1
G.R. No. 185565 November 26, 2014
LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR
INTERNATIONAL SHIPPING COMPANY, INCORPORATED, Petitioners,
vs.
MALAYAN INSURANCE COMPANY, INCORPORATED, Respondent.
DECISION
REYES, J.:
This is a Petition for Review on Certiorari1 filed by Loadstai Shipping Company,
Incorporated and Loadstar International Shipping Company, Incorporated (petitioners)
against Malayan Insurance Company, Incorporated (Malayan) seeking to set aside the
Decision2 dated April 14, 2008 and Resolution3 dated December 11, 2008 of the Court
of Appeals (CA) in CA-G.R. CV No. 82758, which reversed and set aside the Decision4
dated March 31, 2004 of the Regional Trial Court of Manila, Branch 34, in Civil Case
No. 01-101885.
The facts as found by the CA, are as follows:
Loadstar International Shipping, Inc.(Loadstar Shipping) and Philippine Associated
Smelting and Refining Corporation (PASAR) entered into a Contract of Affreightment
for domestic bulk transport of the latter’s copper concentrates for a period of one year
from November 1, 1998 to October 31, 1999. The contract was extended up to the end
of October 2000.
On September 10, 2000, 5,065.47 wet metric tons (WMT) of copper concentrates were
loaded in Cargo Hold Nos. 1 and 2 of MV "Bobcat", a marine vessel owned by Loadstar
International Shipping Co., Inc. (Loadstar International) and operated by Loadstar
Shipping under a charter party agreement. The shipper and consignee under the Bill
of Lading are Philex Mining Corporation (Philex) and PASAR, respectively. The cargo
was insured with Malayan Insurance Company, Inc. (Malayan) under Open Policy No.
M/OP/2000/001-582. P & I Association is the third party liability insurer of Loadstar
Shipping.
On said date (September 10, 2000), MV "Bobcat" sailed from Poro Point, San
Fernando, La Union bound for Isabel, Leyte. On September 12, 2000, while in the
vicinity of Cresta de Gallo, the vessel’s chief officer on routine inspection found a crack
on starboard sideof the main deck which caused seawater to enter and wet the cargo
inside Cargo Hold No. 2 forward/aft. The cracks at the top deck starboard side of Cargo
Hold No. 2, measuring 1.21 meters long x 0.39 meters wide, and at top deck aft section
starboard side on other point, measuring 0.82 meters long x 0.32 meters wide, were
welded.
Immediately after the vessel arrived at Isabel, Leyte anchorage area, on September
13, 2000, PASAR and Philex’s representatives boarded and inspected the vessel and
undertook sampling of the copper concentrates. In its preliminary report dated
September 15, 2000, the Elite Adjusters and Surveyor, Inc. (Elite Surveyor) confirmed
that samples of copper concentrates from Cargo Hold No. 2 were contaminated by
seawater. Consequently, PASAR rejected 750 MT of the 2,300 MT cargo discharged
from Cargo Hold No. 2.
On November 6, 2000, PASAR sent a formal notice of claim in the amount of
[P]37,477,361.31 to Loadstar Shipping. In its final report dated November 16, 2000,
Elite Surveyor recommended payment to the assured the amount of [P]32,351,102.32
as adjusted. On the basis of such recommendation, Malayan paid PASAR the amount
of [P]32,351,102.32.
Meanwhile, on November 24, 2000, Malayan wrote Loadstar Shipping informing the
latter of a prospective buyer for the damaged copper concentrates and the opportunity
to nominate/refer other salvage buyers to PASAR. On November 29, 2000, Malayan
wrote Loadstar Shipping informing the latter of the acceptance of PASAR’s proposal
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to take the damaged copper concentrates at a residual value of US$90,000.00. On

December 9, 2000, Loadstar Shipping wrote Malayan requesting for the reversal of its
After trial, and considering that the billof lading, which was marked as Exhibit "B", is
decision to accept PASAR’s proposal and the conduct of a public bidding to allow
unreadable, the RTC issued on February 17, 2004 an order directing the counsel for
Loadstar Shipping to match or top PASAR’s bid by 10%.
Malayan to furnish it with a clearer copy of the same within three (3) days from receipt
of the order. On February 23, 2004, Malayan filed a compliance attaching thereto copy
of the bill of lading.
On January 23, 2001, PASAR signed a subrogation receipt in favor of Malayan. To
recover the amount paid and in the exercise of its right of subrogation, Malayan
demanded reimbursement from Loadstar Shipping, which refused to comply.
On March 31, 2004, the RTC rendered a judgment dismissing the complaint as well
Consequently, on September 19, 2001, Malayan instituted with the RTC a complaint
as the counterclaim. The RTC was convinced that the vessel was seaworthy at the
for damages. The complaint was later amended to include Loadstar International as
time of loading and that the damage was attributable to the perils of the sea (natural
party defendant.
disaster) and not due to the fault or negligence of Loadstar Shipping.

In its amended complaint, Malayan mainly alleged that as a direct and natural
The RTC found that although contaminated by seawater, the copper concentrates can
consequence of the unseaworthiness of the vessel, PASAR suffered loss of the cargo.
still be used. Itgave credence to the testimony of Francisco Esguerra, defendants-
It prayed for the amount of [P]33,934,948.75, representing actual damages plus legal
appellees’ expert witness, that despite high chlorine content, the copper concentrates
interest fromdate of filing of the complaint until fully paid, and attorney’s fees in the
remain intact and will not lose their value. The gold and silver remain with the
amount of not less than [P]500,000.00. It also sought to declare the bill of lading as
grains/concentrates even if soaked with seawater and does not melt. The RTC
void since it violates the provisions of Articles 1734 and 1745 of the Civil Code.
observed that the purchase agreement between PASAR and Philex contains a penalty
clause and has no rejection clause. Despite this agreement, the parties failed to sit
down and assess the penalty.
On October 30, 2002, Loadstar Shipping and Loadstar International filed their answer
with counterclaim, denying plaintiff appellant’s allegations and averring as follows: that
they are not engaged in the business as common carriers but as private carriers; that
The RTC also found that defendants-appellees were not afforded the opportunity to
the vessel was seaworthy and defendants-appellees exercised the required diligence
object or participate or nominate a participant in the sale of the contaminated copper
under the law; that the entry of water into Cargo Hold No. 2 must have been caused
concentrates to lessen the damages to be paid. No record was presented to show that
by force majeureor heavy weather; that due to the inherent nature of the cargo and
a public bidding was conducted. Malayan sold the contaminated copper concentrates
the use of water in its production process, the same cannot be considered damaged
to PASAR at a low price then paid PASAR the total value of the damaged concentrate
or contaminated; that defendants-appellees were denied reasonable opportunity to
without deducting anything from the claim.
participate in the salvage sale; that the claim had prescribed in accordance with the
bill of lading provisions and the Code of Commerce; that plaintiff-appellant’s claim is
excessive, grossly overstated, unreasonable and unsubstantiated; that their liability, if
any, should not exceed the CIFvalue of the lost/damaged cargo as set forth in the bill Finally, the RTC denied the prayer to declare the Bill of Lading null and void for lack
of lading, charter party or customary rules of trade; and that the arbitration clause in of basis because what was attached to Malayan’s compliance was still an unreadable
the contract of affreightment should be followed. machine copy thereof.5 (Citations omitted)

Ruling of the CA
On April 14, 2008, the CA rendered its Decision,6 the dispositive portion of which
reads: WHEREFORE, the appeal is GRANTED. The Decision dated March 31, 2004
of the RTC, Branch 34, Manila in Civil Case No. 01-101885, is REVERSED and SET
ASIDE. In lieu thereof, a new judgment is entered, ORDERING defendants-appellees
to pay plaintiff-appellant ₱33,934,948.75 as actual damages, plus legal interest at 6%
annually from the date of the trial court’s decision. Upon the finality of the decision, the
total amount of the judgment shall earn annual interest at 12% until full payment.
SO ORDERED.7
On December 11, 2008, the CA modified the above decision through a Resolution,8
the fallo thereof states:
WHEREFORE, the Motion for Reconsiderationis PARTLY GRANTED. The decision
of this Court dated April 14, 2008 is PARTIALLY RECONSIDERED and MODIFIED.
Defendants-appellees are ORDERED to pay to plaintiff-appellant ₱33,934,948.74 as
actual damages, less US$90,000.00, computed at the exchange rate prevailing on
November 29, 2000, plus legal interest at 6% annually from the date of the trial court’s
decision. Upon the finality of the decision, the total amount of the judgment shall earn
annual interest at 12% until full payment.
SO ORDERED.9
3
The CA discussed that the amount of US$90,000.00 should have been deducted from
Malayan’s claim against the petitioners in order to prevent undue enrichment on the
part of Malayan. Otherwise, Malayan would recover from the petitioners not merely
the entire amount of 33,934,948.74 as actual damages, but would also end up unjustly
enriching itself in the amount of US$90,000.00 – the residual value of the subject
copper concentrates it sold to Philippine Associated Smelting and Refining
Corporation (PASAR) on November 29, 2000.10 Issues
In sum, the grounds presented by the petitioners for the Court’s consideration are the
following:
I.
THE [CA] HAS NO BASIS IN REVERSING THE DECISION OF THE TRIAL COURT.
THERE IS NOTHING IN THE DECISION OF THE HONORABLE COURT THAT
REVERSED THE FACTUAL FINDINGS AND CONCLUSIONS OF THE TRIAL
COURT, THAT THERE WAS NO ACTUAL LOSS OR DAMAGE TO THE CARGO OF
COPPER CONCENTRATES WHICH WOULD MAKE LOADSTAR AS THE
SHIPOWNER LIABLE FOR A CARGO CLAIM. CONSEQUENTLY, THERE IS NO
BASIS FOR THE COURT TO ORDER LOADSTAR TO PAY ACTUAL DAMAGES IN
THE AMOUNT OF PH₱33 MILLION.11
II.
M/V BOBCAT IS A PRIVATE CARRIER, THE HONORABLE COURT HAD NO BASIS
IN RULING THAT IT IS A COMMON CARRIER. THE DECISION OF THE TRIAL
COURT IS BEREFT OF ANY CATEGORICAL FINDING THAT M/V BOBCAT IS A
COMMON CARRIER.12
III.

THE HONORABLE COURT OFAPPEALS COMMITTED A REVERSIBLE ERROR IN
RULING THAT RESPONDENT’S PAYMENT TO PASAR, ON THE BASIS OF THE
LATTER’S FRAUDULENT CLAIM, ENTITLED RESPONDENT AUTOMATIC RIGHT
OF RECOVERY BY VIRTUE OF SUBROGATION.13
Ruling of the Court
I. Proof of actual damages
It is not disputed that the copper concentrates carried by M/V Bobcat from Poro Point,
La Union to Isabel, Leyte were indeed contaminated with seawater. The issue lies on
whether such contamination resulted to damage, and the costs thereof, if any,incurred
by the insured PASAR.
The petitioners argued that the copper concentrates, despite being dampened with
seawater, is neither subject to penalty nor rejection. Under the Philex Mining
Corporation (Philex)-PASAR Purchase Contract Agreement, there is no rejection
clause. Instead, there is a pre-agreed formula for the imposition of penalty in case
other elements exceeding the provided minimum level would be found on the
concentrates.14 Since the chlorine content on the copper concentrates is still below
the minimum level provided under the Philex-PASAR purchase contract, no penalty
may be imposed against the petitioners.15
Malayan opposed the petitioners’ invocation of the Philex-PASAR purchase
agreement, stating that the contract involved in this case is a contract of affreightment
between the petitioners and PASAR, not the agreement between Philex and PASAR,
which was a contract for the sale of copper concentrates.16
4
On this score, the Court agrees withMalayan that contrary to the trial court’s
disquisition, the petitioners cannot validly invoke the penalty clause under the Philex-
PASAR purchase agreement, where penalties are to be imposed by the buyer PASAR
against the seller Philex if some elements exceeding the agreed limitations are found
on the copper concentrates upon delivery. The petitioners are not privy tothe contract
of sale of the copper concentrates. The contract between PASAR and the petitioners
is a contract of carriage of goods and not a contract of sale. Therefore, the petitioners
and PASAR are bound by the laws on transportation of goods and their contract of
affreightment. Since the Contract of Affreightment17 between the petitioners and
PASAR is silent as regards the computation of damages, whereas the bill of lading
presented before the trial court is undecipherable, the New Civil Code and the Code
ofCommerce shall govern the contract between the parties.
Malayan paid PASAR the amount of 32,351,102.32 covering the latter’s claim of
damage to the cargo.18 This is based on the recommendation of Elite Adjustors and
Surveyors, Inc. (Elite) which both Malayan and PASAR agreed to. The computation of
Elite is presented as follows:
Computation of Loss Payable.We computed for the insured value of the loss and loss
payable, based on the following pertinent data:
1) Total quantity shipped - 5,065.47 wet metric tons and at risk or (Risk Note and B/L)
4,568.907 dry metric tons
2) Total sum insured - [P]212,032,203.77 (Risk Note and Endorsement)
3) Quantity damaged: 777.290 wet metric tons or (Pasar Laboratory Cert. & 696.336
dry metric tons discharge & sampling Cert.dated September 21, 2000)
Computation:

Total sum insured x Qty. damaged= Insured value of damage
Total Qty. in DMT (DMT) (DMT)
[P] 212,032,203.77 x 696.336 DMT = [P]32,315,312.32
4,568.907 DMT
Insured value of damage = [P] 32,315,312.3219
Based on the preceding computation, the sum of ₱32,315,312.32 represents damages
for the total loss ofthat portion of the cargo which were contaminated with seawater
and not merely the depreciation in its value. Strangely though, after claiming damages
for the total loss of that portion, PASAR bought back the contaminated copper
concentrates from Malayan at the price of US$90,000.00. The fact of repurchase is
enough to conclude that the contamination of the copper concentrates cannot be
considered as total loss on the part of PASAR.
The following provisions of the Code of Commerce state how damages on goods
delivered by the carrier should be appraised:
Article 361. The merchandise shall be transported at the risk and venture of the
shipper, if the contrary has not been expressly stipulated. As a consequence, all the
losses and deteriorations which the goods may suffer during the transportation by
reason of fortuitous event, force majeure, or the inherent nature and defect of the
goods, shall be for the account and risk of the shipper. Proof of these accidents is
incumbent upon the carrier.
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Article 362. Nevertheless, the carrier shall be liable for the losses and damages
resulting from the causes mentioned in the preceding article if it is proved, as against
him, that they arose through his negligence or by reason of his having failed to take
the precautions which usage has established among careful persons, unless the
shipper has committed fraud in the bill of lading, representing the goods to be of a kind
or quality different from what they really were.
If, notwithstanding the precautions referred to in this article, the goods transported run
the risk of being lost, on account of their nature or by reason of unavoidable accident,
there being no time for their owners to dispose of them, the carrier may proceed to sell
them, placing them for this purpose at the disposal of the judicial authority or of the
officials designated by special provisions.
xxxx
Article 364. If the effect of the damage referred to in Article 361 is merely a diminution
in the value of the goods, the obligation of the carrier shall be reduced to the payment
of the amount which, in the judgment of experts, constitutes such difference in value.
Article 365. If, in consequence of the damage, the goods are rendered useless for sale
and consumption for the purposes for which they are properly destined, the consignee
shall not be bound to receive them, and he may have them in the hands of the carrier,
demanding of the latter their value at the current price on that day.
If among the damaged goods there should be some pieces in good condition and
without any defect, the foregoing provision shall be applicable with respect to those
damaged and the consignee shall receive those which are sound, this segregation to
be made by distinct and separate pieces and without dividing a single object, unless
the consignee proves the impossibility of conveniently making use of them in this form.

The same rule shall be applied to merchandise in bales or packages, separating those
parcels which appear sound.
From the above-cited provisions, if the goods are delivered but arrived at the
destination in damaged condition, the remedies to be pursued by the consignee
depend on the extent of damage on the goods.
If the goods are rendered useless for sale, consumption or for the intended purpose,
the consignee may reject the goods and demand the payment of such goods at their
marketprice on that day pursuant to Article 365. In case the damaged portion of the
goods can be segregated from those delivered in good condition, the consignee may
reject those in damaged condition and accept merely those which are in good
condition. But if the consignee is able to prove that it is impossible to use those goods
which were delivered in good condition without the others, then the entire shipment
may be rejected. To reiterate, under Article 365, the nature of damage must be such
that the goods are rendered useless for sale, consumption or intended purpose for the
consignee to be able to validly reject them.
If the effect of damage on the goods consisted merely of diminution in value, the carrier
is bound to pay only the difference between its price on that day and its depreciated
value as provided under Article 364.
Malayan, as the insurer of PASAR, neither stated nor proved that the goods are
rendered useless or unfit for the purpose intended by PASAR due to contamination
with seawater. Hence, there is no basis for the goods’ rejection under Article 365 of
the Code of Commerce. Clearly, it is erroneous for Malayan to reimburse PASAR as
though the latter suffered from total loss of goods in the absence of proof that PASAR
sustained such kind of loss. Otherwise, there will be no difference inthe indemnification
of goods which were not delivered at all; or delivered but rendered useless, compared
against those which were delivered albeit, there is diminution in value.
6
Malayan also failed to establish the legal basis of its decision to sell back the rejected
copper concentrates to PASAR. It cannot be ascertained how and when Malayan
deemed itself asthe owner of the rejected copper concentrates to have these validly
disposed of. If the goods were rejected, it only means there was no acceptance on the
part of PASAR from the carrier. Furthermore, PASAR and Malayan simply agreed on
the purchase price of US$90,000.00 without any allegation or proof that the said price
was the depreciated value based on the appraisal of experts as provided under Article
364 of the Code of Commerce.
II. Subrogation of Malayan to the rights of PASAR
Malayan’s claim against the petitioners is based on subrogation to the rights
possessed by PASAR as consignee of the allegedly damaged goods. The right of
subrogation stems from Article 2207 of the New Civil Code which states:
Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrong doer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing the
loss or injury.
"The right of subrogation is not dependent upon, nor does it grow out of, any privity of
contract or upon written assignment of claim. It accrues simply upon payment of the
insurance claim by the insurer."20 The right of subrogation is however, not absolute.
"There are a few recognized exceptions to this rule. For instance, if the assured by his
own act releases the wrongdoer or third party liable for the loss or damage, from
liability, the insurer’s right of subrogation is defeated. x x x Similarly, where the insurer
pays the assured the value of the lostgoods without notifying the carrier who has in
good faith settled the assured’s claim for loss, the settlement is binding on both the

assured and the insurer, and the latter cannot bring an action against the carrier on
his right of subrogation. x x x And where the insurer pays the assured for a loss which
is not a risk covered by the policy, thereby effecting ‘voluntary payment,’ the former
has no right of subrogation against the third party liable for the loss x x x."21
The rights of a subrogee cannot be superior to the rights possessed by a subrogor.
"Subrogation is the substitution of one person in the place of another with reference to
a lawful claim or right, so that he who is substituted succeeds to the rights of the other
in relation to a debt or claim, including its remedies or securities. The rights to which
the subrogee succeeds are the same as, but not greaterthan, those of the person for
whom he is substituted, that is, he cannot acquire any claim, security or remedy the
subrogor did not have. In other words, a subrogee cannot succeed to a right not
possessed by the subrogor. A subrogee in effect steps into the shoes of the insured
and can recover only ifthe insured likewise could have recovered."22 Consequently,
an insurer indemnifies the insured based on the loss or injury the latter actually
suffered from. If there is no loss or injury, then there is no obligation on the part of the
insurer to indemnify the insured. Should the insurer pay the insured and it turns out
that indemnification is not due, or if due, the amount paid is excessive, the insurer
takes the risk of not being able to seek recompense from the alleged wrongdoer. This
is because the supposed subrogor did not possessthe right to be indemnified and
therefore, no right to collect is passed on to the subrogee. As regards the
determination of actual damages, "[i]t is axiomatic that actual damages must be proved
with reasonable degree of certainty and a party is entitled only to such compensation
for the pecuniary loss that was duly proven."23 Article 2199 of the New Civil Code
speaks of how actual damages are awarded:
Art. 2199. Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved.
Such compensation is referred to as actual or compensatory damages.
Whereas the CA modified its Decision dated April 14, 2008 by deducting the amount
of US$90,000.00 fromthe award, the same is still iniquitous for the petitioners because
PASAR and Malayan never proved the actual damages sustained by PASAR. It is a
flawed notion to merely accept that the salvage value of the goods is US$90,000.00,
7
since the price was arbitrarily fixed between PASAR and Malayan. Actual damages to
PASAR, for example, could include the diminution in value as appraised by experts or
the expenses which PASAR incurred for the restoration of the copper concentrates to
its former condition, ifthere is damage and rectification is still possible.
It is also note worthy that when the expert witness for the petitioners, Engineer
Francisco Esguerra (Esguerra), testified as regards the lack of any adverse effect of
seawater on copper concentrates, Malayan never presented evidence of its own in
refutation to Esguerra’s testimony. And, even if the Court will disregard the entirety of
his testimony, the effect on Malayan’s cause of action is nil. As Malayan is claiming for
actual damages, it bears the burden of proof to substantiate its claim.
"The burden of proof is on the party who would be defeated if no evidence would be
presented on either side. The burden is to establish one’s case by a preponderance
of evidence which means that the evidence, as a whole, adduced by one side, is
superior tothat of the other. Actual damages are not presumed. The claimant must
prove the actual amount of loss with a reasonable degree of certainty premised upon
competent proof and on the best evidence obtainable. Specific facts that could afford
a basis for measuring whatever compensatory or actual damages are borne must be
pointed out. Actual damages cannot be anchored on mere surmises, speculations or
conjectures."24
Having ruled that Malayan did not adduce proof of pecuniary loss to PASAR for which
the latter was questionably indemnified, there is no necessity to expound further on
the other issues raised by the petitioners and Malayan in this case.
WHEREFORE, the petition is GRANTED. The Decision dated April 14, 2008 and
Resolution dated December 11, 2008 of the Court of Appeals in CA-G.R. CV No.
82758 are hereby REVERSED and SET ASIDE. The Decision dated March 31, 2004
of the Regional Trial Comi of Manila, Branch 34 in Civil Case No·. 01-101885 is
REINSTATED.
SO ORDERED.
 8

G.R. No. L-31845 April 30, 1979

GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner, It appears that on March 14, 1957, private respondent Ngo Hing filed an application
with the Great Pacific Life Assurance Company (hereinafter referred to as Pacific Life)
vs.
for a twenty-year endownment policy in the amount of P50,000.00 on the life of his
HONORABLE COURT OF APPEALS, respondents. one-year old daughter Helen Go. Said respondent supplied the essential data which
petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu City
wrote on the corresponding form in his own handwriting (Exhibit I-M). Mondragon
G.R. No. L-31878 April 30, 1979 finally type-wrote the data on the application form which was signed by private
respondent Ngo Hing. The latter paid the annual premuim the sum of P1,077.75 going
over to the Company, but he reatined the amount of P1,317.00 as his commission for
being a duly authorized agebt of Pacific Life. Upon the payment of the insurance
LAPULAPU D. MONDRAGON, petitioner,
premuim, the binding deposit receipt (Exhibit E) was issued to private respondent Ngo
vs. Hing. Likewise, petitioner Mondragon handwrote at the bottom of the back page of the
application form his strong recommendation for the approval of the insurance
HON. COURT OF APPEALS and NGO HING, respondents. application. Then on April 30, 1957, Mondragon received a letter from Pacific Life
disapproving the insurance application (Exhibit 3-M). The letter stated that the said life
insurance application for 20-year endowment plan is not available for minors below
Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for seven years old, but Pacific Life can consider the same under the Juvenile Triple
petitioner Company. Action Plan, and advised that if the offer is acceptable, the Juvenile Non-Medical
Declaration be sent to the company.

Voltaire Garcia for petitioner Mondragon.

Pelaez, Pelaez & Pelaez for respondent Ngo Hing.
DE CASTRO, J.:
The two above-entitled cases were ordered consolidated by the Resolution of this
Court dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in both
cases seek similar relief, through these petitions for certiorari by way of appeal, from
the amended decision of respondent Court of Appeals which affirmed in toto the
decision of the Court of First Instance of Cebu, ordering "the defendants (herein
petitioners Great Pacific Ligfe Assurance Company and Mondragon) jointly and
severally to pay plaintiff (herein private respondent Ngo Hing) the amount of
P50,000.00 with interest at 6% from the date of the filing of the complaint, and the sum
of P1,077.75, without interest.
The non-acceptance of the insurance plan by Pacific Life was allegedly not
communicated by petitioner Mondragon to private respondent Ngo Hing. Instead, on
May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending the
approval of the 20-year endowment insurance plan to children, pointing out that since
1954 the customers, especially the Chinese, were asking for such coverage (Exhibit
4-M).
It was when things were in such state that on May 28, 1957 Helen Go died of influenza
with complication of bronchopneumonia. Thereupon, private respondent sought the
payment of the proceeds of the insurance, but having failed in his effort, he filed the
action for the recovery of the same before the Court of First Instance of Cebu, which
rendered the adverse decision as earlier refered to against both petitioners.
 9

The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit shall be reftmded; and (3) that if the applicant is not ble according to the standard
E) constituted a temporary contract of the life insurance in question; and (2) whether rates, and the company disapproves the application, the insurance applied for shall
private respondent Ngo Hing concealed the state of health and physical condition of not be in force at any time, and the premium paid shall be returned to the applicant.
Helen Go, which rendered void the aforesaid Exhibit E.
1. At the back of Exhibit E are condition precedents required before a deposit is
Clearly implied from the aforesaid conditions is that the binding deposit receipt in
considered a BINDING RECEIPT. These conditions state that:
question is merely an acknowledgment, on behalf of the company, that the latter's
branch office had received from the applicant the insurance premium and had
accepted the application subject for processing by the insurance company; and that
A. If the Company or its agent, shan have received the premium deposit ... and
the latter will either approve or reject the same on the basis of whether or not the
the insurance application, ON or PRIOR to the date of medical examination ... said
applicant is "insurable on standard rates." Since petitioner Pacific Life disapproved the
insurance shan be in force and in effect from the date of such medical examination,
insurance application of respondent Ngo Hing, the binding deposit receipt in question
for such period as is covered by the deposit ..., PROVIDED the company shall be
had never become in force at any time.
satisfied that on said date the applicant was insurable on standard rates under its rule
for the amount of insurance and the kind of policy requested in the application.
Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely
conditional and does not insure outright. As held by this Court, where an agreement is
D. If the Company does not accept the application on standard rate for the amount
made between the applicant and the agent, no liability shall attach until the principal
of insurance and/or the kind of policy requested in the application but issue, or offers
approves the risk and a receipt is given by the agent. The acceptance is merely
to issue a policy for a different plan and/or amount ..., the insurance shall not be in
conditional and is subordinated to the act of the company in approving or rejecting the
force and in effect until the applicant shall have accepted the policy as issued or
application. Thus, in life insurance, a "binding slip" or "binding receipt" does not insure
offered by the Company and shall have paid the full premium thereof. If the applicant
by itself (De Lim vs. Sun Life Assurance Company of Canada, 41 Phil. 264).
does not accept the policy, the deposit shall be refunded.

E. If the applicant shall not have been insurable under Condition A above, and
the Company declines to approve the application the insurance applied for shall not
have been in force at any time and the sum paid be returned to the applicant upon the
surrender of this receipt. (Emphasis Ours).
The aforequoted provisions printed on Exhibit E show that the binding deposit receipt
is intended to be merely a provisional or temporary insurance contract and only upon
compliance of the following conditions: (1) that the company shall be satisfied that the
applicant was insurable on standard rates; (2) that if the company does not accept the
application and offers to issue a policy for a different plan, the insurance contract shall
not be binding until the applicant accepts the policy offered; otherwise, the deposit
It bears repeating that through the intra-company communication of April 30, 1957
(Exhibit 3-M), Pacific Life disapproved the insurance application in question on the
ground that it is not offering the twenty-year endowment insurance policy to children
less than seven years of age. What it offered instead is another plan known as the
Juvenile Triple Action, which private respondent failed to accept. In the absence of a
meeting of the minds between petitioner Pacific Life and private respondent Ngo Hing
over the 20-year endowment life insurance in the amount of P50,000.00 in favor of the
latter's one-year old daughter, and with the non-compliance of the abovequoted
conditions stated in the disputed binding deposit receipt, there could have been no
insurance contract duly perfected between thenl Accordingly, the deposit paid by
private respondent shall have to be refunded by Pacific Life.

As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of
insurance, like other contracts, must be assented to by both parties either in person or
by their agents ... The contract, to be binding from the date of the application, must
have been a completed contract, one that leaves nothing to be dione, nothing to be
completed, nothing to be passed upon, or determined, before it shall take effect. There
can be no contract of insurance unless the minds of the parties have met in
agreement."
We are not impressed with private respondent's contention that failure of petitioner
Mondragon to communicate to him the rejection of the insurance application would not
have any adverse effect on the allegedly perfected temporary contract (Respondent's
Brief, pp. 13-14). In this first place, there was no contract perfected between the parties
who had no meeting of their minds. Private respondet, being an authorized insurance
agent of Pacific Life at Cebu branch office, is indubitably aware that said company
does not offer the life insurance applied for. When he filed the insurance application in
dispute, private respondent was, therefore, only taking the chance that Pacific Life will
approve the recommendation of Mondragon for the acceptance and approval of the
application in question along with his proposal that the insurance company starts to
offer the 20-year endowment insurance plan for children less than seven years.
Nonetheless, the record discloses that Pacific Life had rejected the proposal and
recommendation. Secondly, having an insurable interest on the life of his one-year old
daughter, aside from being an insurance agent and an offense associate of petitioner
Mondragon, private respondent Ngo Hing must have known and followed the progress
on the processing of such application and could not pretend ignorance of the
Company's rejection of the 20-year endowment life insurance application.
At this juncture, We find it fit to quote with approval, the very apt observation of then
Appellate Associate Justice Ruperto G. Martin who later came up to this Court, from
his dissenting opinion to the amended decision of the respondent court which
completely reversed the original decision, the following:
Of course, there is the insinuation that neither the memorandum of rejection (Exhibit
3-M) nor the reply thereto of appellant Mondragon reiterating the desire for applicant's
father to have the application considered as one for a 20-year endowment plan was
ever duly communicated to Ngo; Hing, father of the minor applicant. I am not quite
10
conninced that this was so. Ngo Hing, as father of the applicant herself, was precisely
the "underwriter who wrote this case" (Exhibit H-1). The unchallenged statement of
appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-M), specifically admits that
said Ngo Hing was "our associate" and that it was the latter who "insisted that the plan
be placed on the 20-year endowment plan." Under these circumstances, it is
inconceivable that the progress in the processing of the application was not brought
home to his knowledge. He must have been duly apprised of the rejection of the
application for a 20-year endowment plan otherwise Mondragon would not have
asserted that it was Ngo Hing himself who insisted on the application as originally filed,
thereby implictly declining the offer to consider the application under the Juvenile Triple
Action Plan. Besides, the associate of Mondragon that he was, Ngo Hing should only be
presumed to know what kind of policies are available in the company for minors below 7 years
old. What he and Mondragon were apparently trying to do in the premises was merely to prod
the company into going into the business of issuing endowment policies for minors just as other
insurance companies allegedly do. Until such a definite policy is however, adopted by the
company, it can hardly be said that it could have been bound at all under the binding slip for a
plan of insurance that it could not have, by then issued at all. (Amended Decision, Rollo, pp-
52-53).
2. Relative to the second issue of alleged concealment. this Court is of the firm belief that
private respondent had deliberately concealed the state of health and piysical condition of his
daughter Helen Go. Wher private regpondeit supplied the required essential data for the
insurance application form, he was fully aware that his one-year old daughter is typically a
mongoloid child. Such a congenital physical defect could never be ensconced nor disguished.
Nonetheless, private respondent, in apparent bad faith, withheld the fact materal to the risk to
be assumed by the insurance compary. As an insurance agent of Pacific Life, he ought to know,
as he surely must have known. his duty and responsibility to such a material fact. Had he
diamond said significant fact in the insurance application fom Pacific Life would have verified
the same and would have had no choice but to disapprove the application outright.
The contract of insurance is one of perfect good faith uberrima fides meaning good faith,
absolute and perfect candor or openness and honesty; the absence of any concealment or
demotion, however slight [Black's Law Dictionary, 2nd Edition], not for the alone but equally so
for the insurer (Field man's Insurance Co., Inc. vs. Vda de Songco, 25 SCRA 70). Concealment
is a neglect to communicate that which a partY knows aDd Ought to communicate (Section 25,
Act No. 2427). Whether intentional or unintentional the concealment entitles the insurer to
rescind the contract of insurance (Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al,
 11

105 Phil 930; Satumino vs. Philippine American Life Insurance Company, 7 SCRA 316). Private
respondent appears guilty thereof.

We are thus constrained to hold that no insurance contract was perfected between the parties
with the noncompliance of the conditions provided in the binding receipt, and concealment, as
legally defined, having been comraitted by herein private respondent.

WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one is
hereby entered absolving petitioners Lapulapu D. Mondragon and Great Pacific Life Assurance
Company from their civil liabilities as found by respondent Court and ordering the aforesaid
insurance company to reimburse the amount of P1,077.75, without interest, to private
respondent, Ngo Hing. Costs against private respondent. SO ORDERED.
 12

G.R. No. L-4611 December 17, 1955

QUA CHEE GAN, plaintiff-appellee, (c) Under the third cause of action, the sum of P5,000;
vs. (d) Under the fourth cause of action, the sum of P15,000; and
LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent,
WARNER, BARNES AND CO., LTD., defendant-appellant.
(e) Under the fifth cause of action, the sum of P40,000;

Delgado, Flores & Macapagal for appellant.

all of which shall bear interest at the rate of 8% per annum in accordance with Section
Andres Aguilar, Zacarias Gutierrez Lora, Gregorio Sabater and Perkins, Ponce Enrile 91 (b) of the Insurance Act from September 26, 1940, until each is paid, with costs
& Contreras for appellee. against the defendant.

REYES, J. B. L., J.: The complaint in intervention of the Philippine National Bank is dismissed without
costs. (Record on Appeal, 166-167.)

Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of First
Instance of said province, seeking to recover the proceeds of certain fire insurance
policies totalling P370,000, issued by the Law Union & Rock Insurance Co., Ltd., upon
certain bodegas and merchandise of the insured that were burned on June 21, 1940.
The records of the original case were destroyed during the liberation of the region, and
were reconstituted in 1946. After a trial that lasted several years, the Court of First
Instance rendered a decision in favor of the plaintiff, the dispositive part whereof reads
as follows:
Wherefore, judgment is rendered for the plaintiff and against the defendant
condemning the latter to pay the former —
From the decision, the defendant Insurance Company appealed directly to this Court.
The record shows that before the last war, plaintiff-appellee owned four warehouses
or bodegas (designated as Bodegas Nos. 1 to 4) in the municipality of Tabaco, Albay,
used for the storage of stocks of copra and of hemp, baled and loose, in which the
appellee dealth extensively. They had been, with their contents, insured with the
defendant Company since 1937, and the lose made payable to the Philippine National
Bank as mortgage of the hemp and crops, to the extent of its interest. On June, 1940,
the insurance stood as follows:

Policy No. Property Insured Amount

(a) Under the first cause of action, the sum of P146,394.48;
2637164 (Exhibit "LL") Bodega No. 1 (Building) P15,000.00
2637165 (Exhibit "JJ") Bodega No. 2 (Building) 10,000.00
(b) Under the second cause of action, the sum of P150,000;
Bodega No. 3 (Building) 25,000.00

Bodega No. 4 (Building) 10,000.00
Hemp Press — moved by steam engine 5,000.00
2637345 (Exhibit "X") Merchandise contents (copra and empty sacks of Bodega No.
1) 150,000.00
2637346 (Exhibit "Y") Merchandise contents (hemp) of Bodega No.
150,000.00
2637067 (Exhibit "GG") Merchandise contents (loose hemp) of Bodega No. 4
5,000.00
Total
P370,000.00
Fire of undetermined origin that broke out in the early morning of July 21, 1940, and
lasted almost one week, gutted and completely destroyed Bodegas Nos. 1, 2 and 4,
with the merchandise stored theren. Plaintiff-appellee informed the insurer by telegram
on the same date; and on the next day, the fire adjusters engaged by appellant
insurance company arrived and proceeded to examine and photograph the premises,
pored over the books of the insured and conducted an extensive investigation. The
plaintiff having submitted the corresponding fire claims, totalling P398,562.81 (but
reduced to the full amount of the insurance, P370,000), the Insurance Company
resisted payment, claiming violation of warranties and conditions, filing of fraudulent
claims, and that the fire had been deliberately caused by the insured or by other
persons in connivance with him.
With counsel for the insurance company acting as private prosecutor, Que Chee Gan,
with his brother, Qua Chee Pao, and some employees of his, were indicted and tried
in 1940 for the crime of arson, it being claimed that they had set fire to the destroyed
warehouses to collect the insurance. They were, however, acquitted by the trial court
in a final decision dated July 9, 1941 (Exhibit WW). Thereafter, the civil suit to collect
the insurance money proceeded to its trial and termination in the Court below, with the
result noted at the start of this opinion. The Philippine National Bank's complaint in
intervention was dismissed because the appellee had managed to pay his
indebtedness to the Bank during the pendecy of the suit, and despite the fire losses.
13
In its first assignment of error, the insurance company alleges that the trial Court
should have held that the policies were avoided for breach of warranty, specifically the
one appearing on a rider pasted (with other similar riders) on the face of the policies
(Exhibits X, Y, JJ and LL). These riders were attached for the first time in 1939, and
3 the pertinent portions read as follows:
Memo. of Warranty. — The undernoted Appliances for the extinction of fire being kept
on the premises insured hereby, and it being declared and understood that there is an
ample and constant water supply with sufficient pressure available at all seasons for
the same, it is hereby warranted that the said appliances shall be maintained in
efficient working order during the currency of this policy, by reason whereof a discount
of 2 1/2 per cent is allowed on the premium chargeable under this policy.
Hydrants in the compound, not less in number than one for each 150 feet of external
wall measurement of building, protected, with not less than 100 feet of hose piping and
nozzles for every two hydrants kept under cover in convenient places, the hydrants
being supplied with water pressure by a pumping engine, or from some other source,
capable of discharging at the rate of not less than 200 gallons of water per minute into
the upper story of the highest building protected, and a trained brigade of not less than
20 men to work the same.'
It is argued that since the bodegas insured had an external wall perimeter of 500
meters or 1,640 feet, the appellee should have eleven (11) fire hydrants in the
compound, and that he actually had only two (2), with a further pair nearby, belonging
to the municipality of Tabaco.
We are in agreement with the trial Court that the appellant is barred by waiver (or
rather estoppel) to claim violation of the so-called fire hydrants warranty, for the reason
that knowing fully all that the number of hydrants demanded therein never existed from
the very beginning, the appellant neverthless issued the policies in question subject to
such warranty, and received the corresponding premiums. It would be perilously close

to conniving at fraud upon the insured to allow appellant to claims now as void ab initio
the policies that it had issued to the plaintiff without warning of their fatal defect, of
which it was informed, and after it had misled the defendant into believing that the
policies were effective.
The insurance company was aware, even before the policies were issued, that in the
premises insured there were only two fire hydrants installed by Qua Chee Gan and
two others nearby, owned by the municipality of TAbaco, contrary to the requirements
of the warranty in question. Such fact appears from positive testimony for the insured
that appellant's agents inspected the premises; and the simple denials of appellant's
representative (Jamiczon) can not overcome that proof. That such inspection was
made is moreover rendered probable by its being a prerequisite for the fixing of the
discount on the premium to which the insured was entitled, since the discount
depended on the number of hydrants, and the fire fighting equipment available (See
"Scale of Allowances" to which the policies were expressly made subject). The law,
supported by a long line of cases, is expressed by American Jurisprudence (Vol. 29,
pp. 611-612) to be as follows:
It is usually held that where the insurer, at the time of the issuance of a policy of
insurance, has knowledge of existing facts which, if insisted on, would invalidate the
contract from its very inception, such knowledge constitutes a waiver of conditions in
the contract inconsistent with the facts, and the insurer is stopped thereafter from
asserting the breach of such conditions. The law is charitable enough to assume, in
the absence of any showing to the contrary, that an insurance company intends to
executed a valid contract in return for the premium received; and when the policy
contains a condition which renders it voidable at its inception, and this result is known
to the insurer, it will be presumed to have intended to waive the conditions and to
execute a binding contract, rather than to have deceived the insured into thinking he
is insured when in fact he is not, and to have taken his money without consideration.
(29 Am. Jur., Insurance, section 807, at pp. 611-612.)
The reason for the rule is not difficult to find.
14
The plain, human justice of this doctrine is perfectly apparent. To allow a company to
accept one's money for a policy of insurance which it then knows to be void and of no
effect, though it knows as it must, that the assured believes it to be valid and binding,
is so contrary to the dictates of honesty and fair dealing, and so closely related to
positive fraud, as to the abhorent to fairminded men. It would be to allow the company
to treat the policy as valid long enough to get the preium on it, and leave it at liberty to
repudiate it the next moment. This cannot be deemed to be the real intention of the
parties. To hold that a literal construction of the policy expressed the true intention of
the company would be to indict it, for fraudulent purposes and designs which we
cannot believe it to be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl.
540, 543-544).
The inequitableness of the conduct observed by the insurance company in this case
is heightened by the fact that after the insured had incurred the expense of installing
the two hydrants, the company collected the premiums and issued him a policy so
worded that it gave the insured a discount much smaller than that he was normaly
entitledto. According to the "Scale of Allowances," a policy subject to a warranty of the
existence of one fire hydrant for every 150 feet of external wall entitled the insured to
a discount of 7 1/2 per cent of the premium; while the existence of "hydrants, in
compund" (regardless of number) reduced the allowance on the premium to a mere 2
1/2 per cent. This schedule was logical, since a greater number of hydrants and fire
fighting appliances reduced the risk of loss. But the appellant company, in the
particular case now before us, so worded the policies that while exacting the greater
number of fire hydrants and appliances, it kept the premium discount at the minimum
of 2 1/2 per cent, thereby giving the insurance company a double benefit. No reason
is shown why appellant's premises, that had been insured with appellant for several
years past, suddenly should be regarded in 1939 as so hazardous as to be accorded
a treatment beyond the limits of appellant's own scale of allowances. Such abnormal
treatment of the insured strongly points at an abuse of the insurance company's
selection of the words and terms of the contract, over which it had absolute control.
These considerations lead us to regard the parol evidence rule, invoked by the
appellant as not applicable to the present case. It is not a question here whether or
not the parties may vary a written contract by oral evidence; but whether testimony is
receivable so that a party may be, by reason of inequitable conduct shown, estopped

from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the
insured.
Receipt of Premiums or Assessments afte Cause for Forfeiture Other than
Nonpayment. — It is a well settled rule of law that an insurer which with knowledge of
facts entitling it to treat a policy as no longer in force, receives and accepts a preium
on the policy, estopped to take advantage of the forfeiture. It cannot treat the policy as
void for the purpose of defense to an action to recover for a loss thereafter occurring
and at the same time treat it as valid for the purpose of earning and collecting further
premiums." (29 Am. Jur., 653, p. 657.)
It would be unconscionable to permit a company to issue a policy under circumstances
which it knew rendered the policy void and then to accept and retain premiums under
such a void policy. Neither law nor good morals would justify such conduct and the
doctrine of equitable estoppel is peculiarly applicable to the situation. (McGuire vs.
Home Life Ins. Co. 94 Pa. Super Ct. 457.)
Moreover, taking into account the well known rule that ambiguities or obscurities must
be strictly interpreted aganst the prty that caused them, 1the "memo of warranty"
invoked by appellant bars the latter from questioning the existence of the appliances
called for in the insured premises, since its initial expression, "the undernoted
appliances for the extinction of fire being kept on the premises insured hereby, . . . it
is hereby warranted . . .", admists of interpretation as an admission of the existence of
such appliances which appellant cannot now contradict, should the parol evidence rule
apply.
The alleged violation of the warranty of 100 feet of fire hose for every two hydrants,
must be equally rejected, since the appellant's argument thereon is based on the
assumption that the insured was bound to maintain no less than eleven hydrants (one
per 150 feet of wall), which requirement appellant is estopped from enforcing. The
supposed breach of the wter pressure condition is made to rest on the testimony of
witness Serra, that the water supply could fill a 5-gallon can in 3 seconds; appellant
15
thereupon inferring that the maximum quantity obtainable from the hydrants was 100
gallons a minute, when the warranty called for 200 gallons a minute. The transcript
shows, however, that Serra repeatedly refused and professed inability to estimate the
rate of discharge of the water, and only gave the "5-gallon per 3-second" rate because
the insistence of appellant's counsel forced the witness to hazard a guess. Obviously,
the testimony is worthless and insufficient to establish the violation claimed, specially
since the burden of its proof lay on appellant.
As to maintenance of a trained fire brigade of 20 men, the record is preponderant that
the same was organized, and drilled, from time to give, altho not maintained as a
permanently separate unit, which the warranty did not require. Anyway, it would be
unreasonable to expect the insured to maintain for his compound alone a fire fighting
force that many municipalities in the Islands do not even possess. There is no merit in
appellant's claim that subordinate membership of the business manager (Co Cuan) in
the fire brigade, while its direction was entrusted to a minor employee unders the
testimony improbable. A business manager is not necessarily adept at fire fighting, the
qualities required being different for both activities.
Under the second assignment of error, appellant insurance company avers, that the
insured violated the "Hemp Warranty" provisions of Policy No. 2637165 (Exhibit JJ),
against the storage of gasoline, since appellee admitted that there were 36 cans (latas)
of gasoline in the building designed as "Bodega No. 2" that was a separate structure
not affected by the fire. It is well to note that gasoline is not specifically mentioned
among the prohibited articles listed in the so-called "hemp warranty." The cause relied
upon by the insurer speaks of "oils (animal and/or vegetable and/or mineral and/or
their liquid products having a flash point below 300o Fahrenheit", and is decidedly
ambiguous and uncertain; for in ordinary parlance, "Oils" mean "lubricants" and not
gasoline or kerosene. And how many insured, it may well be wondered, are in a
position to understand or determine "flash point below 003o Fahrenheit. Here, again,
by reason of the exclusive control of the insurance company over the terms and
phraseology of the contract, the ambiguity must be held strictly against the insurer and
liberraly in favor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-
1175; 29 Am. Jur. 180).

Insurance is, in its nature, complex and difficult for the layman to understand. Policies
are prepared by experts who know and can anticipate the hearing and possible
complications of every contingency. So long as insurance companies insist upon the
use of ambiguous, intricate and technical provisions, which conceal rather than frankly
disclose, their own intentions, the courts must, in fairness to those who purchase
insurance, construe every ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L.
Ins. Co., 91 Wash. 324, LRA 1917A, 1237.)
An insurer should not be allowed, by the use of obscure phrases and exceptions, to
defeat the very purpose for which the policy was procured (Moore vs. Aetna Life
Insurance Co., LRA 1915D, 264).
We see no reason why the prohibition of keeping gasoline in the premises could not
be expressed clearly and unmistakably, in the language and terms that the general
public can readily understand, without resort to obscure esoteric expression (now
derisively termed "gobbledygook"). We reiterate the rule stated in Bachrach vs. British
American Assurance Co. (17 Phil. 555, 561):
If the company intended to rely upon a condition of that character, it ought to have
been plainly expressed in the policy.
This rigid application of the rule on ambiguities has become necessary in view of
current business practices. The courts cannot ignore that nowadays monopolies,
cartels and concentrations of capital, endowed with overwhelming economic power,
manage to impose upon parties dealing with them cunningly prepared "agreements"
that the weaker party may not change one whit, his participation in the "agreement"
being reduced to the alternative to take it or leave it" labelled since Raymond Baloilles"
contracts by adherence" (con tracts d'adhesion), in contrast to these entered into by
parties bargaining on an equal footing, such contracts (of which policies of insurance
and international bills of lading are prime examples) obviously call for greater strictness
and vigilance on the part of courts of justice with a view to protecting the weaker party
from abuses and imposition, and prevent their becoming traps for the unwarry (New
16
Civil Coee, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February
1942).
Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia alguna
oscuridad, habra de ser tenido en cuenta que al seguro es, practicamente un contrato
de los llamados de adhesion y por consiguiente en caso de duda sobre la significacion
de las clausulas generales de una poliza — redactada por las compafijas sin la
intervencion alguna de sus clientes — se ha de adoptar de acuerdo con el articulo
1268 del Codigo Civil, la interpretacion mas favorable al asegurado, ya que la
obscuridad es imputable a la empresa aseguradora, que debia haberse explicado mas
claramante. (Dec. Trib. Sup. of Spain 13 Dec. 1934)
The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured
alone, but equally so for the insurer; in fact, it is mere so for the latter, since its
dominant bargaining position carries with it stricter responsibility.
Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2
was only incidental to his business, being no more than a customary 2 day's supply
for the five or six motor vehicles used for transporting of the stored merchandise (t. s.
n., pp. 1447-1448). "It is well settled that the keeping of inflammable oils on the
premises though prohibited by the policy does not void it if such keeping is incidental
to the business." Bachrach vs. British American Ass. Co., 17 Phil. 555, 560); and
"according to the weight of authority, even though there are printed prohibitions against
keeping certain articles on the insured premises the policy will not be avoided by a
violation of these prohibitions, if the prohibited articles are necessary or in customary
use in carrying on the trade or business conducted on the premises." (45 C. J. S., p.
311; also 4 Couch on Insurance, section 966b). It should also be noted that the "Hemp
Warranty" forbade storage only "in the building to which this insurance applies and/or
in any building communicating therewith", and it is undisputed that no gasoline was
stored in the burned bodegas, and that "Bodega No. 2" which was not burned and
where the gasoline was found, stood isolated from the other insured bodegas.

The charge that the insured failed or refused to submit to the examiners of the insurer
the books, vouchers, etc. demanded by them was found unsubstantiated by the trial
Court, and no reason has been shown to alter this finding. The insured gave the
insurance examiner all the date he asked for (Exhibits AA, BB, CCC and Z), and the
examiner even kept and photographed some of the examined books in his possession.
What does appear to have been rejected by the insured was the demand that he
should submit "a list of all books, vouchers, receipts and other records" (Age 4, Exhibit
9-c); but the refusal of the insured in this instance was well justified, since the demand
for a list of all the vouchers (which were not in use by the insured) and receipts was
positively unreasonable, considering that such listing was superfluous because the
insurer was not denied access to the records, that the volume of Qua Chee Gan's
business ran into millions, and that the demand was made just after the fire when
everything was in turmoil. That the representatives of the insurance company were
able to secure all the date they needed is proved by the fact that the adjuster Alexander
Stewart was able to prepare his own balance sheet (Exhibit L of the criminal case) that
did not differ from that submitted by the insured (Exhibit J) except for the valuation of
the merchandise, as expressly found by the Court in the criminal case for arson.
(Decision, Exhibit WW).
How valuations may differ honestly, without fraud being involved, was strikingly
illustrated in the decision of the arson case (Exhibit WW) acquiting Qua Choc Gan,
appellee in the present proceedings. The decision states (Exhibit WW, p. 11):
Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan en
Tabaco asi como su existencia de copra y abaca en las bodega al tiempo del incendio
durante el periodo comprendido desde el 1.o de enero al 21 de junio de 1940 y ha
encontrado que Qua Choc Gan ha sufrico una perdida de P1,750.76 en su negocio
en Tabaco. Segun Steward al llegar a este conclusion el ha tenidoen cuenta el balance
de comprobacion Exhibit 'J' que le ha entregado el mismo acusado Que Choc Gan en
relacion con sus libros y lo ha encontrado correcto a excepcion de los precios de
abaca y copra que alli aparecen que no estan de acuerdo con los precios en el
mercado. Esta comprobacion aparece en el balance mercado exhibit J que fue
preparado por el mismo testigo.
17
In view of the discrepancy in the valuations between the insured and the adjuster
Stewart for the insurer, the Court referred the controversy to a government auditor,
Apolonio Ramos; but the latter reached a different result from the other two. Not only
that, but Ramos reported two different valuations that could be reached according to
the methods employed (Exhibit WW, p. 35):
La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos buenos para
promovar el comercio y la finanza, pero en el caso presente ha resultado un tanto
cumplicada y acomodaticia, como lo prueba el resultado del examen hecho por los
contadores Stewart y Ramos, pues el juzgado no alcanza a ver como habiendo
examinado las mismas partidas y los mismos libros dichos contadores hayan de
llegara dos conclusiones que difieron sustancialmente entre si. En otras palabras, no
solamente la comprobacion hecha por Stewart difiere de la comprobacion hecha por
Ramos sino que, segun este ultimo, su comprobacion ha dado lugar a dos resultados
diferentes dependiendo del metodo que se emplea.
Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained.
The insurer attempted to bolster its case with alleged photographs of certain pages of
the insurance book (destroyed by the war) of insured Qua Chee Gan (Exhibits 26-A
and 26-B) and allegedly showing abnormal purchases of hemp and copra from June
11 to June 20, 1940. The Court below remained unconvinced of the authenticity of
those photographs, and rejected them, because they were not mentioned not
introduced in the criminal case; and considering the evident importance of said exhibits
in establishing the motive of the insured in committing the arson charged, and the
absence of adequate explanation for their omission in the criminal case, we cannot
say that their rejection in the civil case constituted reversible error.
The next two defenses pleaded by the insurer, — that the insured connived at the loss
and that the fraudulently inflated the quantity of the insured stock in the burnt bodegas,
— are closely related to each other. Both defenses are predicted on the assumption
that the insured was in financial difficulties and set the fire to defraud the insurance
company, presumably in order to pay off the Philippine National Bank, to which most
of the insured hemp and copra was pledged. Both defenses are fatally undermined by
the established fact that, notwithstanding the insurer's refusal to pay the value of the

policies the extensive resources of the insured (Exhibit WW) enabled him to pay off
the National Bank in a short time; and if he was able to do so, no motive appears for
attempt to defraud the insurer. While the acquittal of the insured in the arson case is
not res judicata on the present civil action, the insurer's evidence, to judge from the
decision in the criminal case, is practically identical in both cases and must lead to the
same result, since the proof to establish the defense of connivance at the fire in order
to defraud the insurer "cannot be materially less convincing than that required in order
to convict the insured of the crime of arson"(Bachrach vs. British American Assurance
Co., 17 Phil. 536).
As to the defense that the burned bodegas could not possibly have contained the
quantities of copra and hemp stated in the fire claims, the insurer's case rests almost
exclusively on the estimates, inferences and conclusionsAs to the defense that the
burned bodegas could not possibly have contained the quantities of copra and hemp
stated in the fire claims, the insurer's case rests almost exclusively on the estimates,
inferences and conclusions of its adjuster investigator, Alexander D. Stewart, who
examined the premises during and after the fire. His testimony, however, was based
on inferences from the photographs and traces found after the fire, and must yield to
the contradictory testimony of engineer Andres Bolinas, and specially of the then Chief
of the Loan Department of the National Bank's Legaspi branch, Porfirio Barrios, and
of Bank Appraiser Loreto Samson, who actually saw the contents of the bodegas
shortly before the fire, while inspecting them for the mortgagee Bank. The lower Court
was satisfied of the veracity and accuracy of these witnesses, and the appellant insurer
has failed to substantiate its charges aganst their character. In fact, the insurer's
repeated accusations that these witnesses were later "suspended for fraudulent
transactions" without giving any details, is a plain attempt to create prejudice against
them, without the least support in fact.
Stewart himself, in testifying that it is impossible to determine from the remains the
quantity of hemp burned (t. s. n., pp. 1468, 1470), rebutted appellant's attacks on the
refusal of the Court below to accept its inferences from the remains shown in the
photographs of the burned premises. It appears, likewise, that the adjuster's
calculations of the maximum contents of the destroyed warehouses rested on the
assumption that all the copra and hemp were in sacks, and on the result of his
experiments to determine the space occupied by definite amounts of sacked copra.
18
The error in the estimates thus arrived at proceeds from the fact that a large amount
of the insured's stock were in loose form, occupying less space than when kept in
sacks; and from Stewart's obvious failure to give due allowance for the compression
of the material at the bottom of the piles (t. s. n., pp. 1964, 1967) due to the weight of
the overlying stock, as shown by engineer Bolinas. It is probable that the errors were
due to inexperience (Stewart himself admitted that this was the first copra fire he had
investigated); but it is clear that such errors render valueles Stewart's computations.
These were in fact twice passed upon and twice rejected by different judges (in the
criminal and civil cases) and their concordant opinion is practically conclusive.
The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court
below, since the opinions stated therein were based on ex parte investigations made
at the back of the insured; and the appellant did not present at the trial the original
testimony and documents from which the conclusions in the report were
drawn.lawphi1.net
Appellant insurance company also contends that the claims filed by the insured
contained false and fraudulent statements that avoided the insurance policy. But the
trial Court found that the discrepancies were a result of the insured's erroneous
interpretation of the provisions of the insurance policies and claim forms, caused by
his imperfect knowledge of English, and that the misstatements were innocently made
and without intent to defraud. Our review of the lengthy record fails to disclose reasons
for rejecting these conclusions of the Court below. For example, the occurrence of
previous fires in the premises insured in 1939, altho omitted in the claims, Exhibits EE
and FF, were nevertheless revealed by the insured in his claims Exhibits Q (filed
simultaneously with them), KK and WW. Considering that all these claims were
submitted to the smae agent, and that this same agent had paid the loss caused by
the 1939 fire, we find no error in the trial Court's acceptance of the insured's
explanation that the omission in Exhibits EE and FF was due to inadvertance, for the
insured could hardly expect under such circumstances, that the 1939 would pass
unnoticed by the insurance agents. Similarly, the 20 per cent overclaim on 70 per cent
of the hemo stock, was explained by the insured as caused by his belief that he was
entitled to include in the claim his expected profit on the 70 per cent of the hemp,
because the same was already contracted for and sold to other parties before the fire
occurred. Compared with other cases of over-valuation recorded in our judicial annals,
 19

the 20 per cent excess in the case of the insured is not by itself sufficient to establish
fraudulent intent. Thus, in Yu Cua vs. South British Ins. Co., 41 Phil. 134, the claim
was fourteen (14) times (1,400 per cent) bigger than the actual loss; in Go Lu vs.
Yorkshire Insurance Co., 43 Phil., 633, eight (8) times (800 per cent); in Tuason vs.
North China Ins. Co., 47 Phil. 14, six (6) times (600 per cent); in Tan It vs. Sun
Insurance, 51 Phil. 212, the claim totalled P31,860.85 while the goods insured were
inventoried at O13,113. Certainly, the insured's overclaim of 20 per cent in the case at
bar, duly explained by him to the Court a quo, appears puny by comparison, and can
not be regarded as "more than misstatement, more than inadvertence of mistake,
more than a mere error in opinion, more than a slight exaggeration" (Tan It vs. Sun
Insurance Office, ante) that would entitle the insurer to avoid the policy. It is well to
note that the overchange of 20 per cent was claimed only on a part (70 per cent) of
the hemp stock; had the insured acted with fraudulent intent, nothing prevented him
from increasing the value of all of his copra, hemp and buildings in the same
proportion. This also applies to the alleged fraudulent claim for burned empty sacks,
that was likewise explained to our satisfaction and that of the trial Court. The rule is
that to avoid a policy, the false swearing must be wilful and with intent to defraud (29
Am. Jur., pp. 849-851) which was not the cause. Of course, the lack of fraudulent intent
would not authorize the collection of the expected profit under the terms of the polices,
and the trial Court correctly deducte the same from its award.

We find no reversible error in the judgment appealed from, wherefore the smae is
hereby affirmed. Costs against the appellant. So ordered.
 20

G.R. No. 156167 May 16, 2005 "1", "2", "3" and "4" respectively), the risk of loss from earthquake shock was extended
only to plaintiff’s two swimming pools, thus, "earthquake shock endt." (Item 5 only)
GULF RESORTS, INC., petitioner,
(Exhs. "C-1"; "D-1," and "E" and two (2) swimming pools only (Exhs. "C-1"; ‘D-1", "E"
vs. and "F-1"). "Item 5" in those policies referred to the two (2) swimming pools only (Exhs.
"1-B", "2-B", "3-B" and "F-2"); that subsequently AHAC(AIU) issued in plaintiff’s favor
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent. Policy No. 206-4182383-0 covering the period March 14, 1988 to March 14, 1989
(Exhs. "G" also "G-1") and in said policy the earthquake endorsement clause as
indicated in Exhibits "C-1", "D-1", Exhibits "E" and "F-1" was deleted and the entry
DECISION under Endorsements/Warranties at the time of issue read that plaintiff renewed its
policy with AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under
Policy No. 206-4568061-9 (Exh. "H") which carried the entry under
PUNO, J.: "Endorsement/Warranties at Time of Issue", which read "Endorsement to Include
Earthquake Shock (Exh. "6-B-1") in the amount of P10,700.00 and paid P42,658.14
(Exhs. "6-A" and "6-B") as premium thereof, computed as follows:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of
Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE
CHARTER INSURANCE CORPORATION. Petitioner assails the appellate court Item
decision1 which dismissed its two appeals and affirmed the judgment of the trial court.

-
For review are the warring interpretations of petitioner and respondent on the scope
of the insurance company’s liability for earthquake damage to petitioner’s properties.
Petitioner avers that, pursuant to its earthquake shock endorsement rider, Insurance P7,691,000.00
Policy No. 31944 covers all damages to the properties within its resort caused by
earthquake. Respondent contends that the rider limits its liability for loss to the two
swimming pools of petitioner. -

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

@ .392%;
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its
properties in said resort insured originally with the American Home Assurance
Company (AHAC-AIU). In the first four insurance policies issued by AHAC-AIU from
-
1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. "C", "D", "E" and "F"; also Exhs.
 21

-
1,500,000.00
P19,800.00
-
-
on the furniture, etc. contained in the building above-mentioned@ .490%;
0.551%
-
b) Power House
393,000.00
-
-
P41,000.00
on the two swimming pools, only (against the peril of earthquake shock only) @
0.100%
-

-
0.551%

116,600.00
c) House Shed

other buildings include as follows:

-

a) Tilter House
P55,000.00
 22

- –

0.540% 2,061.52

P100,000.00 –

- Typhoon

for furniture, fixtures, lines air-con and operating equipment –

that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) 1,030.76
Policy No. 206-4568061-9 (Exh. "H") provided that the policy wording and rates in said
policy be copied in the policy to be issued by defendant; that defendant issued Policy
No. 31944 to plaintiff covering the period of March 14, 1990 to March 14, 1991 for –
P10,700,600.00 for a total premium of P45,159.92 (Exh. "I"); that in the computation
of the premium, defendant’s Policy No. 31944 (Exh. "I"), which is the policy in question,
contained on the right-hand upper portion of page 7 thereof, the following: EC

Rate-Various –

Premium 393.00

– –

P37,420.60 F/L ES
 23

Doc. Stamps to shock to any of the property insured by this Policy occasioned by or through or in
consequence of earthquake (Exhs. "1-D", "2-D", "3-A", "4-B", "5-A", "6-D" and "7-C");

3,068.10
that in Exhibit "7-C" the word "included" above the underlined portion was deleted; that
on July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and
F.S.T. plaintiff’s properties covered by Policy No. 31944 issued by defendant, including the
two swimming pools in its Agoo Playa Resort were damaged.2

776.89
After the earthquake, petitioner advised respondent that it would be making a claim
under its Insurance Policy No. 31944 for damages on its properties. Respondent
Prem. Tax instructed petitioner to file a formal claim, then assigned the investigation of the claim
to an independent claims adjuster, Bayne Adjusters and Surveyors, Inc.3 On July 30,
1990, respondent, through its adjuster, requested petitioner to submit various
documents in support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors,
409.05
Inc., through its Vice-President A.R. de Leon,4 rendered a preliminary report5 finding
extensive damage caused by the earthquake to the clubhouse and to the two
swimming pools. Mr. de Leon stated that "except for the swimming pools, all affected
TOTAL items have no coverage for earthquake shocks."6 On August 11, 1990, petitioner filed
its formal demand7 for settlement of the damage to all its properties in the Agoo Playa
Resort. On August 23, 1990, respondent denied petitioner’s claim on the ground that
45,159.92; its insurance policy only afforded earthquake shock coverage to the two swimming
pools of the resort.8 Petitioner and respondent failed to arrive at a settlement.9 Thus,
on January 24, 1991, petitioner filed a complaint10 with the regional trial court of Pasig
that the above break-down of premiums shows that plaintiff paid only P393.00 as praying for the payment of the following:
premium against earthquake shock (ES); that in all the six insurance policies (Exhs.
"C", "D", "E", "F", "G" and "H"), the premium against the peril of earthquake shock is
the same, that is P393.00 (Exhs. "C" and "1-B"; "2-B" and "3-B-1" and "3-B-2"; "F-02" 1.) The sum of P5,427,779.00, representing losses sustained by the insured
and "4-A-1"; "G-2" and "5-C-1"; "6-C-1"; issued by AHAC (Exhs. "C", "D", "E", "F", "G" properties, with interest thereon, as computed under par. 29 of the policy (Annex "B")
and "H") and in Policy No. 31944 issued by defendant, the shock endorsement until fully paid;
provide(sic):

2.) The sum of P428,842.00 per month, representing continuing losses sustained by
In consideration of the payment by the insured to the company of the sum included plaintiff on account of defendant’s refusal to pay the claims;
additional premium the Company agrees, notwithstanding what is stated in the printed
conditions of this policy due to the contrary, that this insurance covers loss or damage

3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorney’s fees and expenses of litigation;
5.) Costs.11
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.12
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00
against the peril of earthquake shock, the same premium it paid against earthquake
shock only on the two swimming pools in all the policies issued by AHAC(AIU)
(Exhibits "C", "D", "E", "F" and "G"). From this fact the Court must consequently agree
with the position of defendant that the endorsement rider (Exhibit "7-C") means that
only the two swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence,
where the language used in an insurance contract or application is such as to create
ambiguity the same should be resolved against the party responsible therefor, i.e., the
insurance company which prepared the contract. To the mind of [the] Court, the
language used in the policy in litigation is clear and unambiguous hence there is no
need for interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had
earthquake shock coverage and were heavily damaged by the earthquake which
struck on July 16, 1990. Defendant having admitted that the damage to the swimming
pools was appraised by defendant’s adjuster at P386,000.00, defendant must, by
virtue of the contract of insurance, pay plaintiff said amount.
24
Because it is the finding of the Court as stated in the immediately preceding paragraph
that defendant is liable only for the damage caused to the two (2) swimming pools and
that defendant has made known to plaintiff its willingness and readiness to settle said
liability, there is no basis for the grant of the other damages prayed for by plaintiff. As
to the counterclaims of defendant, the Court does not agree that the action filed by
plaintiff is baseless and highly speculative since such action is a lawful exercise of the
plaintiff’s right to come to Court in the honest belief that their Complaint is meritorious.
The prayer, therefore, of defendant for damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of
THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing
damage to the two (2) swimming pools, with interest at 6% per annum from the date
of the filing of the Complaint until defendant’s obligation to plaintiff is fully paid.
No pronouncement as to costs.13
Petitioner’s Motion for Reconsideration was denied. Thus, petitioner filed an appeal
with the Court of Appeals based on the following assigned errors:14
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN
ONLY RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER
ITS FIRE POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE
CIRCUMSTANCES SURROUNDING THE ISSUANCE OF SAID POLICY AND THE
ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE EARTHQUAKE OF JULY
16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANT’S RIGHT
TO RECOVER UNDER DEFENDANT-APPELLEE’S POLICY (NO. 31944; EXH "I")
BY LIMITING ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED

FROM THE CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE
ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS
ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24%
PER ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower court’s failure
to award it attorney’s fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are
not convinced that the last two (2) insurance contracts (Exhs. "G" and "H"), which the
plaintiff-appellant had with AHAC (AIU) and upon which the subject insurance contract
with Philippine Charter Insurance Corporation is said to have been based and copied
(Exh. "I"), covered an extended earthquake shock insurance on all the insured
properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellant’s
prayer for the imposition of interest – 24% on the insurance claim and 6% on loss of
income allegedly amounting to P4,280,000.00. Since the defendant-appellant has
expressed its willingness to pay the damage caused on the two (2) swimming pools,
as the Court a quo and this Court correctly found it to be liable only, it then cannot be
said that it was in default and therefore liable for interest.
Coming to the defendant-appellant’s prayer for an attorney’s fees, long-standing is the
rule that the award thereof is subject to the sound discretion of the court. Thus, if such
discretion is well-exercised, it will not be disturbed on appeal (Castro et al. v. CA, et
25
al., G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an exception
rather than a rule, it is necessary for the court to make findings of facts and law that
would bring the case within the exception and justify the grant of such award (Country
Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc.,
G.R. No. 136914, January 25, 2002). Therefore, holding that the plaintiff-appellant’s
action is not baseless and highly speculative, We find that the Court a quo did not err
in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and
judgment of the Trial Court hereby AFFIRMED in toto. No costs.15
Petitioner filed the present petition raising the following issues:16
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER
RESPONDENT’S INSURANCE POLICY NO. 31944, ONLY THE TWO (2)
SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES COVERED
THEREUNDER, ARE INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONER’S
PRAYER FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED,
ATTORNEY’S FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policy’s earthquake shock endorsement clearly covers all of the
properties insured and not only the swimming pools. It used the words "any property
insured by this policy," and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement
is confirmed in the body of the insurance policy itself, which states that it is "[s]ubject
to: Other Insurance Clause, Typhoon Endorsement, Earthquake Shock Endt.,

Extended Coverage Endt., FEA Warranty & Annual Payment Agreement On Long
Term Policies."17
Third, that the qualification referring to the two swimming pools had already been
deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent
omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over
the wording of the insurance policy, because the rider is the more deliberate
expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in
favor of petitioner and against respondent. It was respondent which caused the
ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock
endorsement should be interpreted as a caveat on the standard fire insurance policy,
such as to remove the two swimming pools from the coverage for the risk of fire. It
should not be used to limit the respondent’s liability for earthquake shock to the two
swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium was
not paid under the extended coverage. The premium for the earthquake shock
coverage was already included in the premium paid for the policy.
26
Tenth, the parties’ contemporaneous and subsequent acts show that they intended to
extend earthquake shock coverage to all insured properties. When it secured an
insurance policy from respondent, petitioner told respondent that it wanted an exact
replica of its latest insurance policy from American Home Assurance Company
(AHAC-AIU), which covered all the resort’s properties for earthquake shock damage
and respondent agreed. After the July 16, 1990 earthquake, respondent assured
petitioner that it was covered for earthquake shock. Respondent’s insurance adjuster,
Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit the
necessary documents for its building claims and other repair costs. Thus, under the
doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to
petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule
45 of the Revised Rules of Court as its remedy, and there is no need for calibration of
the evidence in order to establish the facts upon which this petition is based.
On the other hand, respondent made the following counter arguments:18
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly
extended coverage against earthquake shock to petitioner’s insured properties other
than on the two swimming pools. Petitioner admitted that from 1984 to 1988, only the
two swimming pools were insured against earthquake shock. From 1988 until 1990,
the provisions in its policy were practically identical to its earlier policies, and there was
no increase in the premium paid. AHAC-AIU, in a letter19 by its representative Manuel
C. Quijano, categorically stated that its previous policy, from which respondent’s policy
was copied, covered only earthquake shock for the two swimming pools.
Second, petitioner’s payment of additional premium in the amount of P393.00 shows
that the policy only covered earthquake shock damage on the two swimming pools.
The amount was the same amount paid by petitioner for earthquake shock coverage

on the two swimming pools from 1990-1991. No additional premium was paid to
warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock
endorsement to the two swimming pools in the policy schedule did not expand the
earthquake shock coverage to all of petitioner’s properties. As per its agreement with
petitioner, respondent copied its policy from the AHAC-AIU policy provided by
petitioner. Although the first five policies contained the said qualification in their rider’s
title, in the last two policies, this qualification in the title was deleted. AHAC-AIU,
through Mr. J. Baranda III, stated that such deletion was a mere inadvertence. This
inadvertence did not make the policy incomplete, nor did it broaden the scope of the
endorsement whose descriptive title was merely enumerated. Any ambiguity in the
policy can be easily resolved by looking at the other provisions, specially the
enumeration of the items insured, where only the two swimming pools were noted as
covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988,
the phrase "Item 5 – P393,000.00 – on the two swimming pools only (against the peril
of earthquake shock only)" meant that only the swimming pools were insured for
earthquake damage. The same phrase is used in toto in the policies from 1989 to
1990, the only difference being the designation of the two swimming pools as "Item 3."
Fifth, in order for the earthquake shock endorsement to be effective, premiums must
be paid for all the properties covered. In all of its seven insurance policies, petitioner
only paid P393.00 as premium for coverage of the swimming pools against earthquake
shock. No other premium was paid for earthquake shock coverage on the other
properties. In addition, the use of the qualifier "ANY" instead of "ALL" to describe the
property covered was done deliberately to enable the parties to specify the properties
included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties
must be included in the earthquake shock coverage. Petitioner’s own evidence shows
27
that it only required respondent to follow the exact provisions of its previous policy from
AHAC-AIU. Respondent complied with this requirement. Respondent’s only deviation
from the agreement was when it modified the provisions regarding the replacement
cost endorsement. With regard to the issue under litigation, the riders of the old policy
and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would
estop it from maintaining that only the two swimming pools were covered for
earthquake shock. The adjuster’s letter notifying petitioner to present certain
documents for its building claims and repair costs was given to petitioner before the
adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIU’s inadvertent deletion of the phrase "Item
5 Only" after the descriptive name or title of the Earthquake Shock Endorsement.
However, the words of the policy reflect the parties’ clear intention to limit earthquake
shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It
did not object to any deficiency nor did it institute any action to reform the policy. The
policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorney’s fees and litigation
expenses. Since respondent was willing and able to pay for the damage caused on
the two swimming pools, it cannot be considered to be in default, and therefore, it is
not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the
case at bar.
 28

First, in the designation of location of risk, only the two swimming pools were specified 0.100%-E/S
as included, viz:

393.0022]
ITEM 3 – 393,000.00 – On the two (2) swimming pools only (against the peril of
earthquake shock only)20
Third, Policy Condition No. 6 stated:

Second, under the breakdown for premium payments,21 it was stated that:
6. This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly of any of the following occurrences, namely:--
PREMIUM RECAPITULATION

(a) Earthquake, volcanic eruption or other convulsion of nature. 23

ITEM NOS.

Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement (To
AMOUNT Include the Perils of Explosion, Aircraft, Vehicle and Smoke)," stated, viz:

RATES ANNUAL PAYMENT AGREEMENT ON

LONG TERM POLICIES
PREMIUM
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS
INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A
xxx
DISCOUNT OF 5% OR 7 ½ % OF THE NET PREMIUM x x x POLICY HEREBY
UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x
x AND TO PAY THE PREMIUM.
3

Earthquake Endorsement
393,000.00

In consideration of the payment by the Insured to the Company of the sum of P. . . . .
. . . . . . . . . . . . additional premium the Company agrees, notwithstanding what is stated
in the printed conditions of this Policy to the contrary, that this insurance covers loss
or damage (including loss or damage by fire) to any of the property insured by this
Policy occasioned by or through or in consequence of Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as
they may be hereby expressly varied) and that any reference therein to loss or damage
by fire should be deemed to apply also to loss or damage occasioned by or through or
in consequence of Earthquake.24
Petitioner contends that pursuant to this rider, no qualifications were placed on the
scope of the earthquake shock coverage. Thus, the policy extended earthquake shock
coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined and
interpreted in consonance with each other.25 All its parts are reflective of the true
intent of the parties. The policy cannot be construed piecemeal. Certain stipulations
cannot be segregated and then made to control; neither do particular words or phrases
necessarily determine its character. Petitioner cannot focus on the earthquake shock
endorsement to the exclusion of the other provisions. All the provisions and riders,
taken and interpreted together, indubitably show the intention of the parties to extend
earthquake shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear intent
of the parties to extend earthquake shock coverage only to the two swimming pools.
Section 2(1) of the Insurance Code defines a contract of insurance as an agreement
whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. Thus, an insurance
contract exists where the following elements concur:
29
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.26 (Emphasis
ours)
An insurance premium is the consideration paid an insurer for undertaking to indemnify
the insured against a specified peril.27 In fire, casualty, and marine insurance, the
premium payable becomes a debt as soon as the risk attaches.28 In the subject policy,
no premium payments were made with regard to earthquake shock coverage, except
on the two swimming pools. There is no mention of any premium payable for the other
resort properties with regard to earthquake shock. This is consistent with the history
of petitioner’s previous insurance policies from AHAC-AIU. As borne out by petitioner’s
witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance
policy during the period from March 4, 1984 to March 4, 1985 the coverage on
earthquake shock was limited to the two swimming pools only?
 30

A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, Q. And they are independent of your company insofar as operations are concerned?
there is a provision here that it was only for item 5.

A. Yes, sir, they are separate entity.

Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the
two swimming pools only?
Q. But insofar as the procurement of the insurance policy is concerned they are of
course subject to your instruction, is that not correct?
A. Yes, sir.

A. Yes, sir. The final action is still with us although they can recommend what
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991 insurance to take.

pp. 23-26 Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14,
1989, did you give written instruction to Forte Insurance Agency advising it that the
earthquake shock coverage must extend to all properties of Agoo Playa Resort in La
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally Union?
arrange for the procurement of this policy?

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

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

Q. And that instruction, according to you, was very important because in April 1987
there was an earthquake tremor in La Union?
A. If you are referring to Forte Insurance Agency, yes.

A. Yes, sir.
Q. Is Forte Insurance Agency a department or division of your company?

Q. And you wanted to protect all your properties against similar tremors in the [future],
A. No, sir. They are our insurance agency. is that correct?
 31

A. Yes, sir. cannot stand alone. As explained by the testimony of Juan Baranda III, underwriter for
AHAC-AIU:

Q. Now, after this policy was delivered to you did you bother to check the provisions
with respect to your instructions that all properties must be covered again by DIRECT EXAMINATION OF JUAN BARANDA III30
earthquake shock endorsement?
TSN, August 11, 1992
pp. 9-12
A. Are you referring to the insurance policy issued by American Home Assurance
Company marked Exhibit "G"?
Atty. Mejia:

Atty. Mejia: Yes.

We respectfully manifest that the same exhibits C to H inclusive have been previously
marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to
Witness: review of (sic) these six (6) policies issued by your company [in favor] of Agoo Playa
Resort?

A. I examined the policy and seeing that the warranty on the earthquake shock
endorsement has no more limitation referring to the two swimming pools only, I was WITNESS:
contented already that the previous limitation pertaining to the two swimming pools
was already removed.
Yes[,] I remember having gone over these policies at one point of time, sir.

Petitioner also cited and relies on the attachment of the phrase "Subject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement,
Extended Coverage Endorsement, FEA Warranty & Annual Payment Agreement on
Long Term Policies"29 to the insurance policy as proof of the intent of the parties to
extend the coverage for earthquake shock. However, this phrase is merely an
enumeration of the descriptive titles of the riders, clauses, warranties or endorsements
to which the policy is subject, as required under Section 50, paragraph 2 of the
Insurance Code.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H
respectively carries an earthquake shock endorsement[?] My question to you is, on
the basis on (sic) the wordings indicated in Exhibits C to H respectively what was the
extent of the coverage [against] the peril of earthquake shock as provided for in each
of the six (6) policies?
xxx

We also hold that no significance can be placed on the deletion of the qualification
limiting the coverage to the two swimming pools. The earthquake shock endorsement WITNESS:
 32

The extent of the coverage is only up to the two (2) swimming pools, sir. We do not normally cover earthquake shock endorsement on stand alone basis. For
swimming pools we do cover earthquake shock. For building we covered it for full
earthquake coverage which includes earthquake shock…
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?

COURT:
A. Yes, sir.

As far as earthquake shock endorsement you do not have a specific coverage for other
ATTY. MEJIA: things other than swimming pool? You are covering building? They are covered by a
general insurance?

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

WITNESS: Earthquake shock coverage could not stand alone. If we are covering building or
another we can issue earthquake shock solely but that the moment I see this, the thing
that comes to my mind is either insuring a swimming pool, foundations, they are
Because it says here in the policies, in the enumeration "Earthquake Shock normally affected by earthquake but not by fire, sir.
Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake Shock
Endorsement)," sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
ATTY. MEJIA:
pp. 23-25

Witness referring to Exhibit C-1, your Honor.

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

WITNESS:
 33

Would you as a matter of practice [insure] swimming pools for fire insurance?
As I have mentioned earlier, earthquake shock cannot stand alone without the other
half of it. I assure you that this one covers the two swimming pools with respect to
WITNESS:
earthquake shock endorsement. Based on it, if we are going to look at the premium
there has been no change with respect to the rates. Everytime (sic) there is a renewal
if the intention of the insurer was to include the earthquake shock, I think there is a
substantial increase in the premium. We are not only going to consider the two (2) No, we don’t, sir.
swimming pools of the other as stated in the policy. As I see, there is no increase in
the amount of the premium. I must say that the coverage was not broaden (sic) to
include the other items. Q. That is why the phrase "earthquake shock to the two (2) swimming pools only" was
placed, is it not?

COURT:
A. Yes, sir.

They are the same, the premium rates?

ATTY. ANDRES:

WITNESS:
Will you not also agree with me that these exhibits, Exhibits G and H which you have
pointed to during your direct-examination, the phrase "Item no. 5 only" meaning to (sic)
They are the same in the sence (sic), in the amount of the coverage. If you are going the two (2) swimming pools was deleted from the policies issued by AIU, is it not?
to do some computation based on the rates you will arrive at the same premiums, your
Honor.
xxx

CROSS-EXAMINATION OF JUAN BARANDA III

ATTY. ANDRES:
TSN, September 7, 1992
pp. 4-6
As an insurance executive will you not attach any significance to the deletion of the
qualifying phrase for the policies?
ATTY. ANDRES:

WITNESS:
 34

Q. So, all the provisions here will be the same except that of the premium rates?
My answer to that would be, the deletion of that particular phrase is inadvertent. Being
a company underwriter, we do not cover. . it was inadvertent because of the previous
A. Yes, sir. He assured me that with regards to the insurance premium rates that they
policies that we have issued with no specific attachments, premium rates and so on.
will be charging will be limited to this one. I (sic) can even be lesser.
It was inadvertent, sir.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

The Court also rejects petitioner’s contention that respondent’s contemporaneous and
subsequent acts to the issuance of the insurance policy falsely gave the petitioner TSN, January 14, 1992
assurance that the coverage of the earthquake shock endorsement included all its
properties in the resort. Respondent only insured the properties as intended by the pp. 12-14
petitioner. Petitioner’s own witness testified to this agreement, viz:

Atty. Mejia:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992 Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the
pp. 4-5 provisions and scope of coverage of Exhibits "I" and "H" sometime in the third week of
March, 1990 or thereabout?

Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did
you tell Atty. Omlas (sic) to copy from Exhibit "H" for purposes of procuring the policy A. Yes, sir, about that time.
from Philippine Charter Insurance Corporation?

Q. And at that time did you notice any discrepancy or difference between the policy
A. I told him that the insurance that they will have to get will have the same provisions wordings as well as scope of coverage of Exhibits "I" and "H" respectively?
as this American Home Insurance Policy No. 206-4568061-9.

A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already
Q. You are referring to Exhibit "H" of course? that the policy wordings and rates were copied from the insurance policy I sent them
but it was only when this case erupted that we discovered some discrepancies.

A. Yes, sir, to Exhibit "H".

Q. With respect to the items declared for insurance coverage did you notice any
discrepancy at any time between those indicated in Exhibit "I" and those indicated in
Exhibit "H" respectively?

A. With regard to the wordings I did not notice any difference because it was exactly
the same P393,000.00 on the two (2) swimming pools only against the peril of
earthquake shock which I understood before that this provision will have to be placed
here because this particular provision under the peril of earthquake shock only is
requested because this is an insurance policy and therefore cannot be insured against
fire, so this has to be placed.
The verbal assurances allegedly given by respondent’s representative Atty. Umlas
were not proved. Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondent’s independent claims
adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the representative
of Bayne Adjusters and Surveyors, Inc., respondent never meant to lead petitioner to
believe that the endorsement for earthquake shock covered properties other than the
two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and Surveyors,
Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of
coverage of the policy issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy
of the insurance coverage policy and it was indicated under Item 3 specifically that the
coverage is only for earthquake shock. Then, I remember I had a talk with Atty. Umlas
(sic), and I relayed to him what I had found out in the policy and he confirmed to me
35
indeed only Item 3 which were the two swimming pools have coverage for earthquake
shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except
for the swimming pools all affected items have no coverage for earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy I
found out that under Item 3 it was specific on the wordings that on the two swimming
pools only, then enclosed in parenthesis (against the peril[s] of earthquake shock
only), and secondly, when I examined the summary of premium payment only Item 3
which refers to the swimming pools have a computation for premium payment for
earthquake shock and all the other items have no computation for payment of
premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner
cannot rely on the general rule that insurance contracts are contracts of adhesion
which should be liberally construed in favor of the insured and strictly against the
insurer company which usually prepares it.31 A contract of adhesion is one wherein a
party, usually a corporation, prepares the stipulations in the contract, while the other
party merely affixes his signature or his "adhesion" thereto. Through the years, the
courts have held that in these type of contracts, the parties do not bargain on equal
footing, the weaker party's participation being reduced to the alternative to take it or
leave it. Thus, these contracts are viewed as traps for the weaker party whom the
courts of justice must protect.32 Consequently, any ambiguity therein is resolved
against the insurer, or construed liberally in favor of the insured.33
The case law will show that this Court will only rule out blind adherence to terms where
facts and circumstances will show that they are basically one-sided.34 Thus, we have
 36

called on lower courts to remain careful in scrutinizing the factual circumstances

behind each case to determine the efficacy of the claims of contending parties. In
Q. What steps did you take?
Development Bank of the Philippines v. National Merchandising Corporation, et al.,35
the parties, who were acute businessmen of experience, were presumed to have
assented to the assailed documents with full knowledge.
A. When I examined the policy of the Philippine Charter Insurance Corporation I
specifically told him that the policy and wordings shall be copied from the AIU Policy
No. 206-4568061-9.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner
cannot claim it did not know the provisions of the policy. From the inception of the
policy, petitioner had required the respondent to copy verbatim the provisions and
terms of its latest insurance policy from AHAC-AIU. The testimony of Mr. Leopoldo Respondent, in compliance with the condition set by the petitioner, copied AIU Policy
Mantohac, a direct participant in securing the insurance policy of petitioner, is reflective No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was
of petitioner’s knowledge, viz: variance in some terms, specifically in the replacement cost endorsement, but the
principal provisions of the policy remained essentially similar to AHAC-AIU’s policy.
Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this
case as the parties’ intent to limit the coverage of the policy to the two swimming pools
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36
only is not ambiguous.37
TSN, September 23, 1991
pp. 20-21
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition
for certiorari is dismissed. No costs. SO ORDERED.
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those
facilities in Agoo Playa?

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

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

A. Yes, sir.
 37

G.R. No. 137172 April 4, 2001 All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May
1991 to 4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiffs properties located at
UCPB GENERAL INSURANCE CO., INC., petitioner,
2410-2432 and 2442-2450 Taft Avenue, Pasay City were razed by fire. On July 13,
vs. 1992, plaintiff tendered, and defendant accepted, five (5) Equitable Bank Manager's
Checks in the total amount of P225,753.45 as renewal premium payments for which
MASAGANA TELAMART, INC., respondent. Official Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued
by defendant. On July 14, 1992, Masagana made its formal demand for
indemnification for the burned insured properties. On the same day, defendant
RESOLUTION returned the five (5) manager's checks stating in its letter (Exhibit "R" / "8", Record, p.
192) that it was rejecting Masagana's claim on the following grounds:

DAVIDE, JR., C.J.:

"a) Said policies expired last May 22, 1992 and were not renewed for another term;

In our decision of 15 June 1999 in this case, we reversed and set aside the assailed
decision 1 of the Court of Appeals, which affirmed with modification the judgment of b) Defendant had put plaintiff and its alleged broker on notice of non-renewal
the trial court (a) allowing Respondent to consign the sum of P225,753.95 as full earlier; and
payment of the premiums for the renewal of the five insurance policies on
Respondent's properties; (b) declaring the replacement-renewal policies effective and
binding from 22 May 1992 until 22 May 1993; and (c) ordering Petitioner to pay c) The properties covered by the said policies were burned in a fire that took place
Respondent P18,645,000.00 as indemnity for the burned properties covered by the last June 13, 1992, or before tender of premium payment."
renewal-replacement policies. The modification consisted in the (1) deletion of the trial
court's declaration that three of the policies were in force from August 1991 to August
1992; and (2) reduction of the award of the attorney's fees from 25% to 10% of the
(Record, p. 5)
total amount due the Respondent.

Hence Masagana filed this case.

The material operative facts upon which the appealed judgment was based are
summarized by the Court of Appeals in its assailed decision as follows:
The Court of Appeals disagreed with Petitioner's stand that Respondent's tender of
payment of the premiums on 13 July 1992 did not result in the renewal of the policies,
Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5)
having been made beyond the effective date of renewal as provided under Policy
insurance policies (Exhibits "A" to "E", Record, pp. 158-175) on its properties [in Pasay
Condition No. 26, which states:
City and Manila] . . . .
 38

26. Renewal Clause. — Unless the company at least forty five days in advance of
the end of the policy period mails or delivers to the assured at the address shown in
the policy notice of its intention not to renew the policy or to condition its renewal upon
reduction of limits or elimination of coverages, the assured shall be entitled to renew
the policy upon payment of the premium due on the effective date of renewal.
Both the Court of Appeals and the trial court found that sufficient proof exists that
Respondent, which had procured insurance coverage from Petitioner for a number of
years, had been granted a 60 to 90-day credit term for the renewal of the policies.
Such a practice had existed up to the time the claims were filed. Thus:
Fire Insurance Policy No. HO/F-29362 was issued on June 15, 1989 but premium was
paid only on February 13, 1990 under O.R. No. 39233 for insurance coverage from
May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No.
26303 was issued on November 22, 1988 but premium therefor was collected only on
March 15, 1989 under O.R. NO. 38573 for insurance risks coverage from December
15, 1988 to December 15, 1989 (Exhs. "FF" and "FF-1").
Moreover, according to the Court of Appeals the following circumstances constitute
preponderant proof that no timely notice of non-renewal was made by Petitioner:

Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued
(1) Defendant-appellant received the confirmation (Exhibit "11", Record, p. 350) from
on May 7, 1990 but premium was paid more than 90 days later on August 31, 1990
Ultramar Reinsurance Brokers that plaintiff's reinsurance facility had been confirmed
under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for
up to 67.5% only on April 15, 1992 as indicated on Exhibit "11". Apparently, the notice
Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB
of non-renewal (Exhibit "7," Record, p. 320) was sent not earlier than said date, or
on May 4, 1990 but premium was collected by UCPB only on July 13, 1990 or more
within 45 days from the expiry dates of the policies as provided under Policy Condition
than 60 days later under O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other
No. 26; (2) Defendant insurer unconditionally accepted, and issued an official receipt
policies: Fire Insurance Policy No. 34657 covering risks from May 22, 1990 to May 22,
for, the premium payment on July 1[3], 1992 which indicates defendant's willingness
1991 was issued on May 7, 1990 but premium therefor was paid only on July 19, 1990
to assume the risk despite only a 67.5% reinsurance cover[age]; and (3) Defendant
under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No. 34661
insurer appointed Esteban Adjusters and Valuers to investigate plaintiff's claim as
covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990 but
shown by the letter dated July 17, 1992 (Exhibit "11", Record, p. 254).
premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X" and "X-1").
Fire Insurance Policy No. 34688 for insurance coverage from May 22, 1990 to May
22, 1991 was issued on May 7, 1990 but premium was paid only on July 19, 1990
under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover In our decision of 15 June 1999, we defined the main issue to be "whether the fire
insurance risks from May 22, 1989 to May 22, 1990 was issued on May 22, 1989 but insurance policies issued by petitioner to the respondent covering the period from May
premium therefor was collected only on July 25, 1990[sic] under O.R. No. 40799 22, 1991 to May 22, 1992 . . . had been extended or renewed by an implied credit
(Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks from arrangement though actual payment of premium was tendered on a later date and
January 12, 1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's after the occurrence of the (fire) risk insured against." We resolved this issue in the
sister company) dated December 10, 1988 but premium therefor was paid only on negative in view of Section 77 of the Insurance Code and our decisions in Valenzuela
February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance v. Court of Appeals; 2 South Sea Surety and Insurance Co., Inc. v. Court of Appeals;
Policy No. 29128 was issued on May 22, 1989 but premium was paid only on July 25, 3 and Tibay v. Court of Appeals. 4 Accordingly, we reversed and set aside the decision
1989 under O.R. No. 40800 for insurance coverage from May 22, 1989 to May 22, of the Court of Appeals.
1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy No. 29127 was issued on May
22, 1989 but premium was paid only on July 17, 1989 under O.R. No. 40682 for
insurance risk coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1").
 39

Respondent seasonably filed a motion for the reconsideration of the adverse verdict.
It alleges in the motion that we had made in the decision our own findings of facts,
which are not in accord with those of the trial court and the Court of Appeals. The
courts below correctly found that no notice of non-renewal was made within 45 days
before 22 May 1992, or before the expiration date of the fire insurance policies. Thus,
the policies in question were renewed by operation of law and were effective and valid
on 30 June 1992 when the fire occurred, since the premiums were paid within the 60-
to 90-day credit term.
insured to be entitled to a renewal of a non-life policy, payment of the premium due on
the effective date of renewal should first be made. Respondent's argument that
Section 77 is not a prohibitive provision finds no authoritative support.
Upon a meticulous review of the records and reevaluation of the issues raised in the
motion for reconsideration and the pleadings filed thereafter by the parties, we
resolved to grant the motion for reconsideration. The following facts, as found by the
trial court and the Court of Appeals, are indeed duly established:

Respondent likewise disagrees with our ruling that parties may neither agree expressly
or impliedly on the extension of credit or time to pay the premium nor consider a policy 1. For years, Petitioner had been issuing fire policies to the Respondent, and
binding before actual payment. It urges the Court to take judicial notice of the fact that these policies were annually renewed.
despite the express provision of Section 77 of the Insurance Code, extension of credit
terms in premium payment has been the prevalent practice in the insurance industry.
Most insurance companies, including Petitioner, extend credit terms because Section 2. Petitioner had been granting Respondent a 60- to 90-day credit term within
77 of the Insurance Code is not a prohibitive injunction but is merely designed for the which to pay the premiums on the renewed policies.
protection of the parties to an insurance contract. The Code itself, in Section 78,
authorizes the validity of a policy notwithstanding non-payment of premiums.
3. There was no valid notice of non-renewal of the policies in question, as there
is no proof at all that the notice sent by ordinary mail was received by Respondent,
Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its and the copy thereof allegedly sent to Zuellig was ever transmitted to Respondent.
awareness of Section 77 Petitioner persuaded and induced Respondent to believe
that payment of premium on the 60- to 90-day credit term was perfectly alright; in fact
it accepted payments within 60 to 90 days after the due dates. By extending credit and
4. The premiums for the policies in question in the aggregate amount of
habitually accepting payments 60 to 90 days from the effective dates of the policies, it
P225,753.95 were paid by Respondent within the 60- to 90-day credit term and were
has implicitly agreed to modify the tenor of the insurance policy and in effect waived
duly accepted and received by Petitioner's cashier.
the provision therein that it would pay only for the loss or damage in case the same
occurred after payment of the premium.

The instant case has to rise or fall on the core issue of whether Section 77 of the
Insurance Code of 1978 (P.D. No. 1460) must be strictly applied to Petitioner's
Petitioner filed an opposition to the Respondent's motion for reconsideration. It argues
advantage despite its practice of granting a 60- to 90-day credit term for the payment
that both the trial court and the Court of Appeals overlooked the fact that on 6 April
of premiums.
1992 Petitioner sent by ordinary mail to Respondent a notice of non-renewal and sent
by personal delivery a copy thereof to Respondent's broker, Zuellig. Both courts
likewise ignored the fact that Respondent was fully aware of the notice of non-renewal.
A reading of Section 66 of the Insurance Code readily shows that in order for an Section 77 of the Insurance Code of 1978 provides:

SECTION 77. An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid, except in the case of
a life or an industrial life policy whenever the grace period provision applies.
This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code)
promulgated on 18 December 1974. In turn, this Section has its source in Section 72
of Act No. 2427 otherwise known as the Insurance Act as amended by R.A. No. 3540,
approved on 21 June 1963, which read:
SECTION 72. An insurer is entitled to payment of premium as soon as the thing
insured is exposed to the peril insured against, unless there is clear agreement to grant
the insured credit extension of the premium due. No policy issued by an insurance
company is valid and binding unless and until the premium thereof has been paid.
(Italic supplied)
It can be seen at once that Section 77 does not restate the portion of Section 72
expressly permitting an agreement to extend the period to pay the premium. But are
there exceptions to Section 77?
The answer is in the affirmative.
The first exception is provided by Section 77 itself, and that is, in case of a life or
industrial life policy whenever the grace period provision applies.
The second is that covered by Section 78 of the Insurance Code, which provides:
40
SECTION 78. Any acknowledgment in a policy or contract of insurance of the receipt
of premium is conclusive evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until premium is
actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs.
Court of Appeals, 5 wherein we ruled that Section 77 may not apply if the parties have
agreed to the payment in installments of the premium and partial payment has been
made at the time of loss. We said therein, thus:
We hold that the subject policies are valid even if the premiums were paid on
installments. The records clearly show that the petitioners and private respondent
intended subject insurance policies to be binding and effective notwithstanding the
staggered payment of the premiums. The initial insurance contract entered into in 1982
was renewed in 1983, then in 1984. In those three years, the insurer accepted all the
installment payments. Such acceptance of payments speaks loudly of the insurer's
intention to honor the policies it issued to petitioner. Certainly, basic principles of equity
and fairness would not allow the insurer to continue collecting and accepting the
premiums, although paid on installments, and later deny liability on the lame excuse
that the premiums were not prepaid in full.
Not only that. In Tuscany, we also quoted with approval the following pronouncement
of the Court of Appeals in its Resolution denying the motion for reconsideration of its
decision:
While the import of Section 77 is that prepayment of premiums is strictly required as a
condition to the validity of the contract, We are not prepared to rule that the request to
make installment payments duly approved by the insurer would prevent the entire
contract of insurance from going into effect despite payment and acceptance of the
initial premium or first installment. Section 78 of the Insurance Code in effect allows
waiver by the insurer of the condition of prepayment by making an acknowledgment
in the insurance policy of receipt of premium as conclusive evidence of payment so far

as to make the policy binding despite the fact that premium is actually unpaid. Section
77 merely precludes the parties from stipulating that the policy is valid even if
premiums are not paid, but does not expressly prohibit an agreement granting credit
extension, and such an agreement is not contrary to morals, good customs, public
order or public policy (De Leon, The Insurance Code, p. 175). So is an understanding
to allow insured to pay premiums in installments not so prescribed. At the very least,
both parties should be deemed in estoppel to question the arrangement they have
voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the Court of Appeals,
Tuscany has provided a fourth exception to Section 77, namely, that the insurer may
grant credit extension for the payment of the premium. This simply means that if the
insurer has granted the insured a credit term for the payment of the premium and loss
occurs before the expiration of the term, recovery on the policy should be allowed even
though the premium is paid after the loss but within the credit term.
Moreover, there is nothing in Section 77 which prohibits the parties in an insurance
contract to provide a credit term within which to pay the premiums. That agreement is
not against the law, morals, good customs, public order or public policy. The
agreement binds the parties. Article 1306 of the Civil Code provides:
ARTICLE 1306. The contracting parties may establish such stipulations clauses,
terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy.
Finally in the instant case, it would be unjust and inequitable if recovery on the policy
would not be permitted against Petitioner, which had consistently granted a 60- to 90-
day credit term for the payment of premiums despite its full awareness of Section 77.
Estoppel bars it from taking refuge under said Section, since Respondent relied in
good faith on such practice. Estoppel then is the fifth exception to Section 77.
41
WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and
SET ASIDE, and a new one is hereby entered DENYING the instant petition for failure
of Petitioner to sufficiently show that a reversible error was committed by the Court of
Appeals in its challenged decision, which is hereby AFFIRMED in toto.
No pronouncement as to cost.
SO ORDERED.
Bellosillo, Kapunan, Mendoza, Panganiban, Buena, Gonzaga-Reyes, Ynares-
Santiago, De Leon, Jr. and Sandoval-Gutierrez, JJ ., concur.
Melo, J., I join the dissents of Justice Vitug and Pardo.
Vitug, J., Please see separate opinion.
Pardo, J., I dissent. See attached.
Separate Opinions
VITUG, J .:
An essential characteristic of an insurance is its being synallagmatic, a highly
reciprocal contract where the rights and obligations of the parties correlate and
mutually correspond. The insurer assumes the risk of loss which an insured
might suffer in consideration of premium payments under a risk-distributing
device. Such assumption of risk is a component of a general scheme to
distribute actual losses among a group of persons, bearing similar risks, who
make ratable contributions to a fund from which the losses incurred due to
exposures to the peril insured against are assured and compensated.
 42

It is generally recognized that the business of insurance is one imbued with

public interest. 1 For the general good and mutual protection of all the parties,
This provision amended Section 72 of the then Insurance Act by deleting the
it is aptly subjected to regulation and control by the State by virtue of an exercise
phrase, "unless there is a clear agreement to grant the insured credit extension
of its police power. 2 The State may regulate in various respects the relations
of the premium due," and adding at the beginning of the second sentence the
between the insurer and the insured, including the internal affairs of an
phrase, "[n]otwithstanding any agreement to the contrary." Commenting on the
insurance company, without being violative of due process. 3
new provision, Dean Hernando B. Perez states:

A requirement imposed by way of State regulation upon insurers is the

"Under the former rule, whenever the insured was granted credit extension of
maintenance of an adequate legal reserve in favor of those claiming under their
the premium due or given a period of time to pay the premium on the policy
policies. 4 The law generally mandates that insurance companies should retain
issued, such policy was binding although premiums had not been paid (Section
an amount sufficient to guarantee the security of its policyholders in the remote
72, Insurance Act; 6 Couch 2d. 67). This rule was changed when the present
future, as well as the present, and to cover any contingencies that may arise or
provision eliminated the portion concerning credit agreement, and added the
may be fairly anticipated. The integrity of this legal reserve is threatened and
phrase 'notwithstanding any agreement to the contrary' which precludes the
undermined if a credit arrangement on the payment of premium were to be
parties from stipulating that the policy is valid even if premiums are not paid.
sanctioned. Calculations and estimations of liabilities under the risk insured
Hence, under the present law, the policy is not valid and binding unless and until
against are predicated on the basis of the payment of premiums, the vital
the premium is paid (Arce vs. Capital Insurance & Surety Co., Inc., 117 SCRA
element that establishes the juridical relation between the insured and the
63). If the insurer wants to favor the insured by making the policy binding
insurer. By legislative fiat, any agreement to the contrary notwithstanding, the
notwithstanding the non-payment of premium, a mere credit agreement would
payment of premium is a condition precedent to, and essential for, the
not be sufficient. The remedy would be for the insurer to acknowledge in the
efficaciousness of the insurance contract, except (a) in case of life or industrial
policy that premiums were paid although they were not, in which case the policy
life insurance where a grace period applies, or (b) in case of a written
becomes binding because such acknowledgment is a conclusive evidence of
acknowledgment by the insurer of the receipt of premium, such as by a deposit
payment of premium (Section 78). Thus, the Supreme Court took note that under
receipt, the written acknowledgment being conclusive evidence of the premium
the present law, Section 77 of the Insurance Code of 1978 has deleted the clause
payment so far as to make the policy binding. 5
'unless there is a clear agreement to grant the insured credit extension of the
premium due' (Velasco vs. Apostol, 173 SCRA 228)." 6
Section 77 of the Insurance Code provides:
By weight of authority, estoppel cannot create a contract of insurance, 7 neither
can it be successfully invoked to create a primary liability, 8 nor can it give
"SECTION 77. An insurer is entitled to payment of the premium as soon
validity to what the law so proscribes as a matter of public policy. 9 So essential
as the thing insured is exposed to the peril insured against. Notwithstanding
is the premium payment to the creation of the vinculum juris between the
any agreement to the contrary, no policy or contract of insurance issued by an
insured and the insurer that it would be doubtful to have that payment validly
insurance company is valid and binding unless and until the premium thereof
excused even for a fortuitous event. 10
has been paid, except in the case of a life or an industrial life policy whenever
the grace period provision applies."
 43

The law, however, neither requires for the establishment of the juridical tie, nor
measures the strength of such tie by, any specific amount of premium payment.
A part payment of the premium, if accepted by the insurer, can thus perfect the
contract and bring the parties into an obligatory relation. 11 Such a payment
puts the contract into full binding force, not merely pro tanto, thereby entitling
and obligating the parties by their agreement. Hence, in case of loss, full
recovery less the unpaid portion of the premium (by the operative act of legal
compensation), can be had by the insured and, correlatively, if no loss occurs
the insurer can demand the payment of the unpaid balance of the premium. 12

In the instant case, no juridical tie appears to have been established under any
of the situations hereinabove discussed.

WHEREFORE, I vote to deny the motion for reconsideration.

Melo, J ., concurs.

G.R. No. L-2294 May 25, 1951
FILIPINAS COMPAÑIA DE SEGUROS, petitioner,
vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc.,
after payment of corresponding premium, obtained from the petitioner ,Filipinas Cia.
de Seguros, fire policy No. 29333 in the sum of P1000,000, covering merchandise
contained in a building located at No. 711 Roman Street, Binondo Manila. On February
27, 1942, or during the Japanese military occupation, the building and insured
merchandise were burned. In due time the respondent submitted to the petitioner its
claim under the policy. The salvage goods were sold at public auction and, after
deducting their value, the total loss suffered by the respondent was fixed at P92,650.
The petitioner refused to pay the claim on the ground that the policy in favor of the
respondent had ceased to be in force on the date the United States declared war
against Germany, the respondent Corporation (though organized under and by virtue
of the laws of the Philippines) being controlled by the German subjects and the
petitioner being a company under American jurisdiction when said policy was issued
on October 1, 1941. The petitioner, however, in pursuance of the order of the Director
of Bureau of Financing, Philippine Executive Commission, dated April 9, 1943, paid to
the respondent the sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in the Court of First Instance of Manila
for the purpose of recovering from the respondent the sum of P92,650 above
mentioned. The theory of the petitioner is that the insured merchandise were burned
up after the policy issued in 1941 in favor of the respondent corporation has ceased to
be effective because of the outbreak of the war between the United States and
44
Germany on December 10, 1941, and that the payment made by the petitioner to the
respondent corporation during the Japanese military occupation was under pressure.
After trial, the Court of First Instance of Manila dismissed the action without
pronouncement as to costs. Upon appeal to the Court of Appeals, the judgment of the
Court of First Instance of Manila was affirmed, with costs. The case is now before us
on appeal by certiorari from the decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner that the respondent
corporation became an enemy when the United States declared war against Germany,
relying on English and American cases which held that a corporation is a citizen of the
country or state by and under the laws of which it was created or organized. It rejected
the theory that nationality of private corporation is determine by the character or
citizenship of its controlling stockholders.
There is no question that majority of the stockholders of the respondent corporation
were German subjects. This being so, we have to rule that said respondent became
an enemy corporation upon the outbreak of the war between the United States and
Germany. The English and American cases relied upon by the Court of Appeals have
lost their force in view of the latest decision of the Supreme Court of the United States
in Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92 Law. Ed.
Advance Opinions, No. 4, pp. 148-153, in which the controls test has been adopted.
In "Enemy Corporation" by Martin Domke, a paper presented to the Second
International Conference of the Legal Profession held at the Hague (Netherlands) in
August. 1948 the following enlightening passages appear:
Since World War I, the determination of enemy nationality of corporations has been
discussion in many countries, belligerent and neutral. A corporation was subject to
enemy legislation when it was controlled by enemies, namely managed under the
influence of individuals or corporations, themselves considered as enemies. It was the
English courts which first the Daimler case applied this new concept of "piercing the
corporate veil," which was adopted by the peace of Treaties of 1919 and the Mixed
Arbitral established after the First World War.
 45

The United States of America did not adopt the control test during the First World War.
Courts refused to recognized the concept whereby American-registered corporations
It becomes unnecessary, therefore, to dwell at length on the authorities cited in support
could be considered as enemies and thus subject to domestic legislation and
of the appealed decision. However, we may add that, in Haw Pia vs. China Banking
administrative measures regarding enemy property.
Corporation,* 45 Off Gaz., (Supp. 9) 299, we already held that China Banking
Corporation came within the meaning of the word "enemy" as used in the Trading with
the Enemy Acts of civilized countries not only because it was incorporated under the
World War II revived the problem again. It was known that German and other enemy
laws of an enemy country but because it was controlled by enemies.
interests were cloaked by domestic corporation structure. It was not only by legal
ownership of shares that a material influence could be exercised on the management
of the corporation but also by long term loans and other factual situations. For that
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that
reason, legislation on enemy property enacted in various countries during World War
"anyone except a public enemy may be insured." It stands to reason that an insurance
II adopted by statutory provisions to the control test and determined, to various
policy ceases to be allowable as soon as an insured becomes a public enemy.
degrees, the incidents of control. Court decisions were rendered on the basis of such
newly enacted statutory provisions in determining enemy character of domestic
corporation.
Effect of war, generally. — All intercourse between citizens of belligerent powers which
is inconsistent with a state of war is prohibited by the law of nations. Such prohibition
includes all negotiations, commerce, or trading with the enemy; all acts which will
The United States did not, in the amendments of the Trading with the Enemy Act
increase, or tend to increase, its income or resources; all acts of voluntary submission
during the last war, include as did other legislations the applications of the control test
to it; or receiving its protection; also all acts concerning the transmission of money or
and again, as in World War I, courts refused to apply this concept whereby the enemy
goods; and all contracts relating thereto are thereby nullified. It further prohibits
character of an American or neutral-registered corporation is determined by the enemy
insurance upon trade with or by the enemy, upon the life or lives of aliens engaged in
nationality of the controlling stockholders.
service with the enemy; this for the reason that the subjects of one country cannot be
permitted to lend their assistance to protect by insurance the commerce or property of
belligerent, alien subjects, or to do anything detrimental too their country's interest.
Measures of blocking foreign funds, the so called freezing regulations, and other
The purpose of war is to cripple the power and exhaust the resources of the enemy,
administrative practice in the treatment of foreign-owned property in the United States
and it is inconsistent that one country should destroy its enemy's property and repay
allowed to large degree the determination of enemy interest in domestic corporations
in insurance the value of what has been so destroyed, or that it should in such manner
and thus the application of the control test. Court decisions sanctioned such
increase the resources of the enemy, or render it aid, and the commencement of war
administrative practice enacted under the First War Powers Act of 1941, and more
determines, for like reasons, all trading intercourse with the enemy, which prior thereto
recently, on December 8, 1947, the Supreme Court of the United States definitely
may have been lawful. All individuals therefore, who compose the belligerent powers,
approved of the control theory. In Clark vs. Uebersee Finanz Korporation, A. G.,
exist, as to each other, in a state of utter exclusion, and are public enemies. (6 Couch,
dealing with a Swiss corporation allegedly controlled by German interest, the Court:
Cyc. of Ins. Law, pp. 5352-5353.)
"The property of all foreign interest was placed within the reach of the vesting power
(of the Alien Property Custodian) not to appropriate friendly or neutral assets but to
reach enemy interest which masqueraded under those innocent fronts. . . . The power
In the case of an ordinary fire policy, which grants insurance only from year, or for
of seizure and vesting was extended to all property of any foreign country or national
some other specified term it is plain that when the parties become alien enemies, the
so that no innocent appearing device could become a Trojan horse."
 46

contractual tie is broken and the contractual rights of the parties, so far as not vested.
lost. (Vance, the Law on Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on December 10, 1941, the
insurance policy issued in its favor on October 1, 1941, by the petitioner (a Philippine
corporation) had ceased to be valid and enforcible, and since the insured goods were
burned after December 10, 1941, and during the war, the respondent was not entitled
to any indemnity under said policy from the petitioner. However, elementary rules of
justice (in the absence of specific provision in the Insurance Law) require that the
premium paid by the respondent for the period covered by its policy from December
11, 1941, should be returned by the petitioner.
It results that the petitioner is entitled to recover what paid to the respondent under the
circumstances on this case. However, the petitioner will be entitled to recover only the
equivalent, in actual Philippines currency of P92,650 paid on April 19, 1943, in
accordance with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the respondent corporation
is ordered to pay to the petitioner the sum of P77,208.33, Philippine currency, less the
amount of the premium, in Philippine currency, that should be returned by the
petitioner for the unexpired term of the policy in question, beginning December 11,
1941. Without costs. So ordered.

The Court of Appeals, in deciding the case, stated that the main issue hinges on the
question of whether the policy in question became null and void upon the declaration
of war between the United States and Germany on December 10, 1941, and its
judgment in favor of the respondent corporation was predicated on its conclusion that
the policy did not cease to be in force. The Court of Appeals necessarily assumed that,
even if the payment by the petitioner to the respondent was involuntary, its action is
not tenable in view of the ruling on the validity of the policy. As a matter of fact, the
Court of Appeals held that "any intimidation resorted to by the appellee was not unjust
but the exercise of its lawful right to claim for and received the payment of the
insurance policy," and that the ruling of the Bureau of Financing to the effect that "the
appellee was entitled to payment from the appellant was, well founded." Factually,
there can be no doubt that the Director of the Bureau of Financing, in ordering the
petitioner to pay the claim of the respondent, merely obeyed the instruction of the
Japanese Military Administration, as may be seen from the following: "In view of the
findings and conclusion of this office contained in its decision on Administrative Case
dated February 9, 1943 copy of which was sent to your office and the concurrence
therein of the Financial Department of the Japanese Military Administration, and
following the instruction of said authority, you are hereby ordered to pay the claim of
Messrs. Christern, Huenefeld & Co., Inc. The payment of said claim, however, should
be made by means of crossed check." (Emphasis supplied.)
 47

G.R. No. 114427 February 6, 1995

ARMANDO GEAGONIA, petitioner, F. Legaspi Gen. Merchandise
vs. 86,432.50
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION,
respondents.
Cebu Tesing Textiles

DAVIDE, JR., J.:

250,000.00
Four 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 (on credit)
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 P392,130.50
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
The policy contained the following condition:
wear and other usual to assured's business."

The petitioner declared in the policy under the subheading entitled CO-INSURANCE
that Mercantile Insurance Co., Inc. was the co-insurer for P50,000.00. From 1989 to
1990, the petitioner had in his inventory stocks amounting to P392,130.50, itemized
as follows:
Zenco Sales, Inc.
3. The insured shall give notice to the Company of any insurance or insurances
already affected, or which may subsequently be effected, covering any of the property
or properties consisting of stocks in trade, goods in process and/or inventories only
hereby insured, and unless such notice be given and the particulars of such insurance
or insurances be stated therein or endorsed in this policy pursuant to Section 50 of the
Insurance Code, by or on behalf of the Company before the occurrence of any loss or
damage, all benefits under this policy shall be deemed forfeited, provided however,
that this condition shall not apply when the total insurance or insurances in force at the
time of the loss or damage is not more than P200,000.00.

P55,698.00
 48

On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public
market of San Francisco, Agusan del Sur. The petitioner's insured stock-in-trade were
In its decision of 21 June 1993,8 the Insurance Commission found that the petitioner
completely destroyed prompting him to file with the private respondent a claim under
did not violate Condition 3 as he had no knowledge of the existence of the two fire
the policy. On 28 December 1990, the private respondent denied the claim because it
insurance policies obtained from the PFIC; that it was Cebu Tesing Textiles which
found that at the time of the loss the petitioner's stocks-in-trade were likewise covered
procured the PFIC policies without informing him or securing his consent; and that
by fire insurance policies No. GA-28146 and No. GA-28144, for P100,000.00 each,
Cebu Tesing Textile, as his creditor, had insurable interest on the stocks. These
issued by the Cebu Branch of the Philippines First Insurance Co., Inc. (hereinafter
findings were based on the petitioner's testimony that he came to know of the PFIC
PFIC). 3 These policies indicate that the insured was "Messrs. Discount Mart (Mr.
policies only when he filed his claim with the private respondent and that Cebu Tesing
Armando Geagonia, Prop.)" with a mortgage clause reading:
Textile obtained them and paid for their premiums without informing him thereof. The
Insurance Commission then decreed:
MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles, Cebu
City as their interest may appear subject to the terms of this policy. CO-INSURANCE
WHEREFORE, judgment is hereby rendered ordering the respondent company to pay
DECLARED: P100,000. — Phils. First CEB/F 24758.4
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.
The basis of the private respondent's denial was the petitioner's alleged violation of
Condition 3 of the policy.
Its motion for the reconsideration of the decision 9 having been denied by the
Insurance Commission in its resolution of 20 August 1993, 10 the private respondent
The petitioner then filed a complaint 5 against the private respondent with the
appealed to the Court of Appeals by way of a petition for review. The petition was
Insurance Commission (Case No. 3340) for the recovery of P100,000.00 under fire
docketed as CA-G.R. SP No. 31916.
insurance policy No. F-14622 and for attorney's fees and costs of litigation. He
attached as Annex "AM"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
In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of
the private respondent's fire insurance policy he knew that the two policies issued by
the Insurance Commission because it found that the petitioner knew of the existence
the PFIC were already in existence; however, he had no knowledge of the provision
of the two other policies issued by the PFIC. It said:
in the private respondent's policy requiring him to inform it of the prior policies; this
requirement was not mentioned to him by the private respondent's agent; and had it
been mentioned, he would not have withheld such information. He further asserted
that the total of the amounts claimed under the three policies was below the actual It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the
value of his stocks at the time of loss, which was P1,000,000.00. insurance was taken in the name of private respondent [petitioner herein]. The policy
states that "DISCOUNT MART (MR. ARMANDO GEAGONIA, PROP)" was the
assured and that "TESING TEXTILES" [was] only the mortgagee of the goods.
In 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 addition, the premiums on both policies were paid for by private respondent, not by
the Tesing Textiles which is alleged to have taken out the other insurance without the
knowledge of private respondent. This is shown by Premium Invoices nos. 46632 and
46630. (Annexes M and N). In both invoices, Tesing Textiles is indicated to be only
the mortgagee of the goods insured but the party to which they were issued were the
"DISCOUNT MART (MR. ARMANDO GEAGONIA)."
In is clear that it was the private respondent [petitioner herein] who took out the policies
on the same property subject of the insurance with petitioner. Hence, in failing to
disclose the existence of these insurances private respondent violated Condition No.
3 of Fire Policy No. 1462. . . .
Indeed private respondent's allegation of lack of knowledge of the provisions
insurances is belied by his letter to petitioner [of 18 January 1991. The body of the
letter reads as follows;]
xxx xxx xxx
Please be informed that I have no knowledge of the provision requiring me to inform
your office about my
prior insurance under FGA-28146 and F-CEB-24758. Your representative did not
mention about said requirement at the time he was convincing me to insure with you.
If he only die or even inquired if I had other existing policies covering my establishment,
I would have told him so. You will note that at the time he talked to me until I decided
to insure with your company the two policies aforementioned were already in effect.
Therefore I would have no reason to withhold such information and I would have
desisted to part with my hard earned peso to pay the insurance premiums [if] I know I
could not recover anything.
Sir, I am only an ordinary businessman interested in protecting my investments. The
actual value of my stocks damaged by the fire was estimated by the Police Department
49
to be P1,000,000.00 (Please see xerox copy of Police Report Annex "A"). My Income
Statement as of December 31, 1989 or five months before the fire, shows my
merchandise inventory was already some P595,455.75. . . . These will support my
claim that the amount claimed under the three policies are much below the value of
my stocks lost.
xxx xxx xxx
The letter contradicts private respondent's pretension that he did not know that there
were other insurances taken on the stock-in-trade and seriously puts in question his
credibility.
His motion to reconsider the adverse decision having been denied, the petitioner filed
the instant petition. He contends therein that the Court of Appeals acted with grave
abuse of discretion amounting to lack or excess of jurisdiction:
A — . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE
INSURANCE COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH THE
DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE DECISION IS
ACCORDED RESPECT AND EVEN FINALITY BY THE COURTS;
B — . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE
NOT PRESENTED AS EVIDENCE DURING THE HEARING OR TRIAL; AND
C — . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN
AGAINST THE PRIVATE RESPONDENT.
The chief issues that crop up from the first and third grounds are (a) whether the
petitioner had prior knowledge of the two insurance policies issued by the PFIC when

he obtained the fire insurance policy from the private respondent, thereby, for not
disclosing such fact, violating Condition 3 of the policy, and (b) if he had, whether he
is precluded from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the
petitioner's letter of reconsideration of 18 January 1991, is without merit. The petitioner
claims that the said letter was not offered in evidence and thus should not have been
considered in deciding the case. However, as correctly pointed out by the Court of
Appeals, a copy of this letter was attached to the petitioner's complaint in I.C. Case
No. 3440 as Annex "M" thereof and made 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.
50
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
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 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 to 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
himself. 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 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:
Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their
interest may appear subject to the terms of this policy.
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved in
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
51
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."
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
 52

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.
Costs against private respondent Country Bankers Insurance Corporation.
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.
SO ORDERED.

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.

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.

G.R. No. L-54216 July 19, 1989
THE PHILIPPINE AMERICAN INSURANCE COMPANY, petitioner,
vs.
HONORABLE GREGORIO G. PINEDA in his capacity as Judge of the Court of
First Instance of Rizal, and RODOLFO C. DIMAYUGA, respondents.
PARAS, J.:
Challenged before Us in this petition for review on certiorari are the Orders of the
respondent Judge dated March 19, 1980 and June 10, 1980 granting the prayer in the
petition in Sp. Proc. No. 9210 and denying petitioner's Motion for Reconsideration,
respectively.
The undisputed facts are as follows:
On January 15, 1968, private respondent procured an ordinary life insurance policy
from the petitioner company and designated his wife and children as irrevocable
beneficiaries of said policy.
Under date February 22, 1980 private respondent filed a petition which was docketed
as Civil Case No. 9210 of the then Court of First Instance of Rizal to amend the
designation of the beneficiaries in his life policy from irrevocable to revocable.
Petitioner, on March 10, 1980 filed an Urgent Motion to Reset Hearing. Also on the
same date, petitioner filed its Comment and/or Opposition to Petition.
When the petition was called for hearing on March 19, 1980, the respondent Judge
Gregorio G. Pineda, presiding Judge of the then Court of First Instance of Rizal, Pasig
Branch XXI, denied petitioner's Urgent Motion, thus allowing the private respondent to
53
adduce evidence, the consequence of which was the issuance of the questioned Order
granting the petition.
Petitioner promptly filed a Motion for Reconsideration but the same was denied in an
Order June 10, 1980. Hence, this petition raising the following issues for resolution:
I
WHETHER OR NOT THE DESIGNATION OF THE IRREVOCABLE BENEFICIARIES
COULD BE CHANGED OR AMENDED WITHOUT THE CONSENT OF ALL THE
IRREVOCABLE BENEFICIARIES.
II
WHETHER OR NOT THE IRREVOCABLE BENEFICIARIES HEREIN, ONE OF
WHOM IS ALREADY DECEASED WHILE THE OTHERS ARE ALL MINORS, COULD
VALIDLY GIVE CONSENT TO THE CHANGE OR AMENDMENT IN THE
DESIGNATION OF THE IRREVOCABLE BENEFICIARIES.
We are of the opinion that his Honor, the respondent Judge, was in error in issuing the
questioned Orders.
Needless to say, the applicable law in the instant case is the Insurance Act, otherwise
known as Act No. 2427 as amended, the policy having been procured in 1968. Under
the said law, the beneficiary designated in a life insurance contract cannot be changed
without the consent of the beneficiary because he has a vested interest in the policy
(Gercio v. Sun Life Ins. Co. of Canada, 48 Phil. 53; Go v. Redfern and the International
Assurance Co., Ltd., 72 Phil. 71).

In this regard, it is worth noting that the Beneficiary Designation Indorsement in the
policy which forms part of Policy Number 0794461 in the name of Rodolfo Cailles
Dimayuga states that the designation of the beneficiaries is irrevocable (Annex "A" of Petition
in Sp. Proc. No. 9210, Annex "C" of the Petition for Review on Certiorari), to wit:
It is hereby understood and agreed that, notwithstanding the provisions of this policy to the
contrary, inasmuch as the designation of the primary/contingent beneficiary/beneficiaries in this
Policy has been made without reserving the right to change said beneficiary/ beneficiaries,
such designation may not be surrendered to the Company, released or assigned; and no right
or privilege under the Policy may be exercised, or agreement made with the Company to any
change in or amendment to the Policy, without the consent of the said beneficiary/beneficiaries.
(Petitioner's Memorandum, p. 72, Rollo)
Be it noted that the foregoing is a fact which the private respondent did not bother to disprove.
Inevitably therefore, based on the aforequoted provision of the contract, not to mention the law
then applicable, it is only with the consent of all the beneficiaries that any change or amendment
in the policy concerning the irrevocable beneficiaries may be legally and validly effected. Both
the law and the policy do not provide for any other exception, thus, abrogating the contention
of the private respondent that said designation can be amended if the Court finds a just,
reasonable ground to do so.
Similarly, the alleged acquiescence of the six (6) children beneficiaries of the policy (the
beneficiary-wife predeceased the insured) cannot be considered an effective ratification to the
change of the beneficiaries from irrevocable to revocable. Indubitable is the fact that all the six
(6) children named as beneficiaries were minors at the time,** for which reason, they could not
validly give their consent. Neither could they act through their father insured since their interests
are quite divergent from one another. In point is an excerpt from the Notes and Cases on
Insurance Law by Campos and Campos, 1960, reading-
The insured ... can do nothing to divest the beneficiary of his rights without his consent. He
cannot assign his policy, nor even take its cash surrender value without the consent of the
beneficiary. Neither can the insured's creditors seize the policy or any right thereunder. The
54
insured may not even add another beneficiary because by doing so, he diminishes the amount
which the beneficiary may recover and this he cannot do without the beneficiary's consent.
Therefore, the parent-insured cannot exercise rights and/or privileges pertaining to the
insurance contract, for otherwise, the vested rights of the irrevocable beneficiaries would be
rendered inconsequential.
Of equal importance is the well-settled rule that the contract between the parties is the law
binding on both of them and for so many times, this court has consistently issued
pronouncements upholding the validity and effectivity of contracts. Where there is nothing in
the contract which is contrary to law, good morals, good customs, public policy or public order
the validity of the contract must be sustained. Likewise, contracts which are the private laws of
the contracting parties should be fulfilled according to the literal sense of their stipulations, if
their terms are clear and leave no room for doubt as to the intention of the contracting parties,
for contracts are obligatory, no matter in what form they may be, whenever the essential
requisites for their validity are present (Phoenix Assurance Co., Ltd. vs. United States Lines,
22 SCRA 675, Phil. American General Insurance Co., Inc. vs. Mutuc, 61 SCRA 22.)
In the recent case of Francisco Herrera vs. Petrophil Corporation, 146 SCRA 385, this Court
ruled that:
... it is settled that the parties may establish such stipulations, clauses, terms, and conditions
as they may want to include; and as long as such agreements are not contrary to law, good
morals, good customs, public policy or public order, they shall have the force of law between
them.
Undeniably, the contract in the case at bar, contains the indispensable elements for its validity
and does not in any way violate the law, morals, customs, orders, etc. leaving no reason for Us
to deny sanction thereto.
Finally, the fact that the contract of insurance does not contain a contingency when the change
in the designation of beneficiaries could be validly effected means that it was never within the
contemplation of the parties. The lower court, in gratuitously providing for such contingency,
 55

made a new contract for them, a proceeding which we cannot tolerate. Ergo, We cannot help
but conclude that the lower court acted in excess of its authority when it issued the Order dated
March 19, 1980 amending the designation of the beneficiaries from "irrevocable" to "revocable"
over the disapprobation of the petitioner insurance company.
18. . . . The LESSEE shall not insure against fire the chattels, merchandise,
textiles, goods and effects placed at any stall or store or space in the leased premises
without first obtaining the written consent and approval of the LESSOR. If the LESSEE
obtain(s) the insurance thereof without the consent of the LESSOR then the policy is
deemed assigned and transferred to the LESSOR for its own benefit; . . .1

WHEREFORE, premises considered, the questioned Orders of the respondent Judge are
hereby nullified and set aside.
3. Notwithstanding the above stipulation in the lease contract, the Cha spouses
SO ORDERED. insured against loss by fire the merchandise inside the leased premises for Five
Hundred Thousand (P500,000.00) with the United Insurance Co., Inc. (hereinafter
G.R. No. 124520 August 18, 1997
United) without the written consent of private respondent CKS.
Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC.,
4. On the day that the lease contract was to expire, fire broke out inside the leased
petitioners,
premises.
vs.
COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents.
5. When CKS learned of the insurance earlier procured by the Cha spouses
(without its consent), it wrote the insurer (United) a demand letter asking that the
proceeds of the insurance contract (between the Cha spouses and United) be paid
PADILLA, J.: directly to CKS, based on its lease contract with the Cha spouses.

This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set 6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha
aside a decision of respondent Court of Appeals. spouses and United.

The undisputed facts of the case are as follows: 7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a
decision * ordering therein defendant United to pay CKS the amount of P335,063.11
and defendant Cha spouses to pay P50,000.00 as exemplary damages, P20,000.00
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a as attorney's fees and costs of suit.
lease contract with private respondent CKS Development Corporation (hereinafter
CKS), as lessor, on 5 October 1988.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a
decision ** dated 11 January 1996, affirming the trial court decision, deleting however
2. One of the stipulations of the one (1) year lease contract states: the awards for exemplary damages and attorney's fees. A motion for reconsideration
by United was denied on 29 March 1996.

In the present petition, the following errors are assigned by petitioners to the Court of
Appeals:
I be contrary to law, morals, good customs, public order or public policy.3
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT
THE STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT IS NULL AND VOID FOR
BEING CONTRARY TO LAW, MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE
CONTRACT OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND
THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR
OF PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING
WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF
THE RESPONDENT CORPORATION.2
The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of
the lease contract entered into between CKS and the Cha spouses is valid insofar as it provides
56
that any fire insurance policy obtained by the lessee (Cha spouses) over their merchandise
inside the leased premises is deemed assigned or transferred to the lessor (CKS) if said policy
is obtained without the prior written consent of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on property shall be enforceable except for
the benefit of some person having an insurable interest in the property insured.
A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over
their merchandise is primarily a contract of indemnity. Insurable interest in the property insured
must exist at the time the insurance takes effect and at the time the loss occurs.4 The basis of
such requirement of insurable interest in property insured is based on sound public policy: to
prevent a person from taking out an insurance policy on property upon which he has no
insurable interest and collecting the proceeds of said policy in case of loss of the property. In
such a case, the contract of insurance is a mere wager which is void under Section 25 of the
Insurance Code, which provides:
Sec. 25. Every stipulation in a policy of Insurance for the payment of loss, whether the
person insured has or has not any interest in the property insured, or that the policy shall be
received as proof of such interest, and every policy executed by way of gaming or wagering, is
void.
In the present case, it cannot be denied that CKS has no insurable interest in the goods and
merchandise inside the leased premises under the provisions of Section 17 of the Insurance
Code which provide:
Sec. 17. The measure of an insurable interest in property is the extent to which the
insured might be damnified by loss of injury thereof.
 57

Therefore, respondent CKS cannot, under the Insurance Code — a special law — be validly a
beneficiary of the fire insurance policy taken by the petitioner-spouses over their merchandise.
This insurable interest over said merchandise remains with the insured, the Cha spouses. The
automatic assignment of the policy to CKS under the provision of the lease contract previously
quoted is void for being contrary to law and/or public policy. The proceeds of the fire insurance
policy thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners).
The insurer (United) cannot be compelled to pay the proceeds of the fire insurance policy to a
person (CKS) who has no insurable interest in the property insured.

The liability of the Cha spouses to CKS for violating their lease contract in that the Cha spouses
obtained a fire insurance policy over their own merchandise, without the consent of CKS, is a
separate and distinct issue which we do not resolve in this case.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE
and a new decision is hereby entered, awarding the proceeds of the fire insurance policy to
petitioners Nilo Cha and Stella Uy-Cha. SO ORDERED.

G.R. No. L-14300 January 19, 1920
SAN MIGUEL BREWERY, ETC., plaintiff-appellee,
vs.
LAW UNION AND ROCK INSURANCE CO., (LTD.) ET AL., defendants-appellees.
HENRY HARDING, defendant-appellant.
Crossfield and O'Brien for appellant Harding.
Lawrence and Ross for appellee Law Union etc. Ins. Co.
Sanz and Luzuriaga for appellee "Filipinas, Compañia de Seguros."
No appearance for the other appellee.
STREET, J.:
This action was begun on October 8, 1917, in the Court of First Instance of the city of
Manila by the plaintiff, the San Miguel Brewery, for the purpose of recovering upon two
policies of insurance underwritten respectively by Law Union and Rock Insurance
Company (Ltd.), and the "Filipinas" Compania de Seguros, for the sum of P7,500 each,
insuring certain property which has been destroyed by fire. The plaintiff, the San
Miguel Brewery, is named as the party assured in the two policies referred to, but it is
alleged in the complaint that said company was in reality interested in the property
which was the subject of insurance in the character of a mortgage creditor only, and
that the owner of said property upon the date the policies were issued was one D. P.
Dunn who was later succeeded as owner by one Henry Harding. Accordingly said
Harding was made a defendant, as a person interested in the subject of the litigation.
The prayer of the complaint is that judgment be entered in favor of the plaintiff against
the two companies named for the sum of P15,000, with interest and costs, and further
that upon satisfaction of the balance of P4,505.30 due to the plaintiff upon the
mortgage debt, and upon the cancellation of the mortgage, the plaintiff be absolved
from liability to the defendants or any of them. The peculiar form of the latter part of
58
the prayer is evidently due to the design of the plaintiff to lay a foundation for Harding
to recover the difference between the plaintiff's credit and the amount for which the
property was insured. Accordingly, as was to be expected, Harding answered,
admitting the material allegations of the complaint and claiming for himself the right to
recover the difference between the plaintiff's mortgage credit and the face value of the
policies. The two insurance companies also answered, admitting in effect their liability
to the San Miguel Brewery to the extent of its mortgage credit, but denying liability to
Harding on the ground that under the contracts of insurance the liability of the
insurance companies was limited to the insurable interest of the plaintiff therein. Soon
after the action was begun the insurance companies effected a settlement with the
San Miguel Brewery by paying the full amount of the credit claimed by it, with the result
that the litigation as between the original plaintiff and the two insurance companies
came to an end, leaving the action to be prosecuted to final judgement by the
defendant Harding with respect to the balance claimed to be due to him upon the
policies.
Upon hearing the evidence the trial judge came to the conclusion that Harding had no
right of action whatever against the companies and absolved them from liability without
special finding as to costs. From this decision the said Henry Harding has appealed.
The two insurance companies who are named as defendants do not dispute their
liability to the San Miguel Brewery, to the extent already stated, and the only question
here under discussion is that of the liability of the insurance companies to Harding. It
is therefore necessary to take account of such facts only as bear upon this aspect of
the case.
In this connection it appears that on January 12, 1916, D. P. Dunn, then the owner of
the property to which the insurance relates, mortgaged the same to the San Miguel
Brewery to secure a debt of P10,000. In the contract of mortgage Dunn agreed to keep
the property insured at his expense to the full amount of its value in companies to be
selected by the Brewery Company and authorized the latter in case of loss to receive
the proceeds of the insurance and to retain such part as might be necessary to cover
the mortgage debt. At the same time, in order more conveniently to accomplish the
end in view, Dunn authorized and requested the Brewery Company to effect said

insurance itself. Accordingly on the same date Antonio Brias, general manager of the
Brewery, made a verbal application to the Law Union and Rock Insurance Company
for insurance to the extent of P15,000 upon said property. In reply to a question of the
company's agent as to whether the Brewery was the owner of the property, he stated
that the company was interested only as a mortgagee. No information was asked as
to who was the owner of the property, and no information upon this point was given.
It seems that the insurance company to whom this application was directed did not
want to carry more than one-half the risk. It therefore issued its own policy for P7,500
and procured a policy in a like amount to be issued by the "Filipinas" Compania de
Seguros. Both policies were issued in the name of the San Miguel Brewery as the
assured, and contained no reference to any other interest in the property. Both policies
contain the usual clause requiring assignments to be approved and noted on the
policy. The premiums were paid by the Brewery and charged to Dunn. A year later the
policies were renewed, without change, the renewal premiums being paid by the
Brewery, supposedly for the account of the owner. In the month of March of the year
1917 Dunn sold the insured property to the defendant Henry Harding, but not
assignment of the insurance, or of the insurance policies, was at any time made to
him.
We agree with the trial court that no cause of action in Henry Harding against the
insurance companies is show. He is not a party to the contracts of insurance and
cannot directly maintain an action thereon. (Uy Tam and Uy Yet vs. Leonard, 30 Phil.
Rep., 471.) His claim is merely of an equitable and subsidiary nature and must be
made effective, if at all, through the San Miguel Brewery in whose name the contracts
are written. Now the Brewery, as mortgagee of the insured property, undoubtedly had
an insurable interest therein; but it could not, in any event, recover upon these policies
an amount in excess of its mortgage credit. In this connection it will be remembered
that Antonio Brias, upon making application for the insurance, informed the company
with which the insurance was placed that the Brewery was interested only as a
mortgagee. It would, therefore, be impossible for the Brewery mortgage on the insured
property.
59
This conclusion is not only deducible from the principles governing the operation and
effect of insurance contracts in general but the point is clearly covered by the express
provisions of sections 16 and 50 of the Insurance Act (Act No. 2427). In the first of the
sections cited, it is declared that "the measure of an insurable interest in property is
the extent to which the insured might be damnified by loss or injury thereof" (sec. 16);
while in the other it is stated that "the insurance shall be applied exclusively to the
proper interest of the person in whose name it is made unless otherwise specified in
the policy" (sec. 50).
These provisions would have been fatal to any attempt at recovery even by D. P. Dunn,
if the ownership of the property had continued in him up to the time of the loss; and as
regards Harding, an additional insuperable obstacle is found in the fact that the
ownership of the property had been charged, prior to the loss, without any
corresponding change having been effected in the policy of insurance. In section 19
of the Insurance Act we find it stated that "a change of interest in any part of a thing
insured unaccompanied by a corresponding change of interest in the insurance,
suspends the insurance to an equivalent extent, until the interest in the thing and the
interest in the insurance are vested in the same person." Again in section 55 it is
declared that "the mere transfer of a thing insured does not transfer the policy, but
suspends it until the same person becomes the owner of both the policy and the thing
insured."
Undoubtedly these policies of insurance might have been so framed as to have been
"payable to the Sane Miguel Brewery, mortgagee, as its interest may appear,
remainder to whomsoever, during the continuance of the risk, may become the owner
of the interest insured." (Sec 54, Act No. 2427.) Such a clause would have proved an
intention to insure the entire interest in the property, not merely the insurable interest
of the San Miguel Brewery, and would have shown exactly to whom the money, in
case of loss, should be paid. But the policies are not so written.
It is easy to collect from the facts stated in the decision of the trial judge, no less than
from the testimony of Brias, the manager of the San Miguel Brewery, that, as the
insurance was written up, the obligation of the insurance companies was different from
that contemplated by Dunn, at whose request the insurance was written, and Brias. In
 60

the contract of mortgage Dunn had agreed, at his own expense, to insure the 443; Woodbury Savings etc., Co., vs. Charter Oak Insurance Co., 31 Conn., 517; Balen vs.
mortgaged property for its full value and to indorse the policies in such manner as to Hanover Fire Insurance Co., 67 Mich., 179.)
authorize the Brewery Company to receive the proceeds in case of loss and to retain
such part thereof as might be necessary to satisfy the remainder then due upon the
mortgage debt. Instead, however, of effecting the insurance himself Dunn authorized Similarly, in cases where the mortgage is by mistake described as owner, the court may grant
and requested the Brewery Company to procure insurance on the property in the reformation and permit a recovery by the mortgage in his character as such. (Dalton vs.
amount of P15,000 at Dunn's expense. The Brewery Company undertook to carry this Milwaukee etc. Insurance Co., 126 Iowa, 377; Spare vs. Home Mutual Insurance Co., 17 Fed.,
568.) In Thompson vs. Phoenix Insurance Co. (136 U.S., 287; 34 L. 3d., 408), it appeared that
mandate into effect, and it of course became its duty to procure insurance of the
one Kearney made application to an insurance company for insurance on certain property in
character contemplated, that is, to have the policies so written as to protect not only the
his hands as receiver and it was understood between him and the company's agent that, in
insurable interest of the Brewery, but also the owner. Brias seems to have supposed that the
case of loss, the proceeds of the policy should accrue to him and his successors as receiver
policies as written had this effect, but in this he was mistaken. It was certainly a hardship on
and to others whom it might concern. However, the policy, as issued, was so worded as to be
the owner to be required to pay the premiums upon P15,000 of insurance when he was
payable only to him as receiver. In an action brought on the policy by a successor of Kearney,
receiving no benefit whatever except in protection to the extent of his indebtedness to the
it was alleged that the making of the contract in this form was due to inadvertence, accident,
Brewery. The blame for the situation thus created rests, however, with the Brewery rather than
and mistake upon the part of both Kearney and the company.
with the insurance companies, and there is nothing in the record to indicate that the insurance
companies were requested to write insurance upon the insurable interest of the owner or
intended to make themselves liable to that extent.
Said the court:

If during the negotiations which resulted in the writing of this insurance, it had been agreed
between the contracting parties that the insurance should be so written as to protect not only
the interest of the mortgagee but also the residuary interest of the owner, and the policies had
been, by inadvertence, ignorance, or mistake written in the form in which they were issued, a
court would have the power to reform the contracts and give effect to them in the sense in
which the parties intended to be bound. But in order to justify this, it must be made clearly to
appear that the minds of the contracting parties did actually meet in agreement and that they
labored under some mutual error or mistake in respect to the expression of their purpose. Thus,
in Bailey vs. American Central Insurance Co. (13 Fed., 250), it appeared that a mortgage
desiring to insure his own insurable interest only, correctly stated his interest, and asked that
the same be insured. The insurance company agreed to accept the risk, but the policy was
issued in the name of the owner, because of the mistaken belief of the company's agent that
the law required it to be so drawn. It was held that a court of equity had the power, at the suit
of the mortgage, to reform the instrument and give judgment in his favor for the loss thereunder,
although it had been exactly as it was. Said the court: "If the applicant correctly states his
interest and distinctly asks for an insurance thereon, and the agent of the insurer agrees to
comply with his request, and assumes to decide upon the form of the policy to be written for
that purpose, and by mistake of law adopts the wrong form, a court of equity will reform the
instrument so as to make it insurance upon the interest named." (See also Fink vs. Queens
Insurance Co., 24 Fed., 318; Esch vs. Home Insurance Co., 78 Iowa, 334; 16 Am. St. Rep.,
If by inadvertence, accident, or mistake the terms of the contract were not fully set forth in the
policy, the plaintiff is entitled to have it reformed.
In another case the same court said:
We have before us a contract from which by mistake, material stipulations have been omitted,
whereby the true intent and meaning of the parties are not fully or accurately expressed. There
was a definite concluded agreement as to insurance, which, in point of time, preceded the
preparation and delivery of the policy, and this is demonstrated by legal and exact evidence,
which removes all doubt as to the sense and undertaking of the parties. In the agreement there
has been a mutual mistake, caused chiefly by that contracting party who now seeks to limit the
insurance to an interest in the property less than that agreed to be insured. The written
agreement did not effect that which the parties intended. That a court of equity can afford relief
in such a case, is, we think, well settled by the authorities. (Smell vs. Atlantic, etc., Ins. Co., 98
U.S., 85, 89; 25 L. ed., 52.)
 61

But to justify the reformation of a contract, the proof must be of the most satisfactory character,
and it must clearly appear that the contract failed to express the real agreement between the
parties. (Philippine Sugar Estates Development Company vs. Government of the Philippine
Islands, 62 L. ed., 1177, reversing Government of Philippine Island vs. Philippine Sugar Estates
Development Co., 30 Phil. Rep., 27.)

In the case now before us the proof is entirely insufficient to authorize the application of the
doctrine state in the foregoing cases, for it is by means clear from the testimony of Brias — and
none other was offered — that the parties intended for the policy to cover the risk of the owner
in addition to that of the mortgagee. It results that the defendant Harding is not entitled to relief
in any aspect of the case.

The judgment is therefore affirmed, with costs against the appellant. So ordered.

G.R. No. 181132 June 5, 2009
HEIRS OF LORETO C. MARAMAG, represented by surviving spouse VICENTA
PANGILINAN MARAMAG, Petitioners,
vs.
EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL
BRIAN DE GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR
LIFE ASSURANCE COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE
CORPORATION, Respondents.
DECISION
NACHURA, J.:
This is a petition1 for review on certiorari under Rule 45 of the Rules, seeking to
reverse and set aside the Resolution2 dated January 8, 2008 of the Court of Appeals
(CA), in CA-G.R. CV No. 85948, dismissing petitioners’ appeal for lack of jurisdiction.
The case stems from a petition3 filed against respondents with the Regional Trial
Court, Branch 29, for revocation and/or reduction of insurance proceeds for being void
and/or inofficious, with prayer for a temporary restraining order (TRO) and a writ of
preliminary injunction.
The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto
Maramag (Loreto), while respondents were Loreto’s illegitimate family; (2) Eva de
Guzman Maramag (Eva) was a concubine of Loreto and a suspect in the killing of the
latter, thus, she is disqualified to receive any proceeds from his insurance policies from
Insular Life Assurance Company, Ltd. (Insular)4 and Great Pacific Life Assurance
Corporation (Grepalife);5 (3) the illegitimate children of Loreto—Odessa, Karl Brian,
and Trisha Angelie—were entitled only to one-half of the legitime of the legitimate
children, thus, the proceeds released to Odessa and those to be released to Karl Brian
62
and Trisha Angelie were inofficious and should be reduced; and (4) petitioners could
not be deprived of their legitimes, which should be satisfied first.
In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged,
among others, that part of the insurance proceeds had already been released in favor
of Odessa, while the rest of the proceeds are to be released in favor of Karl Brian and
Trisha Angelie, both minors, upon the appointment of their legal guardian. Petitioners
also prayed for the total amount of ₱320,000.00 as actual litigation expenses and
attorney’s fees.
In answer,6 Insular admitted that Loreto misrepresented Eva as his legitimate wife and
Odessa, Karl Brian, and Trisha Angelie as his legitimate children, and that they filed
their claims for the insurance proceeds of the insurance policies; that when it
ascertained that Eva was not the legal wife of Loreto, it disqualified her as a beneficiary
and divided the proceeds among Odessa, Karl Brian, and Trisha Angelie, as the
remaining designated beneficiaries; and that it released Odessa’s share as she was
of age, but withheld the release of the shares of minors Karl Brian and Trisha Angelie
pending submission of letters of guardianship. Insular alleged that the complaint or
petition failed to state a cause of action insofar as it sought to declare as void the
designation of Eva as beneficiary, because Loreto revoked her designation as such in
Policy No. A001544070 and it disqualified her in Policy No. A001693029; and insofar
as it sought to declare as inofficious the shares of Odessa, Karl Brian, and Trisha
Angelie, considering that no settlement of Loreto’s estate had been filed nor had the
respective shares of the heirs been determined. Insular further claimed that it was
bound to honor the insurance policies designating the children of Loreto with Eva as
beneficiaries pursuant to Section 53 of the Insurance Code.
In its own answer7 with compulsory counterclaim, Grepalife alleged that Eva was not
designated as an insurance policy beneficiary; that the claims filed by Odessa, Karl
Brian, and Trisha Angelie were denied because Loreto was ineligible for insurance
due to a misrepresentation in his application form that he was born on December 10,
1936 and, thus, not more than 65 years old when he signed it in September 2001; that
the case was premature, there being no claim filed by the legitimate family of Loreto;
 63

and that the law on succession does not apply where the designation of insurance
beneficiaries is clear.
SO ORDERED.10

As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known
In so ruling, the trial court ratiocinated thus –
to petitioners, summons by publication was resorted to. Still, the illegitimate family of
Loreto failed to file their answer. Hence, the trial court, upon motion of petitioners,
declared them in default in its Order dated May 7, 2004.
Art. 2011 of the Civil Code provides that the contract of insurance is governed by the
(sic) special laws. Matters not expressly provided for in such special laws shall be
regulated by this Code. The principal law on insurance is the Insurance Code, as
During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues
amended. Only in case of deficiency in the Insurance Code that the Civil Code may
raised in their respective answers be resolved first. The trial court ordered petitioners
be resorted to. (Enriquez v. Sun Life Assurance Co., 41 Phil. 269.)
to comment within 15 days.

The Insurance Code, as amended, contains a provision regarding to whom the

In their comment, petitioners alleged that the issue raised by Insular and Grepalife was
purely legal – whether the complaint itself was proper or not – and that the designation
of a beneficiary is an act of liberality or a donation and, therefore, subject to the
provisions of Articles 7528 and 7729 of the Civil Code.
In reply, both Insular and Grepalife countered that the insurance proceeds belong
exclusively to the designated beneficiaries in the policies, not to the estate or to the
heirs of the insured. Grepalife also reiterated that it had disqualified Eva as a
beneficiary when it ascertained that Loreto was legally married to Vicenta Pangilinan
Maramag.
On September 21, 2004, the trial court issued a Resolution, the dispositive portion of
which reads –
WHEREFORE, the motion to dismiss incorporated in the answer of defendants Insular
Life and Grepalife is granted with respect to defendants Odessa, Karl Brian and Trisha
Maramag. The action shall proceed with respect to the other defendants Eva Verna
de Guzman, Insular Life and Grepalife.
insurance proceeds shall be paid. It is very clear under Sec. 53 thereof that the
insurance proceeds shall be applied exclusively to the proper interest of the person in
whose name or for whose benefit it is made, unless otherwise specified in the policy.
Since the defendants are the ones named as the primary beneficiary (sic) in the
insurances (sic) taken by the deceased Loreto C. Maramag and there is no showing
that herein plaintiffs were also included as beneficiary (sic) therein the insurance
proceeds shall exclusively be paid to them. This is because the beneficiary has a
vested right to the indemnity, unless the insured reserves the right to change the
beneficiary. (Grecio v. Sunlife Assurance Co. of Canada, 48 Phil. [sic] 63).
Neither could the plaintiffs invoked (sic) the law on donations or the rules on
testamentary succession in order to defeat the right of herein defendants to collect the
insurance indemnity. The beneficiary in a contract of insurance is not the donee
spoken in the law of donation. The rules on testamentary succession cannot apply
here, for the insurance indemnity does not partake of a donation. As such, the
insurance indemnity cannot be considered as an advance of the inheritance which can
be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of Southern Luzon
Employees’ Association v. Juanita Golpeo, et al., the Honorable Supreme Court made
the following pronouncements[:]
 64

Insular12 and Grepalife13 filed their respective motions for reconsideration, arguing,
in the main, that the petition failed to state a cause of action. Insular further averred
"With the finding of the trial court that the proceeds to the Life Insurance Policy belongs
that the proceeds were divided among the three children as the remaining named
exclusively to the defendant as his individual and separate property, we agree that the
beneficiaries. Grepalife, for its part, also alleged that the premiums paid had already
proceeds of an insurance policy belong exclusively to the beneficiary and not to the
been refunded.
estate of the person whose life was insured, and that such proceeds are the separate
and individual property of the beneficiary and not of the heirs of the person whose life
was insured, is the doctrine in America. We believe that the same doctrine obtains in
Petitioners, in their comment, reiterated their earlier arguments and posited that
these Islands by virtue of Section 428 of the Code of Commerce x x x."
whether the complaint may be dismissed for failure to state a cause of action must be
determined solely on the basis of the allegations in the complaint, such that the
defenses of Insular and Grepalife would be better threshed out during trial.1avvphi1
In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic)
no sufficient cause of action against defendants Odessa, Karl Brian and Trisha Angelie
Maramag for the reduction and/or declaration of inofficiousness of donation as primary
On June 16, 2005, the trial court issued a Resolution, disposing, as follows:
beneficiary (sic) in the insurances (sic) of the late Loreto C. Maramag.

WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration

However, herein plaintiffs are not totally bereft of any cause of action. One of the
named beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is
his concubine Eva Verna De Guzman. Any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a life insurance policy of
the person who cannot make any donation to him, according to said article (Art. 2012,
Civil Code). If a concubine is made the beneficiary, it is believed that the insurance
contract will still remain valid, but the indemnity must go to the legal heirs and not to
the concubine, for evidently, what is prohibited under Art. 2012 is the naming of the
improper beneficiary. In such case, the action for the declaration of nullity may be
brought by the spouse of the donor or donee, and the guilt of the donor and donee
may be proved by preponderance of evidence in the same action (Comment of
Edgardo L. Paras, Civil Code of the Philippines, page 897). Since the designation of
defendant Eva Verna de Guzman as one of the primary beneficiary (sic) in the
insurances (sic) taken by the late Loreto C. Maramag is void under Art. 739 of the Civil
Code, the insurance indemnity that should be paid to her must go to the legal heirs of
the deceased which this court may properly take cognizance as the action for the
declaration for the nullity of a void donation falls within the general jurisdiction of this
Court.11
filed by defendants Grepalife and Insular Life are hereby GRANTED. Accordingly, the
portion of the Resolution of this Court dated 21 September 2004 which ordered the
prosecution of the case against defendant Eva Verna De Guzman, Grepalife and
Insular Life is hereby SET ASIDE, and the case against them is hereby ordered
DISMISSED.
SO ORDERED.14
In granting the motions for reconsideration of Insular and Grepalife, the trial court
considered the allegations of Insular that Loreto revoked the designation of Eva in one
policy and that Insular disqualified her as a beneficiary in the other policy such that the
entire proceeds would be paid to the illegitimate children of Loreto with Eva pursuant
to Section 53 of the Insurance Code. It ruled that it is only in cases where there are no
beneficiaries designated, or when the only designated beneficiary is disqualified, that
the proceeds should be paid to the estate of the insured. As to the claim that the
proceeds to be paid to Loreto’s illegitimate children should be reduced based on the
rules on legitime, the trial court held that the distribution of the insurance proceeds is

governed primarily by the Insurance Code, and the provisions of the Civil Code are
irrelevant and inapplicable. With respect to the Grepalife policy, the trial court noted
that Eva was never designated as a beneficiary, but only Odessa, Karl Brian, and
Trisha Angelie; thus, it upheld the dismissal of the case as to the illegitimate children.
It further held that the matter of Loreto’s misrepresentation was premature; the
appropriate action may be filed only upon denial of the claim of the named
beneficiaries for the insurance proceeds by Grepalife.
Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the
appeal for lack of jurisdiction, holding that the decision of the trial court dismissing the
complaint for failure to state a cause of action involved a pure question of law. The
appellate court also noted that petitioners did not file within the reglementary period a
motion for reconsideration of the trial court’s Resolution, dated September 21, 2004,
dismissing the complaint as against Odessa, Karl Brian, and Trisha Angelie; thus, the
said Resolution had already attained finality.
Hence, this petition raising the following issues:
a. In determining the merits of a motion to dismiss for failure to state a cause of action,
may the Court consider matters which were not alleged in the Complaint, particularly
the defenses put up by the defendants in their Answer?
b. In granting a motion for reconsideration of a motion to dismiss for failure to state a
cause of action, did not the Regional Trial Court engage in the examination and
determination of what were the facts and their probative value, or the truth thereof,
when it premised the dismissal on allegations of the defendants in their answer – which
had not been proven?
c. x x x (A)re the members of the legitimate family entitled to the proceeds of the
insurance for the concubine?15
65
In essence, petitioners posit that their petition before the trial court should not have
been dismissed for failure to state a cause of action because the finding that Eva was
either disqualified as a beneficiary by the insurance companies or that her designation
was revoked by Loreto, hypothetically admitted as true, was raised only in the answers
and motions for reconsideration of both Insular and Grepalife. They argue that for a
motion to dismiss to prosper on that ground, only the allegations in the complaint
should be considered. They further contend that, even assuming Insular disqualified
Eva as a beneficiary, her share should not have been distributed to her children with
Loreto but, instead, awarded to them, being the legitimate heirs of the insured
deceased, in accordance with law and jurisprudence.
The petition should be denied.
The grant of the motion to dismiss was based on the trial court’s finding that the petition
failed to state a cause of action, as provided in Rule 16, Section 1(g), of the Rules of
Court, which reads –
SECTION 1. Grounds. – Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on any of
the following grounds:
xxxx
(g) That the pleading asserting the claim states no cause of action.
A cause of action is the act or omission by which a party violates a right of another.16
A complaint states a cause of action when it contains the three (3) elements of a cause
of action—(1) the legal right of the plaintiff; (2) the correlative obligation of the
defendant; and (3) the act or omission of the defendant in violation of the legal right. If
any of these elements is absent, the complaint becomes vulnerable to a motion to
dismiss on the ground of failure to state a cause of action.17

When a motion to dismiss is premised on this ground, the ruling thereon should be
based only on the facts alleged in the complaint. The court must resolve the issue on
the strength of such allegations, assuming them to be true. The test of sufficiency of a
cause of action rests on whether, hypothetically admitting the facts alleged in the
complaint to be true, the court can render a valid judgment upon the same, in
accordance with the prayer in the complaint. This is the general rule.
However, this rule is subject to well-recognized exceptions, such that there is no
hypothetical admission of the veracity of the allegations if:
1. the falsity of the allegations is subject to judicial notice;
2. such allegations are legally impossible;
3. the allegations refer to facts which are inadmissible in evidence;
4. by the record or document in the pleading, the allegations appear unfounded; or
5. there is evidence which has been presented to the court by stipulation of the parties
or in the course of the hearings related to the case.18
In this case, it is clear from the petition filed before the trial court that, although
petitioners are the legitimate heirs of Loreto, they were not named as beneficiaries in
the insurance policies issued by Insular and Grepalife. The basis of petitioners’ claim
is that Eva, being a concubine of Loreto and a suspect in his murder, is disqualified
from being designated as beneficiary of the insurance policies, and that Eva’s children
with Loreto, being illegitimate children, are entitled to a lesser share of the proceeds
66
of the policies. They also argued that pursuant to Section 12 of the Insurance Code,19
Eva’s share in the proceeds should be forfeited in their favor, the former having
brought about the death of Loreto. Thus, they prayed that the share of Eva and
portions of the shares of Loreto’s illegitimate children should be awarded to them,
being the legitimate heirs of Loreto entitled to their respective legitimes.
It is evident from the face of the complaint that petitioners are not entitled to a favorable
judgment in light of Article 2011 of the Civil Code which expressly provides that
insurance contracts shall be governed by special laws, i.e., the Insurance Code.
Section 53 of the Insurance Code states—
SECTION 53. The insurance proceeds shall be applied exclusively to the proper
interest of the person in whose name or for whose benefit it is made unless otherwise
specified in the policy.
Pursuant thereto, it is obvious that the only persons entitled to claim the insurance
proceeds are either the insured, if still alive; or the beneficiary, if the insured is already
deceased, upon the maturation of the policy.20 The exception to this rule is a situation
where the insurance contract was intended to benefit third persons who are not parties
to the same in the form of favorable stipulations or indemnity. In such a case, third
parties may directly sue and claim from the insurer.21
Petitioners are third parties to the insurance contracts with Insular and Grepalife and,
thus, are not entitled to the proceeds thereof. Accordingly, respondents Insular and
Grepalife have no legal obligation to turn over the insurance proceeds to petitioners.
The revocation of Eva as a beneficiary in one policy and her disqualification as such
in another are of no moment considering that the designation of the illegitimate children
as beneficiaries in Loreto’s insurance policies remains valid. Because no legal
proscription exists in naming as beneficiaries the children of illicit relationships by the
insured,22 the shares of Eva in the insurance proceeds, whether forfeited by the court
in view of the prohibition on donations under Article 739 of the Civil Code or by the
insurers themselves for reasons based on the insurance contracts, must be awarded
to the said illegitimate children, the designated beneficiaries, to the exclusion of
petitioners. It is only in cases where the insured has not designated any beneficiary,23
 67

or when the designated beneficiary is disqualified by law to receive the proceeds,24

that the insurance policy proceeds shall redound to the benefit of the estate of the
insured.

In this regard, the assailed June 16, 2005 Resolution of the trial court should be
upheld. In the same light, the Decision of the CA dated January 8, 2008 should be
sustained. Indeed, the appellate court had no jurisdiction to take cognizance of the
appeal; the issue of failure to state a cause of action is a question of law and not of
fact, there being no findings of fact in the first place.25
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.

SO ORDERED.

G.R. No. 147839 June 8, 2006
GAISANO CAGAYAN, INC. Petitioner,
vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision1 dated October
11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the
Decision dated August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC)
in Civil Case No. 92-322 and upheld the causes of action for damages of Insurance
Company of North America (respondent) against Gaisano Cagayan, Inc. (petitioner);
and the CA Resolution dated April 11, 2001 which denied petitioner's motion for
reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi
Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks
owned by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent fire
insurance policies with book debt endorsements. The insurance policies provide for
coverage on "book debts in connection with ready-made clothing materials which have
been sold or delivered to various customers and dealers of the Insured anywhere in
the Philippines."2 The policies defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of the loss
covered under this Policy."3 The policies also provide for the following conditions:
68
1. Warranted that the Company shall not be liable for any unpaid account in respect
of the merchandise sold and delivered by the Insured which are outstanding at the
date of loss for a period in excess of six (6) months from the date of the covering
invoice or actual delivery of the merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12) days
after the close of every calendar month all amount shown in their books of accounts
as unpaid and thus become receivable item from their customers and dealers. x x x4
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25,
1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner,
was consumed by fire. Included in the items lost or destroyed in the fire were stocks
of ready-made clothing materials sold and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It
alleges that IMC and LSPI filed with respondent their claims under their respective fire
insurance policies with book debt endorsements; that as of February 25, 1991, the
unpaid accounts of petitioner on the sale and delivery of ready-made clothing materials
with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid
the claims of IMC and LSPI and, by virtue thereof, respondent was subrogated to their
rights against petitioner; that respondent made several demands for payment upon
petitioner but these went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could
not be held liable because the property covered by the insurance policies were
destroyed due to fortuities event or force majeure; that respondent's right of
subrogation has no basis inasmuch as there was no breach of contract committed by
it since the loss was due to fire which it could not prevent or foresee; that IMC and
LSPI never communicated to it that they insured their properties; that it never
consented to paying the claim of the insured.6
 69

At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus, SO ORDERED.10
trial on the merits ensued.
The CA held that the sales invoices are proofs of sale, being detailed statements of
the nature, quantity and cost of the thing sold; that loss of the goods in the fire must
be borne by petitioner since the proviso contained in the sales invoices is an exception
On August 31, 1998, the RTC rendered its decision dismissing respondent's
under Article 1504 (1) of the Civil Code, to the general rule that if the thing is lost by a
complaint.8 It held that the fire was purely accidental; that the cause of the fire was
fortuitous event, the risk is borne by the owner of the thing at the time the loss under
not attributable to the negligence of the petitioner; that it has not been established that
the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not the
petitioner is the debtor of IMC and LSPI; that since the sales invoices state that "it is
delivery of the lost goods but the payment of its unpaid account and as such the
further agreed that merely for purpose of securing the payment of purchase price, the
obligation to pay is not extinguished, even if the fire is considered a fortuitous event;
above-described merchandise remains the property of the vendor until the purchase
that by subrogation, the insurer has the right to go against petitioner; that, being a fire
price is fully paid", IMC and LSPI retained ownership of the delivered goods and must
insurance with book debt endorsements, what was insured was the vendor's interest
bear the loss.
as a creditor.11

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its
its decision setting aside the decision of the RTC. The dispositive portion of the
Resolution dated April 11, 2001.13
decision reads:

Hence, the present petition for review on certiorari anchored on the following
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and
Assignment of Errors:
SET ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan,
Inc. to pay:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE
INSTANT CASE WAS ONE OVER CREDIT.
1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant
to the insured Inter Capitol Marketing Corporation, plus legal interest from the time of
demand until fully paid;
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE
SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER
UPON DELIVERY THEREOF.
2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant
to the insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until
fully paid.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF
RESPONDENT.14
With costs against the defendant-appellee.
 70

should be liable to respondent for contracted lawyer's fees, litigation expenses and
cost of suit.17
Anent the first error, petitioner contends that the insurance in the present case cannot
be deemed to be over credit since an insurance "on credit" belies not only the nature
of fire insurance but the express terms of the policies; that it was not credit that was
As a general rule, in petitions for review, the jurisdiction of this Court in cases brought
insured since respondent paid on the occasion of the loss of the insured goods to fire
before it from the CA is limited to reviewing questions of law which involves no
and not because of the non-payment by petitioner of any obligation; that, even if the
examination of the probative value of the evidence presented by the litigants or any of
insurance is deemed as one over credit, there was no loss as the accounts were not
them.18 The Supreme Court is not a trier of facts; it is not its function to analyze or
yet due since no prior demands were made by IMC and LSPI against petitioner for
weigh evidence all over again.19 Accordingly, findings of fact of the appellate court
payment of the debt and such demands came from respondent only after it had already
are generally conclusive on the Supreme Court.20
paid IMC and LSPI under the fire insurance policies.15

Nevertheless, jurisprudence has recognized several exceptions in which factual issues

As to the second error, petitioner avers that despite delivery of the goods, petitioner-
may be resolved by this Court, such as: (1) when the findings are grounded entirely
buyer IMC and LSPI assumed the risk of loss when they secured fire insurance policies
on speculation, surmises or conjectures; (2) when the inference made is manifestly
over the goods.
mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when
the judgment is based on a misapprehension of facts; (5) when the findings of facts
are conflicting; (6) when in making its findings the CA went beyond the issues of the
Concerning the third ground, petitioner submits that there is no subrogation in favor of
case, or its findings are contrary to the admissions of both the appellant and the
respondent as no valid insurance could be maintained thereon by IMC and LSPI since
appellee; (7) when the findings are contrary to the trial court; (8) when the findings are
all risk had transferred to petitioner upon delivery of the goods; that petitioner was not
conclusions without citation of specific evidence on which they are based; (9) when
privy to the insurance contract or the payment between respondent and its insured nor
the facts set forth in the petition as well as in the petitioner's main and reply briefs are
was its consent or approval ever secured; that this lack of privity forecloses any real
not disputed by the respondent; (10) when the findings of fact are premised on the
interest on the part of respondent in the obligation to pay, limiting its interest to keeping
supposed absence of evidence and contradicted by the evidence on record; and (11)
the insured goods safe from fire.
when the CA manifestly overlooked certain relevant facts not disputed by the parties,
which, if properly considered, would justify a different conclusion.21 Exceptions (4),
(5), (7), and (11) apply to the present petition.
For its part, respondent counters that while ownership over the ready- made clothing
materials was transferred upon delivery to petitioner, IMC and LSPI have insurable
interest over said goods as creditors who stand to suffer direct pecuniary loss from its
At issue is the proper interpretation of the questioned insurance policy. Petitioner
destruction by fire; that petitioner is liable for loss of the ready-made clothing materials
claims that the CA erred in construing a fire insurance policy on book debts as one
since it failed to overcome the presumption of liability under Article 126516 of the Civil
covering the unpaid accounts of IMC and LSPI since such insurance applies to loss of
Code; that the fire was caused through petitioner's negligence in failing to provide
the ready-made clothing materials sold and delivered to petitioner.
stringent measures of caution, care and maintenance on its property because electric
wires do not usually short circuit unless there are defects in their installation or when
there is lack of proper maintenance and supervision of the property; that petitioner is
The Court disagrees with petitioner's stand.
guilty of gross and evident bad faith in refusing to pay respondent's valid claim and

It is well-settled that when the words of a contract are plain and readily understood,
there is no room for construction.22 In this case, the questioned insurance policies
provide coverage for "book debts in connection with ready-made clothing materials
which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of the loss
covered under this Policy."24 Nowhere is it provided in the questioned insurance
policies that the subject of the insurance is the goods sold and delivered to the
customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not justify
an attempt to read into it any alleged intention of the parties, the terms are to be
understood literally just as they appear on the face of the contract.25 Thus, what were
insured against were the accounts of IMC and LSPI with petitioner which remained
unpaid 45 days after the loss through fire, and not the loss or destruction of the goods
delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "[i]t is further agreed
that merely for purpose of securing the payment of the purchase price the above
described merchandise remains the property of the vendor until the purchase price
thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
71
transferred to the buyer the goods are at the buyer's risk whether actual delivery has
been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the
buyer, in pursuance of the contract and the ownership in the goods has been retained
by the seller merely to secure performance by the buyer of his obligations under the
contract, the goods are at the buyer's risk from the time of such delivery; (Emphasis
supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its debt,
the risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss
of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable
interest until full payment of the value of the delivered goods. Unlike the civil law
concept of res perit domino, where ownership is the basis for consideration of who
bears the risk of loss, in property insurance, one's interest is not determined by concept
of title, but whether insured has substantial economic interest in the property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in
property, whether real or personal, or any relation thereto, or liability in respect thereof,
of such nature that a contemplated peril might directly damnify the insured."
Parenthetically, under Section 14 of the same Code, an insurable interest in property
may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which the
expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property
interest in, or a lien upon, or possession of, the subject matter of the insurance, and
neither the title nor a beneficial interest is requisite to the existence of such an interest,

it is sufficient that the insured is so situated with reference to the property that he would
be liable to loss should it be injured or destroyed by the peril against which it is
insured.29 Anyone has an insurable interest in property who derives a benefit from its
existence or would suffer loss from its destruction.30 Indeed, a vendor or seller retains
an insurable interest in the property sold so long as he has any interest therein, in
other words, so long as he would suffer by its destruction, as where he has a vendor's
lien.31 In this case, the insurable interest of IMC and LSPI pertain to the unpaid
accounts appearing in their Books of Account 45 days after the time of the loss covered
by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under
Article 117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss
under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of goods
by fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days
after the fire. Accordingly, petitioner's obligation is for the payment of money. As
correctly stated by the CA, where the obligation consists in the payment of money, the
failure of the debtor to make the payment even by reason of a fortuitous event shall
not relieve him of his liability.33 The rationale for this is that the rule that an obligor
should be held exempt from liability when the loss occurs thru a fortuitous event only
holds true when the obligation consists in the delivery of a determinate thing and there
is no stipulation holding him liable even in case of fortuitous event. It does not apply
when the obligation is pecuniary in nature.34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the
loss or destruction of anything of the same kind does not extinguish the obligation." If
the obligation is generic in the sense that the object thereof is designated merely by
its class or genus without any particular designation or physical segregation from all
others of the same class, the loss or destruction of anything of the same kind even
72
without the debtor's fault and before he has incurred in delay will not have the effect
of extinguishing the obligation.35 This rule is based on the principle that the genus of
a thing can never perish. Genus nunquan perit.36 An obligation to pay money is
generic; therefore, it is not excused by fortuitous loss of any specific property of the
debtor.37
Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established that
petitioner has outstanding accounts with IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits "C"
to "C-22"38 show that petitioner has an outstanding account with IMC in the amount
of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to IMC.
Exhibit "F"40 is the subrogation receipt executed by IMC in favor of respondent upon
receipt of the insurance proceeds. All these documents have been properly identified,
presented and marked as exhibits in court. The subrogation receipt, by itself, is
sufficient to establish not only the relationship of respondent as insurer and IMC as
the insured, but also the amount paid to settle the insurance claim. The right of
subrogation accrues simply upon payment by the insurance company of the insurance
claim.41 Respondent's action against petitioner is squarely sanctioned by Article 2207
of the Civil Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of
action. No evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated
April 23, 1991 from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is
not an admission of petitioner's unpaid account with LSPI. It only confirms the loss of
 73

Levi's products in the amount of P535,613.00 in the fire that razed petitioner's building
on February 25, 1991.

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no

subrogation receipt was offered in evidence. Thus, there is no evidence that
respondent has been subrogated to any right which LSPI may have against petitioner.
Failure to substantiate the claim of subrogation is fatal to petitioner's case for recovery
of the amount of P535,613.00.

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October
11, 2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV
No. 61848 are AFFIRMED with the MODIFICATION that the order to pay the amount
of P535,613.00 to respondent is DELETED for lack of factual basis. No
pronouncement as to costs. SO ORDERED.
 74

G.R. No. 167330 September 18, 2009 For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,
Philippine Health Care Providers, Inc.2
vs.
We recall the facts of this case, as follows:
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain,

RESOLUTION conduct and operate a prepaid group practice health care delivery system or a health
maintenance organization to take care of the sick and disabled persons enrolled in the
health care plan and to provide for the administrative, legal, and financial
CORONA, J.: responsibilities of the organization." Individuals enrolled in its health care programs
pay an annual membership fee and are entitled to various preventive, diagnostic and
curative medical services provided by its duly licensed physicians, specialists and
other professional technical staff participating in the group practice health delivery
ARTICLE II
system at a hospital or clinic owned, operated or accredited by it.
Declaration of Principles and State Policies

xxx xxx xxx

Section 15. The State shall protect and promote the right to health of the people and
instill health consciousness among them.
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent
petitioner a formal demand letter and the corresponding assessment notices
ARTICLE XIII demanding the payment of deficiency taxes, including surcharges and interest, for the
taxable years 1996 and 1997 in the total amount of ₱224,702,641.18. xxxx
Social Justice and Human Rights

The deficiency [documentary stamp tax (DST)] assessment was imposed on

Section 11. The State shall adopt an integrated and comprehensive approach to health petitioner’s health care agreement with the members of its health care program
development which shall endeavor to make essential goods, health and other social pursuant to Section 185 of the 1997 Tax Code xxxx
services available to all the people at affordable cost. There shall be priority for the
needs of the underprivileged sick, elderly, disabled, women, and children. The State
shall endeavor to provide free medical care to paupers.1
xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As

respondent did not act on the protest, petitioner filed a petition for review in the Court

of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST
assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to
₱22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997
until fully paid for the 1996 VAT deficiency and ₱31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT
deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force
and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting
the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it
cancelled the DST assessment. He claimed that petitioner’s health care agreement
was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care
agreement was in the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency
documentary stamp tax assessment and ordered petitioner to desist from collecting
the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of ₱55,746,352.19 and ₱68,450,258.73 as
deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25%
75
surcharge for late payment and 20% interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been
fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this
case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s
decision. We held that petitioner’s health care agreement during the pertinent period
was in the nature of non-life insurance which is a contract of indemnity, citing Blue
Cross Healthcare, Inc. v. Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We
also ruled that petitioner’s contention that it is a health maintenance organization
(HMO) and not an insurance company is irrelevant because contracts between
companies like petitioner and the beneficiaries under their plans are treated as
insurance contracts. Moreover, DST is not a tax on the business transacted but an
excise on the privilege, opportunity or facility offered at exchanges for the transaction
of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed
only on a company engaged in the business of fidelity bonds and other insurance
policies. Petitioner, as an HMO, is a service provider, not an insurance company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in
effect the CA’s disposition that health care services are not in the nature of an
insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject to DST is
clear, especially in the light of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they
are not those contemplated under Section 185.
(f) Assuming arguendo that petitioner’s agreements are akin to health insurance,
health insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance" mentioned
in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year
2005 and all prior years. Therefore, the questioned assessments on the DST are now
rendered moot and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their
memoranda on June 8, 2009.
76
In its motion for reconsideration, petitioner reveals for the first time that it availed of a
tax amnesty under RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully
paying the amount of ₱5,127,149.08 representing 5% of its net worth as of the year
ending December 31, 2005.8
We find merit in petitioner’s motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and Exchange
Commission on June 30, 1987.9 It is engaged in the dispensation of the following
medical services to individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health problems, family
planning counseling, consultation and advices on diet, exercise and other healthy
habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis,
fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial and
therapeutic processes in the event of an injury or sickness on the part of the enrolled
member.10
Individuals enrolled in its health care program pay an annual membership fee.
Membership is on a year-to-year basis. The medical services are dispensed to enrolled
members in a hospital or clinic owned, operated or accredited by petitioner, through
physicians, medical and dental practitioners under contract with it. It negotiates with
such health care practitioners regarding payment schemes, financing and other
procedures for the delivery of health services. Except in cases of emergency, the
professional services are to be provided only by petitioner's physicians, i.e. those
directly employed by it11 or whose services are contracted by it.12 Petitioner also
provides hospital services such as room and board accommodation, laboratory
services, operating rooms, x-ray facilities and general nursing care.13 If and when a

member avails of the benefits under the agreement, petitioner pays the participating
physicians and other health care providers for the services rendered, at pre-agreed
rates.14
To avail of petitioner’s health care programs, the individual members are required to
sign and execute a standard health care agreement embodying the terms and
conditions for the provision of the health care services. The same agreement contains
the various health care services that can be engaged by the enrolled member, i.e.,
preventive, diagnostic and curative medical services. Except for the curative aspect of
the medical service offered, the enrolled member may actually make use of the health
care services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO
and not an insurer because its agreements are treated as insurance contracts and the
DST is not a tax on the business but an excise on the privilege, opportunity or facility
used in the transaction of the business.15
Petitioner, however, submits that it is of critical importance to characterize the business
it is engaged in, that is, to determine whether it is an HMO or an insurance company,
as this distinction is indispensable in turn to the issue of whether or not it is liable for
DST on its health care agreements.16
A second hard look at the relevant law and jurisprudence convinces the Court that the
arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
77
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies
of insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation
transacting the business of accident, fidelity, employer’s liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life,
marine, inland, and fire insurance), and all bonds, undertakings, or recognizances,
conditioned for the performance of the duties of any office or position, for the doing or
not doing of anything therein specified, and on all obligations guaranteeing the validity
or legality of any bond or other obligations issued by any province, city, municipality,
or other public body or organization, and on all obligations guaranteeing the title to any
real estate, or guaranteeing any mercantile credits, which may be made or renewed
by any such person, company or corporation, there shall be collected a documentary
stamp tax of fifty centavos (₱0.50) on each four pesos (₱4.00), or fractional part
thereof, of the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision
or part of a statute shall be considered surplusage or superfluous, meaningless, void
and insignificant. To this end, a construction which renders every word operative is
preferred over that which makes some words idle and nugatory.17 This principle is
expressed in the maxim Ut magis valeat quam pereat, that is, we choose the
interpretation which gives effect to the whole of the statute – its every word.18
From the language of Section 185, it is evident that two requisites must concur before
the DST can apply, namely: (1) the document must be a policy of insurance or an
obligation in the nature of indemnity and (2) the maker should be transacting the
business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland,
and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance
Act of 1995"), an HMO is "an entity that provides, offers or arranges for coverage of
designated health services needed by plan members for a fixed prepaid premium."19
The payments do not vary with the extent, frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance
during the pertinent taxable years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates
what constitutes "doing an insurance business" or "transacting an insurance
business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation
and not as merely incidental to any other legitimate business or activity of the surety;
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.
In the application of the provisions of this Code, 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 therefore, shall not be deemed conclusive to show that
the making thereof does not constitute the doing or transacting of an insurance
business.
Various courts in the United States, whose jurisprudence has a persuasive effect on
our decisions,21 have determined that HMOs are not in the insurance business. One
78
test that they have applied is whether the assumption of risk and indemnification of
loss (which are elements of an insurance business) are the principal object and
purpose of the organization or whether they are merely incidental to its business. If
these are the principal objectives, the business is that of insurance. But if they are
merely incidental and service is the principal purpose, then the business is not
insurance.
Applying the "principal object and purpose test,"22 there is significant American case
law supporting the argument that a corporation (such as an HMO, whether or not
organized for profit), whose main object is to provide the members of a group with
health services, is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association23 wherein the Court
of Appeals of the District of Columbia Circuit held that Group Health Association should
not be considered as engaged in insurance activities since it was created primarily for
the distribution of health care services rather than the assumption of insurance risk.
xxx Although Group Health’s activities may be considered in one aspect as creating
security against loss from illness or accident more truly they constitute the quantity
purchase of well-rounded, continuous medical service by its members. xxx The
functions of such an organization are not identical with those of insurance or indemnity
companies. The latter are concerned primarily, if not exclusively, with risk and the
consequences of its descent, not with service, or its extension in kind, quantity or
distribution; with the unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned principally with getting
service rendered to its members and doing so at lower prices made possible by
quantity purchasing and economies in operation. Its primary purpose is to reduce the
cost rather than the risk of medical care; to broaden the service to the individual in kind
and quantity; to enlarge the number receiving it; to regularize it as an everyday incident
of living, like purchasing food and clothing or oil and gas, rather than merely protecting
against the financial loss caused by extraordinary and unusual occurrences, such as
death, disaster at sea, fire and tornado. It is, in this instance, to take care of colds,
ordinary aches and pains, minor ills and all the temporary bodily discomforts as well
as the more serious and unusual illness. To summarize, the distinctive features of the

cooperative are the rendering of service, its extension, the bringing of physician and
patient together, the preventive features, the regularization of service as well as
payment, the substantial reduction in cost by quantity purchasing in short, getting the
medical job done and paid for; not, except incidentally to these features, the
indemnification for cost after the services is rendered. Except the last, these are not
distinctive or generally characteristic of the insurance arrangement. There is,
therefore, a substantial difference between contracting in this way for the rendering of
service, even on the contingency that it be needed, and contracting merely to stand its
cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should
not outweigh all other factors. If attention is focused only on that feature, the line
between insurance or indemnity and other types of legal arrangement and economic
function becomes faint, if not extinct. This is especially true when the contract is for
the sale of goods or services on contingency. But obviously it was not the purpose of
the insurance statutes to regulate all arrangements for assumption or distribution of
risk. That view would cause them to engulf practically all contracts, particularly
conditional sales and contingent service agreements. The fallacy is in looking only at
the risk element, to the exclusion of all others present or their subordination to it. The
question turns, not on whether risk is involved or assumed, but on whether that or
something else to which it is related in the particular plan is its principal object
purpose.24 (Emphasis supplied)
In California Physicians’ Service v. Garrison,25 the California court felt that, after
scrutinizing the plan of operation as a whole of the corporation, it was service rather
than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding that the service is not
engaged in the insurance business. Absence or presence of assumption of risk or peril
is not the sole test to be applied in determining its status. The question, more broadly,
is whether, looking at the plan of operation as a whole, ‘service’ rather than ‘indemnity’
is its principal object and purpose. Certainly the objects and purposes of the
corporation organized and maintained by the California physicians have a wide scope
in the field of social service. Probably there is no more impelling need than that of
79
adequate medical care on a voluntary, low-cost basis for persons of small income. The
medical profession unitedly is endeavoring to meet that need. Unquestionably this is
‘service’ of a high order and not ‘indemnity.’26 (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an
insurance company is that HMOs undertake to provide or arrange for the provision of
medical services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-agreed
limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of
New Jersey27 is clear on this point:
The basic distinction between medical service corporations and ordinary health and
accident insurers is that the former undertake to provide prepaid medical services
through participating physicians, thus relieving subscribers of any further financial
burden, while the latter only undertake to indemnify an insured for medical expenses
up to, but not beyond, the schedule of rates contained in the policy.
xxx xxx xxx
The primary purpose of a medical service corporation, however, is an undertaking to
provide physicians who will render services to subscribers on a prepaid basis. Hence,
if there are no physicians participating in the medical service corporation’s plan, not
only will the subscribers be deprived of the protection which they might reasonably
have expected would be provided, but the corporation will, in effect, be doing business
solely as a health and accident indemnity insurer without having qualified as such and
rendering itself subject to the more stringent financial requirements of the General
Insurance Laws….
A participating provider of health care services is one who agrees in writing to render
health care services to or for persons covered by a contract issued by health service

corporation in return for which the health service corporation agrees to make payment
directly to the participating provider.28 (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary
purpose of the business to provide medical services as needed, with payment made
directly to the provider of these services.29 In short, even if petitioner assumes the
risk of paying the cost of these services even if significantly more than what the
member has prepaid, it nevertheless cannot be considered as being engaged in the
insurance business.
By the same token, any indemnification resulting from the payment for services
rendered in case of emergency by non-participating health providers would still be
incidental to petitioner’s purpose of providing and arranging for health care services
and does not transform it into an insurer. To fulfill its obligations to its members under
the agreements, petitioner is required to set up a system and the facilities for the
delivery of such medical services. This indubitably shows that indemnification is not its
sole object.
In fact, a substantial portion of petitioner’s services covers preventive and diagnostic
medical services intended to keep members from developing medical conditions or
diseases.30 As an HMO, it is its obligation to maintain the good health of its members.
Accordingly, its health care programs are designed to prevent or to minimize the
possibility of any assumption of risk on its part. Thus, its undertaking under its
agreements is not to indemnify its members against any loss or damage arising from
a medical condition but, on the contrary, to provide the health and medical services
needed to prevent such loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its members (with
respect to its curative medical services), but these are incidental to the principal activity
of providing them medical care. The "insurance-like" aspect of petitioner’s business is
miniscule compared to its noninsurance activities. Therefore, since it substantially
80
provides health care services rather than insurance services, it cannot be considered
as being in the insurance business.
It is important to emphasize that, in adopting the "principal purpose test" used in the
above-quoted U.S. cases, we are not saying that petitioner’s operations are identical
in every respect to those of the HMOs or health providers which were parties to those
cases. What we are stating is that, for the purpose of determining what "doing an
insurance business" means, we have to scrutinize the operations of the business as a
whole and not its mere components. This is of course only prudent and appropriate,
taking into account the burdensome and strict laws, rules and regulations applicable
to insurers and other entities engaged in the insurance business. Moreover, we are
also not unmindful that there are other American authorities who have found particular
HMOs to be actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry.
This is evident from the fact that it is not supervised by the Insurance Commission but
by the Department of Health.33 In fact, in a letter dated September 3, 2000, the
Insurance Commissioner confirmed that petitioner is not engaged in the insurance
business. This determination of the commissioner must be accorded great weight. It
is well-settled that the interpretation of an administrative agency which is tasked to
implement a statute is accorded great respect and ordinarily controls the interpretation
of laws by the courts. The reason behind this rule was explained in Nestle Philippines,
Inc. v. Court of Appeals:34
The rationale for this rule relates not only to the emergence of the multifarious needs
of a modern or modernizing society and the establishment of diverse administrative
agencies for addressing and satisfying those needs; it also relates to the accumulation
of experience and growth of specialized capabilities by the administrative agency
charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs.
Commissioner of Customs,35 the Court stressed that executive officials are presumed
to have familiarized themselves with all the considerations pertinent to the meaning
and purpose of the law, and to have formed an independent, conscientious and
competent expert opinion thereon. The courts give much weight to the government
agency officials charged with the implementation of the law, their competence,

expertness, experience and informed judgment, and the fact that they frequently are
the drafters of the law they interpret.36
A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section
185 Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance… or obligations
of the nature of indemnity for loss, damage, or liability…." In our decision dated June
12, 2008, we ruled that petitioner’s health care agreements are contracts of indemnity
and are therefore insurance contracts:
It is … incorrect to say that the health care agreement is not based on loss or damage
because, under the said agreement, petitioner assumes the liability and indemnifies
its member for hospital, medical and related expenses (such as professional fees of
physicians). The term "loss or damage" is broad enough to cover the monetary
expense or liability a member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional
services to the member in case of sickness, injury or emergency or his availment of
so-called "out-patient services" (including physical examination, x-ray and laboratory
tests, medical consultations, vaccine administration and family planning counseling) is
the contingent event which gives rise to liability on the part of the member. In case of
exposure of the member to liability, he would be entitled to indemnification by
petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for
expenses arising from the stipulated contingencies belies its claim that its services are
prepaid. The expenses to be incurred by each member cannot be predicted
beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for
the costs of the services even if they are significantly and substantially more than what
the member has "prepaid." Petitioner does not bear the costs alone but distributes or
81
spreads them out among a large group of persons bearing a similar risk, that is, among
all the other members of the health care program. This is insurance.37
We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies
of insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation
transacting the business of accident, fidelity, employer’s liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life,
marine, inland, and fire insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are
strictly construed against the taxing authority.38 This is because taxation is a
destructive power which interferes with the personal and property rights of the people
and takes from them a portion of their property for the support of the government.39
Hence, tax laws may not be extended by implication beyond the clear import of their
language, nor their operation enlarged so as to embrace matters not specifically
provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health
care agreement is in the nature of non-life insurance, which is primarily a contract of
indemnity. However, those cases did not involve the interpretation of a tax provision.
Instead, they dealt with the liability of a health service provider to a member under the
terms of their health care agreement. Such contracts, as contracts of adhesion, are
liberally interpreted in favor of the member and strictly against the HMO. For this
reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here.
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 designed 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.41
Do the agreements between petitioner and its members possess all these elements?
They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that,
even if a contract contains all the elements of an insurance contract, if its primary
purpose is the rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements
mentioned above would be an insurance contract. The primary purpose of the parties
in making the contract may negate the existence of an insurance contract. For
example, a law firm which enters into contracts with clients whereby in consideration
of periodical payments, it promises to represent such clients in all suits for or against
them, is not engaged in the insurance business. Its contracts are simply for the
purpose of rendering personal services. On the other hand, a contract by which a
82
corporation, in consideration of a stipulated amount, agrees at its own expense to
defend a physician against all suits for damages for malpractice is one of insurance,
and the corporation will be deemed as engaged in the business of insurance. Unlike
the lawyer’s retainer contract, the essential purpose of such a contract is not to render
personal services, but to indemnify against loss and damage resulting from the
defense of actions for malpractice.42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in
petitioner’s agreements. To begin with, there is no loss, damage or liability on the part
of the member that should be indemnified by petitioner as an HMO. Under the
agreement, the member pays petitioner a predetermined consideration in exchange
for the hospital, medical and professional services rendered by the petitioner’s
physician or affiliated physician to him. In case of availment by a member of the
benefits under the agreement, petitioner does not reimburse or indemnify the member
as the latter does not pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the services rendered at
pre-agreed rates. The member does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary
liability on the part of the member to any third party-provider of medical services which
might in turn necessitate indemnification from petitioner. The terms "indemnify" or
"indemnity" presuppose that a liability or claim has already been incurred. There is no
indemnity precisely because the member merely avails of medical services to be paid
or already paid in advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the
benefits anytime, e.g. laboratory services, x-ray, routine annual physical examination
and consultations, vaccine administration as well as family planning counseling, even
in the absence of any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who
receives care from a non-participating physician or hospital. However, this is only a

very minor part of the list of services available. The assumption of the expense by
petitioner is not confined to the happening of a contingency but includes incidents even
in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43
although the health care contracts called for the defendant to partially reimburse a
subscriber for treatment received from a non-designated doctor, this did not make
defendant an insurer. Citing Jordan, the Court determined that "the primary activity of
the defendant (was) the provision of podiatric services to subscribers in consideration
of prepayment for such services."44 Since indemnity of the insured was not the focal
point of the agreement but the extension of medical services to the member at an
affordable cost, it did not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily
true that risk alone is sufficient to establish it. Almost anyone who undertakes a
contractual obligation always bears a certain degree of financial risk. Consequently,
there is a need to distinguish prepaid service contracts (like those of petitioner) from
the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide
health services: the risk that it might fail to earn a reasonable return on its investment.
But it is not the risk of the type peculiar only to insurance companies. Insurance risk,
also known as actuarial risk, is the risk that the cost of insurance claims might be
higher than the premiums paid. The amount of premium is calculated on the basis of
assumptions made relative to the insured.45
However, assuming that petitioner’s commitment to provide medical services to its
members can be construed as an acceptance of the risk that it will shell out more than
the prepaid fees, it still will not qualify as an insurance contract because petitioner’s
objective is to provide medical services at reduced cost, not to distribute risk like an
insurer.
83
In sum, an examination of petitioner’s agreements with its members leads us to
conclude that it is not an insurance contract within the context of our Insurance Code.
There Was No Legislative Intent To Impose DST On Health Care Agreements Of
HMOs
Furthermore, militating in convincing fashion against the imposition of DST on
petitioner’s health care agreements under Section 185 of the NIRC of 1997 is the
provision’s legislative history. The text of Section 185 came into U.S. law as early as
1904 when HMOs and health care agreements were not even in existence in this
jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise
known as the "Internal Revenue Law of 1904")46 enacted on July 2, 1904 and became
effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of
1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several
bonds, debentures, or certificates of stock and indebtedness, and other documents,
instruments, matters, and things mentioned and described in this section, or for or in
respect to the vellum, parchment, or paper upon which such instrument, matters, or
things or any of them shall be written or printed by any person or persons who shall
make, sign, or issue the same, on and after January first, nineteen hundred and five,
the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity
for loss, damage, or liability made or renewed by any person, association, company,
or corporation transacting the business of accident, fidelity, employer’s liability, plate

glass, steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance
(except life, marine, inland, and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted
revising and consolidating the laws relating to internal revenue. The aforecited
pertinent portion of Section 116, Article XI of Act No. 1189 was completely reproduced
as Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive
enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced
as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its
amendment on March 10, 1917, the pertinent DST provision became Section 1449 (l)
of Act No. 2711, otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the
NIRC of 1939), which codified all the internal revenue laws of the Philippines. In an
amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but
the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was
reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959,
enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again
increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC
of 1977 was renumbered as Section 198. And under Section 23 of EO47 273 dated
July 25, 1987, it was again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only
with respect to the rate of tax.
84
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or
the NIRC of 1997), the subject legal provision was retained as the present Section
185. In 2004, amendments to the DST provisions were introduced by RA 924348 but
Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the
formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was
later reorganized and renamed Integrated Health Care Services, Inc. (or Intercare).
However, there are those who claim that Health Maintenance, Inc. is the HMO industry
pioneer, having set foot in the Philippines as early as 1965 and having been formally
incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there are
36 registered HMOs with a total enrollment of more than 2 million.49
We can clearly see from these two histories (of the DST on the one hand and HMOs
on the other) that when the law imposing the DST was first passed, HMOs were yet
unknown in the Philippines. However, when the various amendments to the DST law
were enacted, they were already in existence in the Philippines and the term had in
fact already been defined by RA 7875. If it had been the intent of the legislature to
impose DST on health care agreements, it could have done so in clear and categorical
terms. It had many opportunities to do so. But it did not. The fact that the NIRC
contained no specific provision on the DST liability of health care agreements of HMOs
at a time they were already known as such, belies any legislative intent to impose it
on them. As a matter of fact, petitioner was assessed its DST liability only on January
27, 2000, after more than a decade in the business as an HMO.50
Considering that Section 185 did not change since 1904 (except for the rate of tax), it
would be safe to say that health care agreements were never, at any time, recognized
as insurance contracts or deemed engaged in the business of insurance within the
context of the provision.
The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is
to be found only in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it.51 So potent indeed is the power that it was once opined
that "the power to tax involves the power to destroy."52
Petitioner claims that the assessed DST to date which amounts to ₱376 million53 is
way beyond its net worth of ₱259 million.54 Respondent never disputed these
assertions. Given the realities on the ground, imposing the DST on petitioner would
be highly oppressive. It is not the purpose of the government to throttle private
business. On the contrary, the government ought to encourage private enterprise.55
Petitioner, just like any concern organized for a lawful economic activity, has a right to
maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill
the "hen that lays the golden egg."58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of
existence. Incurring losses because of a tax imposition may be an acceptable
consequence but killing the business of an entity is another matter and should not be
allowed. It is counter-productive and ultimately subversive of the nation’s thrust
towards a better economy which will ultimately benefit the majority of our people.59
Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable
years 1996 and 1997 became moot and academic60 when it availed of the tax
amnesty under RA 9480 on December 10, 2007. It paid ₱5,127,149.08 representing
5% of its net worth as of the year ended December 31, 2005 and complied with all
85
requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to
immunity from payment of taxes as well as additions thereto, and the appurtenant civil,
criminal or administrative penalties under the 1997 NIRC, as amended, arising from
the failure to pay any and all internal revenue taxes for taxable year 2005 and prior
years.61
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to
immunity from payment of the tax involved, including the civil, criminal, or
administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in
2005 and the preceding years.
In view of petitioner’s availment of the benefits of [RA 9840], and without conceding
the merits of this case as discussed above, respondent concedes that such tax
amnesty extinguishes the tax liabilities of petitioner. This admission, however, is not
meant to preclude a revocation of the amnesty granted in case it is found to have been
granted under circumstances amounting to tax fraud under Section 10 of said amnesty
law.62 (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax
amnesty program under RA 9480.63 There is no other conclusion to draw than that
petitioner’s liability for DST for the taxable years 1996 and 1997 was totally
extinguished by its availment of the tax amnesty under RA 9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration: whether
this Court is bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that

a health care agreement of Philamcare Health Systems is not an insurance contract
for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of
this Court dismissing the appeal in Philippine National Bank (G.R. No. 148680).66
Petitioner argues that the dismissal of G.R. No. 148680 by minute resolution was a
judgment on the merits; hence, the Court should apply the CA ruling there that a health
care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the petition
was a disposition of the merits of the case. When we dismissed the petition, we
effectively affirmed the CA ruling being questioned. As a result, our ruling in that case
has already become final.67 When a minute resolution denies or dismisses a petition
for failure to comply with formal and substantive requirements, the challenged
decision, together with its findings of fact and legal conclusions, are deemed
sustained.68 But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same
parties, it constitutes res judicata.69 However, if other parties or another subject matter
(even with the same parties and issues) is involved, the minute resolution is not binding
precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a previous case, CIR
v. Baier-Nickel71 involving the same parties and the same issues, was previously
disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining
the ruling of the CA. Nonetheless, the Court ruled that the previous case "ha(d) no
bearing" on the latter case because the two cases involved different subject matters
as they were concerned with the taxable income of different taxable years.72
Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph of
Section 14, Article VIII of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly applies only to decisions,
not to minute resolutions. A minute resolution is signed only by the clerk of court by
86
authority of the justices, unlike a decision. It does not require the certification of the
Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a
decision.73 Indeed, as a rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the members of the Court
and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s
liability for DST on its health care agreement was not the subject matter of G.R. No.
148680, petitioner cannot successfully invoke the minute resolution in that case (which
is not even binding precedent) in its favor. Nonetheless, in view of the reasons already
discussed, this does not detract in any way from the fact that petitioner’s health care
agreements are not subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the ambit of
Section 185 of the NIRC and there was never any legislative intent to impose the same
on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its
coverage.
It is a matter of common knowledge that there is a great social need for adequate
medical services at a cost which the average wage earner can afford. HMOs arrange,
organize and manage health care treatment in the furtherance of the goal of providing
a more efficient and inexpensive health care system made possible by quantity
purchasing of services and economies of scale. They offer advantages over the pay-
for-service system (wherein individuals are charged a fee each time they receive
medical services), including the ability to control costs. They protect their members
from exposure to the high cost of hospitalization and other medical expenses brought
about by a fluctuating economy. Accordingly, they play an important role in society as
partners of the State in achieving its constitutional mandate of providing its citizens
with affordable health services.
 87

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74
Its imposition will elevate the cost of health care services. This will in turn necessitate
an increase in the membership fees, resulting in either placing health services beyond
the reach of the ordinary wage earner or driving the industry to the ground. At the end
of the day, neither side wins, considering the indispensability of the services offered
by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004
decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the
said tax.

No costs.

SO ORDERED.

G.R. No. 125678 March 18, 2002
PHILAMCARE HEALTH SYSTEMS, INC., petitioner,
vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care
coverage with petitioner Philamcare Health Systems, Inc. In the standard application
form, he answered no to the following question:
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
88
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.
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 forgoing, the Court renders judgment in favor of the
plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of the late
Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid
to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;
 89

3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to 1. The insured has an insurable interest;
plaintiff;

2. The insured is subject to a risk of loss by the happening of the designated peril;
4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.

3. The insurer assumes the risk;

SO ORDERED.3

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

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all among a large group of persons bearing a similar risk; and
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 5. In consideration of the insurer’s promise, the insured pays a premium.8
contract; hence the "incontestability clause" under the Insurance Code6 does not
apply.1âwphi1.nêt
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,
Petitioner argues that the agreement grants "living benefits," such as medical check- may be insured against. Every person has an insurable interest in the life and health
ups and hospitalization which a member may immediately enjoy so long as he is alive of himself. Section 10 provides:
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 Every person has an insurable interest in the life and health:
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
(1) of himself, of his spouse and of his children;
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.
(2) of any person on whom he depends wholly or in part for education or support, or
in whom he has a pecuniary interest;
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 (3) of any person under a legal obligation to him for the payment of money, respecting
exists where the following elements concur: 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.
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 in interest under the Agreement herein applied for, that there shall be no
contract of health care coverage unless and until an Agreement is issued on this
application and the full Membership Fee according to the mode of payment applied for
is actually paid during the lifetime and good health of proposed Members; that no
information acquired by any Representative of PhilamCare shall be binding upon
PhilamCare unless set out in writing in the application; that any physician is, by these
presents, expressly authorized to disclose or give testimony at anytime relative to any
information acquired by him in his professional capacity upon any question affecting
the eligibility for health care coverage of the Proposed Members and that the
acceptance of any Agreement issued on this application shall be a ratification of any
correction in or addition to this application as stated in the space for Home Office
Endorsement.11 (Underscoring ours)
90
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 (Underscoring 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 (Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract.16 Concealment as a defense for the health care
provider or insurer to avoid liability is an affirmative defense and the duty to establish
such defense by satisfactory and convincing evidence rests upon the provider or
insurer. In any case, with or without the authority to investigate, petitioner is liable for
claims made under the contract. Having assumed a responsibility under the
agreement, petitioner is bound to answer the same to the extent agreed upon. In the
end, the liability of the health care provider attaches once the member is hospitalized
for the disease or injury covered by the agreement or whenever he avails of the
covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, "a concealment entitles the injured party to
rescind a contract of insurance." The right to rescind should be exercised previous to
the commencement of an action on the contract.17 In this case, no rescission was
made. Besides, the cancellation of health care agreements as in insurance policies
require the concurrence of the following conditions:
1. 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;
91
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
 92

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.

G.R. No. 183526 August 25, 2009
VIOLETA R. LALICAN, Petitioner,
vs.
THE INSULAR LIFE ASSURANCE COMPANY LIMITED, AS REPRESENTED BY
THE PRESIDENT VICENTE R. AVILON, Respondent.
DECISION
CHICO-NAZARIO, J.:
Challenged in this Petition for Review on Certiorari1 under Rule 45 of the Rules of
Court are the Decision2 dated 30 August 2007 and the Orders dated 10 April 20083
and 3 July 20084 of the Regional Trial Court (RTC) of Gapan City, Branch 34, in Civil
Case No. 2177. In its assailed Decision, the RTC dismissed the claim for death
benefits filed by petitioner Violeta R. Lalican (Violeta) against respondent Insular Life
Assurance Company Limited (Insular Life); while in its questioned Orders dated 10
April 2008 and 3 July 2008, respectively, the RTC declared the finality of the aforesaid
Decision and denied petitioner’s Notice of Appeal.
The factual and procedural antecedents of the case, as culled from the records, are
as follows:
Violeta is the widow of the deceased Eulogio C. Lalican (Eulogio).
During his lifetime, Eulogio applied for an insurance policy with Insular Life. On 24 April
1997, Insular Life, through Josephine Malaluan (Malaluan), its agent in Gapan City,
issued in favor of Eulogio Policy No. 9011992,5 which contained a 20-Year
Endowment Variable Income Package Flexi Plan worth ₱500,000.00,6 with two riders
valued at ₱500,000.00 each.7 Thus, the value of the policy amounted to
₱1,500,000.00. Violeta was named as the primary beneficiary.
93
Under the terms of Policy No. 9011992, Eulogio was to pay the premiums on a
quarterly basis in the amount of ₱8,062.00, payable every 24 April, 24 July, 24 October
and 24 January of each year, until the end of the 20-year period of the policy.
According to the Policy Contract, there was a grace period of 31 days for the payment
of each premium subsequent to the first. If any premium was not paid on or before the
due date, the policy would be in default, and if the premium remained unpaid until the
end of the grace period, the policy would automatically lapse and become void.8
Eulogio paid the premiums due on 24 July 1997 and 24 October 1997. However, he
failed to pay the premium due on 24 January 1998, even after the lapse of the grace
period of 31 days. Policy No. 9011992, therefore, lapsed and became void.
Eulogio submitted to the Cabanatuan District Office of Insular Life, through Malaluan,
on 26 May 1998, an Application for Reinstatement9 of Policy No. 9011992, together
with the amount of ₱8,062.00 to pay for the premium due on 24 January 1998. In a
letter10 dated 17 July 1998, Insular Life notified Eulogio that his Application for
Reinstatement could not be fully processed because, although he already deposited
₱8,062.00 as payment for the 24 January 1998 premium, he left unpaid the overdue
interest thereon amounting to ₱322.48. Thus, Insular Life instructed Eulogio to pay the
amount of interest and to file another application for reinstatement. Eulogio was
likewise advised by Malaluan to pay the premiums that subsequently became due on
24 April 1998 and 24 July 1998, plus interest.
On 17 September 1998, Eulogio went to Malaluan’s house and submitted a second
Application for Reinstatement11 of Policy No. 9011992, including the amount of
₱17,500.00, representing payments for the overdue interest on the premium for 24
January 1998, and the premiums which became due on 24 April 1998 and 24 July
1998. As Malaluan was away on a business errand, her husband received Eulogio’s
second Application for Reinstatement and issued a receipt for the amount Eulogio
deposited.

A while later, on the same day, 17 September 1998, Eulogio died of cardio-respiratory
arrest secondary to electrocution.
Without knowing of Eulogio’s death, Malaluan forwarded to the Insular Life Regional
Office in the City of San Fernando, on 18 September 1998, Eulogio’s second
Application for Reinstatement of Policy No. 9011992 and ₱17,500.00 deposit.
However, Insular Life no longer acted upon Eulogio’s second Application for
Reinstatement, as the former was informed on 21 September 1998 that Eulogio had
already passed away.
On 28 September 1998, Violeta filed with Insular Life a claim for payment of the full
proceeds of Policy No. 9011992.
In a letter12 dated 14 January 1999, Insular Life informed Violeta that her claim could
not be granted since, at the time of Eulogio’s death, Policy No. 9011992 had already
lapsed, and Eulogio failed to reinstate the same. According to the Application for
Reinstatement, the policy would only be considered reinstated upon approval of the
application by Insular Life during the applicant’s "lifetime and good health," and
whatever amount the applicant paid in connection thereto was considered to be a
deposit only until approval of said application. Enclosed with the 14 January 1999 letter
of Insular Life to Violeta was DBP Check No. 0000309734, for the amount of
₱25,417.00, drawn in Violeta’s favor, representing the full refund of the payments
made by Eulogio on Policy No. 9011992.
On 12 February 1998, Violeta requested a reconsideration of the disallowance of her
claim. In a letter13 dated 10 March 1999, Insular Life stated that it could not find any
reason to reconsider its decision rejecting Violeta’s claim. Insular Life again tendered
to Violeta the above-mentioned check in the amount of ₱25,417.00.
Violeta returned the letter dated 10 March 1999 and the check enclosed therein to the
Cabanatuan District Office of Insular Life. Violeta’s counsel subsequently sent a
94
letter14 dated 8 July 1999 to Insular Life, demanding payment of the full proceeds of
Policy No. 9011992. On 11 August 1999, Insular Life responded to the said demand
letter by agreeing to conduct a re-evaluation of Violeta’s claim.
Without waiting for the result of the re-evaluation by Insular Life, Violeta filed with the
RTC, on 11 October 1999, a Complaint for Death Claim Benefit,15 which was
docketed as Civil Case No. 2177. Violeta alleged that Insular Life engaged in unfair
claim settlement practice and deliberately failed to act with reasonable promptness on
her insurance claim. Violeta prayed that Insular Life be ordered to pay her death claim
benefits on Policy No. 9011992, in the amount of ₱1,500,000.00, plus interests,
attorney’s fees, and cost of suit.
Insular Life filed with the RTC an Answer with Counterclaim,16 asserting that Violeta’s
Complaint had no legal or factual bases. Insular Life maintained that Policy No.
9011992, on which Violeta sought to recover, was rendered void by the non-payment
of the 24 January 1998 premium and non-compliance with the requirements for the
reinstatement of the same. By way of counterclaim, Insular Life prayed that Violeta be
ordered to pay attorney’s fees and expenses of litigation incurred by the former.
Violeta, in her Reply and Answer to Counterclaim, asserted that the requirements for
the reinstatement of Policy No. 9011992 had been complied with and the defenses put
up by Insular Life were purely invented and illusory.
After trial, the RTC rendered, on 30 August 2007, a Decision in favor of Insular Life.
The RTC found that Policy No. 9011992 had indeed lapsed and Eulogio needed to
have the same reinstated:
[The] arguments [of Insular Life] are not without basis. When the premiums for April
24 and July 24, 1998 were not paid by [Eulogio] even after the lapse of the 31-day

grace period, his insurance policy necessarily lapsed. This is clear from the terms and
conditions of the contract between [Insular Life] and [Eulogio] which are written in [the]
Policy provisions of Policy No. 9011992 x x x.17
The RTC, taking into account the clear provisions of the Policy Contract between
Eulogio and Insular Life and the Application for Reinstatement Eulogio subsequently
signed and submitted to Insular Life, held that Eulogio was not able to fully comply
with the requirements for the reinstatement of Policy No. 9011992:
The well-settled rule is that a contract has the force of law between the parties. In the
instant case, the terms of the insurance contract between [Eulogio] and [Insular Life]
were spelled out in the policy provisions of Insurance Policy No. 9011992. There is
likewise no dispute that said insurance contract is by nature a contract of adhesion[,]
which is defined as "one in which one of the contracting parties imposes a ready-made
form of contract which the other party may accept or reject but cannot modify."
(Polotan, Sr. vs. CA, 296 SCRA 247).
xxxx
The New Lexicon Webster’s Dictionary defines ambiguity as the "quality of having
more than one meaning" and "an idea, statement or expression capable of being
understood in more than one sense." In Nacu vs. Court of Appeals, 231 SCRA 237
(1994), the Supreme Court stated that[:]
"Any ambiguity in a contract, whose terms are susceptible of different interpretations
as a result thereby, must be read and construed against the party who drafted it on
the assumption that it could have been avoided by the exercise of a little care."
In the instant case, the dispute arises from the afore-quoted provisions written on the
face of the second application for reinstatement. Examining the said provisions, the
95
court finds the same clearly written in terms that are simple enough to admit of only
one interpretation. They are clearly not ambiguous, equivocal or uncertain that would
need further construction. The same are written on the very face of the application just
above the space where [Eulogio] signed his name. It is inconceivable that he signed it
without reading and understanding its import.1avvphi1
Similarly, the provisions of the policy provisions (sic) earlier mentioned are written in
simple and clear layman’s language, rendering it free from any ambiguity that would
require a legal interpretation or construction. Thus, the court believes that [Eulogio]
was well aware that when he filed the said application for reinstatement, his lapsed
policy was not automatically reinstated and that its approval was subject to certain
conditions. Nowhere in the policy or in the application for reinstatement was it ever
mentioned that the payment of premiums would have the effect of an automatic and
immediate renewal of the lapsed policy. Instead, what was clearly stated in the
application for reinstatement is that pending approval thereof, the premiums paid
would be treated as a "deposit only and shall not bind the company until this application
is finally approved during my/our" lifetime and good health[.]"
Again, the court finds nothing in the aforesaid provisions that would even suggest an
ambiguity either in the words used or in the manner they were written. [Violeta] did not
present any proof that [Eulogio] was not conversant with the English language. Hence,
his having personally signed the application for reinstatement[,] which consisted only
of one page, could only mean that he has read its contents and that he understood
them. x x x
Therefore, consistent with the above Supreme Court ruling and finding no ambiguity
both in the policy provisions of Policy No. 9011992 and in the application for
reinstatement subject of this case, the court finds no merit in [Violeta’s] contention that
the policy provision stating that [the lapsed policy of Eulogio] should be reinstated
during his lifetime is ambiguous and should be construed in his favor. It is true that
[Eulogio] submitted his application for reinstatement, together with his premium and
interest payments, to [Insular Life] through its agent Josephine Malaluan in the
morning of September 17, 1998. Unfortunately, he died in the afternoon of that same
day. It was only on the following day, September 18, 1998 that Ms. Malaluan brought
 96

the said document to [the regional office of Insular Life] in San Fernando, Pampanga disturb its earlier findings. Per the Registry Return Receipt on record, the 8 November
for approval. As correctly pointed out by [Insular Life] there was no more application 2007 Order of the RTC was received by Violeta on 3 December 2007.
to approve because the applicant was already dead and no insurance company would
issue an insurance policy to a dead person.18 (Emphases ours.)
In the interim, on 22 November 2007, Violeta filed with the RTC a Reply24 to the
Motion for Reconsideration, wherein she reiterated the prayer in her Motion for
The RTC, in the end, explained that: Reconsideration for the setting aside of the Decision dated 30 August 2007. Despite
already receiving on 3 December 2007, a copy of the RTC Order dated 8 November
2007, which denied her Motion for Reconsideration, Violeta still filed with the RTC, on
While the court truly empathizes with the [Violeta] for the loss of her husband, it cannot 26 February 2008, a Reply Extended Discussion elaborating on the arguments she
express the same by interpreting the insurance agreement in her favor where there is had previously made in her Motion for Reconsideration and Reply.
no need for such interpretation. It is conceded that [Eulogio’s] payment of overdue
On 10 April 2008, the RTC issued an Order,25 declaring that the Decision dated 30
premiums and interest was received by [Insular Life] through its agent Ms. Malaluan.
August 2007 in Civil Case No. 2177 had already attained finality in view of Violeta’s
It is also true that [the] application for reinstatement was filed by [Eulogio] a day before
failure to file the appropriate notice of appeal within the reglementary period. Thus,
his death. However, there is nothing that would justify a conclusion that such receipt
any further discussions on the issues raised by Violeta in her Reply and Reply
amounted to an automatic reinstatement of the policy that has already lapsed. The
Extended Discussion would be moot and academic.
evidence suggests clearly that no such automatic renewal was contemplated in the
contract between [Eulogio] and [Insular Life]. Neither was it shown that Ms. Malaluan
was the officer authorized to approve the application for reinstatement and that her
Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with Motion,26 praying
receipt of the documents submitted by [Eulogio] amounted to its approval.19
that the Order dated 10 April 2008 be set aside and that she be allowed to file an
(Emphasis ours.)
appeal with the Court of Appeals.

The fallo of the RTC Decision thus reads:

In an Order27 dated 3 July 2008, the RTC denied Violeta’s Notice of Appeal with
Motion given that the Decision dated 30 August 2007 had long since attained finality.
WHEREFORE, all the foregoing premises considered and finding that [Violeta] has
failed to establish by preponderance of evidence her cause of action against the
Violeta directly elevated her case to this Court via the instant Petition for Review on
defendant, let this case be, as it is hereby DISMISSED.20
Certiorari, raising the following issues for consideration:

On 14 September 2007, Violeta filed a Motion for Reconsideration21 of the afore-

1. Whether or not the Decision of the court a quo dated August 30, 2007, can still be
mentioned RTC Decision. Insular Life opposed22 the said motion, averring that the
reviewed despite having allegedly attained finality and despite the fact that the mode
arguments raised therein were merely a rehash of the issues already considered and
of appeal that has been availed of by Violeta is erroneous?
addressed by the RTC. In an Order23 dated 8 November 2007, the RTC denied
Violeta’s Motion for Reconsideration, finding no cogent and compelling reason to

2. Whether or not the Regional Trial Court in its original jurisdiction has decided the
case on a question of law not in accord with law and applicable decisions of the
Supreme Court?
Violeta insists that her former counsel committed an honest mistake in filing a Reply,
instead of a Notice of Appeal of the RTC Decision dated 30 August 2007; and in the
computation of the reglementary period for appealing the said judgment. Violeta claims
that her former counsel suffered from poor health, which rapidly deteriorated from the
first week of July 2008 until the latter’s death just shortly after the filing of the instant
Petition on 8 August 2008. In light of these circumstances, Violeta entreats this Court
to admit and give due course to her appeal even if the same was filed out of time.
Violeta further posits that the Court should address the question of law arising in this
case involving the interpretation of the second sentence of Section 19 of the Insurance
Code, which provides:
Section. 19. x x x [I]nterest in the life or health of a person insured must exist when the
insurance takes effect, but need not exist thereafter or when the loss occurs.
On the basis thereof, Violeta argues that Eulogio still had insurable interest in his own
life when he reinstated Policy No. 9011992 just before he passed away on 17
September 1998. The RTC should have construed the provisions of the Policy
Contract and Application for Reinstatement in favor of the insured Eulogio and against
the insurer Insular Life, and considered the special circumstances of the case, to rule
that Eulogio had complied with the requisites for the reinstatement of Policy No.
9011992 prior to his death, and that Violeta is entitled to claim the proceeds of said
policy as the primary beneficiary thereof.
The Petition lacks merit.
97
At the outset, the Court notes that the elevation of the case to us via the instant Petition
for Review on Certiorari is not justified. Rule 41, Section 1 of the Rules of Court,28
provides that no appeal may be taken from an order disallowing or dismissing an
appeal. In such a case, the aggrieved party may file a Petition for Certiorari under Rule
65 of the Rules of Court.29
Furthermore, the RTC Decision dated 30 August 2007, assailed in this Petition, had
long become final and executory. Violeta filed a Motion for Reconsideration thereof,
but the RTC denied the same in an Order dated 8 November 2007. The records of the
case reveal that Violeta received a copy of the 8 November 2007 Order on 3 December
2007. Thus, Violeta had 15 days30 from said date of receipt, or until 18 December
2007, to file a Notice of Appeal. Violeta filed a Notice of Appeal only on 20 May 2008,
more than five months after receipt of the RTC Order dated 8 November 2007 denying
her Motion for Reconsideration.
Violeta’s claim that her former counsel’s failure to file the proper remedy within the
reglementary period was an honest mistake, attributable to the latter’s deteriorating
health, is unpersuasive.
Violeta merely made a general averment of her former counsel’s poor health, lacking
relevant details and supporting evidence. By Violeta’s own admission, her former
counsel’s health rapidly deteriorated only by the first week of July 2008. The events
pertinent to Violeta’s Notice of Appeal took place months before July 2008, i.e., a copy
of the RTC Order dated 8 November 2007, denying Violeta’s Motion for
Reconsideration of the Decision dated 30 August 2007, was received on 3 December
2007; and Violeta’s Notice of Appeal was filed on 20 May 2008. There is utter lack of
proof to show that Violeta’s former counsel was already suffering from ill health during
these times; or that the illness of Violeta’s former counsel would have affected his
judgment and competence as a lawyer.
Moreover, the failure of her former counsel to file a Notice of Appeal within the
reglementary period binds Violeta, which failure the latter cannot now disown on the

basis of her bare allegation and self-serving pronouncement that the former was ill. A
client is bound by his counsel’s mistakes and negligence.31
The Court, therefore, finds no reversible error on the part of the RTC in denying
Violeta’s Notice of Appeal for being filed beyond the reglementary period. Without an
appeal having been timely filed, the RTC Decision dated 30 August 2007 in Civil Case
No. 2177 already became final and executory.
A judgment becomes "final and executory" by operation of law. Finality becomes a fact
when the reglementary period to appeal lapses and no appeal is perfected within such
period. As a consequence, no court (not even this Court) can exercise appellate
jurisdiction to review a case or modify a decision that has become final.32 When a
final judgment is executory, it becomes immutable and unalterable. It may no longer
be modified in any respect either by the court, which rendered it or even by this Court.
The doctrine is founded on considerations of public policy and sound practice that, at
the risk of occasional errors, judgments must become final at some definite point in
time.33
The only recognized exceptions to the doctrine of immutability and unalterability are
the correction of clerical errors, the so-called nunc pro tunc entries, which cause no
prejudice to any party, and void judgments.34 The instant case does not fall under any
of these exceptions.
Even if the Court ignores the procedural lapses committed herein, and proceeds to
resolve the substantive issues raised, the Petition must still fail.
Violeta makes it appear that her present Petition involves a question of law,
particularly, whether Eulogio had an existing insurable interest in his own life until the
day of his death.
An insurable interest is one of the most basic and essential requirements in an
insurance contract. In general, an insurable interest is that interest which a person is
98
deemed to have in the subject matter insured, where he has a relation or connection
with or concern in it, such that the person will derive pecuniary benefit or advantage
from the preservation of the subject matter insured and will suffer pecuniary loss or
damage from its destruction, termination, or injury by the happening of the event
insured against.35 The existence of an insurable interest gives a person the legal right
to insure the subject matter of the policy of insurance.36 Section 10 of the Insurance
Code indeed provides that every person has an insurable interest in his own life.37
Section 19 of the same code also states that an interest in the life or health of a person
insured must exist when the insurance takes effect, but need not exist thereafter or
when the loss occurs.38
Upon more extensive study of the Petition, it becomes evident that the matter of
insurable interest is entirely irrelevant in the case at bar. It is actually beyond question
that while Eulogio was still alive, he had an insurable interest in his own life, which he
did insure under Policy No. 9011992. The real point of contention herein is whether
Eulogio was able to reinstate the lapsed insurance policy on his life before his death
on 17 September 1998.
The Court rules in the negative.
Before proceeding, the Court must correct the erroneous declaration of the RTC in its
30 August 2007 Decision that Policy No. 9011992 lapsed because of Eulogio’s non-
payment of the premiums which became due on 24 April 1998 and 24 July 1998. Policy
No. 9011992 had lapsed and become void earlier, on 24 February 1998, upon the
expiration of the 31-day grace period for payment of the premium, which fell due on
24 January 1998, without any payment having been made.
That Policy No. 9011992 had already lapsed is a fact beyond dispute. Eulogio’s filing
of his first Application for Reinstatement with Insular Life, through Malaluan, on 26 May
1998, constitutes an admission that Policy No. 9011992 had lapsed by then. Insular
Life did not act on Eulogio’s first Application for Reinstatement, since the amount
Eulogio simultaneously deposited was sufficient to cover only the ₱8,062.00 overdue
premium for 24 January 1998, but not the ₱322.48 overdue interests thereon. On 17
September 1998, Eulogio submitted a second Application for Reinstatement to Insular

Life, again through Malaluan, depositing at the same time ₱17,500.00, to cover
payment for the overdue interest on the premium for 24 January 1998, and the
premiums that had also become due on 24 April 1998 and 24 July 1998. On the very
same day, Eulogio passed away.
To reinstate a policy means to restore the same to premium-paying status after it has
been permitted to lapse.39 Both the Policy Contract and the Application for
Reinstatement provide for specific conditions for the reinstatement of a lapsed policy.
The Policy Contract between Eulogio and Insular Life identified the following
conditions for reinstatement should the policy lapse:
10. REINSTATEMENT
You may reinstate this policy at any time within three years after it lapsed if the
following conditions are met: (1) the policy has not been surrendered for its cash value
or the period of extension as a term insurance has not expired; (2) evidence of
insurability satisfactory to [Insular Life] is furnished; (3) overdue premiums are paid
with compound interest at a rate not exceeding that which would have been applicable
to said premium and indebtedness in the policy years prior to reinstatement; and (4)
indebtedness which existed at the time of lapsation is paid or renewed.40
Additional conditions for reinstatement of a lapsed policy were stated in the Application
for Reinstatement which Eulogio signed and submitted, to wit:
I/We agree that said Policy shall not be considered reinstated until this application is
approved by the Company during my/our lifetime and good health and until all other
Company requirements for the reinstatement of said Policy are fully satisfied.
99
I/We further agree that any payment made or to be made in connection with this
application shall be considered as deposit only and shall not bind the Company until
this application is finally approved by the Company during my/our lifetime and good
health. If this application is disapproved, I/We also agree to accept the refund of all
payments made in connection herewith, without interest, and to surrender the receipts
for such payment.41 (Emphases ours.)
In the instant case, Eulogio’s death rendered impossible full compliance with the
conditions for reinstatement of Policy No. 9011992. True, Eulogio, before his death,
managed to file his Application for Reinstatement and deposit the amount for payment
of his overdue premiums and interests thereon with Malaluan; but Policy No. 9011992
could only be considered reinstated after the Application for Reinstatement had been
processed and approved by Insular Life during Eulogio’s lifetime and good health.
Relevant herein is the following pronouncement of the Court in Andres v. The Crown
Life Insurance Company,42 citing McGuire v. The Manufacturer's Life Insurance
Co.43:
"The stipulation in a life insurance policy giving the insured the privilege to reinstate it
upon written application does not give the insured absolute right to such reinstatement
by the mere filing of an application. The insurer has the right to deny the reinstatement
if it is not satisfied as to the insurability of the insured and if the latter does not pay all
overdue premium and all other indebtedness to the insurer. After the death of the
insured the insurance Company cannot be compelled to entertain an application for
reinstatement of the policy because the conditions precedent to reinstatement can no
longer be determined and satisfied." (Emphases ours.)
It does not matter that when he died, Eulogio’s Application for Reinstatement and
deposits for the overdue premiums and interests were already with Malaluan. Insular
Life, through the Policy Contract, expressly limits the power or authority of its insurance
agents, thus:
 100

Our agents have no authority to make or modify this contract, to extend the time limit
for payment of premiums, to waive any lapsation, forfeiture or any of our rights or
requirements, such powers being limited to our president, vice-president or persons
authorized by the Board of Trustees and only in writing.44 (Emphasis ours.)
Malaluan did not have the authority to approve Eulogio’s Application for
Reinstatement. Malaluan still had to turn over to Insular Life Eulogio’s Application for
Reinstatement and accompanying deposits, for processing and approval by the latter.
The Court agrees with the RTC that the conditions for reinstatement under the Policy
Contract and Application for Reinstatement were written in clear and simple language,
which could not admit of any meaning or interpretation other than those that they so
obviously embody. A construction in favor of the insured is not called for, as there is
no ambiguity in the said provisions in the first place. The words thereof are clear,
unequivocal, and simple enough so as to preclude any mistake in the appreciation of
the same.
Violeta did not adduce any evidence that Eulogio might have failed to fully understand
the import and meaning of the provisions of his Policy Contract and/or Application for
Reinstatement, both of which he voluntarily signed. While it is a cardinal principle of
insurance law that a policy or contract of insurance is to be construed liberally in favor
of the insured and strictly as against the insurer company, yet, contracts of insurance,
like other contracts, are to be construed according to the sense and meaning of the
terms, which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular
sense.45
remove the prerogative of Insular Life thereunder to approve or disapprove the
Application for Reinstatement. Even though the Court commiserates with Violeta, as
the tragic and fateful turn of events leaves her practically empty-handed, the Court
cannot arbitrarily burden Insular Life with the payment of proceeds on a lapsed
insurance policy. Justice and fairness must equally apply to all parties to a case.
Courts are not permitted to make contracts for the parties. The function and duty of
the courts consist simply in enforcing and carrying out the contracts actually made.46
Policy No. 9011992 remained lapsed and void, not having been reinstated in
accordance with the Policy Contract and Application for Reinstatement before
Eulogio’s death. Violeta, therefore, cannot claim any death benefits from Insular Life
on the basis of Policy No. 9011992; but she is entitled to receive the full refund of the
payments made by Eulogio thereon.
WHEREFORE, premises considered, the Court DENIES the instant Petition for
Review on Certiorari under Rule 45 of the Rules of Court. The Court AFFIRMS the
Orders dated 10 April 2008 and 3 July 2008 of the RTC of Gapan City, Branch 34, in
Civil Case No. 2177, denying petitioner Violeta R. Lalican’s Notice of Appeal, on the
ground that the Decision dated 30 August 2007 subject thereof, was already final and
executory. No costs.
SO ORDERED.

Eulogio’s death, just hours after filing his Application for Reinstatement and depositing
his payment for overdue premiums and interests with Malaluan, does not constitute a
special circumstance that can persuade this Court to already consider Policy No.
9011992 reinstated. Said circumstance cannot override the clear and express
provisions of the Policy Contract and Application for Reinstatement, and operate to
 101

G.R. No. 23703 September 28, 1925 facts. The judgment of the trial court was in favor of the plaintiff without costs, and
ordered the defendant company to eliminate from the insurance policy the name of
HILARIO GERCIO, plaintiff-appellee,
Andrea Zialcita as beneficiary and to substitute therefor such name as the plaintiff
vs. might furnish to the defendant for that purpose.

SUN LIFE ASSURANCE OF CANADA, ET AL., defendants.

SUN LIFE ASSURANCE OF CANADA, appellant. The Sun Life Assurance Co. of Canada has appealed and has assigned three errors
alleged to have been committed by the lower court. The appellee has countered with
a motion which asks the court to dismiss the appeal of the defendant Sun Life
Fisher, DeWitt, Perkins and Brady and Jesus Trinidad for appellant. Assurance Co. of Canada, with costs.

Vicente Romualdez, Feria and La O and P. J. Sevilla for appellee.

MALCOLM, J.:
The question of first impression in the law of life insurance to be here decided is
whether the insured — the husband — has the power to change the beneficiary — the
former wife — and to name instead his actual wife, where the insured and the
beneficiary have been divorced and where the policy of insurance does not expressly
reserve to the insured the right to change the beneficiary. Although the authorities
have been exhausted, no legal situation exactly like the one before us has been
encountered.
As the motion presented by the appellee and the first two errors assigned by the
appellant are preliminary in nature, we will pass upon the first. Appellee argues that
the "substantial defendant" was Andrea Zialcita, and that since she was adjudged in
default, the Sun Life Assurance Co. of Canada has no interest in the appeal. It will be
noticed, however, that the complaint prays for affirmative relief against the insurance
company. It will be noticed further that it is stipulated that the insurance company has
persistently refused to change the beneficiary as desired by the plaintiff. As the rights
of Andrea Zialcita in the policy are rights which are enforceable by her only against the
insurance company, the defendant insurance company will only be fully protected if
the question at issue is conclusively determined. Accordingly, we have decided not to
accede to the motion of the appellee and not to order the dismissal of the appeal of
the appellant.

Hilario Gercio, the insured, is the plaintiff. The Sun Life Assurance Co. of Canada, the
insurer, and Andrea Zialcita, the beneficiary, are the defendants. The complaint is in
This brings us to the main issue. Before, however, discussing its legal aspects, it is
the nature of mandamus. Its purpose is to compel the defendant Sun Life Assurance
advisable to have before us the essential facts. As they are stipulated, this part of the
Co. of Canada to change the beneficiary in the policy issued by the defendant
decision can easily be accomplished.
company on the life of the plaintiff Hilario Gercio, with one Andrea Zialcita as
beneficiary.

On January 29, 1910, the Sun Life Assurance Co. of Canada issued insurance policy
No. 161481 on the life of Hilario Gercio. The policy was what is known as a twenty-
A default judgment was taken in the lower court against the defendant Andrea Zialcita.
year endowment policy. By its terms, the insurance company agreed to insure the life
The other defendant, the Sun Life Assurance Co. of Canada, first demurred to the
of Hilario Gercio for the sum of P/2,000, to be paid him on February 1, 1930, or if the
complaint and when the demurrer was overruled, filed an answer in the nature of a
insured should die before said date, then to his wife, Mrs. Andrea Zialcita, should she
general denial. The case was then submitted for decision on an agreed statement of

survive him; otherwise to the executors, administrators, or assigns of the insured. The
policy also contained a schedule of reserves, amounts in cash, paid-up policies, and
renewed insurance, guaranteed. The policy did not include any provision reserving to
the insured the right to change the beneficiary.
On the date the policy was issued, Andrea Zialcita was the lawful wife of Hilario Gercio.
Towards the end of the year 1919, she was convicted of the crime of adultery. On
September 4, 1920, a decree of divorce was issued in civil case no. 17955, which had
the effect of completely dissolving the bonds of matrimony contracted by Hilario Gercio
and Andrea Zialcita.
On March 4, 1922, Hilario Gercio formally notified the Sun Life Assurance Co. of
Canada that he had revoked his donation in favor of Andrea Zialcita, and that he had
designated in her stead his present wife, Adela Garcia de Gercio, as the beneficiary
of the policy. Gercio requested the insurance company to eliminate Andrea Zialcita as
beneficiary. This, the insurance company has refused and still refuses to do.
With all of these introductory matters disposed of and with the legal question to the
forefront, it becomes our first duty to determine what law should be applied to the facts.
In this connection, it should be remembered that the insurance policy was taken out in
1910, that the Insurance Act. No. 2427, became effective in 1914, and that the effort
to change the beneficiary was made in 1922. Should the provisions of the Code of
Commerce and the Civil Code in force in 1910, or the provisions of the Insurance Act
now in force, or the general principles of law, guide the court in its decision?
On the supposition, first, that the Code of Commerce is applicable, yet there can be
found in it no provision either permitting or prohibiting the insured to change the
beneficiary.
On the supposition, next, that the Civil Code regulates insurance contracts, it would
be most difficult, if indeed it is practicable, to test a life insurance policy by its
provisions. Should the insurance contract, whereby the husband names the wife as
the beneficiary, be denominated a donation inter vivos, a donation causa mortis, a
102
contract in favor of a third person, or an aleatory contract? The subject is further
complicated by the fact that if an insurance contract should be considered a donation,
a husband may then never insure his life in favor of his wife and vice versa, inasmuch
as article 1334 prohibits all donations between spouses during marriage. It would
seem, therefore, that this court was right when in the case of Del Val vs. Del Val
([1915]), 29 Phil., 534), it declined to consider the proceeds of the insurance policy as
a donation or gift, saying "the contract of life insurance is a special contract and the
destination of the proceeds thereof is determined by special laws which deal
exclusively with that subject. The Civil Code has no provisions which relate directly
and specifically to life-insurance contracts or to the destination of life-insurance
proceeds. . . ." Some satisfaction is gathered from the perplexities of the Louisiana
Supreme Court, a civil law jurisdiction, where the jurists have disagreed as to the
classification of the insurance contract, but have agreed in their conclusions as will
hereafter see. (Re Succession of Leone Desforges [1914], 52 L.R.A. [N.S.], 689;
Lambert vs Penn Mutual Life Insurance Company of Philadelphia and L'Hote & Co.
[1898], 50 La. Ann., 1027.)
On the further supposition that the Insurance Act applies, it will be found that in this
Law, there is likewise no provision either permitting or prohibiting the insured to change
the beneficiary.
We must perforce conclude that whether the case be considered as of 1910, or 1914,
or 1922, and whether the case be considered in the light of the Code of Commerce,
the Civil Code, or the Insurance Act, the deficiencies in the law will have to be
supplemented by the general principles prevailing on the subject. To that end, we have
gathered the rules which follow from the best considered American authorities. In
adopting these rules, we do so with the purpose of having the Philippine Law of
Insurance conform as nearly as possible to the modern Law of Insurance as found in
the United States proper.
The wife has an insurable interest in the life of her husband. The beneficiary has an
absolute vested interest in the policy from the date of its issuance and delivery. So
when a policy of life insurance is taken out by the husband in which the wife is named
as beneficiary, she has a subsisting interest in the policy. And this applies to a policy

to which there are attached the incidents of a loan value, cash surrender value, an
automatic extension by premiums paid, and to an endowment policy, as well as to an
ordinary life insurance policy. If the husband wishes to retain to himself the control and
ownership of the policy he may so provide in the policy. But if the policy contains no
provision authorizing a change of beneficiary without the beneficiary's consent, the
insured cannot make such change. Accordingly, it is held that a life insurance policy
of a husband made payable to the wife as beneficiary, is the separate property of the
beneficiary and beyond the control of the husband.
As to the effect produced by the divorce, the Philippine Divorce Law, Act No. 2710,
merely provides in section 9 that the decree of divorce shall dissolve the community
property as soon as such decree becomes final. Unlike the statutes of a few
jurisdictions, there is no provision in the Philippine Law permitting the beneficiary in a
policy for the benefit of the wife of the husband to be changed after a divorce. It must
follow, therefore, in the absence of a statute to the contrary, that if a policy is taken out
upon a husband's life the wife is named as beneficiary therein, a subsequent divorce
does not destroy her rights under the policy.
These are some of the pertinent principles of the Law of Insurance. To reinforce them,
we would, even at the expense of clogging the decision with unnecessary citation of
authority, bring to notice certain decisions which seem to us to have controlling
influence.
To begin with, it is said that our Insurance Act is mostly taken from the statute of
California. It should prove of interest, therefore, to know the stand taken by the
Supreme Court of that State. A California decision oft cited in the Cyclopedias is Yore
vs. Booth ([1895]), 110 Cal., 238; 52 Am. St. Rep., 81), in which we find the following:
. . . It seems to be the settled doctrine, with but slight dissent in the courts of this
country, that a person who procures a policy upon his own life, payable to a designated
beneficiary, although he pays the premiums himself, and keeps the policy in his
exclusive possession, has no power to change the beneficiary, unless the policy itself,
or the charter of the insurance company, so provides. In policy, although he has parted
with nothing, and is simply the object of another's bounty, has acquired a vested and
103
irrevocable interest in the policy, which he may keep alive for his own benefit by paying
the premiums or assessments if the person who effected the insurance fails or refuses
to do so.
As carrying great weight, there should also be taken into account two decisions coming
from the Supreme Court of the United States. The first of these decisions, in point of
time, is Connecticut Mutual Life Insurance Company vs Schaefer ([1877]), 94 U.S.,
457). There, Mr. Justice Bradley, delivering the opinion of the court, in part said:
This was an action on a policy of the court, in part said: July 25, 1868, on the joint lives
of George F. and Francisca Schaefer, then husband and wife, payable to the survivor
on the death of either. In January, 1870, they were divorced, and alimony was decreed
and paid to the wife, and there was never any issue of the marriage. They both
subsequently married again, after which, in February, 1871, George F. Schaefer died.
This action was brought by Francisca, the survivor.
xxx xxx xxx
The other point, relating to the alleged cessation of insurable interest by reason of the
divorce of the parties, is entitled to more serious consideration, although we have very
little difficulty in disposing of it.
It will be proper, in the first place, to ascertain what is an insurable interest. It is
generally agreed that mere wager policies, that is, policies in which the insured party
has no interest in its loss or destruction, are void, as against public policy. . . . But
precisely what interest is necessary, in order to take a policy out of the category of
mere wager, has been the subject of much discussion. In marine and fire insurance
the difficulty is not so great, because there insurance is considered as strictly an
indemnity. But in life insurance the loss can seldom be measured by pecuniary values.
Still, an interest of some sort in the insured life must exist. A man cannot take out

insurance on the life of a total stranger, nor on that of one who is not so connected
with him as to make the continuance of the life a matter of some real interest to him.
It is well settled that a man has an insurable interest in his own life and in that of his
wife and children; a woman in the life of her husband; and the creditor in the life of his
debtor. Indeed it may be said generally that any reasonable expectation of pecuniary
benefit or advantage from the continued life of another creates an insurable interest in
such life. And there is no doubt that a man may effect an insurance on his own life for
the benefit of a relative or fried; or two or more persons, on their joint lives, for the
benefit of the survivor or survivors. The old tontines were based substantially on this
principle, and their validity has never been called in question.
xxx xxx xxx
The policy in question might, in our opinion, be sustained as a joint insurance, without
reference to any other interest, or to the question whether the cessation of interest
avoids a policy good at its inception. We do not hesitate to say, however, that a policy
taken out in good faith and valid at its inception, is not avoided by the cessation of the
insurable interest, unless such be the necessary effect of the provisions of the policy
itself. . . .
. . . .In our judgment of life policy, originally valid, does not cease to be so by the
cessation of the assured party's interest in the life insured.
Another controlling decision of the United States Supreme Court is that of the Central
National Bank of Washington City vs. Hume ([1888], 128 U.S., 134). Therein, Mr. Chief
Justice Fuller, as the organ of the court, announced the following doctrines:
We think it cannot be doubted that in the instance of contracts of insurance with a wife
or children, or both, upon their insurable interest in the life of the husband or father,
104
the latter, while they are living, can exercise no power of disposition over the same
without their consent, nor has he any interest therein of which he can avail himself;
nor upon his death have his personal representatives or his creditors any interest in
the proceeds of such contracts, which belong to the beneficiaries to whom they are
payable.
It is indeed the general rule that a policy, and the money to become due under it,
belong, the moment it is issued, to the person or persons named in it as the beneficiary
or beneficiaries, and that there is no power in the person procuring the insurance, by
any act of his, by deed or by will, to transfer to any other person the interest of the
person named.
A jurisdiction which found itself in somewhat the same situation as the Philippines,
because of having to reconcile the civil law with the more modern principles of
insurance, is Louisiana. In a case coming before the Federal Courts, In re Dreuil & Co.
([1915]), 221 Fed., 796), the facts were that an endowment insurance policy provided
for payment of the amount thereof at the expiration of twenty years to the insured, or
his executors, administrators, or assigns, with the proviso that, if the insured die within
such period, payment was to be made to his wife if she survive him. It was held that
the wife has a vested interest in the policy, of which she cannot be deprived without
her consent. Foster, District Judge, announced:
In so far as the law of Louisiana is concerned, it may also be considered settled that
where a policy is of the semitontine variety, as in this case, the beneficiary has a vested
right in the policy, of which she cannot be deprived without her consent. (Lambert vs
Penn Mutual Life Ins. Co., 50 La. Ann., 1027; 24 South., 16.) (See in same connection
a leading decision of the Louisiana Supreme Court, Re Succession of Leonce
Desforges, [1914], 52 L.R.A. [N.S.], 689.)
Some question has arisen as to the power of the insured to destroy the vested interest
of the beneficiary in the policy. That point is well covered in the case of Entwistle vs.
Travelers Insurance Company ([1902], 202 Pa. St., 141). To quote:
 105

the personal representatives of the insured. During the pendency of divorce

proceedings, the parties signed a contract by which Wallace agreed that, if a divorce
. . . The interest of the wife was wholly contingent upon her surviving her husband, and
was granted to Mrs. Wallace, the court might award her certain specified property as
she could convey no greater interest in the policy than she herself had. The interest of
alimony, and Mrs. Wallace agreed to relinquish all claim to any property arising out of
the children of the insured, which was created for them by the contract when the policy
the relation of husband and wife. The divorce was granted. An action was brought by
was issued; vested in them at the same time that the interest of the wife became vested
Wallace to compel Mrs. Wallace to relinquish her interest in the insurance policy. Mr.
in her. Both interests were contingent. If the wife die before the insured, she will take
Justice Elliott said:
nothing under the policy. If the insured should die before the wife, then the children
take nothing under the policy. We see no reason to discriminate between the wife and
the children. They are all payees, under the policy, and together constitute the
As soon as the policy was issued Mrs. Wallace acquired a vested interest therein, of
assured.
which she could not be deprived without her consent, except under the terms of the
contract with the insurance company. No right to change the beneficiary was reserved.
Her interest in the policy was her individual property, subject to be divested only by
The contingency which will determine whether the wife, or the children as a class will
her death, the lapse of time, or by the failure of the insured to pay the premiums. She
take the proceeds, has not as yet happened; all the beneficiaries are living, and
could keep the policy alive by paying the premiums, if the insured did not do so. It was
nothing has occurred by which the rights of the parties are in any way changed. The
contingent upon these events, but it was free from the control of her husband. He had
provision that the policy may be converted into cash at the option of the holder does
no interest in her property in this policy, contingent or otherwise. Her interest was free
not change the relative rights of the parties. We agree entirely with the suggestion that
from any claim on the part of the insured or his creditors. He could deprive her of her
"holder" or "holders", as used in this connection, means those who in law are the
interest absolutely in but one way, by living more than twenty years. We are unable to
owners of the policy, and are entitled to the rights and benefits which may accrue
see how the plaintiff's interest in the policy was primary or superior to that of the
under it; in other words, all the beneficiaries; in the present case, not only the wife, by
husband. Both interests were contingent, but they were entirely separate and distinct,
the children of the insured. If for any reason, prudence required the conversion of the
the one from the other. The wife's interest was not affected by the decree of court
policy into cash, a guardian would have no special difficulty in reasonable protecting
which dissolved the marriage contract between the parties. It remains her separate
the interest of his wards. But however that may be, it is manifest that the option can
property, after the divorce as before. . .
only be exercised by those having the full legal interest in the policy, or by their
assignee. Neither the husband, nor the wife, nor both together had power to destroy
the vested interest of the children in the policy.
. . . . The fact that she was his wife at the time the policy was issued may have been,
and undoubtedly was, the reason why she was named as beneficiary in the event of
his death. But her property interest in the policy after it was issued did not in any
The case most nearly on all fours with the one at bar is that of Wallace vs Mutual
reasonable sense arise out of the marriage relation.
Benefit Life Insurance Co. ([1906], 97 Minn., 27; 3 L.R.A. [N.S.], 478). The opinion
there delivered also invokes added interest when it is noted that it was written by Mr.
Justice Elliott, the author of a text on insurance, later a member of this court. In the
Somewhat the same question came before the Supreme Court of Kansas in the
Minnesota case cited, one Wallace effected a "twenty-year endowment" policy of
leading case of Filley vs. Illinois Life Insurance Company ([1914]), 91 Kansas, 220;
insurance on his life, payable in the event of his death within twenty years to Emma
L.R.A. [1915 D], 130). It was held, following consideration extending to two motions
G. Wallace, his wife, but, if he lived, to himself at the end of twenty years. If Wallace
for rehearing, as follows:
died before the death of his wife, within the twenty years, the policy was payable to

The benefit accruing from a policy of life insurance upon the life of a married man,
payable upon his death to his wife, naming her, is payable to the surviving beneficiary
named, although she may have years thereafter secured a divorce from her husband,
and he was thereafter again married to one who sustained the relation of wife to him
at the time of his death.
The rights of a beneficiary in an ordinary life insurance policy become vested upon the
issuance of the policy, and can thereafter, during the life of the beneficiary, be defeated
only as provided by the terms of the policy.
If space permitted, the following corroborative authority could also be taken into
account: Joyce, The Law of Insurance, second edition, vol. 2, pp. 1649 et seq.; 37
Corpus Juris, pp. 394 et seq.; 14 R.C.L., pp. 1376 et seq.; Green vs. Green ([1912],
147 Ky., 608; 39 L.R.A. [N.S.], 370); Washington Life Insurance Co. vs. Berwald
([1903], 97 Tex., 111); Begley vs. Miller ([1907]), 137 Ill., App., 278); Blum vs. New
York L. Ins. Co. ([1906], 197 Mo., 513; 8 L.R.A. [N.S.], 923; Union Central Life Ins. Co.
vs. Buxer ([1900], 62 Ohio St., 385; 49 L.R.A., 737); Griffith vs. New York Life Ins. Co.
([1894], 101 Cal., 627; 40 Am. St. Rep., 96); Preston vs. Conn. Mut. L. Ins. Co. of
Hartford ([1902]); 95 Md., 101); Snyder vs. Supreme Ruler of Fraternal Mystic Circle
([1909], 122 Tenn. 248; 45 L.R.A. [N.S.], 209); Lloyd vs. Royal Union Mut. L. Ins. Co.
([1917], 245 Fed., 162); Phoenix Mut. L. Ins. Co. vs. Dunham ([1878], 46 Conn., 79;
33 Am. Rep., 14); McKee vs. Phoenix Ins. Co. ([1859], 28 Mo., 383; 75 Am. Rep.,
129); Supreme Council American Legion of Honor vs. Smith and Smith ([1889], 45
N.J. Eq., 466); Overhiser vs. Overhiser ([1900], 63 Ohio St., 77; 81 Am. St. Rep., 612;
50 L.R.A., 552); Condon vs. New York Life Insurance Co. ([1918], 183 Iowa, 658); with
which compare Foster vs. Gile ([1880], 50 Wis., 603) and Hatch vs. Hatch ([1904], 35
Tex. Civ. App., 373).
On the admitted facts and the authorities supporting the nearly universally accepted
principles of insurance, we are irresistibly led to the conclusion that the question at
issue must be answered in the negative.
106
The judgment appealed from will be reversed and the complaint ordered dismissed as
to the appellant, without special pronouncement as to the costs in either instance. So
ordered.
Street, Villamor, Ostrand, Johns, and Villa-Real, JJ., concur.
Avanceña, C.J., concurs in the result.
Romualdez, J., took no part.
Separate Opinions
JOHNSON, J., concurring in the result.
I agree with the majority of the court, that the judgment of the lower court should be
revoked, but for a different reason. In my judgment, the question presented by the
plaintiff is purely an academic one. The purpose of the petition is to have declared the
rights of certain persons in an insurance policy which is not yet due and payable. It
may never become due and payable. The premiums may not be paid, thereby
endering the contract of insurance of non effect, and many other things may occur,
before the policy becomes due, which would render it non effective. The plaintiff and
the other parties who are claiming an interest in said policy should wait until there is
something due them under the same. For the courts to declare now who are the
persons entitled to receive the amounts due, if they ever become due and payable, is
impossible, for the reason that nothing may ever become payable under the contract
of insurance, and for many reasons such persons may never have a right to receive
anything when the policy does become due and payable. In my judgment, the action
is premature and should have been dismissed.

G.R. No. 85141 November 28, 1989
FILIPINO MERCHANTS INSURANCE CO., INC., petitioner,
vs.
COURT OF APPEALS and CHOA TIEK SENG, respondents.
Balgos & Perez Law Offices for petitioner.
Lapuz Law office for private respondent.
REGALADO, J.:
This is a review of the decision of the Court of Appeals, promulgated on July 19,1988,
the dispositive part of which reads:
WHEREFORE, the judgment appealed from is affirmed insofar as it orders defendant
Filipino Merchants Insurance Company to pay the plaintiff the sum of P51,568.62 with
interest at legal rate from the date of filing of the complaint, and is modified with respect
to the third party complaint in that (1) third party defendant E. Razon, Inc. is ordered
to reimburse third party plaintiff the sum of P25,471.80 with legal interest from the date
of payment until the date of reimbursement, and (2) the third-party complaint against
third party defendant Compagnie Maritime Des Chargeurs Reunis is dismissed. 1
The facts as found by the trial court and adopted by the Court of Appeals are as
follows:
This is an action brought by the consignee of the shipment of fishmeal loaded on board
the vessel SS Bougainville and unloaded at the Port of Manila on or about December
11, 1976 and seeks to recover from the defendant insurance company the amount of
P51,568.62 representing damages to said shipment which has been insured by the
defendant insurance company under Policy No. M-2678. The defendant brought a
third party complaint against third party defendants Compagnie Maritime Des
Chargeurs Reunis and/or E. Razon, Inc. seeking judgment against the third (sic)
107
defendants in case Judgment is rendered against the third party plaintiff. It appears
from the evidence presented that in December 1976, plaintiff insured said shipment
with defendant insurance company under said cargo Policy No. M-2678 for the sum of
P267,653.59 for the goods described as 600 metric tons of fishmeal in new gunny
bags of 90 kilos each from Bangkok, Thailand to Manila against all risks under
warehouse to warehouse terms. Actually, what was imported was 59.940 metric tons
not 600 tons at $395.42 a ton CNF Manila. The fishmeal in 666 new gunny bags were
unloaded from the ship on December 11, 1976 at Manila unto the arrastre contractor
E. Razon, Inc. and defendant's surveyor ascertained and certified that in such
discharge 105 bags were in bad order condition as jointly surveyed by the ship's agent
and the arrastre contractor. The condition of the bad order was reflected in the turn
over survey report of Bad Order cargoes Nos. 120320 to 120322, as Exhibit C-4
consisting of three (3) pages which are also Exhibits 4, 5 and 6- Razon. The cargo
was also surveyed by the arrastre contractor before delivery of the cargo to the
consignee and the condition of the cargo on such delivery was reflected in E. Razon's
Bad Order Certificate No. 14859, 14863 and 14869 covering a total of 227 bags in bad
order condition. Defendant's surveyor has conducted a final and detailed survey of the
cargo in the warehouse for which he prepared a survey report Exhibit F with the
findings on the extent of shortage or loss on the bad order bags totalling 227 bags
amounting to 12,148 kilos, Exhibit F-1. Based on said computation the plaintiff made
a formal claim against the defendant Filipino Merchants Insurance Company for
P51,568.62 (Exhibit C) the computation of which claim is contained therein. A formal
claim statement was also presented by the plaintiff against the vessel dated December
21, 1976, Exhibit B, but the defendant Filipino Merchants Insurance Company refused
to pay the claim. Consequently, the plaintiff brought an action against said defendant
as adverted to above and defendant presented a third party complaint against the
vessel and the arrastre contractor. 2
The court below, after trial on the merits, rendered judgment in favor of private
respondent, the decretal portion whereof reads:
WHEREFORE, on the main complaint, judgment is hereby rendered in favor of the
plaintiff and against the defendant Filipino Merchant's (sic) Insurance Co., ordering the
defendants to pay the plaintiff the following amount:
 108

3. The Court of Appeals erred in not holding that the private respondent was guilty
of fraud in not disclosing the fact, it being bound out of utmost good faith to do so, that
The sum of P51,568.62 with interest at legal rate from the date of the filing of the
it had no insurable interest in the subject cargo, which bars its recovery on the policy.
complaint;
4

On the third party complaint, the third party defendant Compagnie Maritime Des
On the first assignment of error, petitioner contends that an "all risks" marine policy
Chargeurs Reunis and third party defendant E. Razon, Inc. are ordered to pay to the
has a technical meaning in insurance in that before a claim can be compensable it is
third party plaintiff jointly and severally reimbursement of the amounts paid by the third
essential that there must be "some fortuity, " "casualty" or "accidental cause" to which
party plaintiff with legal interest from the date of such payment until the date of such
the alleged loss is attributable and the failure of herein private respondent, upon whom
reimbursement.
lay the burden, to adduce evidence showing that the alleged loss to the cargo in
question was due to a fortuitous event precludes his right to recover from the insurance
policy. We find said contention untenable.
Without pronouncement as to costs.3

The "all risks clause" of the Institute Cargo Clauses read as follows:
On appeal, the respondent court affirmed the decision of the lower court insofar as the
award on the complaint is concerned and modified the same with regard to the
adjudication of the third-party complaint. A motion for reconsideration of the aforesaid
5. This insurance is against all risks of loss or damage to the subject-matter
decision was denied, hence this petition with the following assignment of errors:
insured but shall in no case be deemed to extend to cover loss, damage, or expense
proximately caused by delay or inherent vice or nature of the subject-matter insured.
Claims recoverable hereunder shall be payable irrespective of percentage. 5
1. The Court of Appeals erred in its interpretation and application of the "all risks"
clause of the marine insurance policy when it held the petitioner liable to the private
respondent for the partial loss of the cargo, notwithstanding the clear absence of proof
An "all risks policy" should be read literally as meaning all risks whatsoever and
of some fortuitous event, casualty, or accidental cause to which the loss is attributable,
covering all losses by an accidental cause of any kind. The terms "accident" and
thereby contradicting the very precedents cited by it in its decision as well as a prior
"accidental", as used in insurance contracts, have not acquired any technical meaning.
decision of the same Division of the said court (then composed of Justices Cacdac,
They are construed by the courts in their ordinary and common acceptance. Thus, the
Castro-Bartolome, and Pronove);
terms have been taken to mean that which happens 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
2. The Court of Appeals erred in not holding that the private respondent had no proceeds from an unknown cause, or is an unusual effect of a known cause and,
insurable interest in the subject cargo, hence, the marine insurance policy taken out therefore, not expected. 6
by private respondent is null and void;

The very nature of the term "all risks" must be given a broad and comprehensive
meaning as covering any loss other than a willful and fraudulent act of the insured. 7
This is pursuant to the very purpose of an "all risks" insurance to give protection to the
insured in those cases where difficulties of logical explanation or some mystery
surround the loss or damage to property. 8 An "all asks" policy has been evolved to
grant greater protection than that afforded by the "perils clause," in order to assure
that no loss can happen through the incidence of a cause neither insured against nor
creating liability in the ship; it is written against all losses, that is, attributable to external
causes. 9
The term "all risks" cannot be given a strained technical meaning, the language of the
clause under the Institute Cargo Clauses being unequivocal and clear, to the effect
that it extends to all damages/losses suffered by the insured cargo except (a) loss or
damage or expense proximately caused by delay, and (b) loss or damage or expense
proximately caused by the inherent vice or nature of the subject matter insured.
Generally, the burden of proof is upon the insured to show that a loss arose from a
covered peril, but under an "all risks" policy the burden is not on the insured to prove
the precise cause of loss or damage for which it seeks compensation. The insured
under an "all risks insurance policy" has the initial burden of proving that the cargo was
in good condition when the policy attached and that the cargo was damaged when
unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the
exception to the coverage. 10 As we held in Paris-Manila Perfumery Co. vs. Phoenix
Assurance Co., Ltd. 11 the basic rule is that the insurance company has the burden of
proving that the loss is caused by the risk excepted and for want of such proof, the
company is liable.
Coverage under an "all risks" provision of a marine insurance policy creates a special
type of insurance which extends coverage to risks not usually contemplated and
avoids putting upon the insured the burden of establishing that the loss was due to the
peril falling within the policy's coverage; the insurer can avoid coverage upon
demonstrating that a specific provision expressly excludes the loss from coverage. 12
A marine insurance policy providing that the insurance was to be "against all risks"
must be construed as creating a special insurance and extending to other risks than
109
are usually contemplated, and covers all losses except such as arise from the fraud of
the insured. 13 The burden of the insured, therefore, is to prove merely that the goods
he transported have been lost, destroyed or deteriorated. Thereafter, the burden is
shifted to the insurer to prove that the loss was due to excepted perils. To impose on
the insured the burden of proving the precise cause of the loss or damage would be
inconsistent with the broad protective purpose of "all risks" insurance.
In the present case, there being no showing that the loss was caused by any of the
excepted perils, the insurer is liable under the policy. As aptly stated by the respondent
Court of Appeals, upon due consideration of the authorities and jurisprudence it
discussed —
... it is believed that in the absence of any showing that the losses/damages were
caused by an excepted peril, i.e. delay or the inherent vice or nature of the subject
matter insured, and there is no such showing, the lower court did not err in holding that
the loss was covered by the policy.
There is no evidence presented to show that the condition of the gunny bags in which
the fishmeal was packed was such that they could not hold their contents in the course
of the necessary transit, much less any evidence that the bags of cargo had burst as
the result of the weakness of the bags themselves. Had there been such a showing
that spillage would have been a certainty, there may have been good reason to plead
that there was no risk covered by the policy (See Berk vs. Style [1956] cited in Marine
Insurance Claims, Ibid, p. 125). Under an 'all risks' policy, it was sufficient to show that
there was damage occasioned by some accidental cause of any kind, and there is no
necessity to point to any particular cause. 14
Contracts of insurance are contracts of indemnity upon the terms and conditions
specified in the policy. The agreement has the force of law between the parties. The
terms of the policy constitute the measure of the insurer's liability. If such terms are
clear and unambiguous, they must be taken and understood in their plain, ordinary
and popular sense.15
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of actual delivery since, from that time, the foreign buyers assumed the risks of loss of
the goods and paid the insurance premium covering them. 20
Anent the issue of insurable interest, we uphold the ruling of the respondent court that
private respondent, as consignee of the goods in transit under an invoice containing
the terms under "C & F Manila," has insurable interest in said goods.
C & F contracts are shipment contracts. The term means that the price fixed includes
in a lump sum the cost of the goods and freight to the named destination. 21 It simply
means that the seller must pay the costs and freight necessary to bring the goods to
Section 13 of the Insurance Code defines insurable interest in property as every
the named destination but the risk of loss or damage to the goods is transferred from
interest in property, whether real or personal, or any relation thereto, or liability in
the seller to the buyer when the goods pass the ship's rail in the port of shipment. 22
respect thereof, of such nature that a contemplated peril might directly damnify the
insured. In principle, anyone has an insurable interest in property who derives a benefit
from its existence or would suffer loss from its destruction whether he has or has not
Moreover, the issue of lack of insurable interest was not among the defenses averred
any title in, or lien upon or possession of the property y. 16 Insurable interest in
in petitioners answer. It was neither an issue agreed upon by the parties at the pre-
property may consist in (a) an existing interest; (b) an inchoate interest founded on an
trial conference nor was it raised during the trial in the court below. It is a settled rule
existing interest; or (c) an expectancy, coupled with an existing interest in that out of
that an issue which has not been raised in the court a quo cannot be raised for the first
which the expectancy arises. 17
time on appeal as it would be offensive to the basic rules of fair play, justice and due
process. 23 This is but a permuted restatement of the long settled rule that when a
party deliberately adopts a certain theory, and the case is tried and decided upon that
Herein private respondent, as vendee/consignee of the goods in transit has such
theory in the court below, he will not be permitted to change his theory on appeal
existing interest therein as may be the subject of a valid contract of insurance. His
because, to permit him to do so, would be unfair to the adverse party. 24
interest over the goods is based on the perfected contract of sale. 18 The perfected
contract of sale between him and the shipper of the goods operates to vest in him an
equitable title even before delivery or before be performed the conditions of the sale.
If despite the fundamental doctrines just stated, we nevertheless decided to indite a
19 The contract of shipment, whether under F.O.B., C.I.F., or C. & F. as in this case,
disquisition on the issue of insurable interest raised by petitioner, it was to put at rest
is immaterial in the determination of whether the vendee has an insurable interest or
all doubts on the matter under the facts in this case and also to dispose of petitioner's
not in the goods in transit. The perfected contract of sale even without delivery vests
third assignment of error which consequently needs no further discussion.
in the vendee an equitable title, an existing interest over the goods sufficient to be the
subject of insurance.

WHEREFORE, the instant petition is DENIED and the assailed decision of the
respondent Court of Appeals is AFFIRMED in toto.
Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract
of sale, the seller is authorized or required to send the goods to the buyer, delivery of
the goods to a carrier, whether named by the buyer or not, for, the purpose of
transmission to the buyer is deemed to be a delivery of the goods to the buyer, the SO ORDERED.
exceptions to said rule not obtaining in the present case. The Court has heretofore
ruled that the delivery of the goods on board the carrying vessels partake of the nature