,
Republic Act 1616 was enacted by Congress, amending section 12 of Commonwealth Act 186
as amended by Republic Act 660, by adding thereto two new subsections, designated as
subsections (b) and (c). This subsection (c) of section 12 of Commonwealth Act 186, as
amended by Republic Acts 660, 1616 and 3096, was again amended by Republic Act 3836

which was enacted on June 22, 1963.lwph1.t The pertinent provisions of subsection (c)
of Section 12 of Commonwealth Act 186, as thus amended and reamended, read as follows:
(c) Retirement is likewise allowed to a member, regardless of age, who
has rendered at least twenty years of service. The benefit shall, in
addition to the return of his personal contributions plus interest and the
payment of the corresponding employer's premiums described in
subsection (a) of Section 5 hereof, without interest, be only a gratuity
equivalent to one month's salary for every year of service, based on the
highest rate received, but not to exceed twenty-four months; Provided,
That the retiring officer or employee has been in the service of the said
employer or office for at least four years, immediately preceding his
retirement.
xxx xxx xxx
The gratuity is payable by the employer or office concerned which is
hereby authorized to provide the necessary appropriation to pay the
same from any unexpended items of appropriations.
Elective or appointive officials and employees paid gratuity under this
subsection shall be entitled to the commutation of the unused vacation
and sick leave, based on the highest rate received, which they may have
to their credit at the time of retirement.
Jose Consuegra died on September 26, 1965, and so at the time of his death he had acquired
rights under the above-quoted provisions of subsection (c) of Section 12 of Com. Act 186, as
finally amended by Rep. Act 3836 on June 22, 1963. When Consuegra died on September 26,
1965, he had to his credit 22.5028 years of service in the government, and pursuant to the
above-quoted provisions of subsection (c) of Section 12 of Com. Act 186, as amended, on the
basis of the highest rate of salary received by him which was P282.83 per month, he was
entitled to receive retirement insurance benefits in the amount of P6,304.47. This is the
retirement benefits that are the subject of dispute between the appellants, on the one hand,
and the appellee Rosario Diaz, on the other, in the present case. The question posed is: to
whom should this retirement insurance benefits of Jose Consuegra be paid, because he did
not, or failed to, designate the beneficiary of his retirement insurance?
If Consuegra had 22.5028 years of service in the government when he died on September 26,
1965, it follows that he started in the government service sometime during the early part of
1943, or before 1943. In 1943 Com. Act 186 was not yet amended, and the only benefits then
provided for in said Com. Act 186 were those that proceed from a life insurance. Upon
entering the government service Consuegra became a compulsory member of the GSIS,
being automatically insured on his life, pursuant to the provisions of Com. Act 186 which was
in force at the time. During 1943 the operation of the Government Service Insurance System
was suspended because of the war, and the operation was resumed sometime in 1946.
When Consuegra designated his beneficiaries in his life insurance he could not have intended
those beneficiaries of his life insurance as also the beneficiaries of his retirement insurance
because the provisions on retirement insurance under the GSIS came about only when Com.

Act 186 was amended by Rep. Act 660 on June 16, 1951. Hence, it cannot be said that
because herein appellants were designated beneficiaries in Consuegra's life insurance they
automatically became the beneficiaries also of his retirement insurance. Rep. Act 660 added
to Com. Act 186 provisions regarding retirement insurance, which are Sections 11, 12, and 13
of Com. Act 186, as amended. Subsection (b) of Section 11 of Com. Act 186, as amended by
Rep. Act 660, provides as follows:
(b) Survivors benefit. Upon death before he becomes eligible for
retirement, his beneficiaries as recorded in the application for retirement
annuity filed with the System shall be paid his own premiums with
interest of three per centum per annum, compounded monthly. If on his
death he is eligible for retirement, then the automatic retirement annuity
or the annuity chosen by him previously shall be paid accordingly.
The above-quoted provisions of subsection (b) of Section 11 of Commonwealth Act 186, as
amended by Rep. Act 660, clearly indicate that there is need for the employee to file an
application for retirement insurance benefits when he becomes a member of the GSIS, and
he should state in his application the beneficiary of his retirement insurance. Hence, the
beneficiary named in the life insurance does not automatically become the beneficiary in the
retirement insurance unless the same beneficiary in the life insurance is so designated in the
application for retirement insurance.
Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, provides for a life
insurance fund and for a retirement insurance fund. There was no such provision in Com. Act
186 before it was amended by Rep. Act 660. Thus, subsections (a) and (b) of Section 24 of
Commonwealth Act 186, as amended by Rep. Act 660, partly read as follows:
(a) Life insurance fund. This shall consist of all premiums for life
insurance benefit and/or earnings and savings therefrom. It shall meet
death claims as they may arise or such equities as any member may be
entitled to, under the conditions of his policy, and shall maintain the
required reserves to the end of guaranteeing the fulfillment of the life
insurance contracts issued by the System ...
(b) Retirement insurance fund. This shall consist of all contributions for
retirement insurance benefit and of earnings and savings therefrom. It
shall meet annuity payments and establish the required reserves to the
end of guaranteeing the fulfillment of the contracts issued by the System.
...
Thus, We see that the GSIS offers two separate and distinct systems of benefits to its
members one is the life insurance and the other is the retirement insurance. These two
distinct systems of benefits are paid out from two distinct and separate funds that are
maintained by the GSIS.
In the case of the proceeds of a life insurance, the same are paid to whoever is named the
beneficiary in the life insurance policy. As in the case of a life insurance provided for in the
Insurance Act (Act 2427, as amended), the beneficiary in a life insurance under the GSIS may
not necessarily be a heir of the insured. The insured in a life insurance may designate any

person as beneficiary unless disqualified to be so under the provisions of the Civil Code. And
in the absence of any beneficiary named in the life insurance policy, the proceeds of the
insurance will go to the estate of the insured.
Retirement insurance is primarily intended for the benefit of the employee to provide for
his old age, or incapacity, after rendering service in the government for a required number of
years. If the employee reaches the age of retirement, he gets the retirement benefits even to
the exclusion of the beneficiary or beneficiaries named in his application for retirement
insurance. The beneficiary of the retirement insurance can only claim the proceeds of the
retirement insurance if the employee dies before retirement. If the employee failed or
overlooked to state the beneficiary of his retirement insurance, the retirement benefits will
accrue to his estate and will be given to his legal heirs in accordance with law, as in the case
of a life insurance if no beneficiary is named in the insurance policy.
It is Our view, therefore, that the respondent GSIS had correctly acted when it ruled that the
proceeds of the retirement insurance of the late Jose Consuegra should be divided equally
between his first living wife Rosario Diaz, on the one hand, and his second wife Basilia Berdin
and his children by her, on the other; and the lower court did not commit error when it
confirmed the action of the GSIS, it being accepted as a fact that the second marriage of Jose
Consuegra to Basilia Berdin was contracted in good faith. The lower court has correctly
applied the ruling of this Court in the case of Lao, et al. vs. Dee Tim, et al., 45 Phil. 739 as
5
cited in the stipulation of facts and in the decision appealed from. In the recent case of
6
Gomez vs. Lipana, L-23214, June 30, 1970, this Court, in construing the rights of two women
who were married to the same man a situation more or less similar to the case of
appellant Basilia Berdin and appellee Rosario Diaz held "that since the defendant's first
marriage has not been dissolved or declared void the conjugal partnership established by
that marriage has not ceased. Nor has the first wife lost or relinquished her status as putative
heir of her husband under the new Civil Code, entitled to share in his estate upon his death
should she survive him. Consequently, whether as conjugal partner in a still subsisting
marriage or as such putative heir she has an interest in the husband's share in the property
here in dispute.... " And with respect to the right of the second wife, this Court observed that
although the second marriage can be presumed to be void ab initio as it was celebrated while
the first marriage was still subsisting, still there is need for judicial declaration of such nullity.
And inasmuch as the conjugal partnership formed by the second marriage was dissolved
before judicial declaration of its nullity, "[t]he only lust and equitable solution in this case
would be to recognize the right of the second wife to her share of one-half in the property
acquired by her and her husband and consider the other half as pertaining to the conjugal
partnership of the first marriage."
WHEREFORE, the decision appealed from is affirmed, with costs against petitionersappellants. It is so ordered.

G.R. No. L-54216 July 19, 1989

THE PHILIPPINE AMERICAN INSURANCE COMPANY, petitioner,


vs.
HONORABLE GREGORIO G. PINEDA in his capacity as Judge of the Court of First Instance of
Rizal, and RODOLFO C. DIMAYUGA, respondents.
PARAS, J.:
Challenged before Us in this petition for review on certiorari are the Orders of the
respondent Judge dated March 19, 1980 and June 10, 1980 granting the prayer in the
petition in Sp. Proc. No. 9210 and denying petitioner's Motion for Reconsideration,
respectively.
The undisputed facts are as follows:
On January 15, 1968, private respondent procured an ordinary life insurance policy from the
petitioner company and designated his wife and children as irrevocable beneficiaries of said
policy.
Under date February 22, 1980 private respondent filed a petition which was docketed as Civil
Case No. 9210 of the then Court of First Instance of Rizal to amend the designation of the
beneficiaries in his life policy from irrevocable to revocable.
Petitioner, on March 10, 1980 filed an Urgent Motion to Reset Hearing. Also on the same
date, petitioner filed its Comment and/or Opposition to Petition.
When the petition was called for hearing on March 19, 1980, the respondent Judge Gregorio
G. Pineda, presiding Judge of the then Court of First Instance of Rizal, Pasig Branch XXI,
denied petitioner's Urgent Motion, thus allowing the private respondent to adduce evidence,
the consequence of which was the issuance of the questioned Order granting the petition.
Petitioner promptly filed a Motion for Reconsideration but the same was denied in an Order
June 10, 1980. Hence, this petition raising the following issues for resolution:
I
WHETHER OR NOT THE DESIGNATION OF THE IRREVOCABLE
BENEFICIARIES COULD BE CHANGED OR AMENDED WITHOUT THE
CONSENT OF ALL THE IRREVOCABLE BENEFICIARIES.
I
I
WHETHER OR NOT THE IRREVOCABLE BENEFICIARIES HEREIN, ONE OF
WHOM IS ALREADY DECEASED WHILE THE OTHERS ARE ALL MINORS,
COULD VALIDLY GIVE CONSENT TO THE CHANGE OR AMENDMENT IN THE
DESIGNATION OF THE IRREVOCABLE BENEFICIARIES.
We are of the opinion that his Honor, the respondent Judge, was in error in issuing the
questioned Orders.
Needless to say, the applicable law in the instant case is the Insurance Act, otherwise known
as Act No. 2427 as amended, the policy having been procured in 1968. Under the said law,
the beneficiary designated in a life insurance contract cannot be changed without the
consent of the beneficiary because he has a vested interest in the policy (Gercio v. Sun Life

Ins. Co. of Canada, 48 Phil. 53; Go v. Redfern and the International Assurance Co., Ltd., 72
Phil. 71).
In this regard, it is worth noting that the Beneficiary Designation Indorsement in the policy
which forms part of Policy Number 0794461 in the name of Rodolfo Cailles Dimayuga states
that the designation of the beneficiaries is irrevocable (Annex "A" of Petition in Sp. Proc. No.
9210, Annex "C" of the Petition for Review on Certiorari), to wit:
It is hereby understood and agreed that, notwithstanding the provisions
of this policy to the contrary, inasmuch as the designation of the
primary/contingent beneficiary/beneficiaries in this Policy has been made
without reserving the right to change said beneficiary/ beneficiaries, such
designation may not be surrendered to the Company, released or
assigned; and no right or privilege under the Policy may be exercised, or
agreement made with the Company to any change in or amendment to
the Policy, without the consent of the said beneficiary/beneficiaries.
(Petitioner's Memorandum, p. 72, Rollo)
Be it noted that the foregoing is a fact which the private respondent did not bother to
disprove.
Inevitably therefore, based on the aforequoted provision of the contract, not to mention the
law then applicable, it is only with the consent of all the beneficiaries that any change or
amendment in the policy concerning the irrevocable beneficiaries may be legally and validly
effected. Both the law and the policy do not provide for any other exception, thus,
abrogating the contention of the private respondent that said designation can be amended if
the Court finds a just, reasonable ground to do so.
Similarly, the alleged acquiescence of the six (6) children beneficiaries of the policy (the
beneficiary-wife predeceased the insured) cannot be considered an effective ratification to
the change of the beneficiaries from irrevocable to revocable. Indubitable is the fact that all
the six (6) children named as beneficiaries were minors at the time,** for which reason, they
could not validly give their consent. Neither could they act through their father insured since
their interests are quite divergent from one another. In point is an excerpt from the Notes
and Cases on Insurance Law by Campos and Campos, 1960, readingThe insured ... can do nothing to divest the beneficiary of his rights
without his consent. He cannot assign his policy, nor even take its cash
surrender value without the consent of the beneficiary. Neither can the
insured's creditors seize the policy or any right thereunder. The insured
may not even add another beneficiary because by doing so, he diminishes
the amount which the beneficiary may recover and this he cannot do
without the beneficiary's consent.
Therefore, the parent-insured cannot exercise rights and/or privileges pertaining to the
insurance contract, for otherwise, the vested rights of the irrevocable beneficiaries would be
rendered inconsequential.
Of equal importance is the well-settled rule that the contract between the parties is the law
binding on both of them and for so many times, this court has consistently issued

pronouncements upholding the validity and effectivity of contracts. Where there is nothing
in the contract which is contrary to law, good morals, good customs, public policy or public
order the validity of the contract must be sustained. Likewise, contracts which are the private
laws of the contracting parties should be fulfilled according to the literal sense of their
stipulations, if their terms are clear and leave no room for doubt as to the intention of the
contracting parties, for contracts are obligatory, no matter in what form they may be,
whenever the essential requisites for their validity are present (Phoenix Assurance Co., Ltd.
vs. United States Lines, 22 SCRA 675, Phil. American General Insurance Co., Inc. vs. Mutuc, 61
SCRA 22.)
In the recent case of Francisco Herrera vs. Petrophil Corporation, 146 SCRA 385, this Court
ruled that:
... it is settled that the parties may establish such stipulations, clauses,
terms, and conditions as they may want to include; and as long as such
agreements are not contrary to law, good morals, good customs, public
policy or public order, they shall have the force of law between them.
Undeniably, the contract in the case at bar, contains the indispensable elements for its
validity and does not in any way violate the law, morals, customs, orders, etc. leaving no
reason for Us to deny sanction thereto.
Finally, the fact that the contract of insurance does not contain a contingency when the
change in the designation of beneficiaries could be validly effected means that it was never
within the contemplation of the parties. The lower court, in gratuitously providing for such
contingency, made a new contract for them, a proceeding which we cannot tolerate. Ergo,
We cannot help but conclude that the lower court acted in excess of its authority when it
issued the Order dated March 19, 1980 amending the designation of the beneficiaries from
"irrevocable" to "revocable" over the disapprobation of the petitioner insurance company.
WHEREFORE, premises considered, the questioned Orders of the respondent Judge are
hereby nullified and set aside.
SO ORDERED.

G.R. No. 124520 August 18, 1997

Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC., petitioners,
vs.
COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents.
PADILLA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a
decision of respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract
with private respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5
October 1988.
2. One of the stipulations of the one (1) year lease contract states:
18. . . . The LESSEE shall not insure against fire the chattels, merchandise, textiles,
goods and effects placed at any stall or store or space in the leased premises
without first obtaining the written consent and approval of the LESSOR. If the
LESSEE obtain(s) the insurance thereof without the consent of the LESSOR then the
1
policy is deemed assigned and transferred to the LESSOR for its own benefit; . . .
3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured
against loss by fire the merchandise inside the leased premises for Five Hundred Thousand
(P500,000.00) with the United Insurance Co., Inc. (hereinafter United) without the written
consent of private respondent CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased premises.
5. When CKS learned of the insurance earlier procured by the Cha spouses (without its
consent), it wrote the insurer (United) a demand letter asking that the proceeds of the
insurance contract (between the Cha spouses and United) be paid directly to CKS, based on
its lease contract with the Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and
United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision * ordering
therein defendant United to pay CKS the amount of P335,063.11 and defendant Cha spouses
to pay P50,000.00 as exemplary damages, P20,000.00 as attorney's fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision **
dated 11 January 1996, affirming the trial court decision, deleting however the awards for
exemplary damages and attorney's fees. A motion for reconsideration by United was denied
on 29 March 1996.
In the present petition, the following errors are assigned by petitioners to the Court of
Appeals:
I
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE
STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW,
MORALS AND PUBLIC POLICY

II
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE
CONTRACT OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND
THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR
OF PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING
WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF
2
THE RESPONDENT CORPORATION.
The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of
the lease contract entered into between CKS and the Cha spouses is valid insofar as it
provides that any fire insurance policy obtained by the lessee (Cha spouses) over their
merchandise inside the leased premises is deemed assigned or transferred to the lessor (CKS)
if said policy is obtained without the prior written consent of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a contract
3
cannot be contrary to law, morals, good customs, public order or public policy.
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on property shall be enforceable except
for the benefit of some person having an insurable interest in the property insured.
A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over
their merchandise is primarily a contract of indemnity. Insurable interest in the property
4
insured must exist at the time the insurance takes effect and at the time the loss occurs.
The basis of such requirement of insurable interest in property insured is based on sound
public policy: to prevent a person from taking out an insurance policy on property upon
which he has no insurable interest and collecting the proceeds of said policy in case of loss of
the property. In such a case, the contract of insurance is a mere wager which is void under
Section 25 of the Insurance Code, which provides:
Sec. 25. Every stipulation in a policy of Insurance for the payment of loss, whether
the person insured has or has not any interest in the property insured, or that the
policy shall be received as proof of such interest, and every policy executed by way
of gaming or wagering, is void.
In the present case, it cannot be denied that CKS has no insurable interest in the goods and
merchandise inside the leased premises under the provisions of Section 17 of the Insurance
Code which provide:
Sec. 17. The measure of an insurable interest in property is the extent to which the
insured might be damnified by loss of injury thereof.

Therefore, respondent CKS cannot, under the Insurance Code a special law be validly a
beneficiary of the fire insurance policy taken by the petitioner-spouses over their
merchandise. This insurable interest over said merchandise remains with the insured, the
Cha spouses. The automatic assignment of the policy to CKS under the provision of the lease
contract previously quoted is void for being contrary to law and/or public policy. The
proceeds of the fire insurance policy thus rightfully belong to the spouses Nilo Cha and Stella
Uy-Cha (herein co-petitioners). The insurer (United) cannot be compelled to pay the
proceeds of the fire insurance policy to a person (CKS) who has no insurable interest in the
property insured.
The liability of the Cha spouses to CKS for violating their lease contract in that the Cha
spouses obtained a fire insurance policy over their own merchandise, without the consent of
CKS, is a separate and distinct issue which we do not resolve in this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and a
new decision is hereby entered, awarding the proceeds of the fire insurance policy to
petitioners Nilo Cha and Stella Uy-Cha.
SO ORDERED.

G.R. No. 168115


June 8, 2007
VICENTE ONG LIM SING, JR., petitioner,
vs.
FEB LEASING & FINANCE CORPORATION, respondent.
DECISION
NACHURA, J.:
1
This is a petition for review on certiorari assailing the Decision dated March 15, 2005 and
2
the Resolution dated May 23, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 77498.
The facts are as follows:
3
On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease of
equipment and motor vehicles with JVL Food Products (JVL). On the same date, Vicente Ong
4
Lim Sing, Jr. (Lim) executed an Individual Guaranty Agreement with FEB to guarantee the
prompt and faithful performance of the terms and conditions of the aforesaid lease
5
agreement. Corresponding Lease Schedules with Delivery and Acceptance Certificates over
the equipment and motor vehicles formed part of the agreement. Under the contract, JVL
was obliged to pay FEB an aggregate gross monthly rental of One Hundred Seventy Thousand
Four Hundred Ninety-Four Pesos (P170,494.00).
JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in
arrears, including penalty charges and insurance premiums, amounted to Three Million Four
Hundred Fourteen Thousand Four Hundred Sixty-Eight and 75/100 Pesos (P3,414,468.75). On
August 23, 2000, FEB sent a letter to JVL demanding payment of the said amount. However,
6
JVL failed to pay.

On December 6, 2000, FEB filed a Complaint with the Regional Trial Court of Manila,
docketed as Civil Case No. 00-99451, for sum of money, damages, and replevin against JVL,
Lim, and John Doe.
8
In the Amended Answer, JVL and Lim admitted the existence of the lease agreement but
asserted that it is in reality a sale of equipment on installment basis, with FEB acting as the
financier. JVL and Lim claimed that this intention was apparent from the fact that they were
made to believe that when full payment was effected, a Deed of Sale will be executed by FEB
9
as vendor in favor of JVL and Lim as vendees. FEB purportedly assured them that
documenting the transaction as a lease agreement is just an industry practice and that the
proper documentation would be effected as soon as full payment for every item was made.
They also contended that the lease agreement is a contract of adhesion and should,
therefore, be construed against the party who prepared it, i.e., FEB.
In upholding JVL and Lims stance, the trial court stressed the contradictory terms it found in
the lease agreement. The pertinent portions of the Decision dated November 22, 2002 read:
A profound scrutiny of the provisions of the contract which is a contract of adhesion at once
exposed the use of several contradictory terms. To name a few, in Section 9 of the said
contract disclaiming warranty, it is stated that the lessor is not the manufacturer nor the
latters agent and therefore does not guarantee any feature or aspect of the object of the
contract as to its merchantability. Merchantability is a term applied in a contract of sale of
goods where conditions and warranties are made to apply. Article 1547 of the Civil Code
provides that unless a contrary intention appears an implied warranty on the part of the
seller that he has the right to sell and to pass ownership of the object is furnished by law
together with an implied warranty that the thing shall be free from hidden faults or defects
or any charge or encumbrance not known to the buyer.
In an adhesion contract which is drafted and printed in advance and parties are not given a
real arms length opportunity to transact, the Courts treat this kind of contract strictly against
their architects for the reason that the party entering into this kind of contract has no choice
but to accept the terms and conditions found therein even if he is not in accord therewith
and for that matter may not have understood all the terms and stipulations prescribed
thereat. Contracts of this character are prepared unilaterally by the stronger party with the
best legal talents at its disposal. It is upon that thought that the Courts are called upon to
analyze closely said contracts so that the weaker party could be fully protected.
Another instance is when the alleged lessee was required to insure the thing against loss,
damage or destruction.
In property insurance against loss or other accidental causes, the assured must have an
insurable interest, 32 Corpus Juris 1059.
xxxx
It has also been held that the test of insurable interest in property is whether the assured has
a right, title or interest therein that he will be benefited by its preservation and continued
existence or suffer a direct pecuniary loss from its destruction or injury by the peril insured
against. If the defendants were to be regarded as only a lessee, logically the lessor who

asserts ownership will be the one directly benefited or injured and therefore the lessee is not
supposed to be the assured as he has no insurable interest.
There is also an observation from the records that the actual value of each object of the
contract would be the result after computing the monthly rentals by multiplying the said
rentals by the number of months specified when the rentals ought to be paid.
Still another observation is the existence in the records of a Deed of Absolute Sale by and
between the same parties, plaintiff and defendants which was an exhibit of the defendant
where the plaintiff sold to the same defendants one unit 1995 Mitsubishi L-200 STRADA DC
PICK UP and in said Deed, The Court noticed that the same terms as in the alleged lease were
used in respect to warranty, as well as liability in case of loss and other conditions. This
action of the plaintiff unequivocally exhibited their real intention to execute the
corresponding Deed after the defendants have paid in full and as heretofore discussed and
for the sake of emphasis the obscurity in the written contract cannot favor the party who
caused the obscurity.
Based on substantive Rules on Interpretation, if the terms are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulations shall control. If
the words appear to be contrary to the evident intention of the parties, their
contemporaneous and subsequent acts shall be principally considered. If the doubts are cast
upon the principal object of the contract in such a way that it cannot be known what may
10
have been the intention or will of the parties, the contract shall be null and void.
Thus, the court concluded with the following disposition:
In this case, which is held by this Court as a sale on installment there is no chattel mortgage
on the thing sold, but it appears amongst the Complaints prayer, that the plaintiff elected to
exact fulfillment of the obligation.
For the vehicles returned, the plaintiff can only recover the unpaid balance of the price
because of the previous payments made by the defendants for the reasonable use of the
units, specially so, as it appears, these returned vehicles were sold at auction and that the
plaintiff can apply the proceeds to the balance. However, with respect to the unreturned
units and machineries still in the possession of the defendants, it is this Courts view and so
hold that the defendants are liable therefore and accordingly are ordered jointly and
severally to pay the price thereof to the plaintiff together with attorneys fee and the costs of
suit in the sum of Php25,000.00.
11
SO ORDERED.
12
On December 27, 2002, FEB filed its Notice of Appeal. Accordingly, on January 17, 2003, the
13
court issued an Order elevating the entire records of the case to the CA. FEB averred that
the trial court erred:
A. When it ruled that the agreement between the Parties-Litigants is one of sale of personal
properties on installment and not of lease;
B. When it ruled that the applicable law on the case is Article 1484 (of the Civil Code) and not
R.A. No. 8556;

C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid balance of the
price because of the previous payments made by the defendants for the reasonable use of
the units;
D. When it failed to make a ruling or judgment on the Joint and Solidary Liability of Vicente
14
Ong Lim, Jr. to the Plaintiff-Appellant.
15
On March 15, 2005, the CA issued its Decision declaring the transaction between the
16
parties as a financial lease agreement under Republic Act (R.A.) No. 8556. The fallo of the
assailed Decision reads:
WHEREFORE, the instant appeal is GRANTED and the assailed Decision dated 22 November
2002 rendered by the Regional Trial Court of Manila, Branch 49 in Civil Case No. 00-99451 is
REVERSED and SET ASIDE, and a new judgment is hereby ENTERED ordering appellees JVL
Food Products and Vicente Ong Lim, Jr. to solidarily pay appellant FEB Leasing and Finance
Corporation the amount of Three Million Four Hundred Fourteen Thousand Four Hundred
Sixty Eight Pesos and 75/100 (Php3,414,468.75), with interest at the rate of twelve percent
(12%) per annum starting from the date of judicial demand on 06 December 2000, until full
payment thereof. Costs against appellees.
17
SO ORDERED.
Lim filed the instant Petition for Review on Certiorari under Rule 45
contending that:
I
The Honorable Court of Appeals erred when it failed to consider that the undated complaint
was filed by Saturnino J. Galang, Jr., without any authority from respondents Board of
Directors and/or Secretarys Certificate.
II
The Honorable Court of Appeals erred when it failed to strictly apply Section 7, Rule 18 of the
1997 Rules of Civil Procedure and now Item 1, A(8) of A.M. No. 03-1-09 SC (June 8, 2004).
III
The Honorable Court of Appeals erred in not dismissing the appeal for failure of the
respondent to file on time its appellants brief and to separately rule on the petitioners
motion to dismiss.
IV
The Honorable Court of Appeals erred in finding that the contract between the parties is one
of a financial lease and not of a contract of sale.
V
The Honorable Court of Appeals ERRED IN ruling that the payments paid by the petitioner to
the respondent are "rentals" and not installments paid for the purchase price of the subject
motor vehicles, heavy machines and equipment.
VI
The Honorable Court of Appeals erred in ruling that the previous contract of sale involving
the pick-up vehicle is of no consequence.
VII

The Honorable Court of Appeals failed to take into consideration that the contract of lease, a
contract of adhesion, concealed the true intention of the parties, which is a contract of sale.
VIII
The Honorable Court of Appeals erred in ruling that the petitioner is a lessee with insurable
interest over the subject personal properties.
IX
The Honorable Court of Appeals erred in construing the intentions of the Court a quo in its
18
usage of the term merchantability.
We affirm the ruling of the appellate court.
First, Lim can no longer question Galangs authority as FEBs authorized representative in
filing the suit against Lim. Galang was the representative of FEB in the proceedings before
the trial court up to the appellate court. Petitioner never placed in issue the validity of
Galangs representation before the trial and appellate courts. Issues raised for the first time
on appeal are barred by estoppel. Arguments not raised in the original proceedings cannot
19
be considered on review; otherwise, it would violate basic principles of fair play.
Second, there is no legal basis for Lim to question the authority of the CA to go beyond the
matters agreed upon during the pre-trial conference, or in not dismissing the appeal for
failure of FEB to file its brief on time, or in not ruling separately on the petitioners motion to
dismiss.
Courts have the prerogative to relax procedural rules of even the most mandatory character,
mindful of the duty to reconcile both the need to speedily put an end to litigation and the
parties right to due process. In numerous cases, this Court has allowed liberal construction
20
of the rules when to do so would serve the demands of substantial justice and equity. In
Aguam v. Court of Appeals , the Court explained:
The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power
conferred on the court, not a duty. The "discretion must be a sound one, to be exercised in
accordance with the tenets of justice and fair play, having in mind the circumstances
obtaining in each case." Technicalities, however, must be avoided. The law abhors
technicalities that impede the cause of justice. The court's primary duty is to render or
dispense justice. "A litigation is not a game of technicalities." "Lawsuits unlike duels are not
to be won by a rapier's thrust. Technicality, when it deserts its proper office as an aid to
justice and becomes its great hindrance and chief enemy, deserves scant consideration from
courts." Litigations must be decided on their merits and not on technicality. Every party
litigant must be afforded the amplest opportunity for the proper and just determination of
his cause, free from the unacceptable plea of technicalities. Thus, dismissal of appeals purely
on technical grounds is frowned upon where the policy of the court is to encourage hearings
of appeals on their merits and the rules of procedure ought not to be applied in a very rigid,
technical sense; rules of procedure are used only to help secure, not override substantial
justice. It is a far better and more prudent course of action for the court to excuse a technical
lapse and afford the parties a review of the case on appeal to attain the ends of justice rather
than dispose of the case on technicality and cause a grave injustice to the parties, giving a

false impression of speedy disposal of cases while actually resulting in more delay, if not a
21
miscarriage of justice.
Third, while we affirm that the subject lease agreement is a contract of adhesion, such a
contract is not void per se. It is as binding as any ordinary contract. A party who enters into
22
an adhesion contract is free to reject the stipulations entirely. If the terms thereof are
accepted without objection, then the contract serves as the law between the parties.
In Section 23 of the lease contract, it was expressly stated that:
SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE
23.1. The LESSOR and the LESSEE agree this instrument constitute the entire agreement
between them, and that no representations have been made other than as set forth herein.
This Agreement shall not be amended or altered in any manner, unless such amendment be
made in writing and signed by the parties hereto.
Petitioners claim that the real intention of the parties was a contract of sale of personal
property on installment basis is more likely a mere afterthought in order to defeat the rights
of the respondent.
The Lease Contract with corresponding Lease Schedules with Delivery and Acceptance
Certificates is, in point of fact, a financial lease within the purview of R.A. No. 8556. Section
3(d) thereof defines "financial leasing" as:
[A] mode of extending credit through a non-cancelable lease contract under which the lessor
purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles,
appliances, business and office machines, and other movable or immovable property in
consideration of the periodic payment by the lessee of a fixed amount of money sufficient to
amortize at least seventy (70%) of the purchase price or acquisition cost, including any
incidental expenses and a margin of profit over an obligatory period of not less than two (2)
years during which the lessee has the right to hold and use the leased property with the right
to expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance,
insurance and preservation thereof, but with no obligation or option on his part to purchase
the leased property from the owner-lessor at the end of the lease contract.
FEB leased the subject equipment and motor vehicles to JVL in consideration of a monthly
periodic payment of P170,494.00. The periodic payment by petitioner is sufficient to
amortize at least 70% of the purchase price or acquisition cost of the said movables in
accordance with the Lease Schedules with Delivery and Acceptance Certificates. "The basic
purpose of a financial leasing transaction is to enable the prospective buyer of equipment,
who is unable to pay for such equipment in cash in one lump sum, to lease such equipment
in the meantime for his use, at a fixed rental sufficient to amortize at least 70% of the
acquisition cost (including the expenses and a margin of profit for the financial lessor) with
the expectation that at the end of the lease period the buyer/financial lessee will be able to
23
pay any remaining balance of the purchase price."
The allegation of petitioner that the rent for the use of each movable constitutes the value of
the vehicle or equipment leased is of no moment. The law on financial lease does not
prohibit such a circumstance and this alone does not make the transaction between the
parties a sale of personal property on installment. In fact, the value of the lease, usually

constituting the value or amount of the property involved, is a benefit allowed by law to the
lessor for the use of the property by the lessee for the duration of the lease. It is recognized
that the value of these movables depreciates through wear and tear upon use by the lessee.
24
In Beltran v. PAIC Finance Corporation, we stated that:
Generally speaking, a financing company is not a buyer or seller of goods; it is not a trading
company. Neither is it an ordinary leasing company; it does not make its profit by buying
equipment and repeatedly leasing out such equipment to different users thereof. But a
financial lease must be preceded by a purchase and sale contract covering the equipment
which becomes the subject matter of the financial lease. The financial lessor takes the role of
the buyer of the equipment leased. And so the formal or documentary tie between the seller
and the real buyer of the equipment, i.e., the financial lessee, is apparently severed. In
economic reality, however, that relationship remains. The sale of the equipment by the
supplier thereof to the financial lessor and the latter's legal ownership thereof are intended
to secure the repayment over time of the purchase price of the equipment, plus financing
charges, through the payment of lease rentals; that legal title is the upfront security held by
the financial lessor, a security probably superior in some instances to a chattel mortgagee's
25
lien.
Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld. JVL
entered into the lease contract with full knowledge of its terms and conditions. The contract
was in force for more than four years. Since its inception on March 9, 1995, JVL and Lim
never questioned its provisions. They only attacked the validity of the contract after they
were judicially made to answer for their default in the payment of the agreed rentals.
It is settled that the parties are free to agree to such stipulations, clauses, terms, and
conditions as they may want to include in a contract. As long as such agreements are not
contrary to law, morals, good customs, public policy, or public order, they shall have the
26
force of law between the parties. Contracting parties may stipulate on terms and conditions
27
as they may see fit and these have the force of law between them.
28
The stipulation in Section 14 of the lease contract, that the equipment shall be insured at
the cost and expense of the lessee against loss, damage, or destruction from fire, theft,
accident, or other insurable risk for the full term of the lease, is a binding and valid
stipulation. Petitioner, as a lessee, has an insurable interest in the equipment and motor
vehicles leased. Section 17 of the Insurance Code provides that the measure of an insurable
interest in property is the extent to which the insured might be damnified by loss or injury
thereof. It cannot be denied that JVL will be directly damnified in case of loss, damage, or
destruction of any of the properties leased.
Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does not warrant
the merchantability of the equipment is a valid stipulation. Section 9.1 of the lease contract is
stated as:
9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE
MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE
MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE HEREBY ACKNOWLEDGES THAT IT HAS
SELECTED THE EQUIPMENT AND THE SUPPLIER THEREOF AND THAT THERE ARE NO

WARRANTIES, CONDITIONS, TERMS, REPRESENTATION OR INDUCEMENTS, EXPRESS OR


IMPLIED, STATUTORY OR OTHERWISE, MADE BY OR ON BEHALF OF THE LESSOR AS TO ANY
FEATURE OR ASPECT OF THE EQUIPMENT OR ANY PART THEREOF, OR AS TO ITS FITNESS,
SUITABILITY, CAPACITY, CONDITION OR MERCHANTABILITY, NOR AS TO WHETHER THE
EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY LAW, RULE, SPECIFICATIONS OR
CONTRACT WHICH PROVIDE FOR SPECIFIC MACHINERY OR APPARATUS OR SPECIAL
29
METHODS.
In the financial lease agreement, FEB did not assume responsibility as to the quality,
merchantability, or capacity of the equipment. This stipulation provides that, in case of
defect of any kind that will be found by the lessee in any of the equipment, recourse should
be made to the manufacturer. "The financial lessor, being a financing company, i.e., an
extender of credit rather than an ordinary equipment rental company, does not extend a
warranty of the fitness of the equipment for any particular use. Thus, the financial lessee was
precisely in a position to enforce such warranty directly against the supplier of the
equipment and not against the financial lessor. We find nothing contra legem or contrary to
30
public policy in such a contractual arrangement."
Fifth, petitioner further proffers the view that the real intention of the parties was to enter
into a contract of sale on installment in the same manner that a previous transaction
between the parties over a 1995 Mitsubishi L-200 Strada DC-Pick-Up was initially covered by
an agreement denominated as a lease and eventually became the subject of a Deed of
Absolute Sale.
We join the CA in rejecting this view because to allow the transaction involving the pick-up to
be read into the terms of the lease agreement would expand the coverage of the agreement,
31
in violation of Article 1372 of the New Civil Code. The lease contract subject of the
complaint speaks only of a lease. Any agreement between the parties after the lease contract
has ended is a different transaction altogether and should not be included as part of the
lease. Furthermore, it is a cardinal rule in the interpretation of contracts that if the terms of a
contract are clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of its stipulations shall control. No amount of extrinsic aid is necessary in order to
32
determine the parties' intent.
WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision of the CA
in CA-G.R. CV No. 77498 dated March 15, 2005 and Resolution dated May 23, 2005 are
AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. L-5715 December 20, 1910
E. M. BACHRACH, plaintiff-appellee,
vs.
BRITISH AMERICAN ASSURANCE COMPANY, a corporation, defendant-appellant.
Haussermann, Ortigas, Cohn and Fisher, for appellant
Kincaid & Hurd and Thomas L. Hartigan, for appellee.
JOHNSON, J.:

On the 13th of July, 1908, the plaintiff commenced an action against the defendant to
recover the sum of P9,841.50, the amount due, deducting the salvage, upon the following
fire insurance policy issued by the defendant to the plaintiff:
[Fire policy No. 3007499.]
This policy of insurance witnesseth, that E. M. Bachrach, esq., Manila (hereinafter
called the insured), having paid to the undersigned, as authorized agent of the
British American Assurance Company (hereinafter called the company), the sum of
two thousand pesos Philippine currency, for insuring against loss or damage by fire,
as hereinafter mentioned, the property hereinafter described, in the sum of several
sums following, viz:
Ten thousand pesos Philippine currency, on goods, belonging to a general furniture
store, such as iron and brass bedsteads, toilet tables, chairs, ice boxes, bureaus,
washstands, mirrors, and sea-grass furniture (in accordance with warranty "D" of
the tariff attached hereto) the property of the assured, in trust, on commission or
for which he is responsible, whilst stored in the ground floor and first story of
house and dwelling No. 16 Calle Martinez, district 3, block 70, Manila, built, ground
floor of stone and or brick, first story of hard wood and roofed with galvanized iron
bounded in the front by the said calle, on one side by Calle David and on the
other two sides by buildings of similar construction and occupation.
Co-insurance allowed, particulars of which to be declared in the event of loss or
claim.
The company hereby agrees with the insured (but subject to the conditions on the
back hereof, which are to be taken as a part of this policy) that if the property
above described, or any part thereof, shall be destroyed or damaged by fire, at any
time between the 21st day of February, 1908, and 4 o'clock in the afternoon of the
21st day of February, 1909, or (in case of the renewal of this policy) at any time
afterwards, so long as, and during the period in respect of which the insured shall
have paid to the company, and they shall have accepted, the sum required for the
renewal of this policy, the company will, out of their capital stock, and funds, pay or
make good to the insured the value of the property so destroyed, or the amount of
such damage thereto, to any amount not exceeding, in respect of each or any of
the several matters above specified, the sum set opposite thereto, respectively,
and not exceeding in the whole the sum of ten thousand pesos, and also not
exceeding, in any case, the amount of the insurable interest therein of the insured
at the time of the happening of such fire.
In witness whereof, the British American Assurance Company has accused these
presents to be signed this 21st day of February, in the year of our Lord 1908.
For the company.
W. F. STEVENSON & Co. LTD.,
"By...............................................,
"Manager Agents."
And indorsed on the back the following:

The within policy and includes a "Calalac" automobile to the extent of


(P1,250) twelve hundred and fifty pesos Philippine currency.
Memo: Permission is hereby granted for the use of gasoline not to
exceed 10 gallons for the above automobile, but only whilst contained in
the reservoir of the car. It is further warranted that the car be neither
filled nor emptied in the within-described building or this policy be null
and void.
Manila, 27th February, 1908.
"W. F. STEVENSON & Co. LTD.,
"By.......................................................,
"Manager Agents."
The defendant answered the complaint, admitting some of the facts alleged by the plaintiff
and denying others. The defendant also alleged certain facts under which it claimed that it
was released from all obligations whatever under said policy. These special facts are as
follows:
First. That the plaintiff maintained a paint and varnish shop in the said building where the
goods which were insured were stored.
Second. That the plaintiff transferred his interest in and to the property covered by the policy
to H. W. Peabody & Co. to secure certain indebtedness due and owing to said company, and
also that the plaintiff had transferred his interest in certain of the goods covered by the said
policy to one Macke, to secure certain obligations assumed by the said Macke for and on
behalf of the insured. That the sanction of the said defendant had not been obtained by the
plaintiff, as required by the said policy.
Third. That the plaintiff, on the 18th of April, 1908, and immediately preceding the outbreak
of the alleged fire, willfully placed a gasoline can containing 10 gallons of gasoline in the
upper story of said building in close proximity to a portion of said goods, wares, and
merchandise, which can was so placed by the plaintiff as to permit the gasoline to run on the
floor of said second story, and after so placing said gasoline, he, the plaintiff, placed in close
proximity to said escaping gasoline a lighted lamp containing alcohol, thereby greatly
increasing the risk of fire.
Fourth. That the plaintiff made no proof of the loss within the time required by condition five
of said policy, nor did the insured file a statement with he municipal or any other judge or
court of the goods alleged to have been in said building at the time of the alleged fire, nor of
the goods saved, nor the loss suffered.
The plaintiff, after denying nearly all of the facts set out in the special answer of the
defendant, alleged:
First. That he had been acquitted in a criminal action against him, after a trial duly and
regularly had, upon a charge of arson, based upon the same alleged facts set out in the
answer of the defendant.
Second. That her had made no proof of the loss set up in his complaint for the reason that
immediately after he had, on the 20th of April, 1908, given the defendant due notice in
writing of said loss, the defendant, on the 21st of April, 1908, and thereafter on other

occasions, had waived all right to require proof of said loss by denying all liability under the
policy and by declaring said policy to be null and void.
After hearing the evidence adduced during the trial of the cause, the lower court found that
the defendant was liable to the plaintiff and rendered a judgment against the defendant for
the sum of P9,841.50, with interest for a period of one year at 6 per cent, making a total of
P10,431.99, with costs.
From that decision the defendant appealed and made the following assignments of error:
1. The court erred in failing to hold that the use of the building, No. 16 Calle Martinez, as a
paint and varnish shop annulled the policy of insurance.
2. The court erred in failing to hold the execution of the chattel mortgages without the
knowledge and consent of the insurance company annulled the policy of insurance.
3. The court erred in holding that the keeping of gasoline and alcohol not in bottles in the
building No. 16 Calle Martinez was not such a violation of the conditions of the policy as to
render the same null and void.
4. The court erred in failing to find as a fact that E. M. Bachrach, the insured, willfully placed a
gasoline can containing about 10 gallons of gasoline in the upper story of said building, No.
16 Calle Martinez, in close proximity to a portion of the goods, wares, and merchandise
stored therein, and that said can was so placed by said Bachrach as to permit the gasoline to
run on the floor of said second story.
5. The court erred in failing to find as a fact that E. M. Bachrach, after placing said gasoline
can in close proximity to the goods, wares, and merchandise covered by the policy of
insurance, the he (Bachrach) placed in close proximity to said escaping gasoline a lighted
lamp containing alcohol, thereby greatly increasing the risk of fire.
6. The court erred in holding that the policy of insurance was in force at the time of said fire,
and that the acts or omissions on the part of the insured which cause, or tended to cause,
the forfeiture of the policy, were waived by the defendant.
7. The court erred in holding the defendant liable for the loss under the policy.lawphil.net
8. The court erred in refusing to deduct from the loss sustained by Bachrach the value of the
automobile, which was saved without damage.
9. The court erred in refusing to grant the motion for a new trial.
10. The court erred in refusing to enter judgment in favor of the defendant and against the
plaintiff.
With reference to the first above assignment of error, the lower court in its decision said:
It is claimed that either gasoline or alcohol was kept in violation of the policy in the
bodega containing the insured property. The testimony on this point is somewhat
conflicting, but conceding all of the defendant's claims, the construction given to
this claim by American courts would not justify the forfeiture of the policy on that
ground. The property insured consisted mainly of household furniture kept for the
purpose of sale. The preservation of the furniture in a salable condition by
retouching or otherwise was incidental to the business. The evidence offered by
the plaintiff is to the effect that alcohol was used in preparing varnish for the
purpose of retouching, though he also says that the alcohol was kept in store and

not in the bodega where the furniture was. 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. Thus, where a furniture factory keeps
benzine for the purposes of operation (Davis vs. Pioneer Furniture Company, 78 N.
W. Rep., 596; Faust vs. American Fire Insurance Company, 91 Wis., 158), or where
it is used for the cleaning machinery (Mears vs. Humboldt Insurance Company, 92
Pa. St., 15; 37 Am. Rep., 647), the insurer can not on that ground avoid payment of
loss, though the keeping of the benzine on the premises is expressly prohibited.
These authorities also appear sufficient to answer the objection that the insured
automobile contained gasoline and that the plaintiff on one occasion was seen in
the bodega with a lighted lamp. The first was incidental to the use of the insured
article and the second being a single instance falls within the doctrine of the case
last cited.
It may be added that there was no provision in the policy prohibiting the keeping of paints
and varnishes upon the premises where the insured property was stored. If the company
intended to rely upon a condition of that character, it ought to have been plainly expressed
in the policy.
With reference to the second above assignment of error, the defendant and appellant
contends that the lower court erred in failing to hold that the execution of the said chattel
mortgage, without the knowledge and consent of the insurance company and without
receiving the sanction of said company, annulled the said policy of insurance.
With reference to this assignment of error, upon reading the policy of insurance issued by
the defendant to the plaintiff, it will be noted that there is no provision in said policy
prohibiting the plaintiff from placing a mortgage upon the property insured, but, admitting
that such a provision was intended, we think the lower court has completely answered this
contention of the defendant. He said, in passing upon this question as it was presented:
It is claimed that the execution of a chattel mortgage on the insured property
violated what is known as the "alienation clause," which is now found in most
policies, and which is expressed in the policies involved in cases 6496 and 6497 by a
purchase imposing forfeiture if the interest in the property pass from the insured.
(Cases 6496 and 6497, in which are involved other action against other insurance
companies for the same loss as in the present action.)
This clause has been the subject of a vast number of judicial decisions (13 Am. &
Eng. Encyc. of Law, 2d ed., pp. 239 et seq.), and it is held by the great weight of
authority that the interest in property insured does not pass by the mere execution
of a chattel mortgage and that while a chattel mortgage is a conditional sale, there
is no alienation within the meaning of the insurance law until the mortgage
acquires a right to take possession by default under the terms of the mortgage. No
such right is claimed to have accrued in the case at bar, and the alienation clause is
therefore inapplicable.
With reference to the third assignment of error above noted, upon a reading of the decision
of the lower court it will be found that there is nothing in the decision of the lower court

relating to the facts stated in this assignment of error, neither is there any provision in the
policy relating to the facts alleged in said assignment of error.
Assignment of error numbers 4 and 5 above noted may be considered together.
The record discloses that some time prior to the commencement of this present action, a
criminal action was commenced against the plaintiff herein in the Court of First Instance of
the city of Manila, in which he was charged with willfully and maliciously burning the
property covered by the policy in the present case. At the conclusion of the criminal action
and after hearing the evidence adduced during the trial, the lower court, with the assistance
of two assessors, found that the evidence was insufficient to show beyond peradventure of
doubt that the defendant was guilty of the crime. The evidence adduced during the trial of
the criminal cause was introduced as evidence in the present cause. While the evidence
shows some very peculiar and suspicious circumstances concerning the burning of the goods
covered by the said policy, yet, nevertheless, in view of the findings of the lower court and in
view of the apparent conflict in the testimony, we can not find that there is a preponderance
of evidence showing that the plaintiff did actually set fire or cause fire to be set to the goods
in question. The lower court, in discussing this question, said:
As to the claim that the loss occurred through the voluntary act of the insured, we
consider it unnecessary to review the evidence in detail. That was done by another
branch of this court in disposing of the criminal prosecution brought against the
insured, on the same ground, based mainly on the same evidence. And regardless
of whether or not the judgment in that proceeding is res adjudicata as to anything
here, we are at least of the opinion that the evidence to establish this defense
should not be materially less convincing than that required in order to convict the
insured of the crime of arson. (Turtell vs. Beamount, 25 Rev. Rep., 644.) In order to
find that the defense of incendiarism was established here, we would be obliged,
therefore, in effect to set aside the findings of the judge and assessors in the
criminal cause, and this we would be loath to do even though the evidence now
produced were much stronger than it is.
With reference to the sixth assignment of error above noted, to wit:itc@alf That the court
erred in holding that the policy of insurance was in force at the time of said fire and that the
acts or omissions on the part of the insured which caused or tended to cause a forfeiture of
the policy were waived by the defendant, the lower court, in discussing this question, said:
Regardless of the question whether the plaintiff's letter of April 20 (Exhibit B) was a
sufficient compliance with the requirement that he furnish notice of loss, the fact
remains that on the following day the insurers replied by a letter (Exhibit C)
declaring that the "policies were null and void," and in effect denying liability. It is
well settled by a preponderance of authorities that such a denial is a waiver of
notice of loss, because if the "policies are null and void," the furnishing of such
notice would be vain and useless. (13 Am. & Eng. Encyc. of Law, 347, 348, 349.)
Besides, "immediate notice" is construed to mean only within a reasonable time.
Much the same may be said as to the objection that the insured failed to furnish to
the insurers his books and papers or to present a detailed statement to the "juez

municipal," in accordance with article 404 of the Code of Commerce. The lastnamed provision is similar to one appearing in many American policies requiring a
certificate from a magistrate nearest the loss regarding the circumstance thereof. A
denial of liability on other grounds waives this requirement (O'Niel vs. Buffalo Fire
Insurance Company, 3 N. Y., 122; Peoria Marine Ins. Co. vs. Whitehill, 25 Ill., 382),
as well as that relating to the production of books and papers (Ga. Home Ins. Co.
vs. Goode & Co., 95 Va., 751; 66 Jur. Civ., 16). Besides, the insured might have had
difficulty in attempting to comply with this clause, for there is no longer an official
here with the title of "juez municipal."
Besides the foregoing reasons, it may be added that there was no requirement in the policy
in question that such notice be given.
With reference to the assignments of error numbers 7, 9, and 10, they are too general in
their character to merit consideration.
With reference to the eight assignment of error above noted, the defendant and appellant
contends that he was entitled to have the amount of his responsibility reduced by the full
value (P1,250) of the said automobile.
It does not positively appear of record that the automobile in question was not included in
the other policies. It does appear that the automobile was saved and was considered as a
part of the salvaged. It is alleged that the salvage amounted to P4,000, including the
automobile. This amount (P4,000) was distributed among the different insurers and the
amount of their responsibility was proportionately reduced. The defendant and appellant in
the present case made no objection at any time in the lower court to that distribution of the
salvage. The claim is now made for the first time. No reason is given why the objection was
not made at the time of the distribution of the salvage, including the automobile, among all
of the insurers. The lower court had no opportunity to pass upon the question now
presented for the first time. The defendant stood by and allowed the other insurers to share
in the salvage, which he claims now wholly belonged to him. We think it is now too late to
raise the question.
For all the foregoing reasons, we are of the opinion that the judgment of the lower court
should be affirmed, and it is hereby ordered that judgment be entered against the defendant
and in favor of the plaintiff for the sum of P9,841.50, with interest at the rate of 6 per cent
from the 13th of July, 1908, with costs. So ordered.
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 Yet vs. 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.
G.R. No. 181132
June 5, 2009
HEIRS OF LORETO C. MARAMAG, represented by surviving spouse VICENTA PANGILINAN
MARAMAG, Petitioners,
vs.
EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL BRIAN DE
GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR LIFE ASSURANCE
COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE CORPORATION, Respondents.
DECISION
NACHURA, J.:
1
This is a petition for review on certiorari under Rule 45 of the Rules, seeking to reverse and
2
set aside the Resolution dated January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV
No. 85948, dismissing petitioners appeal for lack of jurisdiction.
3
The case stems from a petition filed against respondents with the Regional Trial Court,
Branch 29, for revocation and/or reduction of insurance proceeds for being void and/or
inofficious, with prayer for a temporary restraining order (TRO) and a writ of preliminary
injunction.
The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto
Maramag (Loreto), while respondents were Loretos illegitimate family; (2) Eva de Guzman
Maramag (Eva) was a concubine of Loreto and a suspect in the killing of the latter, thus, she
is disqualified to receive any proceeds from his insurance policies from Insular Life Assurance
4
5
Company, Ltd. (Insular) and Great Pacific Life Assurance Corporation (Grepalife); (3) the
illegitimate children of LoretoOdessa, Karl Brian, and Trisha Angeliewere entitled only to
one-half of the legitime of the legitimate children, thus, the proceeds released to Odessa and
those to be released to Karl Brian and Trisha Angelie were inofficious and should be reduced;
and (4) petitioners could not be deprived of their legitimes, which should be satisfied first.
In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged,
among others, that part of the insurance proceeds had already been released in favor of
Odessa, while the rest of the proceeds are to be released in favor of Karl Brian and Trisha
Angelie, both minors, upon the appointment of their legal guardian. Petitioners also prayed
for the total amount of P320,000.00 as actual litigation expenses and attorneys fees.
6
In answer, Insular admitted that Loreto misrepresented Eva as his legitimate wife and
Odessa, Karl Brian, and Trisha Angelie as his legitimate children, and that they filed their

claims for the insurance proceeds of the insurance policies; that when it ascertained that Eva
was not the legal wife of Loreto, it disqualified her as a beneficiary and divided the proceeds
among Odessa, Karl Brian, and Trisha Angelie, as the remaining designated beneficiaries; and
that it released Odessas share as she was of age, but withheld the release of the shares of
minors Karl Brian and Trisha Angelie pending submission of letters of guardianship. Insular
alleged that the complaint or petition failed to state a cause of action insofar as it sought to
declare as void the designation of Eva as beneficiary, because Loreto revoked her designation
as such in Policy No. A001544070 and it disqualified her in Policy No. A001693029; and
insofar as it sought to declare as inofficious the shares of Odessa, Karl Brian, and Trisha
Angelie, considering that no settlement of Loretos estate had been filed nor had the
respective shares of the heirs been determined. Insular further claimed that it was bound to
honor the insurance policies designating the children of Loreto with Eva as beneficiaries
pursuant to Section 53 of the Insurance Code.
7
In its own answer with compulsory counterclaim, Grepalife alleged that Eva was not
designated as an insurance policy beneficiary; that the claims filed by Odessa, Karl Brian, and
Trisha Angelie were denied because Loreto was ineligible for insurance due to a
misrepresentation in his application form that he was born on December 10, 1936 and, thus,
not more than 65 years old when he signed it in September 2001; that the case was
premature, there being no claim filed by the legitimate family of Loreto; and that the law on
succession does not apply where the designation of insurance beneficiaries is clear.
As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to
petitioners, summons by publication was resorted to. Still, the illegitimate family of Loreto
failed to file their answer. Hence, the trial court, upon motion of petitioners, declared them
in default in its Order dated May 7, 2004.
During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues raised
in their respective answers be resolved first. The trial court ordered petitioners to comment
within 15 days.
In their comment, petitioners alleged that the issue raised by Insular and Grepalife was
purely legal whether the complaint itself was proper or not and that the designation of a
beneficiary is an act of liberality or a donation and, therefore, subject to the provisions of
8
9
Articles 752 and 772 of the Civil Code.
In reply, both Insular and Grepalife countered that the insurance proceeds belong exclusively
to the designated beneficiaries in the policies, not to the estate or to the heirs of the insured.
Grepalife also reiterated that it had disqualified Eva as a beneficiary when it ascertained that
Loreto was legally married to Vicenta Pangilinan Maramag.
On September 21, 2004, the trial court issued a Resolution, the dispositive portion of which
reads
WHEREFORE, the motion to dismiss incorporated in the answer of defendants Insular Life
and Grepalife is granted with respect to defendants Odessa, Karl Brian and Trisha Maramag.
The action shall proceed with respect to the other defendants Eva Verna de Guzman, Insular
Life and Grepalife.
10
SO ORDERED.

In so ruling, the trial court ratiocinated thus


Art. 2011 of the Civil Code provides that the contract of insurance is governed by the (sic)
special laws. Matters not expressly provided for in such special laws shall be regulated by this
Code. The principal law on insurance is the Insurance Code, as amended. Only in case of
deficiency in the Insurance Code that the Civil Code may be resorted to. (Enriquez v. Sun Life
Assurance Co., 41 Phil. 269.)
The Insurance Code, as amended, contains a provision regarding to whom the insurance
proceeds shall be paid. It is very clear under Sec. 53 thereof that the insurance proceeds shall
be applied exclusively to the proper interest of the person in whose name or for whose
benefit it is made, unless otherwise specified in the policy. Since the defendants are the ones
named as the primary beneficiary (sic) in the insurances (sic) taken by the deceased Loreto C.
Maramag and there is no showing that herein plaintiffs were also included as beneficiary (sic)
therein the insurance proceeds shall exclusively be paid to them. This is because the
beneficiary has a vested right to the indemnity, unless the insured reserves the right to
change the beneficiary. (Grecio v. Sunlife Assurance Co. of Canada, 48 Phil. [sic] 63).
Neither could the plaintiffs invoked (sic) the law on donations or the rules on testamentary
succession in order to defeat the right of herein defendants to collect the insurance
indemnity. The beneficiary in a contract of insurance is not the donee spoken in the law of
donation. The rules on testamentary succession cannot apply here, for the insurance
indemnity does not partake of a donation. As such, the insurance indemnity cannot be
considered as an advance of the inheritance which can be subject to collation (Del Val v. Del
Val, 29 Phil. 534). In the case of Southern Luzon Employees Association v. Juanita Golpeo, et
al., the Honorable Supreme Court made the following pronouncements[:]
"With the finding of the trial court that the proceeds to the Life Insurance Policy belongs
exclusively to the defendant as his individual and separate property, we agree that the
proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of
the person whose life was insured, and that such proceeds are the separate and individual
property of the beneficiary and not of the heirs of the person whose life was insured, is the
doctrine in America. We believe that the same doctrine obtains in these Islands by virtue of
Section 428 of the Code of Commerce x x x."
In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic) no
sufficient cause of action against defendants Odessa, Karl Brian and Trisha Angelie Maramag
for the reduction and/or declaration of inofficiousness of donation as primary beneficiary
(sic) in the insurances (sic) of the late Loreto C. Maramag.
However, herein plaintiffs are not totally bereft of any cause of action. One of the named
beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is his concubine
Eva Verna De Guzman. Any person who is forbidden from receiving any donation under
Article 739 cannot be named beneficiary of a life insurance policy of the person who cannot
make any donation to him, according to said article (Art. 2012, Civil Code). If a concubine is
made the beneficiary, it is believed that the insurance contract will still remain valid, but the
indemnity must go to the legal heirs and not to the concubine, for evidently, what is
prohibited under Art. 2012 is the naming of the improper beneficiary. In such case, the action

for the declaration of nullity may be brought by the spouse of the donor or donee, and the
guilt of the donor and donee may be proved by preponderance of evidence in the same
action (Comment of Edgardo L. Paras, Civil Code of the Philippines, page 897). Since the
designation of defendant Eva Verna de Guzman as one of the primary beneficiary (sic) in the
insurances (sic) taken by the late Loreto C. Maramag is void under Art. 739 of the Civil Code,
the insurance indemnity that should be paid to her must go to the legal heirs of the deceased
which this court may properly take cognizance as the action for the declaration for the nullity
11
of a void donation falls within the general jurisdiction of this Court.
12
13
Insular and Grepalife filed their respective motions for reconsideration, arguing, in the
main, that the petition failed to state a cause of action. Insular further averred that the
proceeds were divided among the three children as the remaining named beneficiaries.
Grepalife, for its part, also alleged that the premiums paid had already been refunded.
Petitioners, in their comment, reiterated their earlier arguments and posited that whether
the complaint may be dismissed for failure to state a cause of action must be determined
solely on the basis of the allegations in the complaint, such that the defenses of Insular and
Grepalife would be better threshed out during trial.1avvphi1
On June 16, 2005, the trial court issued a Resolution, disposing, as follows:
WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration filed by
defendants Grepalife and Insular Life are hereby GRANTED. Accordingly, the portion of the
Resolution of this Court dated 21 September 2004 which ordered the prosecution of the case
against defendant Eva Verna De Guzman, Grepalife and Insular Life is hereby SET ASIDE, and
the case against them is hereby ordered DISMISSED.
14
SO ORDERED.
In granting the motions for reconsideration of Insular and Grepalife, the trial court
considered the allegations of Insular that Loreto revoked the designation of Eva in one policy
and that Insular disqualified her as a beneficiary in the other policy such that the entire
proceeds would be paid to the illegitimate children of Loreto with Eva pursuant to Section 53
of the Insurance Code. It ruled that it is only in cases where there are no beneficiaries
designated, or when the only designated beneficiary is disqualified, that the proceeds should
be paid to the estate of the insured. As to the claim that the proceeds to be paid to Loretos
illegitimate children should be reduced based on the rules on legitime, the trial court held
that the distribution of the insurance proceeds is governed primarily by the Insurance Code,
and the provisions of the Civil Code are irrelevant and inapplicable. With respect to the
Grepalife policy, the trial court noted that Eva was never designated as a beneficiary, but
only Odessa, Karl Brian, and Trisha Angelie; thus, it upheld the dismissal of the case as to the
illegitimate children. It further held that the matter of Loretos misrepresentation was
premature; the appropriate action may be filed only upon denial of the claim of the named
beneficiaries for the insurance proceeds by Grepalife.
Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal for
lack of jurisdiction, holding that the decision of the trial court dismissing the complaint for
failure to state a cause of action involved a pure question of law. The appellate court also
noted that petitioners did not file within the reglementary period a motion for

reconsideration of the trial courts Resolution, dated September 21, 2004, dismissing the
complaint as against Odessa, Karl Brian, and Trisha Angelie; thus, the said Resolution had
already attained finality.
Hence, this petition raising the following issues:
a. In determining the merits of a motion to dismiss for failure to state a cause of
action, may the Court consider matters which were not alleged in the Complaint,
particularly the defenses put up by the defendants in their Answer?
b. In granting a motion for reconsideration of a motion to dismiss for failure to
state a cause of action, did not the Regional Trial Court engage in the examination
and determination of what were the facts and their probative value, or the truth
thereof, when it premised the dismissal on allegations of the defendants in their
answer which had not been proven?
c. x x x (A)re the members of the legitimate family entitled to the proceeds of the
15
insurance for the concubine?
In essence, petitioners posit that their petition before the trial court should not have been
dismissed for failure to state a cause of action because the finding that Eva was either
disqualified as a beneficiary by the insurance companies or that her designation was revoked
by Loreto, hypothetically admitted as true, was raised only in the answers and motions for
reconsideration of both Insular and Grepalife. They argue that for a motion to dismiss to
prosper on that ground, only the allegations in the complaint should be considered. They
further contend that, even assuming Insular disqualified Eva as a beneficiary, her share
should not have been distributed to her children with Loreto but, instead, awarded to them,
being the legitimate heirs of the insured deceased, in accordance with law and jurisprudence.
The petition should be denied.
The grant of the motion to dismiss was based on the trial courts finding that the petition
failed to state a cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court,
which reads
SECTION 1. Grounds. Within the time for but before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss may be made on any of the following grounds:
xxxx
(g) That the pleading asserting the claim states no cause of action.
16
A cause of action is the act or omission by which a party violates a right of another. A
complaint states a cause of action when it contains the three (3) elements of a cause of
action(1) the legal right of the plaintiff; (2) the correlative obligation of the defendant; and
(3) the act or omission of the defendant in violation of the legal right. If any of these
elements is absent, the complaint becomes vulnerable to a motion to dismiss on the ground
17
of failure to state a cause of action.
When a motion to dismiss is premised on this ground, the ruling thereon should be based
only on the facts alleged in the complaint. The court must resolve the issue on the strength
of such allegations, assuming them to be true. The test of sufficiency of a cause of action
rests on whether, hypothetically admitting the facts alleged in the complaint to be true, the

court can render a valid judgment upon the same, in accordance with the prayer in the
complaint. This is the general rule.
However, this rule is subject to well-recognized exceptions, such that there is no hypothetical
admission of the veracity of the allegations if:
1. the falsity of the allegations is subject to judicial notice;
2. such allegations are legally impossible;
3. the allegations refer to facts which are inadmissible in evidence;
4. by the record or document in the pleading, the allegations appear unfounded; or
5. there is evidence which has been presented to the court by stipulation of the
18
parties or in the course of the hearings related to the case.
In this case, it is clear from the petition filed before the trial court that, although petitioners
are the legitimate heirs of Loreto, they were not named as beneficiaries in the insurance
policies issued by Insular and Grepalife. The basis of petitioners claim is that Eva, being a
concubine of Loreto and a suspect in his murder, is disqualified from being designated as
beneficiary of the insurance policies, and that Evas children with Loreto, being illegitimate
children, are entitled to a lesser share of the proceeds of the policies. They also argued that
19
pursuant to Section 12 of the Insurance Code, Evas share in the proceeds should be
forfeited in their favor, the former having brought about the death of Loreto. Thus, they
prayed that the share of Eva and portions of the shares of Loretos illegitimate children
should be awarded to them, being the legitimate heirs of Loreto entitled to their respective
legitimes.
It is evident from the face of the complaint that petitioners are not entitled to a favorable
judgment in light of Article 2011 of the Civil Code which expressly provides that insurance
contracts shall be governed by special laws, i.e., the Insurance Code. Section 53 of the
Insurance Code states
SECTION 53. The insurance proceeds shall be applied exclusively to the proper interest of the
person in whose name or for whose benefit it is made unless otherwise specified in the
policy.
Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds
are either the insured, if still alive; or the beneficiary, if the insured is already deceased, upon
20
the maturation of the policy. The exception to this rule is a situation where the insurance
contract was intended to benefit third persons who are not parties to the same in the form
of favorable stipulations or indemnity. In such a case, third parties may directly sue and claim
21
from the insurer.
Petitioners are third parties to the insurance contracts with Insular and Grepalife and, thus,
are not entitled to the proceeds thereof. Accordingly, respondents Insular and Grepalife have
no legal obligation to turn over the insurance proceeds to petitioners. The revocation of Eva
as a beneficiary in one policy and her disqualification as such in another are of no moment
considering that the designation of the illegitimate children as beneficiaries in Loretos
insurance policies remains valid. Because no legal proscription exists in naming as
22
beneficiaries the children of illicit relationships by the insured, the shares of Eva in the
insurance proceeds, whether forfeited by the court in view of the prohibition on donations

under Article 739 of the Civil Code or by the insurers themselves for reasons based on the
insurance contracts, must be awarded to the said illegitimate children, the designated
beneficiaries, to the exclusion of petitioners. It is only in cases where the insured has not
23
designated any beneficiary, or when the designated beneficiary is disqualified by law to
24
receive the proceeds, that the insurance policy proceeds shall redound to the benefit of the
estate of the insured.
In this regard, the assailed June 16, 2005 Resolution of the trial court should be upheld. In
the same light, the Decision of the CA dated January 8, 2008 should be sustained. Indeed, the
appellate court had no jurisdiction to take cognizance of the appeal; the issue of failure to
state a cause of action is a question of law and not of fact, there being no findings of fact in
25
the first place.
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.
SO ORDERED.

.R. No. 183526


August 25, 2009
VIOLETA R. LALICAN, Petitioner,
vs.
THE INSULAR LIFE ASSURANCE COMPANY LIMITED, AS REPRESENTED BY THE PRESIDENT
VICENTE R. AVILON, Respondent.
DECISION
CHICO-NAZARIO, J.:
1
Challenged in this Petition for Review on Certiorari under Rule 45 of the Rules of Court are
2
3
4
the Decision dated 30 August 2007 and the Orders dated 10 April 2008 and 3 July 2008 of
the Regional Trial Court (RTC) of Gapan City, Branch 34, in Civil Case No. 2177. In its assailed
Decision, the RTC dismissed the claim for death benefits filed by petitioner Violeta R. Lalican
(Violeta) against respondent Insular Life Assurance Company Limited (Insular Life); while in
its questioned Orders dated 10 April 2008 and 3 July 2008, respectively, the RTC declared the
finality of the aforesaid Decision and denied petitioners Notice of Appeal.
The factual and procedural antecedents of the case, as culled from the records, are as
follows:
Violeta is the widow of the deceased Eulogio C. Lalican (Eulogio).
During his lifetime, Eulogio applied for an insurance policy with Insular Life. On 24 April 1997,
Insular Life, through Josephine Malaluan (Malaluan), its agent in Gapan City, issued in favor
5
of Eulogio Policy No. 9011992, which contained a 20-Year Endowment Variable Income
6
7
Package Flexi Plan worth P500,000.00, with two riders valued at P500,000.00 each. Thus,
the value of the policy amounted to P1,500,000.00. Violeta was named as the primary
beneficiary.
Under the terms of Policy No. 9011992, Eulogio was to pay the premiums on a quarterly basis
in the amount of P8,062.00, payable every 24 April, 24 July, 24 October and 24 January of
each year, until the end of the 20-year period of the policy. According to the Policy Contract,
there was a grace period of 31 days for the payment of each premium subsequent to the

first. If any premium was not paid on or before the due date, the policy would be in default,
and if the premium remained unpaid until the end of the grace period, the policy would
8
automatically lapse and become void.
Eulogio paid the premiums due on 24 July 1997 and 24 October 1997. However, he failed to
pay the premium due on 24 January 1998, even after the lapse of the grace period of 31
days. Policy No. 9011992, therefore, lapsed and became void.
Eulogio submitted to the Cabanatuan District Office of Insular Life, through Malaluan, on 26
9
May 1998, an Application for Reinstatement of Policy No. 9011992, together with the
10
amount of P8,062.00 to pay for the premium due on 24 January 1998. In a letter dated 17
July 1998, Insular Life notified Eulogio that his Application for Reinstatement could not be
fully processed because, although he already deposited P8,062.00 as payment for the 24
January 1998 premium, he left unpaid the overdue interest thereon amounting to P322.48.
Thus, Insular Life instructed Eulogio to pay the amount of interest and to file another
application for reinstatement. Eulogio was likewise advised by Malaluan to pay the premiums
that subsequently became due on 24 April 1998 and 24 July 1998, plus interest.
On 17 September 1998, Eulogio went to Malaluans house and submitted a second
11
Application for Reinstatement of Policy No. 9011992, including the amount of P17,500.00,
representing payments for the overdue interest on the premium for 24 January 1998, and
the premiums which became due on 24 April 1998 and 24 July 1998. As Malaluan was away
on a business errand, her husband received Eulogios second Application for Reinstatement
and issued a receipt for the amount Eulogio deposited.
A while later, on the same day, 17 September 1998, Eulogio died of cardio-respiratory arrest
secondary to electrocution.
Without knowing of Eulogios death, Malaluan forwarded to the Insular Life Regional Office
in the City of San Fernando, on 18 September 1998, Eulogios second Application for
Reinstatement of Policy No. 9011992 and P17,500.00 deposit. However, Insular Life no
longer acted upon Eulogios second Application for Reinstatement, as the former was
informed on 21 September 1998 that Eulogio had already passed away.
On 28 September 1998, Violeta filed with Insular Life a claim for payment of the full proceeds
of Policy No. 9011992.
12
In a letter dated 14 January 1999, Insular Life informed Violeta that her claim could not be
granted since, at the time of Eulogios death, Policy No. 9011992 had already lapsed, and
Eulogio failed to reinstate the same. According to the Application for Reinstatement, the
policy would only be considered reinstated upon approval of the application by Insular Life
during the applicants "lifetime and good health," and whatever amount the applicant paid in
connection thereto was considered to be a deposit only until approval of said application.
Enclosed with the 14 January 1999 letter of Insular Life to Violeta was DBP Check No.
0000309734, for the amount of P25,417.00, drawn in Violetas favor, representing the full
refund of the payments made by Eulogio on Policy No. 9011992.
On 12 February 1998, Violeta requested a reconsideration of the disallowance of her claim.
13
In a letter dated 10 March 1999, Insular Life stated that it could not find any reason to

reconsider its decision rejecting Violetas claim. Insular Life again tendered to Violeta the
above-mentioned check in the amount of P25,417.00.
Violeta returned the letter dated 10 March 1999 and the check enclosed therein to the
14
Cabanatuan District Office of Insular Life. Violetas counsel subsequently sent a letter dated
8 July 1999 to Insular Life, demanding payment of the full proceeds of Policy No. 9011992.
On 11 August 1999, Insular Life responded to the said demand letter by agreeing to conduct
a re-evaluation of Violetas claim.
Without waiting for the result of the re-evaluation by Insular Life, Violeta filed with the RTC,
15
on 11 October 1999, a Complaint for Death Claim Benefit, which was docketed as Civil Case
No. 2177. Violeta alleged that Insular Life engaged in unfair claim settlement practice and
deliberately failed to act with reasonable promptness on her insurance claim. Violeta prayed
that Insular Life be ordered to pay her death claim benefits on Policy No. 9011992, in the
amount of P1,500,000.00, plus interests, attorneys fees, and cost of suit.
16
Insular Life filed with the RTC an Answer with Counterclaim, asserting that Violetas
Complaint had no legal or factual bases. Insular Life maintained that Policy No. 9011992, on
which Violeta sought to recover, was rendered void by the non-payment of the 24 January
1998 premium and non-compliance with the requirements for the reinstatement of the
same. By way of counterclaim, Insular Life prayed that Violeta be ordered to pay attorneys
fees and expenses of litigation incurred by the former.
Violeta, in her Reply and Answer to Counterclaim, asserted that the requirements for the
reinstatement of Policy No. 9011992 had been complied with and the defenses put up by
Insular Life were purely invented and illusory.
After trial, the RTC rendered, on 30 August 2007, a Decision in favor of Insular Life.
The RTC found that Policy No. 9011992 had indeed lapsed and Eulogio needed to have the
same reinstated:
[The] arguments [of Insular Life] are not without basis. When the premiums for April 24 and
July 24, 1998 were not paid by [Eulogio] even after the lapse of the 31-day grace period, his
insurance policy necessarily lapsed. This is clear from the terms and conditions of the
contract between [Insular Life] and [Eulogio] which are written in [the] Policy provisions of
17
Policy No. 9011992 x x x.
The RTC, taking into account the clear provisions of the Policy Contract between Eulogio and
Insular Life and the Application for Reinstatement Eulogio subsequently signed and
submitted to Insular Life, held that Eulogio was not able to fully comply with the
requirements for the reinstatement of Policy No. 9011992:
The well-settled rule is that a contract has the force of law between the parties. In the instant
case, the terms of the insurance contract between [Eulogio] and [Insular Life] were spelled
out in the policy provisions of Insurance Policy No. 9011992. There is likewise no dispute that
said insurance contract is by nature a contract of adhesion[,] which is defined as "one in
which one of the contracting parties imposes a ready-made form of contract which the other
party may accept or reject but cannot modify." (Polotan, Sr. vs. CA, 296 SCRA 247).
xxxx

The New Lexicon Websters Dictionary defines ambiguity as the "quality of having more than
one meaning" and "an idea, statement or expression capable of being understood in more
than one sense." In Nacu vs. Court of Appeals, 231 SCRA 237 (1994), the Supreme Court
stated that[:]
"Any ambiguity in a contract, whose terms are susceptible of different interpretations as a
result thereby, must be read and construed against the party who drafted it on the
assumption that it could have been avoided by the exercise of a little care."
In the instant case, the dispute arises from the afore-quoted provisions written on the face of
the second application for reinstatement. Examining the said provisions, the court finds the
same clearly written in terms that are simple enough to admit of only one interpretation.
They are clearly not ambiguous, equivocal or uncertain that would need further construction.
The same are written on the very face of the application just above the space where
[Eulogio] signed his name. It is inconceivable that he signed it without reading and
understanding its import.1avvphi1
Similarly, the provisions of the policy provisions (sic) earlier mentioned are written in simple
and clear laymans language, rendering it free from any ambiguity that would require a legal
interpretation or construction. Thus, the court believes that [Eulogio] was well aware that
when he filed the said application for reinstatement, his lapsed policy was not automatically
reinstated and that its approval was subject to certain conditions. Nowhere in the policy or in
the application for reinstatement was it ever mentioned that the payment of premiums
would have the effect of an automatic and immediate renewal of the lapsed policy. Instead,
what was clearly stated in the application for reinstatement is that pending approval thereof,
the premiums paid would be treated as a "deposit only and shall not bind the company until
this application is finally approved during my/our" lifetime and good health[.]"
Again, the court finds nothing in the aforesaid provisions that would even suggest an
ambiguity either in the words used or in the manner they were written. [Violeta] did not
present any proof that [Eulogio] was not conversant with the English language. Hence, his
having personally signed the application for reinstatement[,] which consisted only of one
page, could only mean that he has read its contents and that he understood them. x x x
Therefore, consistent with the above Supreme Court ruling and finding no ambiguity both in
the policy provisions of Policy No. 9011992 and in the application for reinstatement subject
of this case, the court finds no merit in *Violetas+ contention that the policy provision stating
that [the lapsed policy of Eulogio] should be reinstated during his lifetime is ambiguous and
should be construed in his favor. It is true that [Eulogio] submitted his application for
reinstatement, together with his premium and interest payments, to [Insular Life] through its
agent Josephine Malaluan in the morning of September 17, 1998. Unfortunately, he died in
the afternoon of that same day. It was only on the following day, September 18, 1998 that
Ms. Malaluan brought the said document to [the regional office of Insular Life] in San
Fernando, Pampanga for approval. As correctly pointed out by [Insular Life] there was no
more application to approve because the applicant was already dead and no insurance
18
company would issue an insurance policy to a dead person. (Emphases ours.)
The RTC, in the end, explained that:

While the court truly empathizes with the [Violeta] for the loss of her husband, it cannot
express the same by interpreting the insurance agreement in her favor where there is no
need for such interpretation. It is conceded that *Eulogios+ payment of overdue premiums
and interest was received by [Insular Life] through its agent Ms. Malaluan. It is also true that
[the] application for reinstatement was filed by [Eulogio] a day before his death. However,
there is nothing that would justify a conclusion that such receipt amounted to an automatic
reinstatement of the policy that has already lapsed. The evidence suggests clearly that no
such automatic renewal was contemplated in the contract between [Eulogio] and [Insular
Life]. Neither was it shown that Ms. Malaluan was the officer authorized to approve the
application for reinstatement and that her receipt of the documents submitted by [Eulogio]
19
amounted to its approval. (Emphasis ours.)
The fallo of the RTC Decision thus reads:
WHEREFORE, all the foregoing premises considered and finding that [Violeta] has failed to
establish by preponderance of evidence her cause of action against the defendant, let this
20
case be, as it is hereby DISMISSED.
21
On 14 September 2007, Violeta filed a Motion for Reconsideration of the afore-mentioned
22
RTC Decision. Insular Life opposed the said motion, averring that the arguments raised
therein were merely a rehash of the issues already considered and addressed by the RTC. In
23
an Order dated 8 November 2007, the RTC denied Violetas Motion for Reconsideration,
finding no cogent and compelling reason to disturb its earlier findings. Per the Registry
Return Receipt on record, the 8 November 2007 Order of the RTC was received by Violeta on
3 December 2007.
24
In the interim, on 22 November 2007, Violeta filed with the RTC a Reply to the Motion for
Reconsideration, wherein she reiterated the prayer in her Motion for Reconsideration for the
setting aside of the Decision dated 30 August 2007. Despite already receiving on 3 December
2007, a copy of the RTC Order dated 8 November 2007, which denied her Motion for
Reconsideration, Violeta still filed with the RTC, on 26 February 2008, a Reply Extended
Discussion elaborating on the arguments she had previously made in her Motion for
Reconsideration and Reply.
25
On 10 April 2008, the RTC issued an Order, declaring that the Decision dated 30 August
2007 in Civil Case No. 2177 had already attained finality in view of Violetas failure to file the
appropriate notice of appeal within the reglementary period. Thus, any further discussions
on the issues raised by Violeta in her Reply and Reply Extended Discussion would be moot
and academic.
26
Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with Motion, praying that
the Order dated 10 April 2008 be set aside and that she be allowed to file an appeal with the
Court of Appeals.
27
In an Order dated 3 July 2008, the RTC denied Violetas Notice of Appeal with Motion given
that the Decision dated 30 August 2007 had long since attained finality.
Violeta directly elevated her case to this Court via the instant Petition for Review on
Certiorari, raising the following issues for consideration:

1. Whether or not the Decision of the court a quo dated August 30, 2007, can still
be reviewed despite having allegedly attained finality and despite the fact that the
mode of appeal that has been availed of by Violeta is erroneous?
2. Whether or not the Regional Trial Court in its original jurisdiction has decided the
case on a question of law not in accord with law and applicable decisions of the
Supreme Court?
Violeta insists that her former counsel committed an honest mistake in filing a Reply, instead
of a Notice of Appeal of the RTC Decision dated 30 August 2007; and in the computation of
the reglementary period for appealing the said judgment. Violeta claims that her former
counsel suffered from poor health, which rapidly deteriorated from the first week of July
2008 until the latters death just shortly after the filing of the instant Petition on 8 August
2008. In light of these circumstances, Violeta entreats this Court to admit and give due
course to her appeal even if the same was filed out of time.
Violeta further posits that the Court should address the question of law arising in this case
involving the interpretation of the second sentence of Section 19 of the Insurance Code,
which provides:
Section. 19. x x x [I]nterest in the life or health of a person insured must exist when the
insurance takes effect, but need not exist thereafter or when the loss occurs.
On the basis thereof, Violeta argues that Eulogio still had insurable interest in his own life
when he reinstated Policy No. 9011992 just before he passed away on 17 September 1998.
The RTC should have construed the provisions of the Policy Contract and Application for
Reinstatement in favor of the insured Eulogio and against the insurer Insular Life, and
considered the special circumstances of the case, to rule that Eulogio had complied with the
requisites for the reinstatement of Policy No. 9011992 prior to his death, and that Violeta is
entitled to claim the proceeds of said policy as the primary beneficiary thereof.
The Petition lacks merit.
At the outset, the Court notes that the elevation of the case to us via the instant Petition for
28
Review on Certiorari is not justified. Rule 41, Section 1 of the Rules of Court, provides that
no appeal may be taken from an order disallowing or dismissing an appeal. In such a case,
29
the aggrieved party may file a Petition for Certiorari under Rule 65 of the Rules of Court.
Furthermore, the RTC Decision dated 30 August 2007, assailed in this Petition, had long
become final and executory. Violeta filed a Motion for Reconsideration thereof, but the RTC
denied the same in an Order dated 8 November 2007. The records of the case reveal that
Violeta received a copy of the 8 November 2007 Order on 3 December 2007. Thus, Violeta
30
had 15 days from said date of receipt, or until 18 December 2007, to file a Notice of Appeal.
Violeta filed a Notice of Appeal only on 20 May 2008, more than five months after receipt of
the RTC Order dated 8 November 2007 denying her Motion for Reconsideration.
Violetas claim that her former counsels failure to file the proper remedy within the
reglementary period was an honest mistake, attributable to the latters deteriorating health,
is unpersuasive.
Violeta merely made a general averment of her former counsels poor health, lacking
relevant details and supporting evidence. By Violetas own admission, her former counsels

health rapidly deteriorated only by the first week of July 2008. The events pertinent to
Violetas Notice of Appeal took place months before July 2008, i.e., a copy of the RTC Order
dated 8 November 2007, denying Violetas Motion for Reconsideration of the Decision dated
30 August 2007, was received on 3 December 2007; and Violetas Notice of Appeal was filed
on 20 May 2008. There is utter lack of proof to show that Violetas former counsel was
already suffering from ill health during these times; or that the illness of Violetas former
counsel would have affected his judgment and competence as a lawyer.
Moreover, the failure of her former counsel to file a Notice of Appeal within the
reglementary period binds Violeta, which failure the latter cannot now disown on the basis of
her bare allegation and self-serving pronouncement that the former was ill. A client is bound
31
by his counsels mistakes and negligence.
The Court, therefore, finds no reversible error on the part of the RTC in denying Violetas
Notice of Appeal for being filed beyond the reglementary period. Without an appeal having
been timely filed, the RTC Decision dated 30 August 2007 in Civil Case No. 2177 already
became final and executory.
A judgment becomes "final and executory" by operation of law. Finality becomes a fact when
the reglementary period to appeal lapses and no appeal is perfected within such period. As a
consequence, no court (not even this Court) can exercise appellate jurisdiction to review a
32
case or modify a decision that has become final. When a final judgment is executory, it
becomes immutable and unalterable. It may no longer be modified in any respect either by
the court, which rendered it or even by this Court. The doctrine is founded on considerations
of public policy and sound practice that, at the risk of occasional errors, judgments must
33
become final at some definite point in time.
The only recognized exceptions to the doctrine of immutability and unalterability are the
correction of clerical errors, the so-called nunc pro tunc entries, which cause no prejudice to
34
any party, and void judgments. The instant case does not fall under any of these
exceptions.
Even if the Court ignores the procedural lapses committed herein, and proceeds to resolve
the substantive issues raised, the Petition must still fail.
Violeta makes it appear that her present Petition involves a question of law, particularly,
whether Eulogio had an existing insurable interest in his own life until the day of his death.
An insurable interest is one of the most basic and essential requirements in an insurance
contract. In general, an insurable interest is that interest which a person is deemed to have in
the subject matter insured, where he has a relation or connection with or concern in it, such
that the person will derive pecuniary benefit or advantage from the preservation of the
subject matter insured and will suffer pecuniary loss or damage from its destruction,
35
termination, or injury by the happening of the event insured against. The existence of an
insurable interest gives a person the legal right to insure the subject matter of the policy of
36
insurance. Section 10 of the Insurance Code indeed provides that every person has an
37
insurable interest in his own life. Section 19 of the same code also states that an interest in
the life or health of a person insured must exist when the insurance takes effect, but need
38
not exist thereafter or when the loss occurs.

Upon more extensive study of the Petition, it becomes evident that the matter of insurable
interest is entirely irrelevant in the case at bar. It is actually beyond question that while
Eulogio was still alive, he had an insurable interest in his own life, which he did insure under
Policy No. 9011992. The real point of contention herein is whether Eulogio was able to
reinstate the lapsed insurance policy on his life before his death on 17 September 1998.
The Court rules in the negative.
Before proceeding, the Court must correct the erroneous declaration of the RTC in its 30
August 2007 Decision that Policy No. 9011992 lapsed because of Eulogios non-payment of
the premiums which became due on 24 April 1998 and 24 July 1998. Policy No. 9011992 had
lapsed and become void earlier, on 24 February 1998, upon the expiration of the 31-day
grace period for payment of the premium, which fell due on 24 January 1998, without any
payment having been made.
That Policy No. 9011992 had already lapsed is a fact beyond dispute. Eulogios filing of his
first Application for Reinstatement with Insular Life, through Malaluan, on 26 May 1998,
constitutes an admission that Policy No. 9011992 had lapsed by then. Insular Life did not act
on Eulogios first Application for Reinstatement, since the amount Eulogio simultaneously
deposited was sufficient to cover only the P8,062.00 overdue premium for 24 January 1998,
but not the P322.48 overdue interests thereon. On 17 September 1998, Eulogio submitted a
second Application for Reinstatement to Insular Life, again through Malaluan, depositing at
the same time P17,500.00, to cover payment for the overdue interest on the premium for 24
January 1998, and the premiums that had also become due on 24 April 1998 and 24 July
1998. On the very same day, Eulogio passed away.
To reinstate a policy means to restore the same to premium-paying status after it has been
39
permitted to lapse. Both the Policy Contract and the Application for Reinstatement provide
for specific conditions for the reinstatement of a lapsed policy.
The Policy Contract between Eulogio and Insular Life identified the following conditions for
reinstatement should the policy lapse:
10. REINSTATEMENT
You may reinstate this policy at any time within three years after it lapsed if the following
conditions are met: (1) the policy has not been surrendered for its cash value or the period of
extension as a term insurance has not expired; (2) evidence of insurability satisfactory to
[Insular Life] is furnished; (3) overdue premiums are paid with compound interest at a rate
not exceeding that which would have been applicable to said premium and indebtedness in
the policy years prior to reinstatement; and (4) indebtedness which existed at the time of
40
lapsation is paid or renewed.
Additional conditions for reinstatement of a lapsed policy were stated in the Application for
Reinstatement which Eulogio signed and submitted, to wit:
I/We agree that said Policy shall not be considered reinstated until this application is
approved by the Company during my/our lifetime and good health and until all other
Company requirements for the reinstatement of said Policy are fully satisfied.
I/We further agree that any payment made or to be made in connection with this application
shall be considered as deposit only and shall not bind the Company until this application is

finally approved by the Company during my/our lifetime and good health. If this application
is disapproved, I/We also agree to accept the refund of all payments made in connection
41
herewith, without interest, and to surrender the receipts for such payment. (Emphases
ours.)
In the instant case, Eulogios death rendered impossible full compliance with the conditions
for reinstatement of Policy No. 9011992. True, Eulogio, before his death, managed to file his
Application for Reinstatement and deposit the amount for payment of his overdue premiums
and interests thereon with Malaluan; but Policy No. 9011992 could only be considered
reinstated after the Application for Reinstatement had been processed and approved by
Insular Life during Eulogios lifetime and good health.
Relevant herein is the following pronouncement of the Court in Andres v. The Crown Life
42
43
Insurance Company, citing McGuire v. The Manufacturer's Life Insurance Co. :
"The stipulation in a life insurance policy giving the insured the privilege to reinstate it upon
written application does not give the insured absolute right to such reinstatement by the
mere filing of an application. The insurer has the right to deny the reinstatement if it is not
satisfied as to the insurability of the insured and if the latter does not pay all overdue
premium and all other indebtedness to the insurer. After the death of the insured the
insurance Company cannot be compelled to entertain an application for reinstatement of the
policy because the conditions precedent to reinstatement can no longer be determined and
satisfied." (Emphases ours.)
It does not matter that when he died, Eulogios Application for Reinstatement and deposits
for the overdue premiums and interests were already with Malaluan. Insular Life, through
the Policy Contract, expressly limits the power or authority of its insurance agents, thus:
Our agents have no authority to make or modify this contract, to extend the time limit for
payment of premiums, to waive any lapsation, forfeiture or any of our rights or
requirements, such powers being limited to our president, vice-president or persons
44
authorized by the Board of Trustees and only in writing. (Emphasis ours.)
Malaluan did not have the authority to approve Eulogios Application for Reinstatement.
Malaluan still had to turn over to Insular Life Eulogios Application for Reinstatement and
accompanying deposits, for processing and approval by the latter.
The Court agrees with the RTC that the conditions for reinstatement under the Policy
Contract and Application for Reinstatement were written in clear and simple language, which
could not admit of any meaning or interpretation other than those that they so obviously
embody. A construction in favor of the insured is not called for, as there is no ambiguity in
the said provisions in the first place. The words thereof are clear, unequivocal, and simple
enough so as to preclude any mistake in the appreciation of the same.
Violeta did not adduce any evidence that Eulogio might have failed to fully understand the
import and meaning of the provisions of his Policy Contract and/or Application for
Reinstatement, both of which he voluntarily signed. While it is a cardinal principle of
insurance law that a policy or contract of insurance is to be construed liberally in favor of the
insured and strictly as against the insurer company, yet, contracts of insurance, like other
contracts, are to be construed according to the sense and meaning of the terms, which the

parties themselves have used. If such terms are clear and unambiguous, they must be taken
45
and understood in their plain, ordinary and popular sense.
Eulogios death, just hours after filing his Application for Reinstatement and depositing his
payment for overdue premiums and interests with Malaluan, does not constitute a special
circumstance that can persuade this Court to already consider Policy No. 9011992 reinstated.
Said circumstance cannot override the clear and express provisions of the Policy Contract and
Application for Reinstatement, and operate to remove the prerogative of Insular Life
thereunder to approve or disapprove the Application for Reinstatement. Even though the
Court commiserates with Violeta, as the tragic and fateful turn of events leaves her
practically empty-handed, the Court cannot arbitrarily burden Insular Life with the payment
of proceeds on a lapsed insurance policy. Justice and fairness must equally apply to all parties
to a case. Courts are not permitted to make contracts for the parties. The function and duty
46
of the courts consist simply in enforcing and carrying out the contracts actually made.
Policy No. 9011992 remained lapsed and void, not having been reinstated in accordance with
the Policy Contract and Application for Reinstatement before Eulogios death. Violeta,
therefore, cannot claim any death benefits from Insular Life on the basis of Policy No.
9011992; but she is entitled to receive the full refund of the payments made by Eulogio
thereon.
WHEREFORE, premises considered, the Court DENIES the instant Petition for Review on
Certiorari under Rule 45 of the Rules of Court. The Court AFFIRMS the Orders dated 10 April
2008 and 3 July 2008 of the RTC of Gapan City, Branch 34, in Civil Case No. 2177, denying
petitioner Violeta R. Lalicans Notice of Appeal, on the ground that the Decision dated 30
August 2007 subject thereof, was already final and executory. No costs.
SO ORDERED.
G.R. No. 147839
June 8, 2006
GAISANO CAGAYAN, INC. Petitioner,
vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
1
Before the Court is a petition for review on certiorari of the Decision dated October 11, 2000
of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated
August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322
and upheld the causes of action for damages of Insurance Company of North America
(respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated April
11, 2001 which denied petitioner's motion for reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss
(Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi
Strauss & Co.. IMC and LSPI separately obtained from respondent fire insurance policies with
book debt endorsements. The insurance policies provide for coverage on "book debts in

connection with ready-made clothing materials which have been sold or delivered to various
2
customers and dealers of the Insured anywhere in the Philippines." The policies defined
book debts as the "unpaid account still appearing in the Book of Account of the Insured 45
3
days after the time of the loss covered under this Policy." The policies also provide for the
following conditions:
1. Warranted that the Company shall not be liable for any unpaid account in
respect of the merchandise sold and delivered by the Insured which are
outstanding at the date of loss for a period in excess of six (6) months from the
date of the covering invoice or actual delivery of the merchandise whichever shall
first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12) days
after the close of every calendar month all amount shown in their books of
accounts as unpaid and thus become receivable item from their customers and
4
dealers. x x x
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991,
the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed
by fire. Included in the items lost or destroyed in the fire were stocks of ready-made clothing
materials sold and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges
that IMC and LSPI filed with respondent their claims under their respective fire insurance
policies with book debt endorsements; that as of February 25, 1991, the unpaid accounts of
petitioner on the sale and delivery of ready-made clothing materials with IMC was
P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid the claims of IMC
and LSPI and, by virtue thereof, respondent was subrogated to their rights against petitioner;
that respondent made several demands for payment upon petitioner but these went
5
unheeded.
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be
held liable because the property covered by the insurance policies were destroyed due to
fortuities event or force majeure; that respondent's right of subrogation has no basis
inasmuch as there was no breach of contract committed by it since the loss was due to fire
which it could not prevent or foresee; that IMC and LSPI never communicated to it that they
6
insured their properties; that it never consented to paying the claim of the insured.
7
At the pre-trial conference the parties failed to arrive at an amicable settlement. Thus, trial
on the merits ensued.
8
On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint. It
held that the fire was purely accidental; that the cause of the fire was not attributable to the
negligence of the petitioner; that it has not been established that petitioner is the debtor of
IMC and LSPI; that since the sales invoices state that "it is further agreed that merely for
purpose of securing the payment of purchase price, the above-described merchandise
remains the property of the vendor until the purchase price is fully paid", IMC and LSPI
retained ownership of the delivered goods and must bear the loss.

Dissatisfied, petitioner appealed to the CA. On October 11, 2000, the CA rendered its
decision setting aside the decision of the RTC. The dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and
a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount paid by the plaintiffappellant to the insured Inter Capitol Marketing Corporation, plus legal interest
from the time of demand until fully paid;
2. the amount of P535,613.00 representing the amount paid by the plaintiffappellant to the insured Levi Strauss Phil., Inc., plus legal interest from the time of
demand until fully paid.
With costs against the defendant-appellee.
10
SO ORDERED.
The CA held that the sales invoices are proofs of sale, being detailed statements of the
nature, quantity and cost of the thing sold; that loss of the goods in the fire must be borne by
petitioner since the proviso contained in the sales invoices is an exception under Article 1504
(1) of the Civil Code, to the general rule that if the thing is lost by a fortuitous event, the risk
is borne by the owner of the thing at the time the loss under the principle of res perit
domino; that petitioner's obligation to IMC and LSPI is not the delivery of the lost goods but
the payment of its unpaid account and as such the obligation to pay is not extinguished, even
if the fire is considered a fortuitous event; that by subrogation, the insurer has the right to go
against petitioner; that, being a fire insurance with book debt endorsements, what was
11
insured was the vendor's interest as a creditor.
12
Petitioner filed a motion for reconsideration but it was denied by the CA in its Resolution
13
dated April 11, 2001.
Hence, the present petition for review on certiorari anchored on the following Assignment of
Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE
WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN
THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION
14
UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.
Anent the first error, petitioner contends that the insurance in the present case cannot be
deemed to be over credit since an insurance "on credit" belies not only the nature of fire
insurance but the express terms of the policies; that it was not credit that was insured since
respondent paid on the occasion of the loss of the insured goods to fire and not because of
the non-payment by petitioner of any obligation; that, even if the insurance is deemed as
one over credit, there was no loss as the accounts were not yet due since no prior demands
were made by IMC and LSPI against petitioner for payment of the debt and such demands
came from respondent only after it had already paid IMC and LSPI under the fire insurance
15
policies.

As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer
IMC and LSPI assumed the risk of loss when they secured fire insurance policies over the
goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor of
respondent as no valid insurance could be maintained thereon by IMC and LSPI since all risk
had transferred to petitioner upon delivery of the goods; that petitioner was not privy to the
insurance contract or the payment between respondent and its insured nor was its consent
or approval ever secured; that this lack of privity forecloses any real interest on the part of
respondent in the obligation to pay, limiting its interest to keeping the insured goods safe
from fire.
For its part, respondent counters that while ownership over the ready- made clothing
materials was transferred upon delivery to petitioner, IMC and LSPI have insurable interest
over said goods as creditors who stand to suffer direct pecuniary loss from its destruction by
fire; that petitioner is liable for loss of the ready-made clothing materials since it failed to
16
overcome the presumption of liability under Article 1265 of the Civil Code; that the fire was
caused through petitioner's negligence in failing to provide stringent measures of caution,
care and maintenance on its property because electric wires do not usually short circuit
unless there are defects in their installation or when there is lack of proper maintenance and
supervision of the property; that petitioner is guilty of gross and evident bad faith in refusing
to pay respondent's valid claim and should be liable to respondent for contracted lawyer's
17
fees, litigation expenses and cost of suit.
As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before
it from the CA is limited to reviewing questions of law which involves no examination of the
18
probative value of the evidence presented by the litigants or any of them. The Supreme
19
Court is not a trier of facts; it is not its function to analyze or weigh evidence all over again.
Accordingly, findings of fact of the appellate court are generally conclusive on the Supreme
20
Court.
Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be
resolved by this Court, such as: (1) when the findings are grounded entirely on speculation,
surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making
its findings the CA went beyond the issues of the case, or its findings are contrary to the
admissions of both the appellant and the appellee; (7) when the findings are contrary to the
trial court; (8) when the findings are conclusions without citation of specific evidence on
which they are based; (9) when the facts set forth in the petition as well as in the petitioner's
main and reply briefs are not disputed by the respondent; (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the evidence on record;
and (11) when the CA manifestly overlooked certain relevant facts not disputed by the
21
parties, which, if properly considered, would justify a different conclusion. Exceptions (4),
(5), (7), and (11) apply to the present petition.

At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that
the CA erred in construing a fire insurance policy on book debts as one covering the unpaid
accounts of IMC and LSPI since such insurance applies to loss of the ready-made clothing
materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily understood, there is
22
no room for construction. In this case, the questioned insurance policies provide coverage
for "book debts in connection with ready-made clothing materials which have been sold or
23
delivered to various customers and dealers of the Insured anywhere in the Philippines." ;
and defined book debts as the "unpaid account still appearing in the Book of Account of the
24
Insured 45 days after the time of the loss covered under this Policy." Nowhere is it provided
in the questioned insurance policies that the subject of the insurance is the goods sold and
delivered to the customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not justify an
attempt to read into it any alleged intention of the parties, the terms are to be understood
25
literally just as they appear on the face of the contract. Thus, what were insured against
were the accounts of IMC and LSPI with petitioner which remained unpaid 45 days after the
loss through fire, and not the loss or destruction of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of
the goods by stipulating in the sales invoices that "[i]t is further agreed that merely for
purpose of securing the payment of the purchase price the above described merchandise
26
remains the property of the vendor until the purchase price thereof is fully paid."
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership
therein is transferred to the buyer, but when the ownership therein is transferred to the
buyer the goods are at the buyer's risk whether actual delivery has been made or not, except
that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in the goods has been retained by the seller
merely to secure performance by the buyer of his obligations under the contract, the goods
are at the buyer's risk from the time of such delivery; (Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the
27
risk of loss is borne by the buyer. Accordingly, petitioner bears the risk of loss of the goods
delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest
until full payment of the value of the delivered goods. Unlike the civil law concept of res perit
domino, where ownership is the basis for consideration of who bears the risk of loss, in
property insurance, one's interest is not determined by concept of title, but whether insured
28
has substantial economic interest in the property.

Section 13 of our Insurance Code defines insurable interest as "every interest in property,
whether real or personal, or any relation thereto, or liability in respect thereof, of such
nature that a contemplated peril might directly damnify the insured." Parenthetically, under
Section 14 of the same Code, an insurable interest in property may consist in: (a) an existing
interest; (b) an inchoate interest founded on existing interest; or (c) an expectancy, coupled
with an existing interest in that out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property interest in,
or a lien upon, or possession of, the subject matter of the insurance, and neither the title nor
a beneficial interest is requisite to the existence of such an interest, it is sufficient that the
insured is so situated with reference to the property that he would be liable to loss should it
29
be injured or destroyed by the peril against which it is insured. Anyone has an insurable
interest in property who derives a benefit from its existence or would suffer loss from its
30
destruction. Indeed, a vendor or seller retains an insurable interest in the property sold so
long as he has any interest therein, in other words, so long as he would suffer by its
31
destruction, as where he has a vendor's lien. In this case, the insurable interest of IMC and
LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days after the
time of the loss covered by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under Article
32
1174 of the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article
1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire
but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire.
Accordingly, petitioner's obligation is for the payment of money. As correctly stated by the
CA, where the obligation consists in the payment of money, the failure of the debtor to make
33
the payment even by reason of a fortuitous event shall not relieve him of his liability. The
rationale for this is that the rule that an obligor should be held exempt from liability when
the loss occurs thru a fortuitous event only holds true when the obligation consists in the
delivery of a determinate thing and there is no stipulation holding him liable even in case of
34
fortuitous event. It does not apply when the obligation is pecuniary in nature.
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation." If the obligation
is generic in the sense that the object thereof is designated merely by its class or genus
without any particular designation or physical segregation from all others of the same class,
the loss or destruction of anything of the same kind even without the debtor's fault and
35
before he has incurred in delay will not have the effect of extinguishing the obligation. This
rule is based on the principle that the genus of a thing can never perish. Genus nunquan
36
perit. An obligation to pay money is generic; therefore, it is not excused by fortuitous loss
37
of any specific property of the debtor.
Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to
this case. What is relevant here is whether it has been established that petitioner has
outstanding accounts with IMC and LSPI.

With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C38
22" show that petitioner has an outstanding account with IMC in the amount of
39
40
P2,119,205.00. Exhibit "E" is the check voucher evidencing payment to IMC. Exhibit "F" is
the subrogation receipt executed by IMC in favor of respondent upon receipt of the
insurance proceeds. All these documents have been properly identified, presented and
marked as exhibits in court. The subrogation receipt, by itself, is sufficient to establish not
only the relationship of respondent as insurer and IMC as the insured, but also the amount
paid to settle the insurance claim. The right of subrogation accrues simply upon payment by
41
the insurance company of the insurance claim. Respondent's action against petitioner is
squarely sanctioned by Article 2207 of the Civil Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No
42
evidentiary weight can be given to Exhibit "F Levi Strauss", a letter dated April 23, 1991
from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of
petitioner's unpaid account with LSPI. It only confirms the loss of Levi's products in the
amount of P535,613.00 in the fire that razed petitioner's building on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation
receipt was offered in evidence. Thus, there is no evidence that respondent has been
subrogated to any right which LSPI may have against petitioner. Failure to substantiate the
claim of subrogation is fatal to petitioner's case for recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000
and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are
AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.
No pronouncement as to costs.
SO ORDERED.