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G.R. No.

L-8151

December 16, 1955

VIRGINIA CALANOC, petitioner,


vs.
COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE CO., respondents.
Lucio Javillonar for petitioner.
J. A. Wolfson, Manuel Y. Mecias, Emilio Abello and Anselmo A. Reyes for respondents.

BAUTISTA ANGELO, J.:


This suit involves the collection of P2,000 representing the value of a supplemental policy covering
accidental death which was secured by one Melencio Basilio from the Philippine American Life Insurance
Company. The case originated in the Municipal Court of Manila and judgment being favorable to the
plaintiff it was appealed to the court of first instance. The latter court affirmed the judgment but on appeal to
the Court of Appeals the judgment was reversed and the case is now before us on a petition for review.
Melencio Basilio was a watchman of the Manila Auto Supply located at the corner of Avenida Rizal and
Zurbaran. He secured a life insurance policy from the Philippine American Life Insurance Company in the
amount of P2,000 to which was attached a supplementary contract covering death by accident. On
January 25, 1951, he died of a gunshot wound on the occasion of a robbery committed in the house of Atty.
Ojeda at the corner of Oroquieta and Zurbaan streets. Virginia Calanoc, the widow, was paid the sum of
P2,000, face value of the policy, but when she demanded the payment of the additional sum of P2,000
representing the value of the supplemental policy, the company refused alleging, as main defense, that the
deceased died because he was murdered by a person who took part in the commission of the robbery and
while making an arrest as an officer of the law which contingencies were expressly excluded in the contract
and have the effect of exempting the company from liability.
The pertinent facts which need to be considered for the determination of the questions raised are those
reproduced in the decision of the Court of Appeals as follows:
The circumstances surrounding the death of Melencio Basilio show that when he was killed at about seven
o'clock in the night of January 25, 1951, he was on duty as watchman of the Manila Auto Supply at the
corner of Avenida Rizal and Zurbaran; that it turned out that Atty. Antonio Ojeda who had his residence at
the corner of Zurbaran and Oroquieta, a block away from Basilio's station, had come home that night and
found that his house was well-lighted, but with the windows closed; that getting suspicious that there were
culprits in his house, Atty. Ojeda retreated to look for a policeman and finding Basilio in khaki uniform,
asked him to accompany him to the house with the latter refusing on the ground that he was not a
policeman, but suggesting that Atty. Ojeda should ask the traffic policeman on duty at the corner of Rizal
Avenue and Zurbaran; that Atty. Ojeda went to the traffic policeman at said corner and reported the matter,
asking the policeman to come along with him, to which the policeman agreed; that on the way to the Ojeda
residence, the policeman and Atty. Ojeda passed by Basilio and somehow or other invited the latter to
come along; that as the tree approached the Ojeda residence and stood in front of the main gate which
was covered with galvanized iron, the fence itself being partly concrete and partly adobe stone, a shot was
fired; that immediately after the shot, Atty. Ojeda and the policeman sought cover; that the policeman, at

the request of Atty. Ojeda, left the premises to look for reinforcement; that it turned out afterwards that the
special watchman Melencio Basilio was hit in the abdomen, the wound causing his instantaneous death;
that the shot must have come from inside the yard of Atty. Ojeda, the bullet passing through a hole waisthigh in the galvanized iron gate; that upon inquiry Atty. Ojeda found out that the savings of his children in
the amount of P30 in coins kept in his aparador contained in stockings were taken away, the aparador
having been ransacked; that a month thereafter the corresponding investigation conducted by the police
authorities led to the arrest and prosecution of four persons in Criminal Case No. 15104 of the Court of
First Instance of Manila for 'Robbery in an Inhabited House and in Band with Murder'.
It is contended in behalf of the company that Basilio was killed which "making an arrest as an officer of the
law" or as a result of an "assault or murder" committed in the place and therefore his death was caused by
one of the risks excluded by the supplementary contract which exempts the company from liability. This
contention was upheld by the Court of Appeals and, in reaching this conclusion, made the following
comment:
From the foregoing testimonies, we find that the deceased was a watchman of the Manila Auto Supply,
and, as such, he was not boud to leave his place and go with Atty. Ojeda and Policeman Magsanoc to see
the trouble, or robbery, that occurred in the house of Atty. Ojeda. In fact, according to the finding of the
lower court, Atty. Ojeda finding Basilio in uniform asked him to accompany him to his house, but the latter
refused on the ground that he was not a policeman and suggested to Atty. Ojeda to ask help from the traffic
policeman on duty at the corner of Rizal Avenue and Zurbaran, but after Atty. Ojeda secured the help of the
traffic policeman, the deceased went with Ojeda and said traffic policeman to the residence of Ojeda, and
while the deceased was standing in front of the main gate of said residence, he was shot and thus died.
The death, therefore, of Basilio, although unexpected, was not caused by an accident, being a voluntary
and intentional act on the part of the one wh robbed, or one of those who robbed, the house of Atty. Ojeda.
Hence, it is out considered opinion that the death of Basilio, though unexpected, cannot be considered
accidental, for his death occurred because he left his post and joined policeman Magsanoc and Atty. Ojeda
to repair to the latter's residence to see what happened thereat. Certainly, when Basilio joined Patrolman
Magsanoc and Atty. Ojeda, he should have realized the danger to which he was exposing himself, yet,
instead of remaining in his place, he went with Atty. Ojeda and Patrolman Magsanoc to see what was the
trouble in Atty. Ojeda's house and thus he was fatally shot.
We dissent from the above findings of the Court of Appeals. For one thing, Basilio was a watchman of the
Manila Auto Supply which was a block away from the house of Atty. Ojeda where something suspicious
was happening which caused the latter to ask for help. While at first he declied the invitation of Atty. Ojeda
to go with him to his residence to inquire into what was going on because he was not a regular policeman,
he later agreed to come along when prompted by the traffic policeman, and upon approaching the gate of
the residence he was shot and died. The circumstance that he was a mere watchman and had no duty to
heed the call of Atty. Ojeda should not be taken as a capricious desire on his part to expose his life to
danger considering the fact that the place he was in duty-bound to guard was only a block away. In
volunteering to extend help under the situation, he might have thought, rightly or wrongly, that to know the
truth was in the interest of his employer it being a matter that affects the security of the neighborhood. No
doubt there was some risk coming to him in pursuing that errand, but that risk always existed it being
inherent in the position he was holding. He cannot therefore be blamed solely for doing what he believed
was in keeping with his duty as a watchman and as a citizen. And he cannot be considered as making an
arrest as an officer of the law, as contended, simply because he went with the traffic policeman, for
certainly he did not go there for that purpose nor was he asked to do so by the policeman.

Much less can it be pretended that Basilio died in the course of an assault or murder considering the very
nature of these crimes. In the first place, there is no proof that the death of Basilio is the result of either
crime for the record is barren of any circumstance showing how the fatal shot was fired. Perhaps this may
be clarified in the criminal case now pending in court as regards the incident but before that is done
anything that might be said on the point would be a mere conjecture. Nor can it be said that the killing was
intentional for there is the possibility that the malefactor had fired the shot merely to scare away the people
around for his own protection and not necessarily to kill or hit the victim. In any event, while the act may not
excempt the triggerman from liability for the damage done, the fact remains that the happening was a pure
accident on the part of the victim. The victim could have been either the policeman or Atty. Ojeda for it
cannot be pretended that the malefactor aimed at the deceased precisely because he wanted to take his
life.
We take note that these defenses are included among the risks exluded in the supplementary contract
which enumerates the cases which may exempt the company from liability. While as a general rule "the
parties may limit the coverage of the policy to certain particular accidents and risks or causes of loss, and
may expressly except other risks or causes of loss therefrom" (45 C. J. S. 781-782), however, it is to be
desired that the terms and phraseology of the exception clause be clearly expressed so as to be within the
easy grasp and understanding of the insured, for if the terms are doubtful or obscure the same must of
necessity be interpreted or resolved aganst the one who has caused the obscurity. (Article 1377, new Civil
Code) And so it has bene generally held that the "terms in an insurance policy, which are ambiguous,
equivacal, or uncertain . . . are to be construed strictly and most strongly against the insurer, and liberally
in favor of the insured so as to effect the dominant purpose of indemnity or payment to the insured,
especially where a forfeiture is involved" (29 Am. Jur., 181), and the reason for this rule is that he "insured
usually has no voice in the selection or arrangement of the words employed and that the language of the
contract is selected with great care and deliberation by experts and legal advisers employed by, and acting
exclusively in the interest of, the insurance company." (44 C. J. S., p. 1174.)
Insurance is, in its nature, complex and difficult for the layman to understand. Policies are prepared by
experts who know and can anticipate the bearings and possible complications of every contingency. So
long as insurance companies insist upon the use of ambiguous, intricate and technical provisions, which
conceal rather than frankly disclose, their own intentions, the courts must, in fairness to those who
purchase insurance, construe every ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L. Ins. Co., 91
Wash. 324, LRA 1917A, 1237.)lawphi1.net
An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat the very
purpose for which the policy was procured. (Moore vs. Aetna Life Insurance Co., LRA 1915D, 264.)
We are therefore persuaded to conclude that the circumstances unfolded in the present case do not
warrant the finding that the death of the unfortunate victim comes within the purview of the exception
clause of the supplementary policy and, hence, do not exempt the company from liability.
Wherefore, reversing the decision appealed from, we hereby order the company to pay petitioner-appellant
the amount of P2,000, with legal interest from January 26, 1951 until fully paid, with costs.

G.R. No. L-25579 March 29, 1972


EMILIA T. BIAGTAN, JUAN T. BIAGTAN, JR., MIGUEL T. BIAGTAN, GIL T. BIAGTAN and GRACIA T.
BIAGTAN,plaintiffs-appellees,
vs.
THE INSULAR LIFE ASSURANCE COMPANY, LTD., defendant-appellant.
Tanopo, Millora, Serafica, and Saez for plaintiff-appellees.
Araneta, Mendoza and Papa for defendant-appellant.

MAKALINTAL, J.:p
This is an appeal from the decision of the Court of First Instance of Pangasinan in its Civil Case No. D1700.
The facts are stipulated. Juan S. Biagtan was insured with defendant InsularLife Assurance Company
under Policy No. 398075 for the sum of P5,000.00 and, under a supplementary contract denominated
"Accidental Death Benefit Clause, for an additional sum of P5,000.00 if "the death of the Insured resulted
directly from bodily injury effected solely through external and violent means sustained in an accident ...
and independently of all other causes." The clause, however,expressly provided that it would not apply
where death resulted from an injury"intentionally inflicted by another party."
On the night of May 20, 1964, or during the first hours of the following day a band of robbers entered the
house of the insured Juan S. Biagtan. What happened then is related in the decision of the trial court as
follows:
...; that on the night of May 20, 1964 or the first hours of May 21, 1964, while the said life policy and
supplementary contract were in full force and effect, the house of insured Juan S. Biagtan was robbed by a
band of robbers who were charged in and convicted by the Court of First Instance of Pangasinan for
robbery with homicide; that in committing the robbery, the robbers, on reaching the staircase landing on the
second floor, rushed towards the door of the second floor room, where they suddenly met a person near
the door of oneof the rooms who turned out to be the insured Juan S. Biagtan who received thrusts from
their sharp-pointed instruments, causing wounds on the body of said Juan S. Biagtan resulting in his death
at about 7 a.m. on the same day, May 21, 1964;
Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The insurance company paid the
basic amount of P5,000.00 but refused to pay the additional sum of P5,000.00 under the accidental death
benefit clause, on the ground that the insured's death resulted from injuries intentionally inflicted by third
parties and therefore was not covered. Plaintiffs filed suit to recover, and after due hearing the court a
quo rendered judgment in their favor. Hence the present appeal by the insurer.
The only issue here is whether under the facts are stipulated and found by the trial court the wounds
received by the insured at the hands of the robbers nine in all, five of them mortal and four non-mortal

were inflicted intentionally. The court, in ruling negatively on the issue, stated that since the parties
presented no evidence and submitted the case upon stipulation, there was no "proof that the act of
receiving thrust (sic) from the sharp-pointed instrument of the robbers was intended to inflict injuries upon
the person of the insured or any other person or merely to scare away any person so as to ward off any
resistance or obstacle that might be offered in the pursuit of their main objective which was robbery."
The trial court committed a plain error in drawing the conclusion it did from the admitted facts. Nine wounds
were inflicted upon the deceased, all by means of thrusts with sharp-pointed instruments wielded by the
robbers. This is a physical fact as to which there is no dispute. So is the fact that five of those wounds
caused the death of the insured. Whether the robbers had the intent to kill or merely to scare the victim or
to ward off any defense he might offer, it cannot be denied that the act itself of inflicting the injuries was
intentional. It should be noted that the exception in the accidental benefit clause invoked by the appellant
does not speak of the purpose whether homicidal or not of a third party in causing the injuries, but
only of the fact that such injuries have been "intentionally" inflicted this obviously to distinguish them
from injuries which, although received at the hands of a third party, are purely accidental. This construction
is the basic idea expressed in the coverage of the clause itself, namely, that "the death of the insured
resulted directly from bodily injury effected solely through external and violent means sustained in
an accident ... and independently of all other causes." A gun which discharges while being cleaned and kills
a bystander; a hunter who shoots at his prey and hits a person instead; an athlete in a competitive game
involving physical effort who collides with an opponent and fatally injures him as a result: these are
instances where the infliction of the injury is unintentional and therefore would be within the coverage of an
accidental death benefit clause such as thatin question in this case. But where a gang of robbers enter a
house and coming face to face with the owner, even if unexpectedly, stab him repeatedly, it is contrary to
all reason and logic to say that his injuries are not intentionally inflicted, regardless of whether they prove
fatal or not. As it was, in the present case they did prove fatal, and the robbers have been accused and
convicted of the crime of robbery with homicide.
The case of Calanoc vs. Court of Appeals, 98 Phil. 79, is relied upon by the trial court in support of its
decision. The facts in that case, however, are different from those obtaining here. The insured there was a
watchman in a certain company, who happened to be invited by a policeman to come along as the latter
was on his way to investigate a reported robbery going on in a private house. As the two of them, together
with the owner of the house, approached and stood in front of the main gate, a shot was fired and it turned
out afterwards that the watchman was hit in the abdomen, the wound causing his death. Under those
circumstances this Court held that it could not be said that the killing was intentional for there was the
possibility that the malefactor had fired the shot to scare people around for his own protection and not
necessarrily to kill or hit the victim. A similar possibility is clearly ruled out by the facts in the case now
before Us. For while a single shot fired from a distance, and by a person who was not even seen aiming at
the victim, could indeed have been fired without intent to kill or injure, nine wounds inflicted with bladed
weapons at close range cannot conceivably be considered as innocent insofar as such intent is concerned.
The manner of execution of the crime permits no other conclusion.
Court decisions in the American jurisdiction, where similar provisions in accidental death benefit clauses in
insurance policies have been construed, may shed light on the issue before Us. Thus, it has been held that
"intentional" as used in an accident policy excepting intentional injuries inflicted by the insured or any other
person, etc., implies the exercise of the reasoning faculties, consciousness and volition. 1 Where a
provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is

controlling. 2 If the injuries suffered by the insured clearly resulted from the intentional act of a third person
the insurer is relieved from liability as stipulated. 3
In the case of Hutchcraft's Ex'r v. Travelers' Ins. Co., 87 Ky. 300, 8 S.W. 570, 12 Am. St. Rep. 484, the
insured was waylaid and assassinated for the purpose of robbery. Two (2) defenses were interposed to the
action to recover indemnity, namely: (1) that the insured having been killed by intentional means, his death
was not accidental, and (2) that the proviso in the policy expressly exempted the insurer from liability in
case the insured died from injuries intentionally inflicted by another person. In rendering judgment for the
insurance company the Court held that while the assassination of the insured was as to him an unforeseen
event and therefore accidental, "the clause of the proviso that excludes the (insurer's) liability, in case
death or injury is intentionally inflicted by another person, applies to this case."
In Butero v. Travelers' Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61, 71 S.W. 811, the insured was shot
three times by a person unknown late on a dark and stormy night, while working in the coal shed of a
railroad company. The policy did not cover death resulting from "intentional injuries inflicted by the insured
or any other person." The inquiry was as to the question whether the shooting that caused the insured's
death was accidental or intentional; and the Court found that under the facts, showing that the murderer
knew his victim and that he fired with intent to kill, there could be no recovery under the policy which
excepted death from intentional injuries inflicted by any person.
WHEREFORE, the decision appealed from is reversed and the complaint dismissed, without
pronouncement as to costs.

G.R. No. 100970 September 2, 1992


FINMAN GENERAL ASSURANCE CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and JULIA SURPOSA, respondents.
Aquino and Associates for petitioner.
Public Attorney's Office for private respondent.

NOCON, J.:
This is a petition for certiorari with a prayer for the issuance of a restraining order and preliminary mandatory injunction to annul and set aside the decision of the
Court of Appeals dated July 11, 1991, 1 affirming the decision dated March 20, 1990 of the Insurance Commission 2 in ordering petitioner Finman General
Assurance Corporation to pay private respondent Julia Surposa the proceeds of the personal accident Insurance policy with interest.
It appears on record that on October 22, 1986, deceased, Carlie Surposa was insured with petitioner Finman General Assurance Corporation under Finman
General Teachers Protection Plan Master Policy No. 2005 and Individual Policy No. 08924 with his parents, spouses Julia and Carlos Surposa, and brothers
Christopher, Charles, Chester and Clifton, all surnamed, Surposa, as beneficiaries. 3
While said insurance policy was in full force and effect, the insured, Carlie Surposa, died on October 18, 1988 as a result of a stab wound inflicted by one of the
three (3) unidentified men without provocation and warning on the part of the former as he and his cousin, Winston Surposa, were waiting for a ride on their way
home along Rizal-Locsin Streets, Bacolod City after attending the celebration of the "Maskarra Annual Festival."
Thereafter, private respondent and the other beneficiaries of said insurance policy filed a written notice of claim with the petitioner insurance company which
denied said claim contending that murder and assault are not within the scope of the coverage of the insurance policy.

On February 24, 1989, private respondent filed a complaint with the Insurance Commission which subsequently rendered a decision, the pertinent portion of
which reads:
In the light of the foregoing. we find respondent liable to pay complainant the sum of P15,000.00 representing the proceeds of the policy with interest. As no
evidence was submitted to prove the claim for mortuary aid in the sum of P1,000.00, the same cannot be entertained.
WHEREFORE, judgment is hereby rendered ordering respondent to pay complainant the sum of P15,000.00 with legal interest from the date of the filing of the
complaint until fully satisfied. With costs. 4
On July 11, 1991, the appellate court affirmed said decision.
Hence, petitioner filed this petition alleging grove abuse of discretion on the part of the appellate court in applying the principle of "expresso unius exclusio
alterius" in a personal accident insurance policy since death resulting from murder and/or assault are impliedly excluded in said insurance policy considering that
the cause of death of the insured was not accidental but rather a deliberate and intentional act of the assailant in killing the former as indicated by the location of
the lone stab wound on the insured. Therefore, said death was committed with deliberate intent which, by the very nature of a personal accident insurance
policy, cannot be indemnified.
We do not agree.
The terms "accident" and "accidental" as used in insurance contracts have not acquired any technical meaning, and are construed by the courts in their ordinary
and common acceptation. Thus, the terms have been taken to mean that which happen by chance or fortuitously, without intention and design, and which is
unexpected, unusual, and unforeseen. An accident is an event that takes place without one's foresight or expectation an event that proceeds from an
unknown cause, or is an unusual effect of a known cause and, therefore, not expected.
. . . The generally accepted rule is that, death or injury does not result from accident or accidental means within the terms of an accident-policy if it is the natural
result of the insured's voluntary act, unaccompanied by anything unforeseen except the death or injury. There is no accident when a deliberate act is performed
unless some additional, unexpected, independent, and unforeseen happening occurs which produces or brings about the result of injury or death. In other
words, where the death or injury is not the natural or probable result of the insured's voluntary act, or if something unforeseen occurs in the doing of the act
which produces the injury, the resulting death is within the protection of the policies insuring against death or injury from accident. 5
As correctly pointed out by the respondent appellate court in its decision:
In the case at bar, it cannot be pretended that Carlie Surposa died in the course of an assault or murder as a result of his voluntary act considering the very
nature of these crimes. In the first place, the insured and his companion were on their way home from attending a festival. They were confronted by unidentified
persons. The record is barren of any circumstance showing how the stab wound was inflicted. Nor can it be pretended that the malefactor aimed at the insured
precisely because the killer wanted to take his life. In any event, while the act may not exempt the unknown perpetrator from criminal liability, the fact remains
that the happening was a pure accident on the part of the victim. The insured died from an event that took place without his foresight or expectation, an event
that proceeded from an unusual effect of a known cause and, therefore, not expected. Neither can it be said that where was a capricious desire on the part of
the accused to expose his life to danger considering that he was just going home after attending a festival. 6
Furthermore, the personal accident insurance policy involved herein specifically enumerated only ten (10) circumstances wherein no liability attaches to
petitioner insurance company for any injury, disability or loss suffered by the insured as a result of any of the stimulated causes. The principle of " expresso
unius exclusio alterius" the mention of one thing implies the exclusion of another thing is therefore applicable in the instant case since murder and assault,
not having been expressly included in the enumeration of the circumstances that would negate liability in said insurance policy cannot be considered by
implication to discharge the petitioner insurance company from liability for, any injury, disability or loss suffered by the insured. Thus, the failure of the petitioner
insurance company to include death resulting from murder or assault among the prohibited risks leads inevitably to the conclusion that it did not intend to limit or
exempt itself from liability for such death.
Article 1377 of the Civil Code of the Philippines provides that:
The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.
Moreover,
it is well settled that contracts of insurance are to be construed liberally in favor of the insured and strictly against the insurer. Thus ambiguity in the words of an
insurance contract should be interpreted in favor of its beneficiary. 7
WHEREFORE, finding no irreversible error in the decision of the respondent Court of Appeals, the petition forcertiorari with restraining order and preliminary
injunction is hereby DENIED for lack of merit.

FIRST DIVISION
[G.R. No. 85296. May 14, 1990.]
ZENITH INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS and
LAWRENCE FERNANDEZ, respondents.
Vicente R. Layawen for petitioner.
Lawrence L. Fernandez & Associates for private respondent.
DECISION
MEDIALDEA, J :
p

Assailed in this petition is the decision of the Court of Appeals in CA-G.R. C.V. No.
13498 entitled, "Lawrence L. Fernandez, plaintiff-appellee v. Zenith Insurance Corp.,
defendant-appellant" which affirmed in toto the decision of the Regional Trial Court of Cebu,
Branch XX in Civil Case No. CEB-1215 and the denial of petitioner's Motion for
Reconsideration.
The antecedent facts are as follows:

LibLex

On January 25, 1983, private respondent Lawrence Fernandez insured his car for "own
damage" under private car Policy No. 50459 with petitioner Zenith Insurance Corporation. On
July 6, 1983, the car figured in an accident and suffered actual damages in the amount of
P3,640.00. After allegedly being given a run around by Zenith for two (2) months, Fernandez
filed a complaint with the Regional Trial Court of Cebu for sum of money and damages
resulting from the refusal of Zenith to pay the amount claimed. The complaint was docketed as
Civil Case No. CEB-1215. Aside from actual damages and interests, Fernandez also prayed for
more damages in the amount of P10,000.00, exemplary damages of P5,000.00, attorney's fees
of P3,000.00 and litigation expenses of P3,000.00.
On September 28, 1983, Zenith filed an answer alleging that it offered to pay the claim of
Fernandez pursuant to the terms and conditions of the contract which, the private respondent
rejected. After the issues had been joined, the pre-trial was scheduled on October 17, 1983 but
the same was moved to November 4, 1983 upon petitioner's motion, allegedly to explore ways
to settle the case although at an amount lower than private respondent's claim. On November
14, 1983, the trial court terminated the pre-trial. Subsequently, Fernandez presented his
evidence. Petitioner Zenith, however, failed to present its evidence in new of its failure to
appear in court, without justifiable reason, on the day scheduled for the purpose. The trial court
issued an order on August 23, 1984 submitting the case for decision without Zenith's evidence
(pp. 10-11, Rollo). Petitioner filed a petition for certiorari with the Court of Appeals assailing the
order of the trial court submitting the case for decision without petitioner's evidence. The
petition was docketed as C.A.-G.R. No. 04644. However, the petition was denied due course
on April 29, 1986 (p. 56, Rollo).

On June 4, 1986, a decision was rendered by the trial court in favor of private
respondent Fernandez. The dispositive portion of the trial court's decision provides:
"WHEREFORE, defendant is hereby ordered to pay to the plaintiff:.
1.The amount of P3,640.00 representing the damage incurred plus interest at
the rate of twice the prevailing interest rates;
2.The amount of P20,000.00 by way of moral damages;
3.The amount of P20,000.00 by way of exemplary damages;
4.The amount of P5,000.00 as attorney's fees;
5.The amount of P3,000.00 as litigation expenses; and
6.Costs." (p. 9, Rollo)

Upon motion of Fernandez and before the expiration of the period to appeal, the trial
court, on June 20, 1986, ordered the execution of the decision pending appeal. The order was
assailed by petitioner in a petition for certiorari with the Court of Appeals on October 23, 1986
in C.A. G.R No. 10420 but which petition was also dismissed on December 24, 1986 (p. 69,
Rollo).
LLjur

On June 10, 1986, petitioner filed a notice of appeal before the trial court. The notice of
appeal was granted in the same order granting private respondent's motion for execution
pending appeal. The appeal to respondent court assigned the following errors:
"I.The lower court erred in denying defendant appellant to adduce evidence in
its behalf.
II.The lower court erred in ordering Zenith Insurance Corporation to pay the
amount of P3,640.00 in its decision.
III.The lower court erred in awarding moral damages, attorney's fees and
exemplary damages, the worst is that, the court awarded damages more than what
are prayed for in the complaint." (p. 12, Rollo)

On August 17, 1988, the Court of Appeals rendered its decision affirming in toto the
decision of the trial court. It also ruled that the matter of the trial court's denial of Fernandez's
right to adduce evidence is a closed matter in view of its (CA) ruling in AC-G.R. 04644 wherein
Zenith's petition questioning the trial court's order submitting the case for decision without
Zenith's evidence, was dismissed.
The Motion for Reconsideration of the decision of the Court of Appeals dated August 17,
1988 was denied on September 29, 1988, for lack of merit. Hence, the instant petition was filed
by Zenith on October 18, 1988 on the allegation that respondent Court of Appeals' decision and
resolution ran counter to applicable decisions of this Court and that they were rendered without
or in excess of jurisdiction. The issues raised by petitioners in this petition are:
a)The legal basis of respondent Court of Appeals in awarding moral damages,
exemplary damages and attorney's fees in an amount more than that prayed for in the
complaint.
b)The award of actual damages of P3,460.00 instead of only P1,927.50 which
was arrived at after deducting P250.00 and P274.00 as deductible franchise and 20%
depreciation on parts as agreed upon in the contract of insurance.

Petitioner contends that while the complaint of private respondent prayed for P10,000.00
moral damages, the lower court awarded twice the amount, or P20,000.00 without factual or
legal basis; while private respondent prayed for P5,000.00 exemplary damages, the trial court
awarded P20,000.00; and while private respondent prayed for P3,000.00 attorney's fees, the
trial court awarded P5,000.00.

The propriety of the award of moral damages, exemplary damages and attorney's fees is
the main issue raised herein by petitioner.
The award of damages in case of unreasonable delay in the payment of insurance
claims is governed by the Philippine Insurance Code, which provides:
"SEC. 244.In case of any litigation for the enforcement of any policy or contract
of insurance, it shall be the duty of the Commissioner or the Court, as the case may
be, to make a finding as to whether the payment of the claim of the insured has been
unreasonably denied or withheld; and in the affirmative case, the insurance company
shall be adjudged to pay damages which shall consist of attorney's fees and other
expenses incurred by the insured person by reason of such unreasonable denial or
withholding of payment plus interest of twice the ceiling prescribed by the Monetary
Board of the amount of the claim due the insured, from the date following the time
prescribed in section two hundred forty-two or in section two hundred forty-three, as
the case may be, until the claim is fully satisfied; Provided, That the failure to pay any
such claim within the time prescribed in said sections shall be considered prima facie
evidence of unreasonable delay in payment."

It is clear that under the Insurance Code, in case of unreasonable delay in the payment
of the proceeds of an insurance policy, the damages that may be awarded are: 1) attorney's
fees; 2) other expenses incurred by the insured person by reason of such unreasonable denial
or withholding of payment; 3) interest at twice the ceiling prescribed by the Monetary Board of
the amount of the claim due the injured; and 4) the amount of the claim.
As regards the award of moral and exemplary damages, the rules under the Civil Code
of the Philippines shall govern.
prLL

"The purpose of moral damages is essentially indemnity or reparation, not punishment or


correction. Moral damages are emphatically not intended to enrich a complainant at the
expense of a defendant, they are awarded only to enable the injured party to obtain means,
diversions or amusements that will serve to alleviate the moral suffering he has
undergone by reason of the defendant's culpable action." (J. Cezar S. Sangco, Philippine
Law on Torts and Damages, Revised Edition, p. 539) (See also R and B Surety & Insurance
Co., Inc. v. IAC, G.R. No. 64515, June 22, 1984; 129 SCRA 745). While it is true that no proof
of pecuniary loss is necessary in order that moral damages may be adjudicated, the
assessment of which is left to the discretion of the court according to the circumstances of each
case (Art. 2216, New Civil Code), it is equally true that in awarding moral damages in case of
breach of contract, there must be a showing that the breach was wanton and deliberately
injurious or the one responsible acted fraudently or in bad faith (Perez v. Court of Appeals,
G.R. No. L-20238, January 30, 1965; 13 SCRA 137; Solis v. Salvador, G.R. No. L-17022,
August 14, 1965; 14 SCRA 887). In the instant case, there was a finding that private
respondent was given a "run-around" for two months, which is the basis for the award of the
damages granted under the Insurance Code for unreasonable delay in the payment of the
claim. However, the act of petitioner of delaying payment for two months cannot be considered
as so wanton or malevolent to justify an award of P20,000.00 as moral damages, taking into
consideration also the fact that the actual damage on the car was only P3,460. In the pre-trial
of the case, it was shown that there was no total disclaimer by respondent. The reason for
petitioner's failure to indemnify private respondent within the two-month period was that the
parties could not come to an agreement as regards the amount of the actual damage on the
car. The amount of P10,000.00 prayed for by private respondent as moral damages is
equitable.
On the other hand, exemplary or corrective damages are imposed by way of example or
correction for the public good (Art. 2229, New Civil Code of the Philippines). In the case of

Noda v. Cruz-Arnaldo, G.R. No. 57322, June 22, 1987; 151 SCRA 227, exemplary damages
were not awarded as the insurance company had not acted in wanton, oppressive or
malevolent manner. The same is true in the case at bar.
The amount of P5,000.00 awarded as attorney's fees is justified under the circumstances
of this case considering that there were other petitions filed and defended by private
respondent in connection with this case.
As regards the actual damages incurred by private respondent, the amount of P3,640.00
had been established before the trial court and affirmed by the appellate court. Respondent
appellate court correctly ruled that the deductions of P250.00 and P274.00 as deductible
franchise and 20% depreciation on parts, respectively claimed by petitioners as agreed upon in
the contract, had no basis. Respondent court ruled:
"Under its second assigned error, defendant-appellant puts forward two
arguments, both of which are entirely without merit. It is contented that the amount
recoverable under the insurance policy defendant-appellant issued over the car of
plaintiff-appellee is subject to deductible franchise, and . . .
"The policy (Exhibit G, pp. 4-9, Record), does not mention any deductible
franchise, . . ." (p. 13, Rollo)

Therefore, the award of moral damages is reduced to P10,000.00 and the award of
exemplary damages is hereby deleted. The awards due to private respondent Fernandez are
as follows:
LLphil

1)P3,640.00 as actual claim plus interest of twice the ceiling prescribed by the
Monetary Board computed from the time of submission of proof of loss;
2)P10,000.00 as moral damages;
3)P5,000.00 as attorney's fees;
4)P3,000.00 as litigation expenses and
5)Costs

ACCORDINGLY, the appealed decision is MODIFIED as above stated.


SO ORDERED.
Narvasa, Cruz and Grio-Aquino, JJ., concur.
Gancayco, J., is on leave.
|||

(Zenith Insurance Corp. v. Court of Appeals, G.R. No. 85296, May 14, 1990)

FIRST DIVISION
[G.R. No. 92383. July 17, 1992.]

SUN INSURANCE OFFICE, LTD., petitioner, vs. THE HON. COURT OF APPEALS
and NERISSA LIM, respondents.
DECISION
CRUZ, J :
p

The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of
P200,000.00. Two months later, he was dead with a bullet wound in his head. As beneficiary, his
wife Nerissa Lim sought payment on the policy but her claim was rejected. The petitioner agreed
that there was no suicide. It argued, however, that there was no accident either.
Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6,
1982, at about 10 o'clock in the evening, after his mother's birthday party. According to Nalagon,
Lim was in a happy mood (but not drunk) and was playing with his handgun, from which he had
previously removed the magazine. As she watched the television, he stood in front of her and
pointed the gun at her. She pushed it aside and said it might be loaded. He assured her it was not
and then pointed it to his temple. The next moment there was an explosion and Lim slumped to the
floor. He was dead before he fell. 1
The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was sustained. 2
The petitioner was sentenced to pay her P200,000.00, representing the face value of the policy,
with interest at the legal rate; P10,000.00 as moral damages; P5,000.00 as exemplary damages;
P50,000.00 as actual and compensatory damages; and P5,000.00 as attorney's fees, plus the cost
of the suit. This decision was affirmed on appeal, and the motion for reconsideration was denied. 3
The petitioner then came to this Court of Appeals for approving the payment of the claim and the
award of damages.
The term "accident" has been defined as follows:
The words "accident" and "accidental" have never acquired any technical signification in
law, and when used in an insurance contract are to be construed and considered according
to the ordinary understanding and common usage and speech of people generally. In
substance, the courts are practically agreed that the words "accident" and "accidental"
mean that which happens by change or fortuitously, without intention or design, and which
is unexpected, unusual, and unforeseen. The definition that has usually been adopted by
the courts is that an accident is an event that takes place without one's foresight or
expectation an event that proceeds from an unknown cause, or is an unusual effect of a
known case, and therefore not expected. 4
An accident is an event which happens without any human agency or, if happening through
human agency, an event which, under the circumstances, is unusual to and not expected by
the person to whom it happens. It has also been defined as an injury which happens by
reason of some violence or casualty to the insured without his design, consent, or voluntary
co-operation. 5

In light of these definitions, the Court is convinced that the incident that resulted in Lim's death was
indeed an accident. The petitioner, invoking the case of De la Cruz v. Capital Insurance, 6 says
that "there is no accident when a deliberate act is performed unless some additional, unexpected,

independent and unforeseen happening occurs which produces or brings about their injury or
death." There was such a happening. This was the firing of the gun, which was the additional
unexpected and independent and unforeseen occurrence that led to the insured person's death.

LibLex

The petitioner also cites one of the four exceptions provided for in the insurance contract and
contends that the private petitioner's claim is barred by such provision. It is there stated:
Exceptions
The company shall not be liable in respect of.
1.Bodily injury.
xxx xxx xxx
b.consequent upon.
i)The insured persons attempting to commit suicide or wilfully exposing himself to needless
peril except in an attempt to save human life.

To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner contends
that the insured willfully exposed himself to needless peril and thus removed himself from the
coverage of the insurance policy.
It should be noted at the outset that suicide and willful exposure to needless peril are in pari
materia because they both signify a disregard for one's life. The only difference is in degree, as
suicide imports a positive act of ending such life whereas the second act indicates a reckless
risking of it that is almost suicidal in intent. To illustrate, a person who walks a tightrope one
thousand meters above the ground and without any safety device may not actually be intending to
commit suicide, but his act is nonetheless suicidal. He would thus be considered as "willfully
exposing himself to needless peril" within the meaning of the exception in question.
The petitioner maintains that by the mere act of pointing the gun to his temple, Lim had willfully
exposed himself to needless peril and so came under the exception. The theory is that a gun is per
se dangerous and should therefore be handled cautiously in every case.
That posture is arguable. But what is not is that, as the secretary testified, Lim had removed the
magazine from the gun and believed it was no longer dangerous. He expressly assured her that
the gun was not loaded. It is submitted that Lim did not willfully expose himself to needless peril
when he pointed the gun to his temple because the fact is that he thought it was not unsafe to do
so. The act was precisely intended to assure Nalagon that the gun was indeed harmless.
LLphil

The contrary view is expressed by the petitioner thus:


Accident insurance polices were never intended to reward the insured for his tendency to
show off or for his miscalculations. They were intended to provide for contingencies. Hence,
when I miscalculate and jump from the Quezon Bridge into the Pasig River in the belief that
I can overcome the current, I have wilfully exposed myself to peril and must accept the
consequences of my act. If I drown I cannot go to the insurance company to ask them
to compensate me for my failure to swim as well as I thought I could. The insured in

the case at bar deliberately put the gun to his head and pulled the trigger. He wilfully
exposed himself to peril.

The Court certainly agrees that a drowned man cannot go to the insurance company to ask
for compensation. That might frighten the insurance people to death. We also agree that
under the circumstances narrated, his beneficiary would not be able to collect on the insurance
policy for it is clear that when he braved the currents below, he deliberately exposed himself to a
known peril.
The private respondent maintains that Lim did not. That is where she says the analogy fails. The
petitioner's hypothetical swimmer knew when he dived off the Quezon Bridge that the currents
below were dangerous. By contrast, Lim did not know that the gun he put to his head was loaded.
Lim was unquestionably negligent and that negligence cost him his own life. But it should not
prevent his widow from recovering from the insurance policy he obtained precisely against
accident. There is nothing in the policy that relieves the insurer of the responsibility to pay the
indemnity agreed upon if the insured is shown to have contributed to his own accident. Indeed,
most accidents are caused by negligence. There are only four exceptions expressly made in the
contract to relieve the insurer from liability, and none of these exceptions is applicable in the case
at bar. *
It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in favor of
the assured. There is no reason to deviate from this rule, especially in view of the circumstances of
this case as above analyzed.
On the second assigned error, however, the Court must rule in favor of the petitioner. The basic
issue raised in this case is, as the petitioner correctly observed, one of first impression. It is evident
that the petitioner was acting in good faith when it resisted the private respondent's claim on the
ground that the death of the insured was covered by the exception. The issue was indeed
debatable and was clearly not raised only for the purpose of evading a legitimate obligation. We
hold therefore that the award of moral and exemplary damages and of attorney's fees is unjust and
so must be disapproved.
In order that a person may be made liable to the payment of moral damages, the law
requires that his act be wrongful. The adverse result of an action does not per se make the
act wrongful and subject the act or to the payment of moral damages. The law could not
have meant to impose a penalty on the right to litigate; such right is so precious that moral
damages may not be charged on those who may exercise it erroneously. For these the law
taxes costs. 7
The fact that the results of the trial were adverse to Barreto did not alone make his act in
bringing the action wrongful because in most cases one party will lose; we would be
imposing an unjust condition or limitation on the right to litigate. We hold that the award of
moral damages in the case at bar is not justified by the facts and circumstances, as well as
the law.
cdphil

If a party wins, he cannot, as a rule, recover attorney's fees and litigation expenses, since it
is not the fact of winning alone that entitles him to recover such damages of the exceptional
circumstances enumerated in Art. 2208. Otherwise, every time a defendant wins,
automatically the plaintiff must pay attorney's fees thereby putting premium on the right to

litigate which should not be so. For those expenses, the law deems the award of costs as
sufficient. 8

WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED insofar as it holds
the petitioner liable to the private respondent in the sum of P200,000.00 representing the face
value of the insurance contract, with interest at the legal rate from the date of the filing of the
complaint until the full amount is paid, but MODIFIED with the deletion of all awards for damages,
including attorney's fees, except the costs of the suit.
SO ORDERED.
Grio-Aquino, Medialdea and Bellosillo, JJ ., concur.
|||

(Sun Insurance Office, Ltd. v. Court of Appeals, G.R. No. 92383, July 17, 1992)

FIRST DIVISION
[G.R. No. L-54171. October 28, 1980.]
JEWEL VILLACORTA, assisted by her husband, GUERRERO VILLACORTA,
petitioner, vs. THE INSURANCE COMMISSION and EMPIRE INSURANCE
COMPANY, respondents.
DECISION
TEEHANKEE, Acting C.J :
p

The Court sets aside respondent Insurance Commission's dismissal of petitioner's complaint and
holds that where the insured's car is wrongfully taken without the insured's consent from the car
service and repair shop to whom it had been entrusted for check-up and repairs (assuming that
such taking was for a joy ride, in the course of which it was totally smashed in an accident),
respondent insurer is liable and must pay insured for the total loss of the insured vehicle under the
theft clause of the policy.
cdtai

The undisputed facts of the case as found in the appealed decision of April 14, 1980 of respondent
insurance commission are as follows:
"Complainant (petitioner) was the owner of a Colt Lancer, Model 1976, insured with
respondent company under Private Car Policy No. MBI/PC-0704 for P35,000.00 Own
Damage; P30,000.00 Theft; and P30,000.00 Third Party Liability, effective May 16,
1977 to May 16, 1978. On May 9, 1978, the vehicle was brought to the Sunday Machine

Works, Inc., for general check-up and repairs. On May 11, 1978, while it was in the custody
of the Sunday Machine Works, the car was allegedly taken by six (6) persons and driven
out to Montalban, Rizal. While travelling along Mabini St., Sitio Palyasan, Barrio Burgos,
going North at Montalban, Rizal, the car figured in an accident, hitting and bumping a gravel
and sand truck parked at the right side of the road going south. As a consequence, the
gravel and sand truck veered to the right side of the pavement going south and the car
veered to the right side of the pavement going north. The driver, Benito Mabasa, and one of
the passengers died and the other four sustained physical injuries. The car, as well,
suffered extensive damage. Complainant, thereafter, filed a claim for total loss with the
respondent company but claim was denied. Hence, complainant was compelled to institute
the present action."

The comprehensive motor car insurance policy for P35,000.00 issued by respondent Empire
Insurance Company admittedly undertook to indemnify the petitioner-insured against loss or
damage to the car (a) by accidental collision or overturning, or collision or overturning consequent
upon mechanical breakdown or consequent upon wear and tear; (b) by fire, external explosion,
self-ignition or lightning or burglary, housebreaking or theft; and (c) by malicious act.
LLjur

Respondent insurance commission, however, dismissed petitioner's complaint for recovery of the
total loss of the vehicle against private respondent, sustaining respondent insurer's contention that
the accident did not fall within the provisions of the policy either for the Own Damage or Theft
coverage, invoking the policy provision on "Authorized Driver" clause. 1
Respondent commission upheld private respondent's contention on the "Authorized
Driver" clause in this wise: "It must be observed that under the above-quoted provisions, the
policy limits the use of the insured vehicle to two (2) persons only, namely: the insured himself or
any person on his (insured's) permission. Under the second category, it is to be noted that the
words "any person' is qualified by the phrase ". . . on the insured's order or with his permission.' It
is therefore clear that if the person driving is other than the insured, he must have been duly
authorized by the insured, to drive the vehicle to make the Insurance company liable for the
driver's negligence. Complainant admitted that she did not know the person who drove her vehicle
at the time of the accident, much less consented to the use of the same (par. 5 of the complaint).
Her husband likewise admitted that he neither knew this driver Benito Mabasa (Exhibit '4'). With
these declarations of complainant and her husband, we hold that the person who drove the
vehicle, in the person of Benito Mabasa, is not an authorized driver of the complainant. Apparently,
this is a violation of the 'Authorized Driver' clause of the policy."
Respondent commission likewise upheld private respondent's assertion that the car was not stolen
and therefore not covered by the Theft clause, ruling that "(T)he element of 'taking' in Article 308 of
the Revised Penal Code means that the act of depriving another of the possession and dominion
of a movable thing is coupled . . . with the intention, at the time of the 'taking', of withholding it with
the character of permanency (People vs. Galang, 7 Appt. Ct. Rep. 13). In other words, there must
have been shown a felonious intent upon the part of the taker of the car, and the intent must be an
intent permanently to deprive the insured of his car," and that "(S)uch was not the case in this
instance. The fact that the car was taken by one of the residents of the Sunday Machine Works,
and the withholding of the same, for a joy ride should not be construed to mean 'taking' under Art.
308 of the Revised Penal Code. If at all there was a 'taking', the same was merely temporary in
nature. A temporary taking is held not a taking insured against (48 ALR 2d., page 15)."
The Court finds respondent commission's dismissal of the complaint to be contrary to the evidence
and the law.

First, respondent commission's ruling that the person who drove the vehicle in the person of Benito
Mabasa, who, according to its own finding, was one of the residents of the Sunday Machine
Works, Inc. to whom the car had been entrusted for general check-up and repairs was not an
"authorized driver" of petitioner-complainant is too restrictive and contrary to the established
principle that insurance contracts, being contracts of adhesion where the only participation of the
other party is the signing of his signature or his "adhesion" thereto, "obviously call for greater
strictness and vigilance on the part of courts of justice with a view of protecting the weaker party
from abuse and imposition, and prevent their becoming traps for the unwary." 2
The main purpose of the "authorized driver" clause, as may be seen from its text, supra, is that a
person other than the insured owner, who drives the car on the insured's order, such as his regular
driver, or with his permission, such as a friend or member of the family or the employees of a car
service or repair shop must be duly licensed drivers and have no disqualification to drive a motor
vehicle.
A car owner who entrusts his car to an established car service and repair shop necessarily entrusts
his car key to the shop owner and employees who are presumed to have the insured's permission
to drive the car for legitimate purposes of checking or road-testing the car. The mere happenstance
that the employee(s) of the shop owner diverts the use of the car to his own illicit or unauthorized
purpose in violation of the trust reposed in the shop by the insured car owner does not mean that
the "authorized driver" clause has been violated such as to bar recovery, provided that such
employee is duly qualified to drive under a valid driver's license.
The situation is no different from the regular or family driver, who instead of carrying out the
owner's order to fetch the children from school takes out his girl friend instead for a joy ride and
instead wrecks the car. There is no question of his being an "authorized driver" which allows
recovery of the loss although his trip was for a personal or illicit purpose without the owner's
authorization.
cdll

Secondly, and independently of the foregoing (since when a car is unlawfully taken, it is the theft
clause, not the "authorized driver" clause, that applies), where a car is admittedly as in this case
unlawfully and wrongfully taken by some people, be they employees of the car shop or not to
whom it had been entrusted, and taken on a long trip to Montalban without the owner's consent or
knowledge, such taking constitutes or partakes of the nature of theft as defined in Article 308 of the
Revised Penal Code, viz. "(W)ho are liable for theft. Theft is committed by any person who, with
intent to gain but without violence against or intimidation of persons nor force upon things, shall
take personal property of another without the latter's consent," for purposes of recovering the loss
under the policy in question.
The Court rejects respondent commission's premise that there must be an intent on the part of the
taker of the car "permanently to deprive the insured of his car" and that since the taking here was
for a "joy ride" and "merely temporary in nature," a "temporary taking is held not a taking insured
against."
The evidence does not warrant respondent commission's findings that it was a mere "joy ride".
From the very investigator's report cited in its comment, 3 the police found from the waist of the car
driver Benito Mabasa y Bartolome who smashed the car and was found dead right after the
incident "one Cal. 45 Colt. and one apple type grenade," hardly the materials one would bring
along on a "joy ride". Then, again, it is equally evident that the taking proved to be quite permanent

rather than temporary, for the car was totally smashed in the fatal accident and was never returned
in serviceable and useful condition to petitioner-owner.
Assuming, despite the totally inadequate evidence, that the taking was "temporary" and for a "joy
ride", the Court sustains as the better view that which holds that when a person, either with the
object of going to a certain place, or learning how to drive, or enjoying a free ride, takes
possession of a vehicle belonging to another, without the consent of its owner, he is guilty
of theft because by taking possession of the personal property belonging to another and
using it, his intent to gain is evident since he derives therefrom utility, satisfaction,
enjoyment and pleasure. Justice Ramon C. Aquino cites in his work Groizard who holds
that the use of a thing constitutes gain and Cuello Calon who calls it "hurt de uso." 4

The insurer must therefore indemnify the petitioner owner for the total loss of the insured car in the
sum of P35,000.00 under the theft clause of the policy, subject to the filing of such claim for
reimbursement or payment as it may have as subrogee against the Sunday Machine Works, Inc.
prLL

ACCORDINGLY, the appealed decision is set aside and judgment is hereby rendered sentencing
private respondent to pay petitioner the sum of P35,000.00 with legal interest from the filing of the
complaint until full payment is made and to pay the costs of suit.
SO ORDERED.
Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ., concur.
|||

(Villacorta v. Insurance Commission, G.R. No. L-54171, October 28, 1980)

FIRST DIVISION
[G.R. No. L-36480. May 31, 1988.]
ANDREW PALERMO, plaintiff-appellee, vs. PYRAMID INSURANCE CO., INC.,
defendant-appellant.
DECISION
GRIO-AQUINO, J :
p

The Court of Appeals certified this case to Us for proper disposition as the only question involved
is the interpretation of the provision of the insurance contract regarding the "authorized driver" of
the insured motor vehicle.
On March 7, 1969, the insured, appellee Andrew Palermo, filed a complaint in the Court of First
Instance of Negros Occidental against Pyramid Insurance Co., Inc., for payment of his claim under
a Private Car Comprehensive Policy MV-1251 issued by the defendant (Exh. A).
In its answer, the appellant Pyramid Insurance Co., Inc., alleged that it disallowed the claim
because at the time of the accident, the insured was driving his car with an expired driver's license.
After the trial, the court a quo rendered judgment on October 29, 1969 ordering the defendant "to
pay the plaintiff the sum of P20,000.00, value of the insurance of the motor vehicle in question and
to pay the costs.
LexLib

"On November 26, 1969, the plaintiff filed a "Motion for Immediate Execution Pending Appeal." It
was opposed by the defendant, but was granted by the trial court on December 15, 1969.
The trial court found the following facts to be undisputed:
"On October 12, 1968, after having purchased a brand new Nissan Cedric de Luxe Sedan
car bearing Motor No. 087797 from the Ng Sam Bok Motors Co. in Bacolod City, plaintiff
insured the same with the defendant insurance company against any loss or damage for
P20,000.00 and against third party liability for P10,000.00. Plaintiff paid the defendant
P361.34 premium for one year, March 12, 1968 to March 12, 1969, for which defendant
issued Private Car Comprehensive Policy No. MV-1251, marked Exhibit 'A.'
"The automobile was, however, mortgaged by the plaintiff with the vendor, Ng Sam Bok
Motors Co., to secure the payment of the balance of the purchase price, which explains why
the registration certificate in the name of the plaintiff remains in the hands of the mortgagee,
Ng Sam Bok Motors Co.
"On April 17, 1968, while driving the automobile in question, the plaintiff met a violent
accident. The La Carlota City fire engine crashed head on, and as a consequence, the
plaintiff sustained physical injuries, his father, Cesar Palermo, who was with him in the car
at the time was likewise seriously injured and died shortly thereafter, and the car in question
was totally wrecked.
"The defendant was immediately notified of the occurrence, and upon its orders, the
damaged car was towed from the scene of the accident to the compound of Ng Sam Bok
Motors in Bacolod City where it remains deposited up to the present time.
"The insurance policy, Exhibit 'A,' grants an option unto the defendant, in case of accident
either to indemnify the plaintiff for loss or damage to the car in cash or to replace the
damaged car. The defendant, however, refused to take either of the above-mentioned
alternatives for the reason as alleged, that the insured himself had violated the terms of the
policy when he drove the car in question with an expired driver's license." (Decision, Oct.
29, 1969, p. 68, Record on Appeal.)

Appellant alleges that the trial court erred in interpreting the following provision of the Private Car
Comprehensive Policy MV-1251:

"AUTHORIZED DRIVER:
Any of the following:
(a)The Insured.
(b)Any person driving on the Insured's order or with his permission. Provided
that the person driving is permitted in accordance with the licensing or other laws or
regulations to drive the Motor Vehicle and is not disqualified from driving such motor
vehicle by order of a Court of law or by reason of any enactment or regulation in that
behalf." (Exh. 'A.')

There is no merit in the appellant's allegation that the plaintiff was not authorized to drive the
insured motor vehicle because his driver's license had expired. The driver of the insured motor
vehicle at the time of the accident was the insured himself, hence an "authorized driver" under the
policy.
While the Motor Vehicle Law prohibits a person from operating a motor vehicle on the highway
without a license or with an expired license, an infraction of the Motor Vehicle Law on the part of
the insured, is not a bar to recovery under the insurance contract. It however renders him subject
to the penal sanctions of the Motor Vehicle Law.
The requirement that the driver be "permitted. in accordance with the licensing or other laws or
regulations to drive the Motor Vehicle and is not disqualified from driving such motor vehicle by
order of a Court of Law or by reason of any enactment or regulation in that behalf," applies only
when the driver "is driving on the insured's order or with his permission." It does not apply when
the person driving is the insured himself.
This view may be inferred from the decision of this Court in Villacorta vs. Insurance Commission,
100 SCRA 467, where it was held that:
LLpr

"The main purpose of the 'authorized driver' clause, as may be seen from its text, is that a
person other than the insured owner, who drives the car on the insured's order, such as his
regular driver, or with his permission, such as a friend or member of the family or the
employees of a car service or repair shop, must be duly licensed drivers and have no
disqualification to drive a motor vehicle.

In an American case, where the insured herself was personally operating her automobile but
without a license to operate it, her license having expired prior to the issuance of the policy, the
Supreme Court of Massachusetts was more explicit:
". . . Operating an automobile on a public highway without a license, which act is a statutory
crime is not precluded by public policy from enforcing a policy indemnifying her against
liability for bodily injuries inflicted by use of the automobile." (Drew C. Drewfield McMahon
vs. Hannah Pearlman, et al., 242 Mass. 367, 136 N.E. 154, 23 A.L.R. 1467.)

WHEREFORE, the appealed decision is affirmed with costs against the defendant-appellant.
SO ORDERED.
Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

|||

(Palermo v. Pyramid Insurance Co., Inc., G.R. No. L-36480, May 31, 1988)

THIRD DIVISION
[G.R. No. 60506. August 6, 1992.]
FIGURACION VDA. DE MAGLANA, EDITHA M. CRUZ, ERLINDA M. MASESAR,
LEONILA M. MALLARI, GILDA ANTONIO and the minors LEAH, LOPE, JR., and
ELVIRA, all surnamed MAGLANA, herein represented by their mother,
FIGURACION VDA. DE MAGLANA, petitioners, vs. HONORABLE FRANCISCO Z.
CONSOLACION, Presiding Judge of Davao City, Branch II, and AFISCO
INSURANCE CORPORATION, respondents.
Jose B. Guyo for petitioners.
Angel E. Fernandez for private respondents.
SYLLABUS
1.COMMERCIAL LAW; INSURANCE; COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE; THIRD PARTY LIABILITY; INSURER DIRECTLY LIABLE TO THE INJURED.
"[W]here an insurance policy insures directly against liability, the insurer's liability accrues
immediately upon the occurrence of the injury or event upon which the liability depends, and does
not depend on the recovery of judgment by the injured party against the insured. The underlying
reason behind the third party liability (TPL) of the Compulsory Motor Vehicle Liability Insurance is
"to protect injured persons against the insolvency of the insured who causes such injury, and to
give such injured person a certain beneficial interest in the proceeds of the policy. . . ." (Shafer vs.
Judge, RTC of Olongapo City, Br. 75, G.R. No. 78848, Nov. 14, 1988, 167 SCRA 386, 391)
2.ID.; ID.; ID.; ID.; LIABILITY OF INSURER DISTINCT FROM LIABILITY OF THE INSURED
AGAINST THIRD PARTIES. We cannot agree that AFISCO is likewise solidarily liable with
Destrajo. In Malayan Insurance Co. v. Court of Appeals, (L-36413, September 26, 1988, 165
SCRA 536, 544), this Court had the opportunity to resolve the issue as to the nature of the liability
of the insurer and the insured vis-a-vis the third party injured in an accident. We categorically ruled
thus: "While it is true that where the insurance contract provides for indemnity against liability to
third persons, such third persons can directly sue the insurer, however, the direct liability of the
insurer under indemnity contracts against third party liability does not mean that the insurer can be
held solidarily liable with the insured and/or the other parties found at fault. The liability of the
insurer is based on contract; that of the insured is based on tort. . . . For if petitioner-insurer were
solidarily liable with said two (2) respondents by reason of the indemnity contract against third

party liability under which an insurer can be directly sued by a third party this will result in a
violation of the principles underlying solidary obligation and insurance contracts."
3.ID.; ID.; INSURANCE CONTRACTS DISTINGUISHED FROM ORDINARY CONTRACTS.
The Court distinguish the extent of the liability and manner of enforcing the same in ordinary
contracts from that of insurance contracts. While in solidary obligations, the creditor may enforce
the entire obligation against one of the solidary debtors, in an insurance contract, the insurer
undertakes for a consideration to indemnify the insured against loss, damage or liability arising
from an unknown or contingent event. Thus, petitioner therein, which, under the insurance contract
is liable only up to P20,000.00, can not be made solidarily liable with the insured for the entire
obligation of P29,013.00 otherwise there would result "an evident breach of the concept of solidary
obligation."
DECISION
ROMERO, J :
p

The nature of the liability of an insurer sued together with the insured/operator-owner of a common
carrier which figured in an accident causing the death of a third person is sought to be defined in
this petition for certiorari.
The facts as found by the trial court are as follows:
" . . . . Lope Maglana was an employee of the Bureau of Customs whose work station was
at Lasa, here in Davao City. On December 20, 1978, early morning, Lope Maglana was on
his way to his work station, driving a motorcycle owned by the Bureau of Customs. At Km.
7, Lanang, he met an accident that resulted in his death. He died on the spot. The PUJ jeep
that bumped the deceased was driven by Pepito Into, operated and owned by defendant
Destrajo. From the investigation conducted by the traffic investigator, the PUJ jeep was
overtaking another passenger jeep that was going towards the city poblacion. While
overtaking, the PUJ jeep of defendant Destrajo running abreast with the overtaken jeep,
bumped the motorcycle driven by the deceased who was going towards the direction of
Lasa, Davao City. The point of impact was on the lane of the motorcycle and the deceased
was thrown from the road and met his untimely death." 1

Consequently, the heirs of Lope Maglana, Sr., here petitioners, filed an action for damages and
attorney's fees against operator Patricio Destrajo and the Afisco Insurance Corporation (AFISCO
for brevity) before the then Court of First Instance of Davao, Branch II. An information for homicide
thru reckless imprudence was also filed against Pepito Into.
prcd

During the pendency of the civil case, Into was sentenced to suffer an indeterminate penalty of one
(1) year, eight (8) months and one (1) day of prision correccional, as minimum, to four (4) years,
nine (9) months and eleven (11) days of prision correccional, as maximum, with all the accessory
penalties provided by law, and to indemnify the heirs of Lope Maglana, Sr. in the amount of twelve
thousand pesos (P12,000.00) with subsidiary imprisonment in case of insolvency, plus five
thousand pesos (P5,000.00) in the concept of moral and exemplary damages with costs. No
appeal was interposed by the accused who later applied for probation. 2

On December 14, 1981, the lower court rendered a decision finding that Destrajo had not
exercised sufficient diligence as the operator of the jeepney. The dispositive portion of the decision
reads:
"WHEREFORE, the Court finds judgment in favor of the plaintiffs against defendant
Destrajo, ordering him to pay plaintiffs the sum of P28,000.00 for loss of income; to pay
plaintiffs the sum of P12,000.00 which amount shall be deducted in the event
judgment in Criminal Case No. 3527-D against the driver, accused Into, shall have
been enforced; to pay plaintiffs the sum of P5,901.70 representing funeral and burial
expenses of the deceased; to pay plaintiffs the sum of P5,000.00 as moral damages
which shall be deducted in the event judgment (sic) in Criminal Case No. 3527-D
against the driver, accused Into; to pay plaintiffs the sum of P3,000.00 as attorney's fees
and to pay the costs of suit.
The defendant insurance company is ordered to reimburse defendant Destrajo
whatever amounts the latter shall have paid only up to the extent of its insurance
coverage.
SO ORDERED." 3

Petitioners filed a motion for the reconsideration of the second paragraph of the dispositive
portion of the decision contending that AFISCO should not merely be held secondarily
liable because the Insurance Code provides that the insurer's liability is "direct and primary
and/or jointly and severally with the operator of the vehicle, although only up to the extent
of the insurance coverage." 4 Hence, they argued that the P20,000.00 coverage of the
insurance policy issued by AFISCO, should have been awarded in their favor.
In its comment on the motion for reconsideration, AFISCO argued that since the Insurance Code
does not expressly provide for a solidary obligation, the presumption is that the obligation is joint.
In its Order of February 9, 1982, the lower court denied the motion for reconsideration ruling that
since the insurance contract "is in the nature of suretyship, then the liability of the insurer is
secondary only up to the extent of the insurance coverage." 5
Petitioners filed a second motion for reconsideration reiterating that the liability of the insurer is
direct, primary and solidary with the jeepney operator because the petitioners became
direct beneficiaries under the provision of the policy which, in effect, is a stipulation pour
autrui. 6 This motion was likewise denied for lack of merit.
Cdpr

Hence, petitioners filed the instant petition for certiorari which, although it does not seek the
reversal of the lower court's decision in its entirety, prays for the setting aside or modification of the
second paragraph of the dispositive portion of said decision. Petitioners reassert their position that
the insurance company is directly and solidarily liable with the negligent operator up to the extent
of its insurance coverage.
We grant the petition.
The particular provision of the insurance policy on which petitioners base their claim is as follows:
"SECTION 1 LIABILITY TO THE PUBLIC

1.The Company will, subject to the Limits of Liability, pay all sums necessary to discharge
liability of the insured in respect of.
(a)death of or bodily injury to any THIRD PARTY
(b). . . .
2.. . . .
3.In the event of the death of any person entitled to indemnity under this Policy, the
Company will, in respect of the liability incurred to such person indemnify his personal
representatives in terms of, and subject to the terms and conditions hereof." 7

The above-quoted provision leads to no other conclusion but that AFISCO can be held directly
liable by petitioners. As this Court ruled in Shafer vs. Judge, RTC of Olongapo City, Br. 75,
"[w]here an insurance policy insures directly against liability, the insurer's liability accrues
immediately upon the occurrence of the injury or event upon which the liability depends,
and does not depend on the recovery of judgment by the injured party against the insured."
8 The underlying reason behind the third party liability (TPL) of the Compulsory Motor Vehicle
Liability Insurance is "to protect injured persons against the insolvency of the insured who
causes such injury, and to give such injured person a certain beneficial interest in the
proceeds of the policy . . . ." 9 Since petitioners had received from AFISCO the sum of
P5,000.00 under the no-fault clause, AFISCO's liability is now limited to P15,000.00.

However, we cannot agree that AFISCO is likewise solidarily liable with Destrajo. In Malayan
Insurance Co., Inc. v. Court of Appeals, 10 this Court had the opportunity to resolve the issue as to
the nature of the liability of the insurer and the insured vis-a-vis the third party injured in an
accident. We categorically ruled thus:
"While it is true that where the insurance contract provides for indemnity against liability to
third persons, such third persons can directly sue the insurer, however, the direct liability
of the insurer under indemnity contracts against third party liability does not mean
that the insurer can be held solidarily liable with the insured and/or the other parties
found at fault. The liability of the insurer is based on contract; that of the insured is
based on tort.
In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos (the
injured third party), but it cannot, as incorrectly held by the trial court, be made `solidarily'
liable with the two principal tortfeasors, namely respondents Sio Choy and San Leon Rice
Mill, Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by
reason of the indemnity contract against third party liability under which an insurer can
be directly sued by a third party this will result in a violation of the principles underlying
solidary obligation and insurance contracts" (emphasis supplied).
llcd

The Court then proceeded to distinguish the extent of the liability and manner of enforcing the
same in ordinary contracts from that of insurance contracts. While in solidary obligations, the
creditor may enforce the entire obligation against one of the solidary debtors, in an insurance
contract, the insurer undertakes for a consideration to indemnify the insured against loss,
damage or liability arising from an unknown or contingent event. 11 Thus, petitioner therein,
which, under the insurance contract is liable only up to P20,000.00, can not be made

solidarily liable with the insured for the entire obligation of P29,013.00 otherwise there
would result "an evident breach of the concept of solidary obligation."
Similarly, petitioners herein cannot validly claim that AFISCO, whose liability under the insurance
policy is also P20,000.00, can be held solidarily liable with Destrajo for the total amount of
P53,901.70 in accordance with the decision of the lower court. Since under both the law and the
insurance policy, AFISCO's liability is only up to P20,000.00, the second paragraph of the
dispositive portion of the decision in question may have unwittingly sown confusion among
the petitioners and their counsel. What should have been clearly stressed as to leave no room
for doubt was the liability of AFISCO under the explicit terms of the insurance contract.
In fine, we conclude that the liability of AFISCO based on the insurance contract is direct, but not
solidary with that of Destrajo which is based on Article 2180 of the Civil Code. 12 As such,
petitioners have the option either to claim the P15,000 from AFISCO and the balance from
Destrajo or enforce the entire judgment from Destrajo subject to reimbursement from AFISCO to
the extent of the insurance coverage.
While the petition seeks a definitive ruling only on the nature of AFISCO's liability, we noticed that
the lower court erred in the computation of the probable loss of income. Using the formula: 2/3 of
(80-56) x P12,000.00, it awarded P28,000.00. 13 Upon recomputation, the correct amount is
P192,000.00. Being a "plain error," we opt to correct the same. 14 Furthermore, in accordance with
prevailing jurisprudence, the death indemnity is hereby increased to P50,000.00. 15
WHEREFORE, premises considered, the present petition is hereby GRANTED. The award of
P28,800.00 representing loss of income is INCREASED to P192,000.00 and the death indemnity
of P12,000.00 to P50,000.00.
SO ORDERED.
Gutierrez, Jr., Bidin and Davide, JJ., concur.
|||

(Vda. De Maglana v. Consolacion, G.R. No. 60506, August 06, 1992)

SECOND DIVISION
[G.R. No. 96452. May 7, 1992.]
PERLA COMPANIA DE SEGUROS, INC., petitioner, vs. THE COURT OF
APPEALS, HERMINIO LIM and EVELYN LIM, respondents.
[G.R. No. 96493. May 7, 1992.]

FCP CREDIT CORPORATION, petitioner, vs. THE COURT OF APPEALS, Special


Third Division, HERMINIO LIM and EVELYN LIM,, respondents.
Yolanda Quisumbing-Javellana and Nelson A. Loyola for petitioner.
Wilson L. Tee for respondents Hermenio and Evelyn Lim.
SYLLABUS
1.COMMERCIAL LAW; INSURANCE; LOSS OF MOTOR VEHICLE THRU THEFT; NO CAUSAL
CONNECTION BETWEEN POSSESSION OF A VALID DRIVER'S LICENSE AND LOSS OF
VEHICLE THRU THEFT. It is worthy to note that there is no causal connection between the
possession of a valid driver's license and the loss of a vehicle. To rule otherwise would render car
insurance practically a sham since an insurance company can easily escape liability by citing
restrictions which are not applicable or germane to the claim, thereby reducing indemnity to a
shadow.
2.ID.; ID.; INSURANCE POLICY MEANT TO BE ADDITIONAL SECURITY TO PRINCIPAL
CONTRACT; CASE AT BAR. The insurance policy was therefore meant to be an additional
security to the principal contract, that is, to insure that the promissory note will be paid in case the
automobile is lost through accident or theft. The Chattel Mortgage Contract provided that: "'THE
SAID MORTGAGOR COVENANTS AND AGREES THAT HE/IT WILL CAUSE THE
PROPERTY/IES HEREIN-ABOVE MORTGAGED TO BE INSURED AGAINST LOSS OR
DAMAGE BY ACCIDENT, THEFT AND FIRE FOR A PERIOD OF ONE YEAR FROM DATE
HEREOF AND EVERY YEAR THEREAFTER UNTIL THE MORTGAGE OBLIGATION IS FULLY
PAID WITH AN INSURANCE COMPANY OR COMPANIES ACCEPTABLE TO THE MORTGAGEE
IN AN AMOUNT NOT LESS THAN THE OUTSTANDING BALANCE OF THE MORTGAGE
OBLIGATION; THAT HE/IT WILL MAKE ALL LOSS, IF ANY, UNDER SUCH POLICY OR
POLICIES, PAYABLE TO THE MORTGAGEE OR ITS ASSIGNS AS ITS INTERESTS MAY
APPEAR AND FORTHWITH DELIVER SUCH POLICY OR POLICIES TO THE MORTGAGEE,
. . .'" It is clear from the abovementioned provision that upon the loss of the insured vehicle, the
insurance company Perla undertakes to pay directly to the mortgagor or to their assignee, FCP, the
outstanding balance of the mortgage at the time of said loss under the mortgage contract.
3.CIVIL LAW; CONTRACTS; CHATTEL MORTGAGE; MERELY AN ACCESSORY TO
PROMISSORY NOTE; PRINCIPAL CONTRACT UNAFFECTED BY WHATEVER BEFALLS
ACCESSORY CONTRACT; CASE AT BAR. The chattel mortgage constituted over the
automobile is merely an accessory contract to the promissory note. Being the principal contract,
the promissory note is unaffected by whatever befalls the subject matter of the accessory contract.
Therefore, the unpaid balance on the promissory note should be paid, and not just the installments
due and payable before the automobile was carnapped, as erroneously held by the Court of
Appeals.
4.ID.; DAMAGES; MAKER NOT LIABLE FOR INTEREST, LIQUIDATED DAMAGES AND
ATTORNEY'S FEES STIPULATED IN PROMISSORY NOTE REMAINING UNPAID DUE TO
INSURER'S DENIAL OF A VALID CLAIM; CASE AT BAR. Because petitioner Perla had
unreasonably denied their valid claim, private respondents should not be made to pay the interest,
liquidated damages and attorney's fees as stipulated in the promissory note. As mentioned above,
the contract of indemnity was procured to insure the return of the money loaned from petitioner

FCP, and the unjustified refusal of petitioner Perla to recognize the valid claim of the private
respondents should not in any way prejudice the latter.
5.ID.; ID.; AWARD FOR MORAL AND EXEMPLARY DAMAGES, AS WELL AS ATTORNEY'S
FEES LEFT TO SOUND DISCRETION OF THE COURT; CASE AT BAR. As to the award of a
moral damages, exemplary damages and attorney's fees, private respondents are legally entitled
to the same since petitioner Perla had acted in bad faith by unreasonably refusing to honor the
insurance claim of the private respondents. Besides, awards for moral and exemplary damages,
as well as attorney's fees are left to the sound discretion of the Court. Such discretion, if well
exercised, will not be disturbed on appeal.
DECISION
NOCON, J :
p

These are two petitions for review on certiorari, one filed by Perla Compania de Seguros, Inc. in
G.R. No. 96452, and the other by FCP Credit Corporation in G.R. No. 96493 both seeking to annul
and set aside the decision dated July 30, 1990 1 of the Court of Appeals in CA-G.R. No. 13037,
which reversed the decision of the Regional Trial Court of Manila, Branch VIII in Civil Case No. 8319098 for replevin and damages. The dispositive portion of the decision of the Court of Appeals
reads, as follows:
"WHEREFORE, the decision appealed from is reversed and appellee Perla Compania de
Seguros, Inc. is ordered to indemnify appellants Herminio and Evelyn Lim for the loss of
their insured vehicle; while said appellants are ordered to pay appellee FCP Credit
Corporation all the unpaid installments that were due and payable before the date said
vehicle was carnapped; and appellee Perla Compania de Seguros, Inc. is also ordered to
pay appellants moral damages of P12,000.00 for the latter's mental sufferings, exemplary
damages of P20,000.00 for appellee Perla Compania de Seguros. Inc.'s unreasonable
refusal on sham grounds to honor the just insurance claim of appellants by way of example
and correction for public good, and attorney's fees of P10,000.00 as a just and equitable
reimbursement for the expenses incurred therefor by appellants, and the costs of suit both
in the lower court and in this appeal." 2

The facts as found by the trial court are as follows:


On December 24, 1981, private respondents spouses Herminio and Evelyn Lim executed a
promissory note in favor of Supercars, Inc. in the sum of P77,940.00, payable in monthly
installments according to the schedule of payment indicated in said note, 3 and secured by a
chattel mortgage over a brand new red Ford Laser 1300 5DR Hatchback 1981 model with motor
and serial No. SUPJYK-03780, which is registered under the name of private respondent Herminio
Lim 4 and insured with the petitioner Perla Compania de Seguros, Inc. (Perla for brevity) for
comprehensive coverage under Policy No. PC/41PP-QCB-43383. 5
On the same date, Supercars, Inc., with notice to private respondents spouses, assigned to
petitioner FCP Credit Corporation (FCP for brevity) its rights, title and interest on said promissory
note and chattel mortgage as shown by the Deed of Assignment. 6

At around 2:30 P.M. of November 9, 1982, said vehicle was carnapped while parked at the back of
Broadway Centrum along N. Domingo Street, Quezon City. Private respondent Evelyn Lim, who
was driving said car before it was carnapped, immediately called up the Anti-Carnapping Unit of
the Philippine Constabulary to report said incident and thereafter, went to the nearest police
substation at Araneta, Cubao to make a police report regarding said incident, as shown by the
certification issued by the Quezon City police. 7
On November 10, 1982, private respondent Evelyn Lim reported said incident to the Land
Transportation Commission in Quezon City, as shown by the letter of her counsel to said office, 8
in compliance with the insurance requirement. She also filed a complaint with the Headquarters
Constabulary Highway Patrol Group. 9
On November 11, 1982, private respondent filed a claim for loss with the petitioner Perla but said
claim was denied on November 18, 1982 10 on the ground that Evelyn Lim, who was using the
vehicle before it was carnapped, was in possession of an expired driver's license at the time of the
loss of said vehicle which is in violation of the authorized driver clause of the insurance policy,
which states, to wit:
Cdpr

"AUTHORIZED DRIVER:
Any of the following: (a) The Insured (b) Any person driving on the Insured's order, or with
his permission. Provided that the person driving is permitted, in accordance with the
licensing or other laws or regulations, to drive the Scheduled Vehicle, or has been permitted
and is not disqualified by order of a Court of Law or by reason of any enactment or
regulation in that behalf." 11

On November 17, 1982, private respondents requested from petitioner FCP for a suspension of
payment on the monthly amortization agreed upon due to the loss of the vehicle and, since the
carnapped vehicle was insured with petitioner Perla, said insurance company should be made to
pay the remaining balance of the promissory note and the chattel mortgage contract.
Perla, however, denied private respondents' claim. Consequently, petitioner FCP demanded that
private respondents pay the whole balance of the promissory note or to return the vehicle 12 but
the latter refused.
On July 25, 1983, petitioner FCP filed a complaint against private respondents, who in turn filed an
amended third party complaint against petitioner Perla on December 8, 1983. After trial on the
merits, the trial court rendered a decision, the dispositive portion of which reads.
"WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:
1.Ordering defendants Herminio Lim and Evelyn Lim to pay, jointly and severally, plaintiff
the sum of P55,055.93 plus interest thereon at the rate of 24% per annum from July 2, 1983
until fully paid;
2.Ordering defendants to pay plaintiff P5,000.00 as and for attorney's fees; and the costs of
suit.
Upon the other hand, likewise, ordering the DISMISSAL of the Third Party Complaint filed
against Third-Party Defendant." 13

Not satisfied with said decision, private respondents appealed the same to the Court of Appeals,
which reversed said decision.
After petitioners' separate motions for reconsideration were denied by the Court of Appeals in its
resolution of December 10, 1990, petitioners filed these separate petitions for review on certiorari.
Petitioner Perla alleged that there was grave abuse of discretion on the part of the appellate court
in holding that private respondents did not violate the insurance contract because the authorized
driver clause is not applicable to the "Theft" clause of said Contract.

For its part, petitioner FCP raised the issue of whether or not the loss of the collateral exempted
the debtor from his admitted obligations under the promissory note particularly the payment of
interest, litigation expenses and attorney's fees.
prLL

We find no merit in Perla's petition.


The comprehensive motor car insurance policy issued by petitioner Perla undertook to indemnify
the private respondents against loss or damages to the car (a) by accidental collision or
overturning, or collision or overturning consequent upon mechanical breakdown or consequent
upon wear and tear; (b) by fire, external explosion, self-ignition or lightning or burglary,
housebreaking or theft; and (c) by malicious act. 14
Where a car is admittedly, as in this case, unlawfully and wrongfully taken without the owner's
consent or knowledge, such taking constitutes theft, and, therefore, it is the "THEFT" clause, and
not the "AUTHORIZED DRIVER" clause, that should apply. As correctly stated by the respondent
court in its decision:
". . . Theft is an entirely different legal concept from that of accident. Theft is committed by a
person with the intent to gain or, to put it in another way, with the concurrence of the doer's
will. On the other hand, accident, although it may proceed or result from negligence, is the
happening of an event without the concurrence of the will of the person by whose agency it
was caused. (Bouvier's Law Dictionary, Vol. I, 1914 ed., p. 101).
Clearly, the risk against accident is distinct from the risk against theft. The 'authorized driver
clause' in a typical insurance policy as in contemplation or anticipation of accident in the
legal sense in which it should be understood, and not in contemplation or anticipation of an
event such as theft. The distinction often seized upon by insurance companies in
resisting claims from their assureds between death occurring as a result of accident and
death occurring as a result of intent may, by analogy, apply to the case at bar. Thus, if the
insured vehicle had figured in an accident at the time she drove it with an expired license,
then, appellee Perla Compania could properly resist appellants' claim for indemnification for
the loss or destruction of the vehicle resulting from the accident. But in the present case,
the loss of the insured vehicle did not result from an accident where intent was involved; the
loss in the present case was caused by theft, the commission of which was attended by
intent." 15

It is worthy to note that there is no causal connection between the possession of a valid driver's
license and the loss of a vehicle. To rule otherwise would render car insurance practically a sham

since an insurance company can easily escape liability by citing restrictions which are not
applicable or germane to the claim, thereby reducing indemnity to a shadow.
We however find the petition of FCP meritorious.
This Court agrees with petitioner FCP that private respondents are not relieved of their obligation
to pay the former the installments due on the promissory note on account of the loss of the
automobile. The chattel mortgage constituted over the automobile is merely an accessory contract
to the promissory note. Being the principal contract, the promissory note is unaffected by whatever
befalls the subject matter of the accessory contract. Therefore, the unpaid balance on the
promissory note should be paid, and not just the installments due and payable before the
automobile was carnapped, as erroneously held by the Court of Appeals.
However, this does not mean that private respondents are bound to pay the interest, litigation
expenses and attorney's fees stipulated in the promissory note. Because of the peculiar
relationship between the three contracts in this case, i. e., the promissory note, the chattel
mortgage contract and the insurance policy, this Court is compelled to construe all three contracts
as intimately interrelated to each other, despite the fact that at first glance there is no relationship
whatsoever between the parties thereto.
Under the promissory note, private respondents are obliged to pay Supercars, Inc. the amount
stated therein in accordance with the schedule provided for. To secure said promissory note,
private respondents constituted a chattel mortgage in favor of Supercars, Inc. over the automobile
the former purchased from the latter. The chattel mortgage, in turn, required private respondents to
insure the automobile and to make the proceeds thereof payable to Supercars, Inc. The
promissory note and chattel mortgage were assigned by Supercars, Inc. to petitioner FCP, with the
knowledge of private respondents. Private respondents were able to secure an insurance policy
from petitioner Perla, and the same was made specifically payable to petitioner FCP. 16
The insurance policy was therefore meant to be an additional security to the principal contract, that
is, to insure that the promissory note will still be paid in case the automobile is lost through
accident or theft. The Chattel Mortgage Contract provided that:
LLjur

"'THE SAID MORTGAGOR COVENANTS AND AGREES THAT HE/IT WILL CAUSE THE
PROPERTY/IES HEREIN-ABOVE MORTGAGED TO BE INSURED AGAINST LOSS OR
DAMAGE BY ACCIDENT, THEFT AND FIRE FOR A PERIOD OF ONE YEAR FROM DATE
HEREOF AND EVERY YEAR THEREAFTER UNTIL THE MORTGAGE OBLIGATION IS
FULLY PAID WITH AN INSURANCE COMPANY OR COMPANIES ACCEPTABLE TO THE
MORTGAGEE IN AN AMOUNT NOT LESS THAN THE OUTSTANDING BALANCE OF
THE MORTGAGE OBLIGATION; THAT HE/IT WILL MAKE ALL LOSS, IF ANY, UNDER
SUCH POLICY OR POLICIES, PAYABLE TO THE MORTGAGEE OR ITS ASSIGNS AS
ITS INTERESTS MAY APPEAR AND FORTHWITH DELIVER SUCH POLICY OR
POLICIES TO THE MORTGAGEE, . . .'" 17

It is clear from the abovementioned provision that upon the loss of the insured vehicle, the
insurance company Perla undertakes to pay directly to the mortgagor or to their assignee, FCP, the
outstanding balance of the mortgage at the time of said loss under the mortgage contract. If the
claim on the insurance policy had been approved by petitioner Perla, it would have paid the
proceeds thereof directly to petitioner FCP, and this would have had the effect of extinguishing
private respondents' obligation to petitioner FCP. Therefore, private respondents were justified in
asking petitioner FCP to demand the unpaid installments from petitioner Perla.

Because petitioner Perla had unreasonably denied their valid claim, private respondents should
not be made to pay the interest, liquidated damages and attorney's fees as stipulated in the
promissory note. As mentioned above, the contract of indemnity was procured to insure the return
of the money loaned from petitioner FCP, and the unjustified refusal of petitioner Perla to recognize
the valid claim of the private respondents should not in any way prejudice the latter.
Private respondents can not be said to have unduly enriched themselves at the expense of
petitioner FCP since they will be required to pay the latter the unpaid balance of its obligation
under the promissory note.
In view of the foregoing discussion, We hold that the Court of Appeals did not err in requiring
petitioner Perla to indemnify private respondents for the loss of their insured vehicle. However, the
latter should be ordered to pay petitioner FCP the amount of P55,055.93, representing the unpaid
installments from December 30, 1982 up to July 1, 1983, as shown in the statement of account
prepared by petitioner FCP, 18 plus legal interest from July 2, 1983 until fully paid.
llcd

As to the award of moral damages, exemplary damages and attorney's fees, private respondents
are legally entitled to the same since petitioner Perla had acted in bad faith by unreasonably
refusing to honor the insurance claim of the private respondents. Besides, awards for moral and
exemplary damages, as well as attorney's fees are left to the sound discretion of the Court. Such
discretion, if well exercised, will not be disturbed on appeal. 19
WHEREFORE, the assailed decision of the Court of Appeals is hereby MODIFIED to require
private respondents to pay petitioner FCP the amount of P55,055.93, with legal interest from July
2, 1983 until fully paid. The decision appealed from is hereby affirmed as to all other respects. No
pronouncement as to costs.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Regalado, JJ ., concur.
|||

(Perla Compania de Seguros, Inc. v. Court of Appeals, G.R. No. 96452, 96493, May 07, 1992)

FIRST DIVISION
[G.R. No. 114427. February 6, 1995.]
ARMANDO GEAGONIA, petitioner, vs. COURT OF APPEALS and COUNTRY
BANKERS INSURANCE CORPORATION, respondents.
DECISION

DAVIDE, JR., J :
p

For our review under Rule 45 of the Rules of Court is the decision1 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
insurance policy No. F-146222 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."
cdasia

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.P55,698.00
F. Legaspi Gen. Merchandise86,432.50
Cebu Tesing Textiles250,000.00 (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 effected, 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 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."
cdasia

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 stocks-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
Philippines First Insurance Co., Inc. (hereinafter PFIC). 3 These policies indicate that the
insured was "Messrs. Discount Mart (Mr. Armando Geagonia, Prop.)" with a mortgage clause
reading:
"MORTGAGEE: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. CO-INSURANCE DECLARED:
P100,000. Phils. First CEB/F-24758" 4

The basis of the private respondent's denial was the petitioner's alleged violation of
Condition 3 of the policy.

The petitioner then filed a complaint5 against the private respondent with the Insurance
Commission (Case No. 3340) for the recovery of P100,000.00 under fire insurance policy No.
F-14622 and for attorney's fees and costs of litigation. He attached as Annex "M" 6 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 so 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
In its answer,7 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.
In its decision of 21 June 1993,8 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:
cdasia

"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 decision9 having been denied by the Insurance
Commission in its resolution of 20 August 1993, 10 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.
In its decision of 29 December 1993, 11 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 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 insurances 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).'
It 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.
14622. . . .
Indeed private respondent's allegation of lack of knowledge of the previous insurances is
belied by his letter to petitioner [of 18 January 1991. The body of the letter reads as
follows:]
cdasia

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 did 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 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 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."

cdasia

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 of 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. 3340 as Annex "M" thereof and made an
integral part of the complaint. 12 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 it
even if it were not introduced as an independent evidence. 13
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 conclusive and binding upon this Court. 14
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.
cdasia

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 Code
15 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 policy. 16 However, in order to constitute a violation,
the other insurance must be upon the same subject matter, the same interest therein, and the
same risk. 17
As to a mortgaged property, the mortgagor and the mortgagee have each an independent
insurable interest therein and both interests may be covered by one policy, or each may take
out a separate policy covering his interest, either at the same or at separate times. 18 The
mortgagor's insurable interest covers the full value of the mortgaged property, even though the
mortgage debt is equivalent to the full value of the property. 19 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 the amount of the debt, not exceeding the
value of the mortgaged property.20 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 upon the proceeds. 21
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 itself. Hence, any
act of the mortgagor which defeats his right will also defeat the right of the mortgagee.22 This
kind of policy covers only such interest as the mortgagee has at the issuing of the policy. 23
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
upon such insurance. 24 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 a policy on the assurance that it insures him, the policy is in
fact in the form used to insure a mortgagor with loss payable clause. 25
The fire insurance policies issued by the PFIC name the petitioner as the assured and
contain a mortgage clause which reads:
cdasia

"Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their
interest may appear subject to the terms of the 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
General Insurance and Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety Corp. vs.
Yap, 27 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 Co. 28 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."
cdasia

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 forfeiture. 29 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 intended to operate. 30 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 therein is rarely understood by ordinary laymen. 31
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 non-disclosure then of the
former policies was not fatal to the petitioner's right to recover on the private respondent's
policy.
cdasia

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 over-insurance 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 situation in which a fire would be profitable to
the insured. 32
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.
Padilla, Bellosillo, Quiason and Kapunan, JJ ., concur.

FIRST DIVISION
[G.R. No. 115278. May 23, 1995.]
FORTUNE INSURANCE AND SURETY CO., INC., petitioner, vs. COURT OF
APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.
Santiago, Arevalo, Tomas & Associates for petitioner.
Julius Caesar Q. Llamas for private respondent.
SYLLABUS
1.COMMERCIAL LAW; INSURANCE; BURGLARY, THEFT AND ROBBERY POLICY; A
CASUALTY INSURANCE; GOVERNING PRINCIPLES. The insurance policy entered into by
the parties is a theft or robbery insurance policy which is a form of casualty insurance. Except with
respect to compulsory motor vehicle liability insurance, the Insurance Code contains no other
provisions applicable to casualty insurance or to robbery insurance in particular. These contracts
are, therefore, governed by the general provisions applicable to all types of insurance. Outside of
these, the rights and obligations of the parties must be determined by the terms of their contract,
taking into consideration its purpose and always in accordance with the general principles of
insurance law.
2.ID.; ID.; ID.; GENERAL EXCEPTIONS; SERVICE AND EMPLOYMENT; MEANING THEREOF.
It has been aptly observed that in burglary, robbery and theft insurance, "the opportunity to
defraud the insurer the moral hazard is so great that insurers have found it necessary to fill
up their policies with countless restrictions, many designed to reduce this hazard. Seldom does the
insurer assume the risk of all losses due to the hazards insured against." Persons frequently
excluded under such provisions are those in the insured's service and employment. The purpose
of the exception is to guard against liability should the theft be committed by one having
unrestricted access to the property. In such cases, the terms specifying the excluded classes are
to be given their meaning as understood in common speech. The terms "service" and
"employment" are generally associated with the idea of selection, control, and compensation.
3.ID.; ID.; ID.; ID.; ID.; LABOR-ONLY CONTRACTS, CONSIDERED AUTHORIZED
REPRESENTATIVE IN CASE AT BAR. Notwithstanding the express assumption of PRC
Management Systems and Unicorn Security Services that the drivers and the security guards each
shall supply to Producers are not the latter's employees, it may, in fact, be that it is because the
contracts are, indeed, "labor-only" contracts. Whether they are is, in the light of the criteria
provided for in Article 106 of the Labor Code, a question of fact. Since the parties opted to submit
the case for judgment on the basis of their stipulation of facts which are strictly limited to the
insurance policy, the contracts with PRC Management Systems and Unicorn Security Services, the
complaint for violation of P.D. No. 532, and the information therefor filed by the City Fiscal of Pasay
City, there is a paucity of evidence as to whether the contracts between Producers and PRC
Management Systems and Unicorn Security Services are "labor-only" contracts. But even granting
for the sake of argument that these contracts were not "labor-only" contracts, and PRC
Management Systems and Unicorn Security Services were truly independent contractors, we are
satisfied that Magalong and Atiga were, in respect of the transfer of Producer's money from its

Pasay City branch to its head office in Makati, its "authorized representatives" who served as such
with its teller Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the
specific duty to safely transfer the money to its head office, with Alampay to be responsible for its
custody in transit; Magalong to drive the armored vehicle which would carry the money; and Atiga
to provide the needed security for the money, the vehicle, and his two other companions. In short,
for these particular tasks, the three acted as agents of Producers. A "representative" is defined as
one who represents or stands in the place of another; one who represents others or another in a
special capacity, as an agent, and is interchangeable with "agent." In view of the foregoing,
Fortune is exempt from liability under the general exceptions clause of the insurance policy.
4.ID.; ID.; CONTRACT OF INSURANCE AS CONTRACT OF ADHESION; INTERPRETATION
THEREOF. A contract of insurance is a contract of adhesion, thus any ambiguity therein should
be resolved against the insurer, or it should be construed liberally in favor of the insured and
strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and
must be construed in such a way as to preclude the insurer from non-compliance with its
obligation. It goes without saying then that if the terms of the contract are clear and unambiguous,
there is no room for construction and such terms cannot be enlarged or diminished by judicial
construction.
5.ID.; ID.; CONTRACT OF INSURANCE AS CONTRACT OF INDEMNITY. An insurance
contract is a contract of indemnity upon the terms and conditions specified therein. It is settled that
the terms of the policy constitute the measure of the insurer's liability. In the absence of statutory
prohibition to the contract, insurance companies have the same rights as individuals to limit their
liability and to impose whatever conditions they deem best upon their obligations not inconsistent
with public policy.
DECISION
DAVIDE, JR., J :
p

The fundamental legal issue raised in this petition for review on certiorari is whether the
petitioner is liable under the Money, Security, and Payroll Robbery policy it issued to the private
respondent or whether recovery thereunder is precluded under the general exceptions clause
thereof. Both the trial court and the Court of Appeals held that there should be recovery. The
petitioner contends otherwise.
This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro
Manila, by private respondent Producers Bank of the Philippines (hereinafter Producers)
against petitioner Fortune Insurance and Surety Co., Inc. (hereinafter Fortune) of a complaint
for recovery of the sum of P725,000.00 under the policy issued by Fortune. The sum was
allegedly lost during a robbery of Producer's armored vehicle while it was in transit to transfer
the money from its Pasay City Branch to its head office in Makati. The case was docketed as
Civil Case No. 1817 and assigned to Branch 146 thereof.
LibLex

After joinder of issues, the parties asked the trial court to render judgment based on the
following stipulation of facts:
1.The plaintiff was insured by the defendants and an insurance policy was issued, the
duplicate original of which is hereto attached as Exhibit "A";

2.An armored car of the plaintiff, while in the process of transferring cash in the sum of
P725,000.00 under the custody of its teller, Maribeth Alampay, from its Pasay Branch
to its Head Office at 8737 Paseo de Roxas, Makati, Metro Manila on June 29, 1987,
was robbed of the said cash. The robbery took place while the armored car was
traveling along Taft Avenue in Pasay City;
3.The said armored car was driven by Benjamin Magalong y de Vera, escorted by Security
Guard Saturnino Atiga y Rosete. Driver Magalong was assigned by PRC
Management Systems with the plaintiff by virtue of an Agreement executed on
August 7, 1983, a duplicate original copy of which is hereto attached as Exhibit "B";
4.The Security Guard Atiga was assigned by Unicorn Security Services, Inc. with the
plaintiff by virtue of a contract of Security Service executed on October 25, 1982, a
duplicate original copy of which is hereto attached as Exhibit "C";
5.After an investigation conducted by the Pasay police authorities, the driver Magalong and
guard Atiga were charged, together with Edelmer Bantigue Y Eulalio, Reynaldo
Aquino and John Doe, with violation of P.D. 532 (Anti-Highway Robbery Law) before
the Fiscal of Pasay City. A copy of the complaint is hereto attached as Exhibit "D";
6.The Fiscal of Pasay City then filed an information charging the aforesaid persons with the
said crime before Branch 112 of the Regional Trial Court of Pasay City. A copy of the
said information is hereto attached as Exhibit "E." The case is still being tried as of
this date;
7.Demands were made by the plaintiff upon the defendant to pay the amount of the loss of
P725,000.00, but the latter refused to pay as the loss is excluded from the coverage
of the insurance policy, attached hereto as Exhibit "A," specifically under page 1
thereof, "General Exceptions" Section (b), which is marked as Exhibit "A-1," and
which reads as follows:
"GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of
xxx xxx xxx
(b)any loss caused by any dishonest, fraudulent or criminal act of the insured or any
officer, employee, partner, director, trustee or authorized representative of the
Insured whether acting alone or in conjunction with others. . . . "
8.The plaintiff opposes the contention of the defendant and contends that Atiga and
Magalong are not its "officer, employee, . . . trustee or authorized representative . . .
at the time of the robbery. 1

On 26 April 1990, the trial court rendered its decision in favor of Producers. The
dispositive portion thereof reads as follows:
WHEREFORE, premises considered, the Court finds for plaintiff and against defendant, and
(a)orders defendant to pay plaintiff the net amount of P540,000.00 as liability under
Policy No. 0207 (as mitigated by the P40,000.00 special clause deduction and

by the recovered sum of P145,000.00), with interest thereon at the legal rate,
until fully paid;
(b)orders defendant to pay plaintiff the sum of P30,000.00 as and for attorney's fees;
and
(c)orders defendant to pay costs of suit.
All other claims and counterclaims are accordingly dismissed forthwith.
SO ORDERED.2

The trial court ruled that Magalong and Atiga were not employees or representatives of
Producers. It said:
The Court is satisfied that plaintiff may not be said to have selected and engaged Magalong
and Atiga, their services as armored car driver and as security guard having been merely
offered by PRC Management and by Unicorn Security and which latter firms assigned them
to plaintiff. The wages and salaries of both Magalong and Atiga are presumably paid by
their respective firms, which alone wields the power to dismiss them. Magalong and Atiga
are assigned to plaintiff in fulfillment of agreements to provide driving services and property
protection as such in a context which does not impress the Court as translating into
plaintiff's power to control the conduct of any assigned driver or security guard, beyond
perhaps entitling plaintiff to request a replacement for such driver or guard. The finding is
accordingly compelled that neither Magalong nor Atiga were plaintiff's "employees" in
avoidance of defendant's liability under the policy, particularly the general exceptions
therein embodied.

Neither is the Court prepared to accept the proposition that driver Magalong and guard
Atiga were the "authorized representatives" of plaintiff. They were merely an assigned
armored car driver and security guard, respectively, for the June 29, 1987 money transfer
from plaintiff's Pasay Branch to its Makati Head Office. Quite plainly it was teller Maribeth
Alampay who had "custody" of the P725,000.00 cash being transferred along a specified
money route, and hence plaintiff's then designated "messenger" adverted to in the policy. 3

Fortune appealed this decision to the Court of Appeals which docketed the case as CAG.R. CV No. 32946. In its decision 4 promulgated on 3 May 1994, it affirmed in toto the
appealed decision.
The Court of Appeals agreed with the conclusion of the trial court that Magalong and
Atiga were neither employees nor authorized representatives of Producers and ratiocinated as
follows:
A policy or contract of insurance is to be construed liberally in favor of the insured and
strictly against the insurance company (New Life Enterprises vs. Court of Appeals, 207
SCRA 669; Sun Insurance Office, Ltd. vs. Court of Appeals, 211 SCRA 554). 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 and understood in their plain, ordinary and popular sense
(New Life Enterprises Case, supra, p. 676; Sun Insurance Office, Ltd. vs. Court of Appeals,
195 SCRA 193).

The language used by defendant-appellant in the above quoted stipulation is plain, ordinary
and simple. No other interpretation is necessary. The word "employee" should be taken to
mean in the ordinary sense.
The Labor Code is a special law specifically dealing with/and specifically designed to
protect labor and therefore its definition as to employer-employee relationships insofar as
the application/enforcement of said Code is concerned must necessarily be inapplicable to
an insurance contract which defendant-appellant itself had formulated. Had it intended to
apply the Labor Code in defining what the word "employee" refers to, it must/should have
so stated expressly in the insurance policy.
Said driver and security guard cannot be considered as employees of plaintiff-appellee
bank because it has no power to hire or to dismiss said driver and security guard under the
contracts (Exhs. 8 and C) except only to ask for their replacements from the contractors. 5

On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the trial
court and the Court of Appeals erred in holding it liable under the insurance policy because the
loss falls within the general exceptions clause considering that driver Magalong and security
guard Atiga were Producers' authorized representatives or employees in the transfer of the
money and payroll from its branch office in Pasay City to its head office in Makati.
LLpr

According to Fortune, when Producers commissioned a guard and a driver to transfer its
funds from one branch to another, they effectively and necessarily became its authorized
representatives in the care and custody of the money. Assuming that they could not be
considered authorized representatives, they were, nevertheless, employees of Producers. It
asserts that the existence of an employer-employee relationship "is determined by law and
being such, it cannot be the subject of agreement." Thus, if there was in reality an employeremployee relationship between Producers, on the one hand, and Magalong and Atiga, on the
other, the provisions in the contracts of Producers with PRC Management System for Magalong
and with Unicorn Security Services for Atiga which state that Producers is not their employer
and that it is absolved from any liability as an employer, would not obliterate the relationship.
Fortune points out that an employer-employee relationship depends upon four standards:
(1) the manner of selection and engagement of the putative employee; (2) the mode of payment
of wages; (3) the presence or absence of a power to dismiss; and (4) the presence and
absence of a power to control the putative employee's conduct. Of the four, the right-of-control
test has been held to be the decisive factor. 6 It asserts that the power of control over Magalong
and Atiga was vested in and exercised by Producers. Fortune further insists that PRC
Management System and Unicorn Security Services are but "labor-only" contractors under
Article 106 of the Labor Code which provides:
prcd

Art. 106.Contractor or subcontractor. There is "labor-only" contracting where the person


supplying workers to an employer does not have substantial capital or investment in the
form of tools, equipment, machineries, work premises, among others, and the workers
recruited and placed by such persons are performing activities which are directly related to
the principal business of such employer. In such cases, the person or intermediary shall be
considered merely as an agent of the employer who shall be responsible to the workers in
the same manner and extent as if the latter were directly employed by him.

Fortune thus contends that Magalong and Atiga were employees of Producers, following
the ruling in International Timber Corp. vs. NLRC 7 that a finding that a contractor is a "laboronly" contractor is equivalent to a finding that there is an employer-employee relationship
between the owner of the project and the employee of the "labor-only" contractor.

On the other hand, Producers contends that Magalong and Atiga were not its employees
since it had nothing to do with their selection and engagement, the payment of their wages,
their dismissal, and the control of their conduct. Producers argued that the rule in International
Timber Corp. is not applicable to all cases but only when it becomes necessary to prevent any
violation or circumvention of the Labor Code, a social legislation whose provisions may set
aside contracts entered into by parties in order to give protection to the working man.
Producer further asseverates that what should be applied is the rule in American
President Lines vs. Clave,8 to wit:
In determining the existence of employer-employee relationship, the following elements are
generally considered, namely: (1) the selection and engagement of the employee; (2) the
payment of wages; (3) the power of dismissal; and (4) the power to control the employee's
conduct.

Since under Producers' contract with PRC Management Systems it is the latter which assigned
Magalong as the driver of Producers' armored car and was responsible for his faithful discharge
of his duties and responsibilities, and since Producers paid the monthly compensation of
P1,400.00 per driver to PRC Management Systems and not to Magalong, it is clear that
Magalong was not Producers' employee. As to Atiga, Producers relies on the provision of its
contract with Unicorn Security Services which provides that the guards of the latter "are in no
sense employees of the CLIENT."
prcd

There is merit in this petition.


It should be noted that the insurance policy entered into by the parties is a theft or
robbery insurance policy which is a form of casualty insurance. Section 174 of the Insurance
Code provides:
Sec. 174.Casualty insurance is insurance covering loss or liability arising from accident or
mishap, excluding certain types of loss which by law or custom are considered as falling
exclusively within the scope of insurance such as fire or marine. It includes, but is not
limited to, employer's liability insurance, public liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary and theft insurance, personal accident and health
insurance as written by non-life insurance companies, and other substantially similar kinds
of insurance. (emphasis supplied)

Except with respect to compulsory motor vehicle liability insurance, the Insurance Code
contains no other provisions applicable to casualty insurance or to robbery insurance in
particular. These contracts are, therefore, governed by the general provisions applicable to all
types of insurance. Outside of these, the rights and obligations of the parties must be
determined by the terms of their contract, taking into consideration its purpose and always in
accordance with the general principles of insurance law.9
It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity
to defraud the insurer the moral hazard is so great that insurers have found it necessary
to fill up their policies with countless restrictions, many designed to reduce this hazard. Seldom
does the insurer assume the risk of all losses due to the hazards insured against." 10 Persons
frequently excluded under such provisions are those in the insured's service and employment.
11 The purpose of the exception is to guard against liability should the theft be committed by
one having unrestricted access to the property." 12 In such cases, the terms specifying the
excluded classes are to be given their meaning as understood in common speech. 13 The

terms "service" and "employment" are generally associated with the idea of selection, control,
and compensation. 14
A contract of insurance is a contract of adhesion, thus any ambiguity therein should be
resolved against the insurer, 15 or it should be construed liberally in favor of the insured and
strictly against the insurer. 16 Limitations of liability should be regarded with extreme jealousy
and must be construed in such a way as to preclude the insurer from non-compliance with its
obligation. 17 It goes without saying then that if the terms of the contract are clear and
unambiguous, there is no room for construction and such terms cannot be enlarged or
diminished by judicial construction. 18
An insurance contract is a contract of indemnity upon the terms and conditions specified
therein. 19 It is settled that the terms of the policy constitute the measure of the insurer's
liability. 20 In the absence of statutory prohibition to the contrary, insurance companies have the
same rights as individuals to limit their liability and to impose whatever conditions they deem
best upon their obligations not inconsistent with public policy.
With the foregoing principles in mind, it may now be asked whether Magalong and Atiga
qualify as employees or authorized representatives of Producers under paragraph (b) of the
general exceptions clause of the policy which, for easy reference, is again quoted:
LibLex

GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of
xxx xxx xxx
(b)any loss caused by any dishonest, fraudulent or criminal act of the insured or any officer,
employee, partner, director, trustee or authorized representative of the Insured
whether acting alone or in conjunction with others. . . . (emphasis supplied)

There is marked disagreement between the parties on the correct meaning of the terms
"employee" and "authorized representatives."
It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and
exempt from protection and coverage losses arising from dishonest, fraudulent, or criminal acts
of persons granted or having unrestricted access to Producers' money or payroll. When it used
then the term "employee," it must have had in mind any person who qualifies as such as
generally and universally understood, or jurisprudentially established in the light of the four
standards in the determination of the employer-employee relationship, 21 or as statutorily
declared even in a limited sense as in the case of Article 106 of the Labor Code which
considers the employees under a "labor-only" contract as employees of the party employing
them and not of the party who supplied them to the employer. 22
Fortune claims that Producers' contracts with PRC Management Systems and Unicorn
Security Services are "labor-only" contracts. Producers, however, insists that by the express
terms thereof, it is not the employer of Magalong. Notwithstanding such express assumption of
PRC Management Systems and Unicorn Security Services that the drivers and the security
guards each shall supply to Producers are not the latter's employees, it may, in fact, be that it is
because the contracts are, indeed, "labor-only" contracts. Whether they are is, in the light of the
criteria provided for in Article 106 of the Labor Code, a question of fact. Since the parties opted
to submit the case for judgment on the basis of their stipulation of facts which are strictly limited

to the insurance policy, the contracts with PRC Management Systems and Unicorn Security
Services, the complaint for violation of P.D. No. 532, and the information therefor filed by the
City Fiscal of Pasay City, there is a paucity of evidence as to whether the contracts between
Producers and the PRC Management Systems and Unicorn Security Services are "labor-only"
contracts.
LLphil

But even granting for the sake of argument that these contracts were not "labor-only"
contracts, and PRC Management Systems and Unicorn Security Services were truly
independent contractors, we are satisfied that Magalong and Atiga were, in respect of the
transfer of Producer's money from its Pasay City branch to its head office in Makati, its
"authorized representatives" who served as such with its teller Maribeth Alampay. Howsoever
viewed, Producers entrusted the three with the specific duty to safely transfer the money to its
head office, with Alampay to be responsible for its custody in transit; Magalong to drive the
armored vehicle which would carry the money; and Atiga to provide the needed security for the
money, the vehicle, and his two other companions. In short, for these particular tasks, the three
acted as agents of Producers. A "representative" is defined as one who represents or stands in
the place of another; one who represents others or another in a special capacity, as an agent,
and is interchangeable with "agent." 23
In view of the foregoing, Fortune is exempt from liability under the general exceptions
clause of the insurance policy.
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of
Appeals in CA-G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of the
Regional Trial Court of Makati in Civil Case No. 1817 are REVERSED and SET ASIDE. The
complaint in Civil Case No. 1817 is DISMISSED.
No pronouncement as to costs.
SO ORDERED.
Bellosillo and Kapunan, JJ., concur.
Padilla, J., took no part.
Quiason, J., is on leave.
|||

(Fortune Insurance and Surety Co., Inc. v. Court of Appeals, G.R. No. 115278, May 23, 1995)

G.R. No. L-34200 September 30, 1982


REGINA L. EDILLON, as assisted by her husband, MARCIAL EDILLON, petitioners-appellants,
vs.
MANILA BANKERS LIFE INSURANCE CORPORATION and the COURT OF FIRST INSTANCE OF RIZAL, BRANCH V, QUEZON CITY, respondentsappellees.
K.V. Faylona for petitioners-appellants.
L. L. Reyes for respondents-appellees.

VASQUEZ, J.:
The question of law raised in this case that justified a direct appeal from a decision of the Court of First Instance Rizal, Branch V, Quezon City, to be taken
directly to the Supreme Court is whether or not the acceptance by the private respondent insurance corporation of the premium and the issuance of the
corresponding certificate of insurance should be deemed a waiver of the exclusionary condition of overage stated in the said certificate of insurance.
The material facts are not in dispute. Sometime in April 1969, Carmen O, Lapuz applied with respondent insurance corporation for insurance coverage against
accident and injuries. She filled up the blank application form given to her and filed the same with the respondent insurance corporation. In the said application
form which was dated April 15, 1969, she gave the date of her birth as July 11, 1904. On the same date, she paid the sum of P20.00 representing the premium
for which she was issued the corresponding receipt signed by an authorized agent of the respondent insurance corporation. (Rollo, p. 27.) Upon the filing of said
application and the payment of the premium on the policy applied for, the respondent insurance corporation issued to Carmen O. Lapuz its Certificate of
Insurance No. 128866. (Rollo, p. 28.) The policy was to be effective for a period of 90 days.
On May 31, 1969 or during the effectivity of Certificate of Insurance No. 12886, Carmen O. Lapuz died in a vehicular accident in the North Diversion Road.
On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and who was the named beneficiary in the policy, filed her claim for the proceeds of the
insurance, submitting all the necessary papers and other requisites with the private respondent. Her claim having been denied, Regina L. Edillon instituted this
action in the Court of First Instance of Rizal on August 27, 1969.
In resisting the claim of the petitioner, the respondent insurance corporation relies on a provision contained in the Certificate of Insurance, excluding its liability to
pay claims under the policy in behalf of "persons who are under the age of sixteen (16) years of age or over the age of sixty (60) years ..." It is pointed out that
the insured being over sixty (60) years of age when she applied for the insurance coverage, the policy was null and void, and no risk on the part of the
respondent insurance corporation had arisen therefrom.
The trial court sustained the contention of the private respondent and dismissed the complaint; ordered the petitioner to pay attorney's fees in the sum of ONE
THOUSAND (P1,000.00) PESOS in favor of the private respondent; and ordered the private respondent to return the sum of TWENTY (P20.00) PESOS
received by way of premium on the insurancy policy. It was reasoned out that a policy of insurance being a contract of adhesion, it was the duty of the insured to
know the terms of the contract he or she is entering into; the insured in this case, upon learning from its terms that she could not have been qualified under the
conditions stated in said contract, what she should have done is simply to ask for a refund of the premium that she paid. It was further argued by the trial court
that the ruling calling for a liberal interpretation of an insurance contract in favor of the insured and strictly against the insurer may not be applied in the present
case in view of the peculiar facts and circumstances obtaining therein.
We REVERSE the judgment of the trial court. The age of the insured Carmen 0. Lapuz was not concealed to the insurance company. Her application for
insurance coverage which was on a printed form furnished by private respondent and which contained very few items of information clearly indicated her age of
the time of filing the same to be almost 65 years of age. Despite such information which could hardly be overlooked in the application form, considering its
prominence thereon and its materiality to the coverage applied for, the respondent insurance corporation received her payment of premium and issued the
corresponding certificate of insurance without question. The accident which resulted in the death of the insured, a risk covered by the policy, occurred on May
31, 1969 or FORTY-FIVE (45) DAYS after the insurance coverage was applied for. There was sufficient time for the private respondent to process the application
and to notice that the applicant was over 60 years of age and thereby cancel the policy on that ground if it was minded to do so. If the private respondent failed
to act, it is either because it was willing to waive such disqualification; or, through the negligence or incompetence of its employees for which it has only itself to
blame, it simply overlooked such fact. Under the circumstances, the insurance corporation is already deemed in estoppel. It inaction to revoke the policy despite
a departure from the exclusionary condition contained in the said policy constituted a waiver of such condition, as was held in the case of "Que Chee Gan vs.
Law Union Insurance Co., Ltd.,", 98 Phil. 85. This case involved a claim on an insurance policy which contained a provision as to the installation of fire hydrants
the number of which depended on the height of the external wan perimeter of the bodega that was insured. When it was determined that the bodega should
have eleven (11) fire hydrants in the compound as required by the terms of the policy, instead of only two (2) that it had, the claim under the policy was resisted
on that ground. In ruling that the said deviation from the terms of the policy did not prevent the claim under the same, this Court stated the following:
We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim violation of the so-called fire hydrants warranty, for the
reason that knowing fully an that the number of hydrants demanded therein never existed from the very beginning, the appellant nevertheless issued the policies
in question subject to such warranty, and received the corresponding premiums. It would be perilously close to conniving at fraud upon the insured to allow
appellant to claim now as void ab initio the policies that it had issued to the plaintiff without warning of their fatal defect, of which it was informed, and after it had
misled the defendant into believing that the policies were effective.
The insurance company was aware, even before the policies were issued, that in the premises insured there were only two fire hydrants installed by Que Chee
Gan and two others nearby, owned by the municipality of Tabaco, contrary to the requirements of the warranty in question. Such fact appears from positive
testimony for the insured that appellant's agents inspected the premises; and the simple denials of appellant's representative (Jamiczon) can not overcome that
proof. That such inspection was made it moreover rendered probable by its being a prerequisite for the fixing of the discount on the premium to which the
insured was entitled, since the discount depended on the number of hydrants, and the fire fighting equipment available (See"'Scale of Allowances" to which the
policies were expressly made subject). The law, supported by a long line of cases, is expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as
follows:
It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing facts which, if insisted on, would invalidate
the contract from its very inception, such knowledge constitutes a waiver of conditions in the contract inconsistent with the known facts, and the insurer is
stopped thereafter from asserting the breach of such conditions. The law is charitable enough to assume, in the absence of any showing to the contrary, that an
insurance company intends to execute a valid contract in return for the premium received; and when the policy contains a condition which renders it voidable at
its inception, and this result is known to the insurer, it will be presumed to have intended to waive the conditions and to execute a binding contract, rather than to

have deceived the insured into thinking he is insured when in fact he is not, and to have taken is money without consideration.' (29 Am. Jur., Insurance, section
807, at pp. 611-612.)
The reason for the rule is not difficult to find.
The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one's money for a policy of insurance which it then knows to be void
and of no effect, though it knows as it must, that the assured believes it to be valid and binding, is so contrary to the dictates of honesty and fair dealing, and so
closely related to positive fraud, as to be abhorent to fairminded men. It would be to allow the company to treat the policy as valid long enough to get the
premium on it, and leave it at liberty to repudiate it the next moment. This cannot be deemed to be the real intention of the parties. To hold that a literal
construction of the policy expressed the true intention of the company would be to indict it, for fraudulent purposes and designs which we cannot believe it to be
guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543544).
A similar view was upheld in the case of Capital Insurance & Surety Co., Inc. vs. Plastic Era Co., Inc., 65 SCRA 134, which involved a violation of the provision of
the policy requiring the payment of premiums before the insurance shall become effective. The company issued the policy upon the execution of a promissory
note for the payment of the premium. A check given subsequent by the insured as partial payment of the premium was dishonored for lack of funds. Despite
such deviation from the terms of the policy, the insurer was held liable.
Significantly, in the case before Us the Capital Insurance accepted the promise of Plastic Era to pay the insurance premium within thirty (30) days from the
effective date of policy. By so doing, it has impliedly agreed to modify the tenor of the insurance policy and in effect, waived the provision therein that it would
only pay for the loss or damage in case the same occurs after the payment of the premium. Considering that the insurance policy is silent as to the mode of
payment, Capital Insurance is deemed to have accepted the promissory note in payment of the premium. This rendered the policy immediately operative on the
date it was delivered. The view taken in most cases in the United States:
... is that although one of conditions of an insurance policy is that "it shall not be valid or binding until the first premium is paid", if it is silent as to the mode of
payment, promissory notes received by the company must be deemed to have been accepted in payment of the premium. In other words, a requirement for the
payment of the first or initial premium in advance or actual cash may be waived by acceptance of a promissory note...
WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. In lieu thereof, the private respondent insurance corporation is hereby
ordered to pay to the petitioner the sum of TEN THOUSAND (P10,000.00) PESOS as proceeds of Insurance Certificate No. 128866 with interest at the legal rate
from May 31, 1969 until fully paid, the further sum of TWO THOUSAND (P2,000.00) PESOS as and for attorney's fees, and the costs of suit.

THIRD DIVISION
[G.R. No. 78860. May 28, 1990.]
PERLA COMPANIA DE SEGUROS, INC., petitioner, vs. HONORABLE COURT OF
APPEALS and MILAGROS CAYAS, respondents.
Yabut, Arandia & Associates for petitioner.
Dolorfino and Dominguez Law Offices for private respondent.
SYLLABUS
1.COMMERCIAL LAW; INSURANCE; TERMS AND CONDITIONS IN THE POLICY;
MEASURES THE INSURER'S LIABILITY; CASE AT BAR. In the case at bar, the insurance
policy clearly and categorically placed petitioner's liability for all damages arising out of death or
bodily injury sustained by one person as a result of any one accident at P12,000.00. Said

amount complied with the minimum fixed by the law then prevailing, Section 377 of Presidential
Decree No. 612 (which was retained by P.D. No. 1460, the Insurance Code of 1978), which
provided that the liability of land transportation vehicle operators for bodily injuries sustained by
a passenger arising out of the use of their vehicles shall not be less than P12,000. In other
words, under the law, the minimum liability is P12,000 per passenger. Petitioner's liability under
the insurance contract not being less than P12,000.00, and therefore not contrary to law,
morals, good customs, public order or public policy, said stipulation must be upheld as effective,
valid and binding as between the parties.
2.ID.; ID.; ID.; COMPLIANCE THEREWITH; CONDITION PRECEDENT TO THE RIGHT
OF RECOVERY OF THE INSURED. we rule as valid and binding upon private respondent
the condition above-quoted requiring her to secure the written permission of petitioner before
effecting any payment in settlement of any claim against her. There is nothing unreasonable,
arbitrary or objectionable in this stipulation as would warrant its nullification. The same was
obviously designed to safeguard the insurer's interest against collusion between the insured
and the claimants. It being specifically required that petitioner's written consent be first secured
before any payment in settlement of any claim could be made, private respondent is precluded
from seeking reimbursement of the payments made to del Carmen, Magsarili and Antolin in
view of her failure to comply with the condition contained in the insurance policy.
3.CIVIL LAW; CONTRACTS; CONSIDERED PRIVATE LAWS OF THE CONTRACTING
PARTIES. The fundamental principle that contracts are respected as the law between the
contracting parties finds application in the present case. Thus, it was error on the part of the trial
and appellate courts to have disregarded the stipulations of the parties and to have substituted
their own interpretation of the insurance policy. In Phil. American General Insurance Co., Inc.
vs. Mutuc (G.R. No. L-19632, November 13, 1974, 61 SCRA 22, cited in Castro vs. Court of
Appeals, G.R. No. L-44727, September 11, 1980, 99 SCRA 197), we ruled that 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 what form they may be, whenever the
essential requisites for their validity are present. Moreover, we stated in Pacific Oxygen &
Acetylene Co. vs. Central Bank (G.R. No. L-21881, March 1, 1969, 22 SCRA 917) that the first
and fundamental duty of the courts is the application of the law according to its express terms,
interpretation being called for only when such literal application is impossible.
DECISION
FERNAN, C.J :
p

This is a petition for review on certiorari of the decision of the Court of Appeals 1
affirming in toto the decision of the Regional Trial Court of Cavite, Branch XVI, 2 the dispositive
portion of which states:
"IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering
defendant Perla Compania de Seguros, Inc. to pay plaintiff Milagros Cayas the sum of
P50,000.00 under its maximum liability as provided for in the insurance policy; and the
sum of P5,000.00 as reasonable attorney's fees, with costs against said defendant.
"SO ORDERED." 3

Private respondent Milagros Cayas was the registered owner of a Mazda bus with serial
No. TA3H4 P-000445 and plate No. PUB-4G-593. 4 Said passenger vehicle was insured with
Perla Compania de Seguros, Inc. (PCSI) under policy No. LTO/60CC-04241 issued on
February 3, 1978. 5
On December 17, 1978, the bus figured in an accident in Naic, Cavite injuring several of
its passengers. One of them, 19-year-old Edgardo Perea, sued Milagros Cayas for damages in
the Court of First Instance of Cavite, Branch I 6 docketed as Civil Case No. NC-794; while
three others, namely: Rosario del Carmen, Ricardo Magsarili and Charlie Antolin, agreed to a
settlement of P4,000.00 each with Milagros Cayas.
At the pre-trial of Civil Case No. NC-794, Milagros Cayas failed to appear and hence,
she was declared as in default. After trial, the court rendered a decision 7 in favor of Perea with
its dispositive portion reading thus:
llcd

"WHEREFORE, under our present imperatives, judgment is hereby rendered in


favor of the plaintiffs and against the defendant Milagros Cayas who is hereby ordered
to compensate the plaintiff Edgar Perea with damages in the sum of Ten Thousand
(P10,000.00) Pesos for the medical predicament he found himself as damaging
consequences of defendant Milagros Cayas' complete lack of 'diligence of a good
father of a family' when she secured the driving services of one Oscar Figueroa on
December 17, 1978; the sum of Ten Thousand (P10,000.00) Pesos for exemplary
damages; the sum of Five Thousand (P5,000.00) Pesos for moral damages; the sum
of Seven Thousand (P7,000.00) Pesos for Attorney's fees, under the imperatives of
the monetary power of the peso today;
"With costs against the defendant.
"SO ORDERED."

When the decision in Civil Case No. NC-794 was about to be executed against her,
Milagros Cayas filed a complaint against PCSI in the Office of the Insurance Commissioner
praying that PCSI be ordered to pay P40,000.00 for all the claims against her arising from the
vehicular accident plus legal and other expenses. 8 Realizing her procedural mistake, she later
withdrew said complaint. 9
Consequently, on November 11, 1981, Milagros Cayas filed a complaint for a sum of
money and damages against PCSI in the Court of First Instance of Cavite (Civil Case No. N4161). She alleged therein that to satisfy the judgment in Civil Case No. NC-794, her house
and lot were levied upon and sold at public auction for P38,200; 10 that to avoid numerous
suits and the "detention" of the insured vehicle, she paid P4,000 to each of the following injured
passengers: Rosario del Carmen, Ricardo Magsarili and Charlie Antolin; that she could not
have suffered said financial setback had the counsel for PCSI, who also represented her,
appeared at the trial of Civil Case No. NC-794 and attended to the claims of the three other
victims; that she sought reimbursement of said amounts from the defendant, which,
notwithstanding the fact that her claim was within its contractual liability under the insurance
policy, refused to make such reimbursement; that she suffered moral damages as a
consequence of such refusal, and that she was constrained to secure the services of counsel
to protect her rights. She prayed that judgment be rendered directing PCSI to pay her P50,000
for compensation of the injured victims, such sum as the court might approximate as damages,
and P6,000 as attorney's fees.
In view of Milagros Cayas' failure to prosecute the case, the court motu proprio ordered
its dismissal without prejudice. 11 Alleging that she had not received a copy of the answer to
the complaint, and that "out of sportsmanship", she did not file a motion to hold PCSI in default,

Milagros Cayas moved for the reconsideration of the dismissal order. Said motion for
reconsideration was acted upon favorably by the court in its order of March 31, 1982.
About two months later, Milagros Cayas filed a motion to declare PCSI in default for its
failure to file an answer. The motion was granted and plaintiff was allowed to adduce evidence
ex-parte. On July 13, 1982, the court rendered judgment by default ordering PCSI to pay
Milagros Cayas P50,000 as compensation for the injured passengers, P5,000 as moral
damages and P5,000 as attorney's fees.
Said decision was set aside after the PCSI filed a motion therefor. Trial of the case
ensued. In due course, the court promulgated a decision in Civil Case No. N-4161, the
dispositive portion of which was quoted earlier, finding that:
prLL

"In disavowing its obligation to plaintiff under the insurance policy, defendant
advanced the proposition that before it can be made to pay, the liability must first be
determined in an appropriate court action. And so plaintiffs liability was determined in
that case filed against her by Perea in the Naic CFI. Still, despite this determination of
liability, defendant sought escape from its obligation by positing the theory that plaintiff
Milagros Cayas lost the Naic case due to her negligence because of which, efforts
exerted by defendant's lawyers in protecting Cayas' rights proved futile and rendered
nugatory. Blame was laid entirely on plaintiff by defendant for losing the Naic case.
Defendant labored under the impression that had Cayas cooperated fully with
defendant's lawyers, the latter could have won the suit and thus relieved of any
obligation to Perea. Defendant's posture is stretching the factual circumstances of the
Naic case too far. But even accepting defendant's postulate, it cannot be said, nor was
it shown positively and convincingly, that if the Naic case had proceeded on trial on the
merits, a decision favorable to Milagros Cayas could have been obtained. Nor was it
definitely established that if the pre-trial was undertaken in that case, defendant's
lawyers could have mitigated the claim for damages by Perea against Cayas." 12

The court, however, held that inasmuch as Milagros Cayas failed to establish that she
underwent moral suffering and mental anguish to justify her prayer for damages, there should
be no such award. But, there being proof that she was compelled to engage the services of
counsel to protect her rights under the insurance policy, the court allowed attorney's fees in the
amount of P5,000.
PCSI appealed to the Court of Appeals, which, in its decision of May 8, 1987 affirmed in
toto the lower court's decision. Its motion for reconsideration having been denied by said
appellate court, PCSI filed the instant petition charging the Court of Appeals with having erred
in affirming in toto the decision of the lower court.
At the outset, we hold as factual and therefore undeserving of this Court's attention,
petitioner's assertions that private respondent lost Civil Case No. NC-794 because of her
negligence and that there is no proof that the decision in said case has been executed. Said
contentions, having been raised and threshed out in the Court of Appeals and rejected by it,
may no longer be addressed to this Court.
Petitioner's other contentions are primarily concerned with the extent of its liability to
private respondent under the insurance policy. This, we consider to be the only issue in this
case.
Petitioner seeks to limit its liability only to the payment made by private respondent to
Perea and only up to the amount of P12,000.00. It altogether denies liability for the payments
made by private respondents to the other three (3) injured passengers Rosario del Carmen,
Ricardo Magsarili and Charlie Antolin in the amount of P4,000.00 each or a total of P12,000.00.

There is merit in petitioner's assertions.


The insurance policy involved explicitly limits petitioner's liability to P12,000.00 per
person and to P50,000.00 per accident. 13 Pertinent provisions of the policy also state:
"SECTION I Liability to the Public.
xxx xxx xxx
"3.The Limit of Liability stated in Schedule A as applicable (a) to THIRD PARTY
is the limit of the Company's liability for all damages arising out of death, bodily injury
and damage to property combined so sustained as the result of any one accident; (b)
"per person" for PASSENGER liability is the limit of the Company's liability for all
damages arising out of death or bodily injury sustained by one person as the result of
any one accident; (c) "per accident" for PASSENGER liability is, subject to the above
provision respecting per person, the total limit of the Company's liability for all such
damages arising out of death or bodily injury sustained by two or more persons as the
result of any one accident."
"Conditions Applicable to All Sections.
xxx xxx xxx
"5.No admission, offer, promise or payment shall be made by or on behalf of the
Insured without the written consent of the Company which shall been titled, if it so
desires, to take over and conduct in his (sic) name the defense or settlement of any
claim, or to prosecute in his (sic) name for its own benefit any claim for indemnity or
damages or otherwise, and shall have full discretion in the conduct of any proceedings
in the settlement of any claim, and the insured shall give all such information and
assistance as the Company may require. If the Company shall make any payment in
settlement of any claim, and such payment includes any amount not covered by this
Policy, the Insured shall repay the Company the amount not so covered.

We have ruled in Stokes vs. Malayan Insurance Co., Inc., 14 that the terms of the
contract constitute the measure of the insurer's liability and compliance therewith is a condition
precedent to the insured's right of recovery from the insurer.
llcd

In the case at bar, the insurance policy clearly and categorically placed petitioner's
liability for all damages arising out of death or bodily injury sustained by one person as a result
of any one accident at P12,000.00. Said amount complied with the minimum fixed by the law
then prevailing, Section 377 of Presidential Decree No. 612 (which was retained by P.D. No.
1460, the Insurance Code of 1978), which provided that the liability of land transportation
vehicle operators for bodily injuries sustained by a passenger arising out of the use of their
vehicles shall not be less than P12,000. In other words, under the law, the minimum liability is
P12,000 per passenger. Petitioner's liability under the insurance contract not being less than
P12,000.00, and therefore not contrary to law, morals, good customs, public order or public
policy, said stipulation must be upheld as effective, valid and binding as between the parties.
15
In like manner, we rule as valid and binding upon private respondent the condition
above-quoted requiring her to secure the written permission of petitioner before effecting any
payment in settlement of any claim against her. There is nothing unreasonable, arbitrary or
objectionable in this stipulation as would warrant its nullification. The same was obviously
designed to safeguard the insurer's interest against collusion between the insured and the
claimants.
In her cross-examination before the trial court, Milagros Cayas admitted, thus:
"Atty. Yabut:

qWith respect to the other injured passengers of your bus wherein you made payments you
did not secure the consent of defendant (herein petitioner) Perla Compania de
Seguros when you made those payments?
aI informed them about that.
qBut they did not give you the written authority that you were supposed to pay those
claims?
aNo, sir." 16

It being specifically required that petitioner's written consent be first secured before any
payment in settlement of any claim could be made, private respondent is precluded from
seeking reimbursement of the payments made to del Carmen, Magsarili and Antolin in view of
her failure to comply with the condition contained in the insurance policy.
LibLex

Clearly, the fundamental principle that contracts are respected as the law between the
contracting parties finds application in the present case. 17 Thus, it was error on the part of the
trial and appellate courts to have disregarded the stipulations of the parties and to have
substituted their own interpretation of the insurance policy. In Phil. American General Insurance
Co., Inc. vs. Mutuc, 18 we ruled that 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 what form they may be, whenever the essential requisites for their
validity are present.
Moreover, we stated in Pacific Oxygen & Acetylene Co. vs. Central Bank, 19 that the first
and fundamental duty of the courts is the application of the law according to its express terms,
interpretation being called for only when such literal application is impossible.
We observe that although Milagros Cayas was able to prove a total loss of only
P44,000.00, petitioner was made liable for the amount of P50,000.00, the maximum liability per
accident stipulated in the policy. This is patent error. An insurance indemnity, being merely an
assistance or restitution insofar as can be fairly ascertained, cannot be availed of by any
accident victim or claimant as an instrument of enrichment by reason of an accident. 20
Finally, we find no reason to disturb the award of attorney's fees.
WHEREFORE, the decision of the Court of Appeals is hereby modified in that petitioner
shall pay Milagros Cayas the amount of Twelve Thousand Pesos (P12,000.00) plus legal
interest from the promulgation of the decision of the lower court until it is fully paid and
attorney's fees in the amount of P5,000.00. No pronouncement as to costs.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Cortes, JJ., concur.
|||

(Perla Compania De Seguros, Inc. v. Court of Appeals, G.R. No. 78860, May 28, 1990)

G.R. No. L-39419 April 12, 1982


MAPALAD AISPORNA, petitioner,
vs.
THE COURT OF APPEALS and THE PEOPLE OF THE PHILIPPINES, respondents.

DE CASTRO, J.:
In this petition for certiorari, petitioner-accused Aisporna seeks the reversal of the decision dated August 14, 1974 1 in CA-G.R. No. 13243-CR entitled "People of
the Philippines, plaintiff-appellee, vs. Mapalad Aisporna, defendant-appellant" of respondent Court of Appeals affirming the judgment of the City Court of
Cabanatuan 2 rendered on August 2, 1971 which found the petitioner guilty for having violated Section 189 of the Insurance Act (Act No. 2427, as amended) and
sentenced her to pay a fine of P500.00 with subsidiary imprisonment in case of insolvency, and to pay the costs.
Petitioner Aisporna was charged in the City Court of Cabanatuan for violation of Section 189 of the Insurance Act on November 21, 1970 in an
information 3 which reads as follows:
That on or before the 21st day of June, 1969, in the City of Cabanatuan, Republic of the Philippines, and within the jurisdiction of this Honorable Court, the
above-named accused, did then and there, wilfully, unlawfully and feloniously act as agent in the solicitation or procurement of an application for insurance by
soliciting therefor the application of one Eugenio S. Isidro, for and in behalf of Perla Compania de Seguros, Inc., a duly organized insurance company, registered
under the laws of the Republic of the Philippines, resulting in the issuance of a Broad Personal Accident Policy No. 28PI-RSA 0001 in the amount not exceeding
FIVE THOUSAND PESOS (P5,000.00) dated June 21, 1969, without said accused having first secured a certificate of authority to act as such agent from the
office of the Insurance Commissioner, Republic of the Philippines.
CONTRARY TO LAW.
The facts, 4 as found by the respondent Court of Appeals are quoted hereunder:
IT RESULTING: That there is no debate that since 7 March, 1969 and as of 21 June, 1969, appellant's husband, Rodolfo S. Aisporna was duly licensed by
Insurance Commission as agent to Perla Compania de Seguros, with license to expire on 30 June, 1970, Exh. C; on that date, at Cabanatuan City, Personal
Accident Policy, Exh. D was issued by Perla thru its author representative, Rodolfo S. Aisporna, for a period of twelve (12) months with beneficiary as Ana M.
Isidro, and for P5,000.00; apparently, insured died by violence during lifetime of policy, and for reasons not explained in record, present information was filed by
Fiscal, with assistance of private prosecutor, charging wife of Rodolfo with violation of Sec. 189 of Insurance Law for having, wilfully, unlawfully, and feloniously
acted, "as agent in the solicitation for insurance by soliciting therefore the application of one Eugenio S. Isidro for and in behalf of Perla Compaa de Seguros, ...
without said accused having first secured a certificate of authority to act as such agent from the office of the Insurance Commission, Republic of the Philippines."
and in the trial, People presented evidence that was hardly disputed, that aforementioned policy was issued with active participation of appellant wife of Rodolfo,
against which appellant in her defense sought to show that being the wife of true agent, Rodolfo, she naturally helped him in his work, as clerk, and that policy
was merely a renewal and was issued because Isidro had called by telephone to renew, and at that time, her husband, Rodolfo, was absent and so she left a
note on top of her husband's desk to renew ...
Consequently, the trial court found herein petitioner guilty as charged. On appeal, the trial court's decision was affirmed by the respondent appellate court finding
the petitioner guilty of a violation of the first paragraph of Section 189 of the Insurance Act. Hence, this present recourse was filed on October 22, 1974. 5
In its resolution of October 28, 1974, 6 this Court resolved, without giving due course to this instant petition, to require the respondent to comment on the
aforesaid petition. In the comment 7 filed on December 20, 1974, the respondent, represented by the Office of the Solicitor General, submitted that petitioner may
not be considered as having violated Section 189 of the Insurance Act. 8 On April 3, 1975, petitioner submitted his Brief 9 while the Solicitor General, on behalf of
the respondent, filed a manifestation 10 in lieu of a Brief on May 3, 1975 reiterating his stand that the petitioner has not violated Section 189 of the Insurance Act.
In seeking reversal of the judgment of conviction, petitioner assigns the following errors

11

allegedly committed by the appellate court:

1. THE RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT RECEIPT OF COMPENSATION IS NOT AN ESSENTIAL ELEMENT OF THE CRIME
DEFINED BY THE FIRST PARAGRAPH OF SECTION 189 OF THE INSURANCE ACT.
2. THE RESPONDENT COURT OF APPEALS ERRED IN GIVING DUE WEIGHT TO EXHIBITS F, F-1, TO F-17, INCLUSIVE SUFFICIENT TO ESTABLISH
PETITIONER'S GUILT BEYOND REASONABLE DOUBT.
3. THE RESPONDENT COURT OF APPEALS ERRED IN NOT ACQUITTING HEREIN PETITIONER.
We find the petition meritorious.
The main issue raised is whether or not a person can be convicted of having violated the first paragraph of Section 189 of the Insurance Act without reference to
the second paragraph of the same section. In other words, it is necessary to determine whether or not the agent mentioned in the first paragraph of the aforesaid
section is governed by the definition of an insurance agent found on its second paragraph.
The pertinent provision of Section 189 of the Insurance Act reads as follows:
No insurance company doing business within the Philippine Islands, nor any agent thereof, shall pay any commission or other compensation to any person for
services in obtaining new insurance, unless such person shall have first procured from the Insurance Commissioner a certificate of authority to act as an agent
of such company as hereinafter provided. No person shall act as agent, sub-agent, or broker in the solicitation of procurement of applications for insurance, or

receive for services in obtaining new insurance, any commission or other compensation from any insurance company doing business in the Philippine Islands, or
agent thereof, without first procuring a certificate of authority so to act from the Insurance Commissioner, which must be renewed annually on the first day of
January, or within six months thereafter. Such certificate shall be issued by the Insurance Commissioner only upon the written application of persons desiring
such authority, such application being approved and countersigned by the company such person desires to represent, and shall be upon a form approved by the
Insurance Commissioner, giving such information as he may require. The Insurance Commissioner shall have the right to refuse to issue or renew and to revoke
any such certificate in his discretion. No such certificate shall be valid, however, in any event after the first day of July of the year following the issuing of such
certificate. Renewal certificates may be issued upon the application of the company.
Any person who for compensation solicits or obtains insurance on behalf of any insurance company, or transmits for a person other than himself an application
for a policy of insurance to or from such company or offers or assumes to act in the negotiating of such insurance, shall be an insurance agent within the intent
of this section, and shall thereby become liable to all the duties, requirements, liabilities, and penalties to which an agent of such company is subject.
Any person or company violating the provisions of this section shall be fined in the sum of five hundred pesos. On the conviction of any person acting as agent,
sub-agent, or broker, of the commission of any offense connected with the business of insurance, the Insurance Commissioner shall immediately revoke the
certificate of authority issued to him and no such certificate shall thereafter be issued to such convicted person.
A careful perusal of the above-quoted provision shows that the first paragraph thereof prohibits a person from acting as agent, sub-agent or broker in the
solicitation or procurement of applications for insurance without first procuring a certificate of authority so to act from the Insurance Commissioner, while its
second paragraph defines who is an insurance agent within the intent of this section and, finally, the third paragraph thereof prescribes the penalty to be imposed
for its violation.
The respondent appellate court ruled that the petitioner is prosecuted not under the second paragraph of Section 189 of the aforesaid Act but under its first
paragraph. Thus
... it can no longer be denied that it was appellant's most active endeavors that resulted in issuance of policy to Isidro, she was there and then acting as agent,
and received the pay thereof her defense that she was only acting as helper of her husband can no longer be sustained, neither her point that she received
no compensation for issuance of the policy because
any person who for compensation solicits or obtains insurance on behalf of any insurance company or transmits for a person other than himself an application
for a policy of insurance to or from such company or offers or assumes to act in the negotiating of such insurance, shall be an insurance agent within the intent of
this section, and shall thereby become liable to all the duties, requirements, liabilities, and penalties, to which an agent of such company is subject. paragraph 2,
Sec. 189, Insurance Law,
now it is true that information does not even allege that she had obtained the insurance,
for compensation
which is the gist of the offense in Section 189 of the Insurance Law in its 2nd paragraph, but what appellant apparently overlooks is that she is prosecuted not
under the 2nd but under the 1st paragraph of Sec. 189 wherein it is provided that,
No person shall act as agent, sub-agent, or broker, in the solicitation or procurement of applications for insurance, or receive for services in obtaining new
insurance any commission or other compensation from any insurance company doing business in the Philippine Island, or agent thereof, without first procuring a
certificate of authority to act from the insurance commissioner, which must be renewed annually on the first day of January, or within six months thereafter.
therefore, there was no technical defect in the wording of the charge, so that Errors 2 and 4 must be overruled.

12

From the above-mentioned ruling, the respondent appellate court seems to imply that the definition of an insurance agent under the second paragraph of
Section 189 is not applicable to the insurance agent mentioned in the first paragraph. Parenthetically, the respondent court concludes that under the second
paragraph of Section 189, a person is an insurance agent if he solicits and obtains an insurance for compensation, but, in its first paragraph, there is no
necessity that a person solicits an insurance for compensation in order to be called an insurance agent.
We find this to be a reversible error. As correctly pointed out by the Solicitor General, the definition of an insurance agent as found in the second paragraph of
Section 189 is intended to define the word "agent" mentioned in the first and second paragraphs of the aforesaid section. More significantly, in its second
paragraph, it is explicitly provided that the definition of an insurance agent is within the intent of Section 189. Hence
Any person who for compensation ... shall be an insurance agent within the intent of this section, ...
Patently, the definition of an insurance agent under the second paragraph holds true with respect to the agent mentioned in the other two paragraphs of the said
section. The second paragraph of Section 189 is a definition and interpretative clause intended to qualify the term "agent" mentioned in both the first and third
paragraphs of the aforesaid section.
Applying the definition of an insurance agent in the second paragraph to the agent mentioned in the first and second paragraphs would give harmony to the
aforesaid three paragraphs of Section 189. Legislative intent must be ascertained from a consideration of the statute as a whole. The particular words, clauses
and phrases should not be studied as detached and isolated expressions, but the whole and every part of the statute must be considered in fixing the meaning
of any of its parts and in order to produce harmonious whole. 13 A statute must be so construed as to harmonize and give effect to all its provisions whenever

possible. 14 The meaning of the law, it must be borne in mind, is not to be extracted from any single part, portion or section or from isolated words and phrases,
clauses or sentences but from a general consideration or view of the act as a whole. 15 Every part of the statute must be interpreted with reference to the context.
This means that every part of the statute must be considered together with the other parts, and kept subservient to the general intent of the whole enactment,
not separately and independently. 16 More importantly, the doctrine of associated words (Noscitur a Sociis) provides that where a particular word or phrase in a
statement is ambiguous in itself or is equally susceptible of various meanings, its true meaning may be made clear and specific by considering the company in
which it is found or with which it is associated. 17
Considering that the definition of an insurance agent as found in the second paragraph is also applicable to the agent mentioned in the first paragraph, to receive
a compensation by the agent is an essential element for a violation of the first paragraph of the aforesaid section. The appellate court has established ultimately
that the petitioner-accused did not receive any compensation for the issuance of the insurance policy of Eugenio Isidro. Nevertheless, the accused was
convicted by the appellate court for, according to the latter, the receipt of compensation for issuing an insurance policy is not an essential element for a violation
of the first paragraph of Section 189 of the Insurance Act.
We rule otherwise. Under the Texas Penal Code 1911, Article 689, making it a misdemeanor for any person for direct or indirect compensation to solicit
insurance without a certificate of authority to act as an insurance agent, an information, failing to allege that the solicitor was to receive compensation either
directly or indirectly, charges no offense. 18 In the case of Bolen vs. Stake, 19 the provision of Section 3750, Snyder's Compiled Laws of Oklahoma 1909 is
intended to penalize persons only who acted as insurance solicitors without license, and while acting in such capacity negotiated and concluded insurance
contracts for compensation. It must be noted that the information, in the case at bar, does not allege that the negotiation of an insurance contracts by the
accused with Eugenio Isidro was one for compensation. This allegation is essential, and having been omitted, a conviction of the accused could not be
sustained. It is well-settled in Our jurisprudence that to warrant conviction, every element of the crime must be alleged and proved. 20
After going over the records of this case, We are fully convinced, as the Solicitor General maintains, that accused did not violate Section 189 of the Insurance
Act.
WHEREFORE, the judgment appealed from is reversed and the accused is acquitted of the crime charged, with costs de oficio.

G.R. No. 136914

January 25, 2002

COUNTRY BANKERS INSURANCE CORPORATION, petitioner,


vs.
LIANGA BAY AND COMMUNITY MULTI-PURPOSE COOPERATIVE, INC., respondent.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals2 dated December 29, 1998 in CA-G.R. CV Case No. 36902 affirming in
toto the Decision3 dated December 26, 1991 of the Regional Trial Court of Lianga, Surigao del Sur, Branch 28, in Civil Case No. L-518 which ordered petitioner
Country Bankers Insurance Corporation to fully pay the insurance claim of respondent Lianga Bay and Community Multi-Purpose Cooperative, Inc., under Fire
Insurance Policy No. F-1397, for loss sustained as a result of the fire that occurred on July 1, 1989 in the amount of Two Hundred Thousand Pesos
(P200,000.00), with interest at twelve percent (12%) per annum from the date of filing of the complaint until fully paid, as well as Fifty Thousand Pesos
(P50,000.00) as actual damages, Fifty Thousand Pesos (P50,000.00) as exemplary damages, Five Thousand Pesos (P5,000.00) as litigation expenses, Ten
Thousand Pesos (P10,000.00) as attorneys fees, and the costs of suit.
The facts are undisputed:
The petitioner is a domestic corporation principally engaged in the insurance business wherein it undertakes, for a consideration, to indemnify another against
loss, damage or liability from an unknown or contingent event including fire while the respondent is a duly registered cooperative judicially declared insolvent and
represented by the elected assignee, Cornelio Jamero.
It appears that sometime in 1989, the petitioner and the respondent entered into a contract of fire insurance. Under Fire Insurance Policy No. F-1397, the
petitioner insured the respondents stocks-in-trade against fire loss, damage or liability during the period starting from June 20, 1989 at 4:00 p.m. to June 20,
1990 at 4:00 p.m., for the sum of Two Hundred Thousand Pesos (P200,000.00).
On July 1, 1989, at or about 12:40 a.m., the respondents building located at Barangay Diatagon, Lianga, Surigao del Sur was gutted by fire and reduced to
ashes, resulting in the total loss of the respondents stocks-in-trade, pieces of furnitures and fixtures, equipments and records.
Due to the loss, the respondent filed an insurance claim with the petitioner under its Fire Insurance Policy No. F-1397, submitting: (a) the Spot Report of Pfc.
Arturo V. Juarbal, INP Investigator, dated July 1, 1989; (b) the Sworn Statement of Jose Lomocso; and (c) the Sworn Statement of Ernesto Urbiztondo.

The petitioner, however, denied the insurance claim on the ground that, based on the submitted documents, the building was set on fire by two (2) NPA rebels
who wanted to obtain canned goods, rice and medicines as provisions for their comrades in the forest, and that such loss was an excepted risk under paragraph
No. 6 of the policy conditions of Fire Insurance Policy No. F-1397, which provides:
This insurance does not cover any loss or damage occasioned by or through or in consequence, directly or indirectly, of any of the following occurrences,
namely:
xxx

xxx

xxx

(d) Mutiny, riot, military or popular uprising, insurrection, rebellion, revolution, military or usurped power.
Any loss or damage happening during the existence of abnormal conditions (whether physical or otherwise) which are occasioned by or through or in
consequence, directly or indirectly, of any of said occurrences shall be deemed to be loss or damage which is not covered by this insurance, except to the extent
that the Insured shall prove that such loss or damage happened independently of the existence of such abnormal conditions.
Finding the denial of its claim unacceptable, the respondent then instituted in the trial court the complaint for recovery of "loss, damage or liability" against
petitioner. The petitioner answered the complaint and reiterated the ground it earlier cited to deny the insurance claim, that is, that the loss was due to NPA
rebels, an excepted risk under the fire insurance policy.
In due time, the trial court rendered its Decision dated December 26, 1991 in favor of the respondent, declaring that:
Based on its findings, it is therefore the considered opinion of this Court, as it so holds, that the defenses raised by defendant-Country Bankers has utterly
crumbled on account of its inherent weakness, incredibility and unreliability, and after applying those helpful tools like common sense, logic and the Courts
honest appraisal of the real and actual situation obtaining in this area, such defenses remains (sic) unimpressive and unconvincing, and therefore, the
defendant-Country Bankers has to be irreversibly adjudged liable, as it should be, to plaintiff-Insolvent Cooperative, represented in this action by its Assignee,
Cornelio Jamero, and thus, ordering said defendant-Country Bankers to pay the plaintiff-Insolvent Cooperative, as follows:
1. To fully pay the insurance claim for the loss the insured-plaintiff sustained as a result of the fire under its Fire Insurance Policy No. F-1397 in its full face value
of P200,000.00 with interest of 12% per annum from date of filing of the complaint until the same is fully paid;
2. To pay as and in the concept of actual or compensatory damages in the total sum of P50,000.00;
3. To pay as and in the concept of exemplary damages in the total sum of P50,000.00;
4. To pay in the concept of litigation expenses the sum of P5,000.00;
5. To pay by way of reimbursement the attorneys fees in the sum of P10,000.00; and
6. To pay the costs of the suit.
For being unsubstantiated with credible and positive evidence, the "counterclaim" is dismissed.
IT IS SO ORDERED.
Petitioner interposed an appeal to the Court of Appeals. On December 29, 1998, the appellate court affirmed the challenged decision of the trial court in its
entirety. Petitioner now comes before us via the instant petition anchored on three (3) assigned errors, 4 to wit:
1. THE HONORABLE COURT OF APPEALS FAILED TO APPRECIATE AND GIVE CREDENCE TO THE SPOT REPORT OF PFC. ARTURO JUARBAL
(EXH. 3) AND THE SWORN STATEMENT OF JOSE LOMOCSO (EXH. 4) THAT THE RESPONDENTS STOCK-IN-TRADE WAS BURNED BY THE NPA
REBELS, HENCE AN EXCEPTED RISK UNDER THE FIRE INSURANCE POLICY.
2. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING PETITIONER LIABLE FOR 12% INTEREST PER ANNUM ON THE FACE VALUE OF
THE POLICY FROM THE FILING OF THE COMPLAINT UNTIL FULLY PAID.
3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THE PETITIONER LIABLE FOR ACTUAL AND EXEMPLARY DAMAGES, LITIGATION
EXPENSES, ATTORNEYS FEES AND COST OF SUIT.
A party is bound by his own affirmative allegations. This is a well-known postulate echoed in Section 1 of Rule 131 of the Revised Rules of Court. Each party
must prove his own affirmative allegations by the amount of evidence required by law which in civil cases, as in this case, is preponderance of evidence, to
obtain a favorable judgment.5
In the instant case, the petitioner does not dispute that the respondents stocks-in-trade were insured against fire loss, damage or liability under Fire Insurance
Policy No. F- 1397 and that the respondent lost its stocks-in-trade in a fire that occurred on July 1, 1989, within the duration of said fire insurance. The petitioner,
however, posits the view that the cause of the loss was an excepted risk under the terms of the fire insurance policy.

Where a risk is excepted by the terms of a policy which insures against other perils or hazards, loss from such a risk constitutes a defense which the insurer may
urge, since it has not assumed that risk, and from this it follows that an insurer seeking to defeat a claim because of an exception or limitation in the policy has
the burden of proving that the loss comes within the purview of the exception or limitation set up. If a proof is made of a loss apparently within a contract of
insurance, the burden is upon the insurer to prove that the loss arose from a cause of loss which is excepted or for which it is not liable, or from a cause which
limits its liability.6 Stated else wise, since the petitioner in this case is defending on the ground of non-coverage and relying upon an exemption or exception
clause in the fire insurance policy, it has the burden of proving the facts upon which such excepted risk is based, by a preponderance of evidence. 7 But petitioner
failed to do so.
The petitioner relies on the Sworn Statements of Jose Lomocso and Ernesto Urbiztondo as well as on the Spot Report of Pfc. Arturo V. Juarbal dated July 1,
1989, more particularly the following statement therein:
xxx investigation revealed by Jose Lomocso that those armed men wanted to get can goods and rice for their consumption in the forest PD investigation further
disclosed that the perpetrator are member (sic) of the NPA PD end x x x
A witness can testify only to those facts which he knows of his personal knowledge, which means those facts which are derived from his
perception.8 Consequently, a witness may not testify as to what he merely learned from others either because he was told or read or heard the same. Such
testimony is considered hearsay and may not be received as proof of the truth of what he has learned. Such is the hearsay rule which applies not only to oral
testimony or statements but also to written evidence as well.9
The hearsay rule is based upon serious concerns about the trustworthiness and reliability of hearsay evidence inasmuch as such evidence are not given under
oath or solemn affirmation and, more importantly, have not been subjected to cross-examination by opposing counsel to test the perception, memory, veracity
and articulateness of the out-of-court declarant or actor upon whose reliability on which the worth of the out-of-court statement depends. 10
Thus, the Sworn Statements of Jose Lomocso and Ernesto Urbiztondo are inadmissible in evidence, for being hearsay, inasmuch as they did not take the
witness stand and could not therefore be cross-examined.
There are exceptions to the hearsay rule, among which are entries in official records. 11 To be admissible in evidence, however, three (3) requisites must concur,
to wit:
(a) that the entry was made by a public officer, or by another person specially enjoined by law to do so;
(b) that it was made by the public officer in the performance of his duties, or by such other person in the performance of a duty specially enjoined by law; and
(c) that the public officer or other person had sufficient knowledge of the facts by him stated, which must have been acquired by him personally or through official
information.12
The third requisite was not met in this case since no investigation, independent of the statements gathered from Jose Lomocso, was conducted by Pfc. Arturo V.
Juarbal. In fact, as the petitioner itself pointed out, citing the testimony of Pfc. Arturo Juarbal,13 the latters Spot Report "was based on the personal knowledge of
the caretaker Jose Lomocso who witnessed every single incident surrounding the facts and circumstances of the case." This argument undeniably weakens the
petitioners defense, for the Spot Report of Pfc. Arturo Juarbal relative to the statement of Jose Lomocso to the effect that NPA rebels allegedly set fire to the
respondents building is inadmissible in evidence, for the purpose of proving the truth of the statements contained in the said report, for being hearsay.
The said Spot Report is admissible only insofar as it constitutes part of the testimony of Pfc. Arturo V. Juarbal since he himself took the witness stand and was
available for cross-examination. The portions of his Spot Report which were of his personal knowledge or which consisted of his perceptions and conclusions are
not hearsay. The rest of the said report relative to the statement of Jose Lomocso may be considered as independently relevant statements gathered in the
course of Juarbals investigation and may be admitted as such but not necessarily to prove the truth thereof.14
The petitioners evidence to prove its defense is sadly wanting and thus, gives rise to its liability to the respondent under Fire Insurance Policy No. F-1397.
Nonetheless, we do not sustain the trial courts imposition of twelve percent (12%) interest on the insurance claim as well as the monetary award for actual and
exemplary damages, litigation expenses and attorneys fees for lack of legal and valid basis.
Concerning the application of the proper interest rates, the following guidelines were set in Eastern Shipping Lines, Inc. v. Court of Appeals and Mercantile
Insurance Co., Inc.:15
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts, is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
In the said case of Eastern Shipping, the Court further observed that a "forbearance" in the context of the usury law is a "contractual obligation of lender or
creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable."
Considering the foregoing, the insurance claim in this case is evidently not a forbearance of money, goods or credit, and thus the interest rate should be as it is
hereby fixed at six percent (6%) computed from the date of filing of the complaint.
We find no justification for the award of actual damages of Fifty Thousand Pesos (P50,000.00). Well-entrenched is the doctrine that actual, compensatory and
consequential damages must be proved, and cannot be presumed.16That part of the dispositive portion of the Decision of the trial court ordering the petitioner to
pay actual damages of Fifty Thousand Pesos (P50,000.00) has no basis at all. The justification, if any, for such an award of actual damages does not appear in
the body of the decision of the trial court. Neither is there any testimonial and documentary evidence on the alleged actual damages of Fifty Thousand Pesos
(P50,000.00) to warrant such an award. Thus, the same must be deleted.
Concerning the award of exemplary damages for Fifty Thousand Pesos (P50,000.00), we likewise find no legal and valid basis for granting the same. Article
2229 of the New Civil Code provides that exemplary damages may be imposed by way of example or correction for the public good. Exemplary damages are
imposed not to enrich one party or impoverish another but to serve as a deterrent against or as a negative incentive to curb socially deleterious actions. They are
designed to permit the courts to mould behavior that has socially deleterious consequences, and its imposition is required by public policy to suppress the
wanton acts of an offender. However, it cannot be recovered as a matter of right. It is based entirely on the discretion of the court. We find no cogent and valid
reason to award the same in the case at bar.
With respect to the award of litigation expenses and attorneys fees, Article 2208 of the New Civil Code 17enumerates the instances where such may be awarded
and, in all cases, it must be reasonable, just and equitable if the same were to be granted. Attorneys fees as part of damages are not meant to enrich the
winning party at the expense of the losing litigant. They are not awarded every time a party prevails in a suit because of the policy that no premium should be
placed on the right to litigate.18 The award of attorneys fees is the exception rather than the general rule. As such, it is necessary for the court to make findings
of facts and law that would bring the case within the exception and justify the grant of such award. We find none in this case to warrant the award by the trial
court of litigation expenses and attorneys fees in the amounts of Five Thousand Pesos (P5,000.00) and Ten Thousand Pesos (P10,000.00), respectively, and
therefore, the same must also be deleted.
WHEREFORE, the appealed Decision is MODIFIED. The rate of interest on the adjudged principal amount of Two Hundred Thousand Pesos (P200,000.00)
shall be six percent (6%) per annum computed from the date of filing of the Complaint in the trial court. The awards in the amounts of Fifty Thousand Pesos
(P50,000.00) as actual damages, Fifty Thousand Pesos (P50,000.00) as exemplary damages, Five Thousand Pesos (P5,000.00) as litigation expenses, and Ten
Thousand Pesos (P10,000.00) as attorneys fees are hereby DELETED. Costs against the petitioner.

G.R. No. 138941

October 8, 2001

AMERICAN HOME ASSURANCE COMPANY, petitioner,


vs.
TANTUCO ENTERPRISES, INC., respondent.
PUNO, J.:
Before us is a Petition for Review on Certiorari assailing the Decision of the Court of Appeals in CA-G.R. CV No. 52221 promulgated on January 14, 1999, which
affirmed in toto the Decision of the Regional Trial Court, Branch 53, Lucena City in Civil Case No. 92-51 dated October 16, 1995.
Respondent Tantuco Enterprises, Inc. is engaged in the coconut oil milling and refining industry. It owns two oil mills. Both are located at factory compound at
Iyam, Lucena City. It appears that respondent commenced its business operations with only one oil mill. In 1988, it started operating its second oil mill. The latter
came to be commonly referred to as the new oil mill.

The two oil mills were separately covered by fire insurance policies issued by petitioner American Home Assurance Co., Philippine Branch. 1 The first oil mill was
insured for three million pesos (P3,000,000.00) under Policy No. 306-7432324-3 for the period March 1, 1991 to 1992. 2 The new oil mill was insured for six
million pesos (P6,000,000.00) under Policy No. 306-7432321-9 for the same term.3 Official receipts indicating payment for the full amount of the premium were
issued by the petitioner's agent.4
A fire that broke out in the early morning of September 30,1991 gutted and consumed the new oil mill. Respondent immediately notified the petitioner of the
incident. The latter then sent its appraisers who inspected the burned premises and the properties destroyed. Thereafter, in a letter dated October 15, 1991,
petitioner rejected respondent's claim for the insurance proceeds on the ground that no policy was issued by it covering the burned oil mill. It stated that the
description of the insured establishment referred to another building thus: "Our policy nos. 306-7432321-9 (Ps 6M) and 306-7432324-4 (Ps 3M) extend
insurance coverage to your oil mill under Building No. 5, whilst the affected oil mill was under Building No. 14. " 5
A complaint for specific performance and damages was consequently instituted by the respondent with the RTC, Branch 53 of Lucena City. On October 16,
1995, after trial, the lower court rendered a Decision finding the petitioner liable on the insurance policy thus:
"WHEREFORE, judgment is rendered in favor of the plaintiff ordering defendant to pay plaintiff:
(a) P4,406,536.40 representing damages for loss by fire of its insured property with interest at the legal rate;
(b) P80,000.00 for litigation expenses;
(c) P300,000.00 for and as attorney's fees; and
(d) Pay the costs.
SO ORDERED."6
Petitioner assailed this judgment before the Court of Appeals. The appellate court upheld the same in a Decision promulgated on January 14, 1999, the pertinent
portion of which states:
"WHEREFORE, the instant appeal is hereby DISMISSED for lack of merit and the trial court's Decision dated October 16, 1995 is hereby AFFIRMED in toto.
SO ORDERED."7
Petitioner moved for reconsideration. The motion, however, was denied for lack of merit in a Resolution promulgated on June 10, 1999.
Hence, the present course of action, where petitioner ascribes to the appellate court the following errors:
"(1) The Court of Appeals erred in its conclusion that the issue of non-payment of the premium was beyond its jurisdiction because it was raised for the first time
on appeal."8
"(2) The Court of Appeals erred in its legal interpretation of 'Fire Extinguishing Appliances Warranty' of the policy." 9
"(3) With due respect, the conclusion of the Court of Appeals giving no regard to the parole evidence rule and the principle of estoppel is erroneous." 10
The petition is devoid of merit.
The primary reason advanced by the petitioner in resisting the claim of the respondent is that the burned oil mill is not covered by any insurance policy.
According to it, the oil mill insured is specifically described in the policy by its boundaries in the following manner:
"Front: by a driveway thence at 18 meters distance by Bldg. No. 2.
Right: by an open space thence by Bldg. No. 4.
Left: Adjoining thence an imperfect wall by Bldg. No. 4.
Rear: by an open space thence at 8 meters distance."
However, it argues that this specific boundary description clearly pertains, not to the burned oil mill, but to the other mill. In other words, the oil mill gutted by fire
was not the one described by the specific boundaries in the contested policy.
What exacerbates respondent's predicament, petitioner posits, is that it did not have the supposed wrong description or mistake corrected. Despite the fact that
the policy in question was issued way back in 1988, or about three years before the fire, and despite the "Important Notice" in the policy that "Please read and
examine the policy and if incorrect, return it immediately for alteration," respondent apparently did not call petitioner's attention with respect to the misdescription.

By way of conclusion, petitioner argues that respondent is "barred by the parole evidence rule from presenting evidence (other than the policy in question) of its
self-serving intention (sic) that it intended really to insure the burned oil mill," just as it is "barred by estoppel from claiming that the description of the insured oil
mill in the policy was wrong, because it retained the policy without having the same corrected before the fire by an endorsement in accordance with its Condition
No. 28."
These contentions can not pass judicial muster.
In construing the words used descriptive of a building insured, the greatest liberality is shown by the courts in giving effect to the insurance. 11 In view of the
custom of insurance agents to examine buildings before writing policies upon them, and since a mistake as to the identity and character of the building is
extremely unlikely, the courts are inclined to consider that the policy of insurance covers any building which the parties manifestly intended to insure, however
inaccurate the description may be.12
Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute, to our mind, that what the parties manifestly intended to insure was the new oil
mill. This is obvious from the categorical statement embodied in the policy, extending its protection:
"On machineries and equipment with complete accessories usual to a coconut oil mill including stocks of copra, copra cake and copra mills whilst contained in
the new oil mill building, situate (sic) at UNNO. ALONG NATIONAL HIGH WAY, BO. IYAM, LUCENA CITY UNBLOCKED.'' 13 (emphasis supplied.)
If the parties really intended to protect the first oil mill, then there is no need to specify it as new.
Indeed, it would be absurd to assume that respondent would protect its first oil mill for different amounts and leave uncovered its second one. As mentioned
earlier, the first oil mill is already covered under Policy No. 306-7432324-4 issued by the petitioner. It is unthinkable for respondent to obtain the other policy from
the very same company. The latter ought to know that a second agreement over that same realty results in its over insurance.
The imperfection in the description of the insured oil mill's boundaries can be attributed to a misunderstanding between the petitioner's general agent, Mr. Alfredo
Borja, and its policy issuing clerk, who made the error of copying the boundaries of the first oil mill when typing the policy to be issued for the new one. As
testified to by Mr. Borja:
"Atty. G. Camaligan:
Q:

What did you do when you received the report?

A:
I told them as will be shown by the map the intention really of Mr. Edison Tantuco is to cover the new oil mill that is why when I presented the existing
policy of the old policy, the policy issuing clerk just merely (sic) copied the wording from the old policy and what she typed is that the description of the
boundaries from the old policy was copied but she inserted covering the new oil mill and to me at that time the important thing is that it covered the
new oil mill because it is just within one compound and there are only two oil mill[s] and so just enough, I had the policy prepared. In fact, two policies
were prepared having the same date one for the old one and the other for the new oil mill and exactly the same policy period, sir." 14 (emphasis supplied)
It is thus clear that the source of the discrepancy happened during the preparation of the written contract.
These facts lead us to hold that the present case falls within one of the recognized exceptions to the parole evidence rule. Under the Rules of Court, a party may
present evidence to modify, explain or add to the terms of the written agreement if he puts in issue in his pleading, among others, its failure to express the true
intent and agreement of the parties thereto.15 Here, the contractual intention of the parties cannot be understood from a mere reading of the instrument. Thus,
while the contract explicitly stipulated that it was for the insurance of the new oil mill, the boundary description written on the policy concededly pertains to the
first oil mill. This irreconcilable difference can only be clarified by admitting evidence aliunde, which will explain the imperfection and clarify the intent of the
parties.
Anent petitioner's argument that the respondent is barred by estoppel from claiming that the description of the insured oil mill in the policy was wrong, we find
that the same proceeds from a wrong assumption. Evidence on record reveals that respondent's operating manager, Mr. Edison Tantuco, notified Mr. Borja (the
petitioner's agent with whom respondent negotiated for the contract) about the inaccurate description in the policy. However, Mr. Borja assured Mr. Tantuco that
the use of the adjective new will distinguish the insured property. The assurance convinced respondent, despite the impreciseness in the specification of the
boundaries, the insurance will cover the new oil mill. This can be seen from the testimony on cross of Mr. Tantuco:
"ATTY. SALONGA:
Q:

You mentioned, sir, that at least in so far as Exhibit A is concern you have read what the policy contents. (sic)

Kindly take a look in the page of Exhibit A which was marked as Exhibit A-2 particularly the boundaries of the property insured by the insurance policy Exhibit A,
will you tell us as the manager of the company whether the boundaries stated in Exhibit A-2 are the boundaries of the old (sic) mill that was burned or not.
A:
It was not, I called up Mr. Borja regarding this matter and he told me that what is important is the word new oil mill. Mr. Borja said, as a matter of fact, you
can never insured (sic) one property with two (2) policies, you will only do that if you will make to increase the amount and it is by indorsement not by another
policy, sir.,16

We again stress that the object of the court in construing a contract is to ascertain the intent of the parties to the contract and to enforce the agreement which the
parties have entered into. In determining what the parties intended, the courts will read and construe the policy as a whole and if possible, give effect to all the
parts of the contract, keeping in mind always, however, the prime rule that in the event of doubt, this doubt is to be resolved against the insurer. In determining
the intent of the parties to the contract, the courts will consider the purpose and object of the contract. 17
In a further attempt to avoid liability, petitioner claims that respondent forfeited the renewal policy for its failure to pay the full amount of the premium and breach
of the Fire Extinguishing Appliances Warranty.
The amount of the premium stated on the face of the policy was P89,770.20. From the admission of respondent's own witness, Mr. Borja, which the petitioner
cited, the former only paid it P75,147.00, leaving a difference of P14,623.20. The deficiency, petitioner argues, suffices to invalidate the policy, in accordance
with Section 77 of the Insurance Code.18
The Court of Appeals refused to consider this contention of the petitioner. It held that this issue was raised for the first time on appeal, hence, beyond its
jurisdiction to resolve, pursuant to Rule 46, Section 18 of the Rules of Court.19
Petitioner, however, contests this finding of the appellate court. It insists that the issue was raised in paragraph 24 of its Answer, viz.:
"24. Plaintiff has not complied with the condition of the policy and renewal certificate that the renewal premium should be paid on or before renewal date."
Petitioner adds that the issue was the subject of the cross-examination of Mr. Borja, who acknowledged that the paid amount was lacking by P14,623.20 by
reason of a discount or rebate, which rebate under Sec. 361 of the Insurance Code is illegal.
The argument fails to impress. It is true that the asseverations petitioner made in paragraph 24 of its Answer ostensibly spoke of the policy's condition for
payment of the renewal premium on time and respondent's non-compliance with it. Yet, it did not contain any specific and definite allegation that respondent did
not pay the premium, or that it did not pay the full amount, or that it did not pay the amount on time.
Likewise, when the issues to be resolved in the trial court were formulated at the pre-trial proceedings, the question of the supposed inadequate payment was
never raised. Most significant to point, petitioner fatally neglected to present, during the whole course of the trial, any witness to testify that respondent indeed
failed to pay the full amount of the premium. The thrust of the cross-examination of Mr. Borja, on the other hand, was not for the purpose of proving this fact.
Though it briefly touched on the alleged deficiency, such was made in the course of discussing a discount or rebate, which the agent apparently gave the
respondent. Certainly, the whole tenor of Mr. Borja's testimony, both during direct and cross examinations, implicitly assumed a valid and subsisting insurance
policy. It must be remembered that he was called to the stand basically to demonstrate that an existing policy issued by the petitioner covers the burned building.
Finally, petitioner contends that respondent violated the express terms of the Fire Extinguishing Appliances Warranty. The said warranty provides:
"WARRANTED that during the currency of this Policy, Fire Extinguishing Appliances as mentioned below shall be maintained in efficient working order on the
premises to which insurance applies:
-

PORTABLE EXTINGUISHERS

INTERNAL HYDRANTS

EXTERNAL HYDRANTS

FIRE PUMP

24-HOUR SECURITY SERVICES

BREACH of this warranty shall render this policy null and void and the Company shall no longer be liable for any loss which may occur." 20
Petitioner argues that the warranty clearly obligates the insured to maintain all the appliances specified therein. The breach occurred when the respondent failed
to install internal fire hydrants inside the burned building as warranted. This fact was admitted by the oil mill's expeller operator, Gerardo Zarsuela.
Again, the argument lacks merit. We agree with the appellate court's conclusion that the aforementioned warranty did not require respondent to provide for all
the fire extinguishing appliances enumerated therein. Additionally, we find that neither did it require that the appliances are restricted to those mentioned in the
warranty. In other words, what the warranty mandates is that respondent should maintain in efficient working condition within the premises of the insured
property, fire fighting equipments such as, but not limited to, those identified in the list, which will serve as the oil mill's first line of defense in case any part of it
bursts into flame.
To be sure, respondent was able to comply with the warranty. Within the vicinity of the new oil mill can be found the following devices: numerous portable fire
extinguishers, two fire hoses,21 fire hydrant,22 and an emergency fire engine.23 All of these equipments were in efficient working order when the fire occurred.
It ought to be remembered that not only are warranties strictly construed against the insurer, but they should, likewise, by themselves be reasonably
interpreted.24 That reasonableness is to be ascertained in light of the factual conditions prevailing in each case. Here, we find that there is no more need for an

internal hydrant considering that inside the burned building were: (1) numerous portable fire extinguishers, (2) an emergency fire engine, and (3) a fire hose
which has a connection to one of the external hydrants.
IN VIEW WHEREOF, finding no reversible error in the impugned Decision, the instant petition is hereby DISMISSED.

G.R. No. 154514. July 28, 2005


WHITE GOLD MARINE SERVICES, INC., Petitioners,
vs.
PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., Respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No. 60144, affirming the Decision2 dated May 3, 2000
of the Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that there was no violation of the Insurance Code and the respondents do not
need license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels from The Steamship Mutual Underwriting
Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently, White Gold was issued a
Certificate of Entry and Acceptance.3Pioneer also issued receipts evidencing payments for the coverage. When White Gold failed to fully pay its accounts,
Steamship Mutual refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the latters unpaid balance. White Gold on the other hand,
filed a complaint before the Insurance Commission claiming that Steamship Mutual violated Sections 1864 and 1875 of the Insurance Code, while Pioneer
violated Sections 299,63007 and 3018 in relation to Sections 302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual to secure a license because it was not engaged in the
insurance business. It explained that Steamship Mutual was a Protection and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as
insurance agent and/or a broker for Steamship Mutual because Steamship Mutual was not engaged in the insurance business. Moreover, Pioneer was already
licensed, hence, a separate license solely as agent/broker of Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the appellate court distinguished between P & I Clubs vis-vis conventional insurance. The appellate court also held that Pioneer merely acted as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES ON THE GROUND
THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE TO
ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN
INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN
AGENT/BROKER OF RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS
OF RESPONDENT PIONEER.9
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance business in the Philippines? (2) Does Pioneer need a
license as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license to do business in the Philippines although Pioneer
is its resident agent. This relationship is reflected in the certifications issued by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its assertion, it cites the definition of a P & I Club
in Hyopsung Maritime Co., Ltd. v. Court of Appeals10 as "an association composed of shipowners in general who band together for the specific purpose of
providing insurance cover on a mutual basis against liabilities incidental to shipowning that the members incur in favor of third parties." It stresses that as a P & I
Club, Steamship Mutuals primary purpose is to solicit and provide protection and indemnity coverage and for this purpose, it has engaged the services of
Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance business in the Philippines. It is merely an association
of vessel owners who have come together to provide mutual protection against liabilities incidental to shipowning. 11 Respondents aver Hyopsung is inapplicable
in this case because the issue in Hyopsung was the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business" or "transacting an insurance business". These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of
the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of
this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code.
...
The same provision also provides, the fact that no profit is derived from the making of insurance contracts, agreements or transactions, or that no separate or
direct consideration is received therefor, shall not preclude the existence of an insurance business.12
The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the act required to be performed, and the exact nature
of the agreement in the light of the occurrence, contingency, or circumstances under which the performance becomes requisite. It is not by what it is called. 13
Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to indemnify another against loss, damage or liability arising
from an unknown or contingent event.14
In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the losses incident to a marine adventure. 15 Section 9916 of
the Insurance Code enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer and insured. In it, the members all contribute, by a
system of premiums or assessments, to the creation of a fund from which all losses and liabilities are paid, and where the profits are divided among themselves,
in proportion to their interest.17 Additionally, mutual insurance associations, or clubs, provide three types of coverage, namely, protection and indemnity, war
risks, and defense costs.18
A P & I Club is "a form of insurance against third party liability, where the third party is anyone other than the P & I Club and the members."19 By definition then,
Steamship Mutual as a P & I Club is a mutual insurance association engaged in the marine insurance business.
The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate of authority mandated by Section 187 20 of the
Insurance Code. It maintains a resident agent in the Philippines to solicit insurance and to collect payments in its behalf. We note that Steamship Mutual even
renewed its P & I Club cover until it was cancelled due to non-payment of the calls. Thus, to continue doing business here, Steamship Mutual or through its
agent Pioneer, must secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or insurance company is allowed to engage in the
insurance business without a license or a certificate of authority from the Insurance Commission.21
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?

Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration 22 issued by the Insurance Commission. It has been licensed to
do or transact insurance business by virtue of the certificate of authority23 issued by the same agency. However, a Certification from the Commission states that
Pioneer does not have a separate license to be an agent/broker of Steamship Mutual. 24
Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance agent for Steamship Mutual. Section 299 of the
Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of applications for insurance, or receive for services in
obtaining insurance, any commission or other compensation from any insurance company doing business in the Philippines or any agent thereof, without first
procuring a license so to act from the Commissioner, which must be renewed annually on the first day of January, or within six months thereafter. . .
Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of its directors and officers. Regrettably, we are not the forum for these
issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of Appeals affirming the Decision dated May 3, 2000 of the
Insurance Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and
Surety Corporation are ORDERED to obtain licenses and to secure proper authorizations to do business as insurer and insurance agent, respectively. The
petitioners prayer for the revocation of Pioneers Certificate of Authority and removal of its directors and officers, is DENIED. Costs against respondents.

THIRD DIVISION
[G.R. No. 158085. October 14, 2005.]
REPUBLIC OF THE PHILIPPINES, Represented by the COMMISSIONER OF
INTERNAL REVENUE, petitioner, vs. SUNLIFE ASSURANCE COMPANY OF
CANADA, respondent.
DECISION
PANGANIBAN, J :
p

Having satisfactorily proven to the Court of Tax Appeals, to the Court of Appeals and to this Court
that it is a bona fide cooperative, respondent is entitled to exemption from the payment of taxes on
life insurance premiums and documentary stamps. Not being governed by the Cooperative Code
of the Philippines, it is not required to be registered with the Cooperative Development Authority in
order to avail itself of the tax exemptions. Significantly, neither the Tax Code nor the Insurance
Code mandates this administrative registration.
acCDSH

The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, seeking to nullify the
January 23, 2003 Decision 2 and the April 21, 2003 Resolution 3 of the Court of Appeals (CA) in
CA-GR SP No. 69125. The dispositive portion of the Decision reads as follows:
"WHEREFORE, the petition for review is hereby DENIED." 4

The Facts

The antecedents, as narrated by the CA, are as follows:


"Sun Life is a mutual life insurance company organized and existing under the laws of
Canada. It is registered and authorized by the Securities and Exchange Commission and
the Insurance Commission to engage in business in the Philippines as a mutual life
insurance company with principal office at Paseo de Roxas, Legaspi Village, Makati City.
"On October 20, 1997, Sun Life filed with the [Commissioner of Internal Revenue] (CIR) its
insurance premium tax return for the third quarter of 1997 and paid the premium tax in the
amount of P31,485,834.51. For the period covering August 21 to December 18, 1997,
petitioner filed with the CIR its [documentary stamp tax (DST)] declaration returns and paid
the total amount of P30,000,000.00.
"On December 29, 1997, the [Court of Tax Appeals] (CTA) rendered its decision in Insular
Life Assurance Co. Ltd. v. [CIR], which held that mutual life insurance companies are purely
cooperative companies and are exempt from the payment of premium tax and DST. This
pronouncement was later affirmed by this court in [CIR] v. Insular Life Assurance Company,
Ltd. Sun Life surmised that[,] being a mutual life insurance company, it was likewise exempt
from the payment of premium tax and DST. Hence, on August 20, 1999, Sun Life filed with
the CIR an administrative claim for tax credit of its alleged erroneously paid premium tax
and DST for the aforestated tax periods.
"For failure of the CIR to act upon the administrative claim for tax credit and with the 2-year
period to file a claim for tax credit or refund dwindling away and about to expire, Sun Life
filed with the CTA a petition for review on August 23, 1999. In its petition, it prayed for the
issuance of a tax credit certificate in the amount of P61,485,834.51 representing
P31,485,834.51 of erroneously paid premium tax for the third quarter of 1997 and
P30,000[,000].00 of DST on policies of insurance from August 21 to December 18, 1997.
Sun Life stood firm on its contention that it is a mutual life insurance company vested with
all the characteristic features and elements of a cooperative company or association as
defined in [S]ection 121 of the Tax Code. Primarily, the management and affairs of Sun Life
were conducted by its members; secondly, it is operated with money collected from its
members; and, lastly, it has for its purpose the mutual protection of its members and not for
profit or gain.
cAEaSC

"In its answer, the CIR, then respondent, raised as special and affirmative defenses the
following:
'7.Petitioner's (Sun Life's) alleged claim for refund is subject to administrative
routinary investigation/examination by respondent's (CIR's) Bureau.
'8.Petitioner must prove that it falls under the exception provided for under Section
121 (now 123) of the Tax Code to be exempted from premium tax and be entitled to
the refund sought.
'9.Claims for tax refund/credit are construed strictly against the claimants thereof as
they are in the nature of exemption from payment of tax.

'10.In an action for tax credit/refund, the burden is upon the taxpayer to establish its
right thereto, and failure to sustain this burden is fatal to said claim. . . . .
'11.It is incumbent upon petitioner to show that it has complied with the provisions of
Section 204[,] in relation to Section 229, both in the 1997 Tax Code.'
"On November 12, 2002, the CTA found in favor of Sun Life. Quoting largely from its earlier
findings in Insular Life Assurance Company, Ltd. v. [CIR], which it found to be on all fours
with the present action, the CTA ruled:
'The [CA] has already spoken. It ruled that a mutual life insurance company is a
purely cooperative company[;] thus, exempted from the payment of premium and
documentary stamp taxes. Petitioner Sun Life is without doubt a mutual life
insurance company. . . . .
xxx xxx xxx
'Being similarly situated with Insular, Petitioner at bar is entitled to the same
interpretation given by this Court in the earlier cases of The Insular Life Assurance
Company, Ltd. vs. [CIR] (CTA Case Nos. 5336 and 5601) and by the [CA] in the case
entitled [CIR] vs. The Insular Life Assurance Company, Ltd., C.A. G.R. SP No.
46516, September 29, 1998. Petitioner Sun Life as a mutual life insurance company
is[,] therefore[,] a cooperative company or association and is exempted from the
payment of premium tax and [DST] on policies of insurance pursuant to Section 121
(now Section 123) and Section 199[1]) (now Section 199[a]) of the Tax Code.'
"Seeking reconsideration of the decision of the CTA, the CIR argued that Sun Life ought to
have registered, foremost, with the Cooperative Development Authority before it could enjoy
the exemptions from premium tax and DST extended to purely cooperative companies or
associations under [S]ections 121 and 199 of the Tax Code. For its failure to register, it
could not avail of the exemptions prayed for. Moreover, the CIR alleged that Sun Life failed
to prove that ownership of the company was vested in its members who are entitled to vote
and elect the Board of Trustees among [them]. The CIR further claimed that change in the
1997 Tax Code subjecting mutual life insurance companies to the regular corporate income
tax rate reflected the legislature's recognition that these companies must be earning profits.
"Notwithstanding these arguments, the CTA denied the CIR's motion for reconsideration.
"Thwarted anew but nonetheless undaunted, the CIR comes to this court via this petition on
the sole ground that:
'The Tax Court erred in granting the refund[,] because respondent does not fall under
the exception provided for under Section 121 (now 123) of the Tax Code to be
exempted from premium tax and DST and be entitled to the refund.'
"The CIR repleads the arguments it raised with the CTA and proposes further that the [CA]
decision in [CIR] v. Insular Life Assurance Company, Ltd. is not controlling and cannot
constitute res judicata in the present action. At best, the pronouncements are merely

persuasive as the decisions of the Supreme Court alone have a universal and mandatory
effect." 5

Ruling of the Court of Appeals


In upholding the CTA, the CA reasoned that respondent was a purely cooperative corporation duly
licensed to engage in mutual life insurance business in the Philippines. Thus, respondent was
deemed exempt from premium and documentary stamp taxes, because its affairs are managed
and conducted by its members with money collected from among themselves, solely for their own
protection, and not for profit. Its members or policyholders constituted both insurer and insured
who contribute, by a system of premiums or assessments, to the creation of a fund from which all
losses and liabilities were paid. The dividends it distributed to them were not profits, but returns of
amounts that had been overcharged them for insurance.
For having satisfactorily shown with substantial evidence that it had erroneously paid and
seasonably filed its claim for premium and documentary stamp taxes, respondent was entitled to a
refund, the CA ruled.
Hence, this Petition. 6
The Issues
Petitioner raises the following issues for our consideration:
"I.
"Whether or not respondent is a purely cooperative company or association under Section
121 of the National Internal Revenue Code and a fraternal or beneficiary society, order or
cooperative company on the lodge system or local cooperation plan and organized and
conducted solely by the members thereof for the exclusive benefit of each member and not
for profit under Section 199 of the National Internal Revenue Code.
aATHIE

"II.
"Whether or not registration with the Cooperative Development Authority is a sine qua non
requirement to be entitled to tax exemption.
"III.
"Whether or not respondent is exempted from payment of tax on life insurance premiums
and documentary stamp tax." 7

We shall tackle the issues seriatim.


The Court's Ruling
The Petition has no merit.

First Issue:
Whether Respondent Is a Cooperative
The Tax Code defines a cooperative as an association "conducted by the members thereof with
the money collected from among themselves and solely for their own protection and not for profit."
8 Without a doubt, respondent is a cooperative engaged in a mutual life insurance business.
aHcDEC

First, it is managed by its members. Both the CA and the CTA found that the management and
affairs of respondent were conducted by its member-policyholders. 9
A stock insurance company doing business in the Philippines may "alter its organization and
transform itself into a mutual insurance company." 10 Respondent has been mutualized or
converted from a stock life insurance company to a nonstock mutual life insurance corporation 11
pursuant to Section 266 of the Insurance Code of 1978. 12 On the basis of its bylaws, its ownership
has been vested in its member-policyholders who are each entitled to one vote; 13 and who, in
turn, elect from among themselves the members of its board of trustees. 14 Being the governing
body of a nonstock corporation, the board exercises corporate powers, lays down all corporate
business policies, and assumes responsibility for the efficiency of management. 15

Second, it is operated with money collected from its members. Since respondent is composed
entirely of members who are also its policyholders, all premiums collected obviously come only
from them. 16
The member-policyholders constitute "both insurer and insured " 17 who "contribute, by a system of
premiums or assessments, to the creation of a fund from which all losses and liabilities are paid."
18 The premiums 19 pooled into this fund are earmarked for the payment of their indemnity and
benefit claims.
Third, it is licensed for the mutual protection of its members, not for the profit of anyone.
As early as October 30, 1947, the director of commerce had already issued a license to
respondent a corporation organized and existing under the laws of Canada to engage in
business in the Philippines. 20 Pursuant to Section 225 of Canada's Insurance Companies Act, the
Canadian minister of state (for finance and privatization) also declared in its Amending Letters
Patent that respondent would be a mutual company effective June 1, 1992. 21 In the Philippines,
the insurance commissioner also granted it annual Certificates of Authority to transact life
insurance business, the most relevant of which were dated July 1, 1997 and July 1, 1998. 22
A mutual life insurance company is conducted for the benefit of its member-policyholders, 23 who
pay into its capital by way of premiums. To that extent, they are responsible for the payment of all
its losses. 24 "The cash paid in for premiums and the premium notes constitute their assets . . . . "
25 In the event that the company itself fails before the terms of the policies expire, the memberpolicyholders do not acquire the status of creditors. 26 Rather, they simply become debtors for

whatever premiums that they have originally agreed to pay the company, if they have not yet paid
those amounts in full, for "[m]utual companies . . . depend solely upon . . . premiums." 27 Only
when the premiums will have accumulated to a sum larger than that required to pay for company
losses will the member-policyholders be entitled to a "pro rata division thereof as profits." 28
Contributing to its capital, the member-policyholders of a mutual company are obviously also its
owners. 29 Sustaining a dual relationship inter se, they not only contribute to the payment of its
losses, but are also entitled to a proportionate share 30 and participate alike 31 in its profits and
surplus.
DaTEIc

Where the insurance is taken at cost, it is important that the rates of premium charged by a mutual
company be larger than might reasonably be expected to carry the insurance, in order to constitute
a margin of safety. The table of mortality used will show an admittedly higher death rate than will
probably prevail; the assumed interest rate on the investments of the company is made lower than
is expected to be realized; and the provision for contingencies and expenses, made greater than
would ordinarily be necessary. 32 This course of action is taken, because a mutual company has
no capital stock and relies solely upon its premiums to meet unexpected losses, contingencies and
expenses.
Certainly, many factors are considered in calculating the insurance premium. Since they vary with
the kind of insurance taken and with the group of policyholders insured, any excess in the amount
anticipated by a mutual company to cover the cost of providing for the insurance over its actual
realized cost will also vary. If a member-policyholder receives an excess payment, then the
apportionment must have been based upon a calculation of the actual cost of insurance that the
company has provided for that particular member-policyholder. Accordingly, in apportioning
divisible surpluses, any mutual company uses a contribution method that aims to distribute those
surpluses among its member-policyholders, in the same proportion as they have contributed to the
surpluses by their payments. 33
Sharing in the common fund, any member-policyholder may choose to withdraw dividends in cash
or to apply them in order to reduce a subsequent premium, purchase additional insurance, or
accelerate the payment period. Although the premium made at the beginning of a year is more
than necessary to provide for the cost of carrying the insurance, the member-policyholder will
nevertheless receive the benefit of the overcharge by way of dividends, at the end of the year
when the cost is actually ascertained. "The declaration of a dividend upon a policy reduces pro
tanto the cost of insurance to the holder of the policy. That is its purpose and effect." 34
A stipulated insurance premium "cannot be increased, but may be lessened annually by so much
as the experience of the preceding year has determined it to have been greater than the cost of
carrying the insurance . . . ." 35 The difference between that premium and the cost of carrying the
risk of loss constitutes the so-called "dividend" which, however, "is not in any real sense a
dividend." 36 It is a technical term that is well understood in the insurance business to be widely
different from that to which it is ordinarily attached.

The so-called "dividend" that is received by member-policyholders is not a portion of profits set
aside for distribution to the stockholders in proportion to their subscription to the capital stock of a
corporation. 37 One, a mutual company has no capital stock to which subscription is necessary;
there are no stockholders to speak of, but only members. And, two, the amount they receive does
not partake of the nature of a profit or income. The quasi-appearance of profit will not change its
character. It remains an overpayment, a benefit to which the member-policyholder is equitably
entitled. 38
Verily, a mutual life insurance corporation is a cooperative that promotes the welfare of its own
members. It does not operate for profit, but for the mutual benefit of its member-policyholders.
They receive their insurance at cost, while reasonably and properly guarding and maintaining the
stability and solvency of the company. 39 "The economic benefits filter to the cooperative members.
Either equally or proportionally, they are distributed among members in correlation with the
resources of the association utilized." 40
It does not follow that because respondent is registered as a nonstock corporation and thus exists
for a purpose other than profit, the company can no longer make any profits. 41 Earning profits is
merely its secondary, not primary, purpose. In fact, it may not lawfully engage in any business
activity for profit, for to do so would change or contradict its nature 42 as a non-profit entity. 43 It
may, however, invest its corporate funds in order to earn additional income for paying its operating
expenses and meeting benefit claims. Any excess profit it obtains as an incident to its operations
can only be used, whenever necessary or proper, for the furtherance of the purpose for which it
was organized. 44
Second Issue:
Whether CDA Registration Is Necessary
Under the Tax Code although respondent is a cooperative, registration with the Cooperative
Development Authority (CDA) 45 is not necessary in order for it to be exempt from the payment of
both percentage taxes on insurance premiums, under Section 121; and documentary stamp taxes
on policies of insurance or annuities it grants, under Section 199.
aCSTDc

First, the Tax Code does not require registration with the CDA. No tax provision requires a mutual
life insurance company to register with that agency in order to enjoy exemption from both
percentage and documentary stamp taxes.
A provision of Section 8 of Revenue Memorandum Circular (RMC) No. 48-91 requires the
submission of the Certificate of Registration with the CDA, 46 before the issuance of a tax
exemption certificate. That provision cannot prevail over the clear absence of an equivalent
requirement under the Tax Code. One, as we will explain below, the Circular does not apply to
respondent, but only to cooperatives that need to be registered under the Cooperative Code. Two,
it is a mere issuance directing all internal revenue officers to publicize a new tax legislation.
Although the Circular does not derogate from their authority to implement the law, it cannot add a
registration requirement, 47 when there is none under the law to begin with.

Second, the provisions of the Cooperative Code of the Philippines 48 do not apply. Let us trace the
Code's development in our history.
As early as 1917, a cooperative company or association was already defined as one "conducted
by the members thereof with money collected from among themselves and solely for their own
protection and not profit." 49 In 1990, it was further defined by the Cooperative Code as a "duly
registered association of persons, with a common bond of interest, who have voluntarily joined
together to achieve a lawful common social or economic end, making equitable contributions to the
capital required and accepting a fair share of the risks and benefits of the undertaking in
accordance with universally accepted cooperative principles." 50
The Cooperative Code was actually an offshoot of the old law on cooperatives. In 1973,
Presidential Decree (PD) No. 175 was signed into law by then President Ferdinand E. Marcos in
order to strengthen the cooperative movement. 51 The promotion of cooperative development was
one of the major programs of the "New Society" under his administration. It sought to improve the
country's trade and commerce by enhancing agricultural production, cottage industries, community
development, and agrarian reform through cooperatives. 52
The whole cooperative system, with its vertical and horizontal linkages from the market
cooperative of agricultural products to cooperative rural banks, consumer cooperatives and
cooperative insurance was envisioned to offer considerable economic opportunities to people
who joined cooperatives. 53 As an effective instrument in redistributing income and wealth, 54
cooperatives were promoted primarily to support the agrarian reform program of the government.
55

Notably, the cooperative under PD 175 referred only to an organization composed primarily of
small producers and consumers who voluntarily joined to form a business enterprise that they
themselves owned, controlled, and patronized. 56 The Bureau of Cooperatives Development
under the Department of Local Government and Community Development (later Ministry of
Agriculture) 57 had the authority to register, regulate and supervise only the following
cooperatives: (1) barrio associations involved in the issuance of certificates of land transfer; (2)
local or primary cooperatives composed of natural persons and/or barrio associations; (3)
federations composed of cooperatives that may or may not perform business activities; and (4)
unions of cooperatives that did not perform any business activities. 58 Respondent does not fall
under any of the above-mentioned types of cooperatives required to be registered under PD 175.
When the Cooperative Code was enacted years later, all cooperatives that were registered under
PD 175 and previous laws were also deemed registered with the CDA. 59 Since respondent was
not required to be registered under the old law on cooperatives, it followed that it was not required
to be registered even under the new law.
Furthermore, only cooperatives to be formed or organized under the Cooperative Code needed
registration with the CDA. 60 Respondent already existed before the passage of the new law on

cooperatives. It was not even required to organize under the Cooperative Code, not only because
it performed a different set of functions, but also because it did not operate to serve the same
objectives under the new law particularly on productivity, marketing and credit extension. 61
The insurance against losses of the members of a cooperative referred to in Article 6(7) of the
Cooperative Code is not the same as the life insurance provided by respondent to memberpolicyholders. The former is a function of a service cooperative, 62 the latter is not. Cooperative
insurance under the Code is limited in scope and local in character. It is not the same as mutual
life insurance.
We have already determined that respondent is a cooperative. The distinguishing feature of a
cooperative enterprise 63 is the mutuality of cooperation among its member-policyholders united
for that purpose. 64 So long as respondent meets this essential feature, it does not even have to
use 65 and carry the name of a cooperative to operate its mutual life insurance business. Gratia
argumenti that registration is mandatory, it cannot deprive respondent of its tax exemption privilege
merely because it failed to register. The nature of its operations is clear; its purpose well-defined.
Exemption when granted cannot prevail over administrative convenience.
EAcTDH

Third, not even the Insurance Code requires registration with the CDA. The provisions of this Code
primarily govern insurance contracts; only if a particular matter in question is not specifically
provided for shall the provisions of the Civil Code on contracts and special laws govern. 66
True, the provisions of the Insurance Code relative to the organization and operation of an
insurance company also apply to cooperative insurance entities organized under the Cooperative
Code. 67 The latter law, however, does not apply to respondent, which already existed as a
cooperative company engaged in mutual life insurance prior to the passage of that law. The
statutes prevailing at the time of its organization and mutualization were the Insurance Code and
the Corporation Code, which imposed no registration requirement with the CDA.
Third Issue:
Whether Respondent Is Exempted
from Premium Taxes and DST
Having determined that respondent is a cooperative that does not have to be registered with the
CDA, we hold that it is entitled to exemption from both premium taxes and documentary stamp
taxes (DST).
The Tax Code is clear. On the one hand, Section 121 of the Code exempts cooperative companies
from the 5 percent percentage tax on insurance premiums. On the other hand, Section 199 also
exempts from the DST, policies of insurance or annuities made or granted by cooperative
companies. Being a cooperative, respondent is thus exempt from both types of taxes.
It is worthy to note that while RA 8424 amending the Tax Code has deleted the income tax of 10
percent imposed upon the gross investment income of mutual life insurance companies domestic
68 and foreign 69 the provisions of Section 121 and 199 remain unchanged. 70

Having been seasonably filed and amply substantiated, the claim for exemption in the amount of
P61,485,834.51, representing percentage taxes on insurance premiums and documentary stamp
taxes on policies of insurance or annuities that were paid by respondent in 1997, is in order. Thus,
the grant of a tax credit certificate to respondent as ordered by the appellate court was correct.

aHCSTD

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution are
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio Morales and Garcia, JJ., concur.
|||

(Republic v. Sunlife Assurance Co. of Canada, G.R. No. 158085, October 14, 2005)

FIRST DIVISION
[G.R. No. 125678. March 18, 2002.]
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS
and JULITA TRINOS, respondents.
Alvin B. Cunada for petitioner.
Ronald O. Layawen for private respondent.
SYNOPSIS
Ernani Trinos, deceased husband of respondent Julita Trinos, was issued a Health Care
Agreement for a health coverage with petitioner. During the period of his coverage, he suffered a
heart attack and was confined in the hospital. Respondent tried to claim the benefits under the
health care agreement, but petitioner denied her claim. Thus, respondent paid the hospitalization
expenses herself.

Respondent then filed with the RTC an action for damages against petitioner and its president, Dr.
Benito Reverente. The court ruled in favor of Julita and awarded damages. On appeal, the Court of
Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved
petitioner Reverente. Hence, petitioner brought the instant petition for review, raising the primary
argument that a health care agreement is not an insurance contract.
IAaCST

In affirming the decision of the Court of Appeals, the Supreme Court ruled that an insurance
contract exists when the following elements concur: (1) the insured has an insurable interest; (2)
the insured is subject to a risk of loss by the happening of the designated peril; (3) the insurer
assumes the risk; (4) such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and (5) in consideration of the
insurer's promise, the insured pays a premium.
The health care agreement was in the nature of a non-life insurance, which is primarily a contract
of indemnity.
SYLLABUS
1.COMMERCIAL LAW; INSURANCE LAW; CONTRACT OF INSURANCE; DEFINED. Section 2
(1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event.
2.ID.; ID.; ID.; ELEMENTS. An insurance contract exists where the following elements concur:
1. The insured has an insurable interest; 2. The insured is subject to a risk of loss by the
happening of the designated peril; 3. The insurer assumes the risk; 4. Such assumption of risk is
part of a general scheme to distribute actual losses among a large group of persons bearing a
similar risk; and 5. In consideration of the insurer's promise, the insured pays a premium.
3.ID.; ID.; ID.; INSURABLE INTEREST, CONSTRUED; CASE AT BAR. Section 3 of the
Insurance Code states that any contingent or unknown event, whether past or future, which may
damnify a person having an insurable interest against him, may be insured against. Every person
has an insurable interest in the life and health of himself. Section 10 provides: "Every person has
an insurable interest in the life and health: (1) of himself, of his spouse and of his children; (2) of
any person on whom he depends wholly or in part for education or support, or in whom he has a
pecuniary interest; (3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or prevent the performance;
and (4) of any person upon whose life any estate or interest vested in him depends." In the case at
bar, the insurable interest of respondent's husband in obtaining the health care agreement was his
own health. The health care agreement was in the nature of non-life insurance, which is primarily a
contract of indemnity. Once the member incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingent, the health care provider must pay for the same to
the extent agreed upon under the contract.

4.ID.; ID.; ID.; CONCEALMENT; AVOIDS A POLICY; EXCEPTION; CASE AT BAR. The answer
assailed by petitioner was in response to the question relating to the medical history of the
applicant. This largely depends on opinion rather than fact, especially coming from respondent's
husband who was not a medical doctor. Where matters of opinion or judgment are called for,
answers made in good faith and without intent to deceive will not avoid a policy even though they
are untrue. Thus, "(A)lthough false, a representation of the expectation, intention, belief, opinion, or
judgment of the insured will not avoid the policy if there is no actual fraud in inducing the
acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise the rule
although the statement is material to the risk, if the statement is obviously of the foregoing
character, since in such case the insurer is not justified in relying upon such statement, but is
obligated to make further inquiry. There is a clear distinction between such a case and one in
which the insured is fraudulently and intentionally states to be true, as a matter of expectation or
belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the
facts within his knowledge, since in such case the intent to deceive the insurer is obvious and
amounts to actual fraud."
CAacTH

5.ID.; ID.; ID.; ID.; MUST BE ESTABLISHED BY SATISFACTORY AND CONVINCING EVIDENCE
BY INSURER. The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract. Concealment as a defense for the health care provider or
insurer to avoid liability is an affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the provider or insurer.
6.ID.; ID.; ID.; HEALTH CARE AGREEMENT; HEALTH CARE PROVIDER, WHEN LIABLE; CASE
AT BAR. In any case, with or without the authority to investigate, petitioner is liable for claims
made under the contract. Having assumed a responsibility under the agreement, petitioner is
bound to answer the same to the extent agreed upon. In the end, the liability of the health care
provider attaches once the member is hospitalized for the disease or injury covered by the
agreement or whenever he avails of the covered benefits which he has prepaid.
7.ID.; ID.; ID.; RESCISSION OF; CONDITIONS; NOT FULFILLED IN CASE AT BAR. Under
Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a contract of
insurance." The right to rescind should be exercised previous to the commencement of an action
on the contract. In this case, no rescission was made. Besides, the cancellation of health care
agreements as in insurance policies require the concurrence of the following conditions: 1. Prior
notice of cancellation to insured; 2. Notice must be based on the occurrence after effective date of
the policy of one or more of the grounds mentioned; 3. Must be in writing, mailed or delivered to
the insured at the address shown in the policy; 4. Must state the grounds relied upon provided in
Section 64 of the Insurance Code and upon request of insured, to furnish facts on which
cancellation is based. None of the above pre-conditions was fulfilled in this case.
8.ID.; ID.; ID.; TERMS AND PHRASEOLOGY CONTAINED THEREIN MUST BE STRICTLY
INTERPRETED AGAINST THE INSURER AND LIBERALLY IN FAVOR OF THE INSURED; CASE
AT BAR. When the terms of insurance contract contain limitations on liability, courts should
construe them in such a way as to preclude the insurer from non-compliance with his obligation.

Being a contract of adhesion, the terms of an insurance contract are to be construed strictly
against the party which prepared the contract the insurer. By reason of the exclusive control of
the insurance company over the terms and phraseology of the insurance contract, ambiguity must
be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid
forfeiture. This is equally applicable to Health Care Agreements. The phraseology used in medical
or hospital service contracts, such as the one at bar, must be liberally construed in favor of the
subscriber, and if doubtful or reasonably susceptible of two interpretations the construction
conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly
construed against the provider.
DECISION
YNARES-SANTIAGO, J :
p

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage
with petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no
to the following question:
Have you or any of your family members ever consulted or been treated for high blood
pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give
details). 1

The application was approved for a period of one year from March 1, 1988 to March 1, 1989.
Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement,
respondent's husband was entitled to avail of hospitalization benefits, whether ordinary or
emergency, listed therein. He was also entitled to avail of "out-patient benefits" such as annual
physical examinations, preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another year from March 1,
1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was
increased to a maximum sum of P75,000.00 per disability. 2
During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila
Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the
hospital, respondent tried to claim the benefits under the health care agreement. However,
petitioner denied her claim saying that the Health Care Agreement was void. According to
petitioner, there was a concealment regarding Ernani's medical history. Doctors at the MMC
allegedly discovered at the time of Ernani's confinement that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization
expenses herself, amounting to about P76,000.00.

After her husband was discharged from the MMC, he was attended by a physical therapist at
home. Later, he was admitted at the Chinese General Hospital. Due to financial difficulties,

however, respondent brought her husband home again. In the morning of April 13, 1990, Ernani
had fever and was feeling very weak. Respondent was constrained to bring him back to the
Chinese General Hospital where he died on the same day.
THcaDA

On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an
action for damages against petitioner and its president, Dr. Benito Reverente, which was docketed
as Civil Case No. 90-53795. She asked for reimbursement of her expenses plus moral damages
and attorney's fees. After trial, the lower court ruled against petitioners, viz:
WHEREFORE, in view of the foregoing, the Court renders judgment in favor of the plaintiff
Julita Trinos, ordering:
1.Defendants to pay and reimburse the medical and hospital coverage of the late Ernani
Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff
who paid the same;
2.Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;
3.Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;
4.Defendants to pay attorney's fees of P20,000.00, plus costs of suit.
SO ORDERED. 3

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for
damages and absolved petitioner Reverente. 4 Petitioner's motion for reconsideration was denied.
5 Hence, petitioner brought the instant petition for review, raising the primary argument that a
health care agreement is not an insurance contract; hence the "incontestability clause" under the
Insurance Code 6 does not apply.
Petitioner argues that the agreement grants "living benefits," such as medical check-ups and
hospitalization which a member may immediately enjoy so long as he is alive upon effectivity of the
agreement until its expiration one-year thereafter. Petitioner also points out that only medical and
hospitalization benefits are given under the agreement without any indemnification, unlike in an
insurance contract where the insured is indemnified for his loss. Moreover, since Health Care
Agreements are only for a period of one year, as compared to insurance contracts which last
longer, 7 petitioner argues that the incontestability clause does not apply, as the same requires an
effectivity period of at least two years. Petitioner further argues that it is not an insurance company,
which is governed by the Insurance Commission, but a Health Maintenance Organization under
the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event. An insurance contract exists where the following elements
concur:

1.The insured has an insurable interest;


2.The insured is subject to a risk of loss by the happening of the designated peril;
3.The insurer assumes the risk;
4.Such assumption of risk is part of a general scheme to distribute actual losses
among a large group of persons bearing a similar risk; and
5.In consideration of the insurer's promise, the insured pays a premium. 8
Section 3 of the Insurance Code states that any contingent or unknown event, whether past or
future, which may damnify a person having an insurable interest against him, may be insured
against. Every person has an insurable interest in the life and health of himself. Section 10
provides:
Every person has an insurable interest in the life and health:
(1)of himself, of his spouse and of his children;
(2)of any person on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest;
(3)of any person under a legal obligation to him for the payment of money, respecting
property or service, of which death or illness might delay or prevent the performance;
and
(4)of any person upon whose life any estate or interest vested in him depends.

In the case at bar, the insurable interest of respondent's husband in obtaining the health care
agreement was his own health. The health care agreement was in the nature of non-life insurance,
which is primarily a contract of indemnity. 9 Once the member incurs hospital, medical or any other
expense arising from sickness, injury or other stipulated contingent, the health care provider must
pay for the same to the extent agreed upon under the contract.
cDTHIE

Petitioner argues that respondent's husband concealed a material fact in his application. It appears
that in the application for health coverage, petitioners required respondent's husband to sign an
express authorization for any person, organization or entity that has any record or knowledge of
his health to furnish any and all information relative to any hospitalization, consultation, treatment
or any other medical advice or examination. 10 Specifically, the Health Care Agreement signed by
respondent's husband states:
We hereby declare and agree that all statement and answers contained herein and in any
addendum annexed to this application are full, complete and true and bind all parties-ininterest under the Agreement herein applied for, that there shall be no contract of health
care coverage unless and until an Agreement is issued on this application and the full
Membership Fee according to the mode of payment applied for is actually paid during the

lifetime and good health of proposed Members; that no information acquired by any
Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in
the application; that any physician is, by these presents, expressly authorized to disclose or
give testimony at anytime relative to any information acquired by him in his professional
capacity upon any question affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this application shall be a
ratification of any correction in or addition to this application as stated in the space for Home
Office Endorsement. 11 (Emphasis ours)

In addition to the above condition, petitioner additionally required the applicant for authorization to
inquire about the applicant's medical history, thus:
I hereby authorize any person, organization, or entity that has any record or knowledge of
my health and/or that of ________ to give to the PhilamCare Health Systems, Inc. any and
all information relative to any hospitalization, consultation, treatment or any other medical
advice or examination. This authorization is in connection with the application for health
care coverage only. A photographic copy of this authorization shall be as valid as the
original. 12 (Emphasis ours)

Petitioner cannot rely on the stipulation regarding "Invalidation of Agreement" which reads:
Failure to disclose or misrepresentation of any material information by the member in the
application or medical examination, whether intentional or unintentional, shall automatically
invalidate the Agreement from the very beginning and liability of Philamcare shall be limited
to return of all Membership Fees paid. An undisclosed or misrepresented information is
deemed material if its revelation would have resulted in the declination of the applicant by
Philamcare or the assessment of a higher Membership Fee for the benefit or benefits
applied for. 13

The answer assailed by petitioner was in response to the question relating to the medical history of
the applicant. This largely depends on opinion rather than fact, especially coming from
respondent's husband who was not a medical doctor. Where matters of opinion or judgment are
called for, answers made in good faith and without intent to deceive will not avoid a policy even
though they are untrue. 14 Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment
of the insured will not avoid the policy if there is no actual fraud in inducing the acceptance
of the risk, or its acceptance at a lower rate of premium, and this is likewise the rule
although the statement is material to the risk, if the statement is obviously of the foregoing
character, since in such case the insurer is not justified in relying upon such statement, but
is obligated to make further inquiry. There is a clear distinction between such a case and
one in which the insured is fraudulently and intentionally states to be true, as a matter of
expectation or belief, that which he then knows, to be actually untrue, or the impossibility of
which is shown by the facts within his knowledge, since in such case the intent to deceive
the insurer is obvious and amounts to actual fraud. 15 (Emphasis ours)

The fraudulent intent on the part of the insured must be established to warrant rescission of the
insurance contract. 16 Concealment as a defense for the health care provider or insurer to avoid
liability is an affirmative defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the provider or insurer. In any case, with or without the authority to
investigate, petitioner is liable for claims made under the contract. Having assumed a responsibility
under the agreement, petitioner is bound to answer the same to the extent agreed upon. In the
end, the liability of the health care provider attaches once the member is hospitalized for the
disease or injury covered by the agreement or whenever he avails of the covered benefits which
he has prepaid.
Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a
contract of insurance." The right to rescind should be exercised previous to the commencement of
an action on the contract. 17 In this case, no rescission was made. Besides, the cancellation of
health care agreements as in insurance policies require the concurrence of the following
conditions:

1.Prior notice of cancellation to insured;


2.Notice must be based on the occurrence after effective date of the policy of one or
more of the grounds mentioned;
3.Must be in writing, mailed or delivered to the insured at the address shown in the
policy;
4.Must state the grounds relied upon provided in Section 64 of the Insurance Code
and upon request of insured, to furnish facts on which cancellation is based.
18

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the insurer
from non-compliance with his obligation. 19 Being a contract of adhesion, the terms of an insurance
contract are to be construed strictly against the party which prepared the contract the insurer. 20
By reason of the exclusive control of the insurance company over the terms and phraseology of
the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in
favor of the insured, especially to avoid forfeiture. 21 This is equally applicable to Health Care
Agreements. The phraseology used in medical or hospital service contracts, such as the one at
bar, must be liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible
of two interpretations the construction conferring coverage is to be adopted, and exclusionary
clauses of doubtful import should be strictly construed against the provider. 22
Anent the incontestability of the membership of respondent's husband, we quote with approval the
following findings of the trial court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems
Inc. had twelve months from the date of issuance of the Agreement within which to contest
the membership of the patient if he had previous ailment of asthma, and six months from
the issuance of the agreement if the patient was sick of diabetes or hypertension. The
periods having expired, the defense of concealment or misrepresentation no longer lie. 23

Finally, petitioner alleges that respondent was not the legal wife of the deceased member
considering that at the time of their marriage, the deceased was previously married to another
woman who was still alive. The health care agreement is in the nature of a contract of indemnity.
Hence, payment should be made to the party who incurred the expenses. It is not controverted that
respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement.
The records adequately prove the expenses incurred by respondent for the deceased's
hospitalization, medication and the professional fees of the attending physicians. 24
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court
of Appeals dated December 14, 1995 is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., Puno and Kapunan, JJ., concur.
|||

(Philamcare Health Systems, Inc. v. Court of Appeals, G.R. No. 125678, March 18, 2002)

FIRST DIVISION
[G.R. No. 119176. March 19, 2002.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINCOLN PHILIPPINE
LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE INSURANCE
COMPANY, INC.) and THE COURT OF APPEALS, respondents.
Juanito C. Castaeda, Jr. for private respondent.
The Solicitor General for public respondent.
SYNOPSIS

Subject insurance policy, at the time it was issued, contained an "automatic increase clause."
Private respondent paid documentary stamp taxes due on the policy based on the initial sum
assured. In 1984, when the automatic clause took effect, petitioner Internal Revenue
Commissioner issued deficiency documentary stamps tax assessment corresponding to the
automatic increase in the insurance coverage.
Private respondent questioned the deficiency documentary stamps tax assessment because the
"automatic increase clause" is not a separate agreement from the main agreement.
The CTA nullified the deficiency tax assessment on the policy, which was affirmed by the CA, ruling
that the increase in the amount insured should not be included in the computation of the
documentary stamp taxes on the policy.
The Supreme Court held that the "automatic increase clause" in the policy is in the nature of a
condition obligation under Art. 1181 of the Civil Code. The additional insurance that took effect in
1984 was an obligation to a suspensive obligation, but still part of the insurance sold, to which
private respondent was liable for the payment of the documentary stamp tax without the need of
another contract.
IaTSED

SYLLABUS
1.TAXATION; NATIONAL INTERNAL REVENUE CODE; DOCUMENTARY STAMPS TAX ON LIFE
INSURANCE POLICIES; PAYMENT, WHEN MADE; BASIS THEREOF; CASE AT BAR. The
subject insurance policy at the time it was issued contained an "automatic increase clause."
Although the clause was to take effect only in 1984, it was written into the policy at the time of its
issuance. The distinctive feature of the "junior estate builder policy" called the "automatic increase
clause" already formed part and parcel of the insurance contract, hence, there was no need for an
execution of a separate agreement for the increase in the coverage that took effect in 1984 when
the assured reached a certain age. It is clear from Section 173 that the payment of documentary
stamp taxes is done at the time the act is done or transaction had and the tax base for the
computation of documentary stamp taxes on life insurance policies under Section 183 is the
amount fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary
measurement. What then is the amount fixed in the policy? Logically, we believe that the amount
fixed in the policy is the figure written on its face and whatever increases will take effect in the
future by reason of the "automatic increase clause" embodied in the policy without the need of
another contract.
2.ID.; ID.; ID.; LIABILITY FOR DEFICIENCY OF DOCUMENTARY STAMP TAX UPON THE
EFFECTIVITY OF AN "AUTOMATIC INCREASE CLAUSE" IN THE POLICY; CASE AT BAR.
The "automatic increase clause" in the policy is in the nature of a conditional obligation under
Article 1181, by which the increase of the insurance coverage shall depend upon the happening of
the event which constitutes the obligation. In the instant case, the additional insurance that took
effect in 1984 was an obligation subject to a suspensive obligation, but still a part of the insurance
sold to which private respondent was liable for the payment of the documentary stamp tax. The

deficiency of documentary stamp tax imposed on private respondent is definitely not on the
amount of the original insurance coverage, but on the increase of the amount insured upon the
effectivity of the "Junior Estate Builder Policy."
IaHCAD

DECISION
KAPUNAN, J :
p

This is a petition for review on certiorari filed by the Commission on Internal Revenue of the
decision of the Court of Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224 which
reversed in part the decision of the Court of Tax Appeals in C.T.A. Case No. 4583.
The facts of the case are undisputed.
Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance
Company, Inc.) is a domestic corporation registered with the Securities and Exchange Commission
and engaged in life insurance business. In the years prior to 1984, private respondent issued a
special kind of life insurance policy known as the "Junior Estate Builder Policy," the distinguishing
feature of which is a clause providing for an automatic increase in the amount of life insurance
coverage upon attainment of a certain age by the insured without the need of issuing a new policy.
The clause was to take effect in the year 1984. Documentary stamp taxes due on the policy were
paid by petitioner only on the initial sum assured.
In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of
P100.00 per share or a total par value of P5,000,000.00. The actual value of said shares,
represented by its book value, was P19,307,500.00. Documentary stamp taxes were paid based
only on the par value of P5,000,000.00 and not on the book value.
Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984
in the amounts of (a) P464,898.75, corresponding to the amount of automatic increase of the sum
assured on the policy issued by respondent, and (b) P78,991.25 corresponding to the book value
in excess of the par value of the stock dividends. The computation of the deficiency documentary
stamp taxes is as follows:
On Policies Issued:
Total policy issued during the year P1,360,054,000.00
Documentary stamp tax due thereon
(P1,360,054,000.00 divided by
P200.00 multiplied by P0.35)P2,380,094.50
Less: PaymentP1,915,495.75
DeficiencyP464,598.75
Add: Compromise Penalty300.00
------------------TOTAL AMOUNT DUE & COLLECTIBLE P464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation in a
petition filed in the Court of Tax Appeals, docketed as CTA Case No. 4583.
On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax
assessment on the stock dividends, as well as on the insurance policy. The dispositive portion of
the CTA's decision reads:
WHEREFORE, the deficiency documentary stamp tax assessments in the amount of
P464,898.76 and P78,991.25 or a total of P543,890.01 are hereby cancelled for lack of
merit. Respondent Commissioner of Internal Revenue is ordered to desist from collecting
said deficiency documentary stamp taxes for the same are considered withdrawn.
SO ORDERED. 1

Petitioner appealed the CTA's decision to the Court of Appeals. On November 18, 1994, the Court
of Appeals promulgated a decision affirming the CTA's decision insofar as it nullified the deficiency
assessment on the insurance policy, but reversing the same with regard to the deficiency
assessment on the stock dividends. The CTA ruled that the correct basis of the documentary
stamp tax due on the stock dividends is the actual value or book value represented by the shares.
The dispositive portion of the Court of Appeals' decision states:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED
with respect to the deficiency tax assessment on the stock dividends, but AFFIRMED with
regards to the assessment on the Insurance Policies. Consequently, private respondent is
ordered to pay the petitioner herein the sum of P78,991.25, representing documentary
stamp tax on the stock dividends it issued. No costs pronouncement.
SO ORDERED. 2

A motion for reconsideration of the decision having been denied, 3 both the Commissioner of
Internal Revenue and private respondent appealed to this Court, docketed as G.R. No. 118043
and G.R. No. 119176, respectively. In G.R. No. 118043, private respondent appealed the decision
of the Court of Appeals insofar as it upheld the validity of the deficiency tax assessment on the
stock dividends. The Commissioner of Internal Revenue, on his part, filed the present petition
questioning that portion of the Court of Appeals' decision which invalidated the deficiency
assessment on the insurance policy, attributing the following errors:
THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A
SINGLE AGREEMENT EMBODIED IN THE POLICY AND THAT THE AUTOMATIC
INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49
OF THE INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE THAT A
RIDER, A CLAUSE IS PART OF THE POLICY.
THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT
OF TAX ON THE TOTAL VALUE OF THE INSURANCE ASSURED IN THE POLICY
INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE

CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC
CLAUSE CONSTITUTED ONLY A SINGULAR TRANSACTION. 4

Section 173 of the National Internal Revenue Code on documentary stamp taxes provides:
Sec. 173.Stamp taxes upon documents, instruments and papers. Upon documents,
instruments, loan agreements, and papers, and upon acceptances, assignments, sales, and
transfers of the obligation, right or property incident thereto, there shall be levied, collected
and paid for, and in respect of the transaction so had or accomplished, the corresponding
documentary stamp taxes prescribed in the following section of this Title, by the person
making, signing, issuing, accepting, or transferring the same wherever the document is
made, signed, issued, accepted, or transferred when the obligation or right arises from
Philippine sources or the property is situated in the Philippines, and at the same time such
act is done or transaction had: Provided, That whenever one party to the taxable document
enjoys exemption from the tax herein imposed, the other party thereto who is not exempt
shall be the one directly liable for the tax. (As amended by PD No. 1994) The basis for the
value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the
National Internal Revenue Code which states in part:

The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section
183 of the National Internal Revenue Code which states in part:
Sec. 183.Stamp tax on life insurance policies. On all policies of insurance or other
instruments by whatever name the same may be called, whereby any insurance shall be
made or renewed upon any life or lives, there shall be collected a documentary stamp tax of
thirty (now 50c) centavos on each Two hundred pesos per fractional part thereof, of the
amount insured by any such policy.

Petitioner claims that the "automatic increase clause" in the subject insurance policy is separate
and distinct from the main agreement and involves another transaction; and that, while no new
policy was issued, the original policy was essentially re-issued when the additional obligation was
assumed upon the effectivity of this "automatic increase clause" in 1984; hence, a deficiency
assessment based on the additional insurance not covered in the main policy is in order.
The Court of Appeals sustained the CTA's ruling that there was only one transaction involved in the
issuance of the insurance policy and that the "automatic increase clause" is an integral part of that
policy.
The petition is impressed with merit.
Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in
which a contract of insurance is set forth. 5 Section 50 of the same Code provides that the policy,
which is required to be in printed form, may contain any word, phrase, clause, mark, sign, symbol,
signature, number, or word necessary to complete the contract of insurance. 6 It is thus clear that

any rider, clause, warranty or endorsement pasted or attached to the policy is considered part of
such policy or contract of insurance.
The subject insurance policy at the time it was issued contained an "automatic increase clause."
Although the clause was to take effect only in 1984, it was written into the policy at the time of its
issuance. The distinctive feature of the "junior estate builder policy" called the "automatic increase
clause" already formed part and parcel of the insurance contract, hence, there was no need for an
execution of a separate agreement for the increase in the coverage that took effect in 1984 when
the assured reached a certain age.
It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the
act is done or transaction had and the tax base for the computation of documentary stamp taxes
on life insurance policies under Section 183 is the amount fixed in policy, unless the interest of a
person insured is susceptible of exact pecuniary measurement. 7 What then is the amount fixed in
the policy? Logically, we believe that the amount fixed in the policy is the figure written on its face
and whatever increases will take effect in the future by reason of the "automatic increase clause"
embodied in the policy without the need of another contract.
Here, although the automatic increase in the amount of life insurance coverage was to take effect
later on, the date of its effectivity, as well as the amount of the increase, was already definite at the
time of the issuance of the policy. Thus, the amount insured by the policy at the time of its issuance
necessarily included the additional sum covered by the automatic increase clause because it was
already determinable at the time the transaction was entered into and formed part of the policy.
The "automatic increase clause" in the policy is in the nature of a conditional obligation under
Article 1181, 8 by which the increase of the insurance coverage shall depend upon the happening
of the event which constitutes the obligation. In the instant case, the additional insurance that took
effect in 1984 was an obligation subject to a suspensive obligation, 9 but still a part of the
insurance sold to which private respondent was liable for the payment of the documentary stamp
tax.
The deficiency of documentary stamp tax imposed on private respondent is definitely not on the
amount of the original insurance coverage, but on the increase of the amount insured upon the
effectivity of the "Junior Estate Builder Policy."
Finally, it should be emphasized that while tax avoidance schemes and arrangements are not
prohibited, 10 tax laws cannot be circumvented in order to evade the payment of just taxes. In the
case at bar, to claim that the increase in the amount insured (by virtue of the automatic increase
clause incorporated into the policy at the time of issuance) should not be included in the
computation of the documentary stamp taxes due on the policy would be a clear evasion of the law
requiring that the tax be computed on the basis of the amount insured by the policy.
WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals is
SET ASIDE insofar as it affirmed the decision of the Court of Tax Appeals nullifying the deficiency

stamp tax assessment petitioner imposed on private respondent in the amount of P464,898.75
corresponding to the increase in 1984 of the sum under the policy issued by respondent.
SO ORDERED.
Davide, Jr., C.J. and Ynares-Santiago, J., concur.
Puno, J., is on official leave.
|||

(Commr. v. Lincoln Philippine Life Insurance Co., Inc., G.R. No. 119176, March 19, 2002)